As a medical economist asked almost daily to comment on the health reform, I remember that Murray Weidenbaum (chairman of the President’s Council of Economic Advisers in the 1980s) described our professional role as “serving as a social wet blanket, dampening the enthusiasm of proponents of simplistic solutions.” The more I learn about the recent laws and their implementation, the more I am convinced that reform as legislated in 2010 is simplistic. It will actually make health care more expensive for patients. Unless I am missing something—please let me know if I am—the long-run outcomes are likely to be the opposite of “affordable.”
For example, one of the laws’ major unintended consequences will be determined by the regulation of medical expenses. When Democratic leaders shifted the reform focus from containing costs to overhauling insurance, they severely criticized health plans for spending too much on administration. The final legislation consequently requires health plans to spend 80% or 85% of premium income on medical care—based on the simplistic but politically appealing premise that health insurance is unaffordable because insurers spend too much on non-medical expenditures.
If Congressional leaders had explored the relationship between administrative costs and the price of health insurance, I believe they would have discovered some non-medical expenses that ought to be increased. For example, health plans should be spending more money to prevent the delivery of unnecessary care and to help patients manage chronic conditions. The economic problem is finding the level of administrative spending that produces desired outcomes at the least cost. The political “solution” was establishing an arbitrary cap that will cause more money to be spent on care that does not benefit the patient.
Limits on administrative expenses will also force insurers to spend less on sales and customer service—a sad irony because reform is intended to allow (or force) millions of uninsured Americans to buy individual policies. As an economist, I foresee a real problem as sellers are required to spend less on administration while serving a growing market. I do not know the mix of medical and non-medical spending that would produce the most health for Americans, but I am seriously concerned that the reform laws were passed without any focus on this fundamental economic issue.
All stakeholders in the medical marketplace—health plans included—are guilty of wasteful spending that needs to be harnessed and redirected to productive use. However, more non-medical spending is arguably needed to control the cost curve, at least in the short-run. This issue cannot be resolved within the 450 words of a blog post, but it deserves extensive discussion. Do you think that limiting administrative expenses is a solution or a new problem?
2 comments:
Yes, it's likely that limiting the proportion of premiums spent on administration will have negative unintended consequences. Yes, the approach is simplistic; populist bordering on pandering. However, the insurance industry has made itself an easy target. Anecdotes about unfair recissions, seemingly outsized executive compensation, and even the term "medical loss ratio" put healthcare insurers in an unflattering light.
Even before we can enter into this discussion, we need to wrangle out the actual definition that allows us to put any expenditure into one of two categories -- medical care and administrative. Something that has not proven to be easy as shown by the extended discussions of the state commissioners of insurance.
it is yet another example of using a wrecking ball to smash through a 'solution' to a politically created witch hunt rather than careful analysis to define the issue.
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