Monday, March 22, 2010

Explaining Healthcare

So I realize that many (all?) of you are not nearly as big geeks as I am, and, as such, you may have some questions about the Health Insurance Reform bill that President Obama will be signing tomorrow. I'm going to attempt to explain the main elements of the bill here.

Prior to the current recession, over 50% of bankruptcies were caused by health care expenses. Seemingly safe and secure middle class lives were turned upside down - and this could happen to any of us. Insurers had a host of tricks to disqualify coverage from rescission (kicking people off for problems in their original registration - no matter how old), lifetime caps on coverage, annual caps on coverage, not letting people with pre-existing conditions join in the first place. This whole class of reasons I'd term as ethically questionable if the real point of insurance is to ensure that people in need get covered.

The need to fix these problems and other ideological neutral fixes (such as allowing children up to 26 to remain on their parents policies) was the starting point for this legislation. However, it's not enough to just say you can't discriminate against people with pre-existing conditions, because if you did, rates would just rocket. So this bill requires community pricing, among your cohorts you all pay the same.

However, if this was all the bill did, rates would still skyrocket as the cost to insurers is undoubtedly going up to cover those with pre-existing conditions. The only way to make the cost manageable is to bring new people (often healthy) into the system. If you fail to get insurance, then the government will impose a tax on you comparable to the lowest priced health care option. This is the mandate.

However, if you mandate insurance for someone who can't afford it, there's no recourse and it's extremely unfair. To deal with that, they've introduced subsidies. Subsidies will help individuals and small businesses that provide insurance.

These three elements work together, to quote Paul Krugman 'it's a 3-legged stool': Community Pricing, Mandates and Subsidies. That is the topline story.

The other major element that is perhaps the most important is the introduction of exchanges. Currently, if you're a large employer you get courted by insurers and can pick the plan that fits you best. However, if you're an individual or a small business - you're screwed. Rates are high, coverage is limited and the plans are very different from one another - making it very difficult to analyze the plan best for you. Exchanges will change that and introduce market economics into health care. The government will set minimum standards and then the insurers will come in and attempt to offer the best plan. This should hopefully inject a great deal of rationality into our health insurance decisions - something that's sorely needed.

As we dig a little deeper, some issues with this plan emerge. First of all, how can we afford this?

The bulk of this new plan is paid in two halves. The cost of the new plan is pegged at just under $1 trillion over the next 10 years. This is paid almost evenly in taxes on unearned income and cuts to medicare. As we dig into the taxes we find some interesting numbers. Bush rolled back the capital gains rate, this moves it back up about 5% for those making over $200,000. We have an increase in the medicare tax on high earners. We also have a 10% tax on tanning salons (that's why John Boehner was so mad!).

House Minority Leader John Boehner: Does this look like a natural tan to you?

The other tax that's gotten a lot of attention is an excise tax on 'cadillac' insurance plans. Starting in 2018 there will be a new tax assessed on insurance plans that are extremely expensive. The thing to keep in mind, that this is a great way to lower the cost of health care. Since we don't currently pay taxes on employer provided health care, a lot of salary is hidden by using it to pay for insurance. Since the cost is hidden, we end up getting more insurance than we often need driving the cost of everything up. Many 'cadillac plans' have such low deductibles that the patient isn't encouraged to be rational about what care they need. It's all free. Higher deductibles (not high, but higher than they are now) will have a very stabilizing effect on the cost of care.

Additionally, there are about $500 billion in Medicare cuts. The highly ineffective Medicare Advantage (where private insurers provide Medicare instead of the government at a cost of 15% more than it costs the government) will receive cuts. The pharmaceutical industry has lowered some of the rates it charges Medicare. And several other changes I'm not too familiar with.

This is the real simple story. Also contained within the bill is funding to create pilot programs to control costs, funding for community centers, savings from not having the uninsured clogging up and abusing the emergency room system...and much much more.



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