Steps Toward Fixing Health Care
by David Stockman at Brownstone Institute

Once in a blue moon even a blind squirrel finds an acorn, or so the saying goes. But, boy, did the occupant of the office of presidency find a MOAPA (Mother Of All Policy Acorns):

THE ONLY HEALTHCARE I WILL SUPPORT OR APPROVE IS SENDING THE MONEY DIRECTLY BACK TO THE PEOPLE, WITH NOTHING GOING TO THE BIG, FAT, RICH INSURANCE COMPANIES, WHO HAVE MADE $TRILLIONS, AND RIPPED OFF AMERICA LONG ENOUGH.

THE PEOPLE WILL BE ALLOWED TO NEGOTIATE AND BUY THEIR OWN, MUCH BETTER, INSURANCE. POWER TO THE PEOPLE!

Congress, do not waste your time and energy on anything else.

This is the only way to have great Healthcare in America!!! 

GET IT DONE, NOW. 

President DJT

Trump hit the nail squarely on the head. Above all other factors, the reason we have runaway health costs is that the fundamental payment mechanism for health care in the US is ass-backwards.

The third-party payment system for the $5 trillion US health care sector is totally opaque when it should be blindingly transparent. It is also radically collectivized when it should be thoroughly individualized; and is completely bureaucratized and cartelized when competitive free market economics are of the essence.

That is to say, individual consumers should see charges hit their credit card or other payment accounts each and every time medical care services are utilized or premiums for an honest form of health insurance are paid. Likewise, providers should always be looking over their shoulders—like in all other economic markets—at the prices, practices, and value propositions of their competitors.

But what we have, instead, is a clunky, pooled, opaque, pre-payment system that is the very opposite of transparent risk-based insurance. This perverse system utterly euthanizes both consumers and providers when it comes to any knowledge of, and incentives for, economizing on the use of medical services.

Indeed, if automobile purchases were on this kind of homogenized, pooled pre-payment system everyone would be driving a Lamborghini, Rolls-Royce, Mercedes, or even a Cadillac or two. You’d be a sucker to drive a Korean-branded, Mexico-assembled econobox—of which there are actually millions on the US roads today.

Of course, they are pleased to call this pooled, homogenized method of health care pricing “community-rated” underwriting. But there is nothing that resembles insurance “underwriting” about it. It’s just a case of adding up all the costs for an accounting period and dividing by the number of “insured” units in the pool. After this primitive math exercise, every insured unit gets tagged with the same price, save for family-size differentials and, under ObamaCare, a virtue-signaling discount for not smoking.

To get to the heart of the matter, therefore, the only real appropriate word for what passes for “health insurance” in America today is “socialism.” That is, essentially a one-size-fits-all pricing algorithm that is inherently an engine of inflation, excess, and waste like few other economic arrangements in America or communist China, for that matter.

Accordingly, it doesn’t really matter whether we are talking about Medicare, Medicaid, ObamaCare Exchange plans, employer group plans, or the odds and sods of individual commercial insurance plans that still hang around the basket. The common characteristic of all of these plans is that they radically homogenize beneficiary payment rates by wholesale elimination of risk-based pricing to the individual consumer/beneficiary, which by definition, of course, includes an ixnay on pricing for “pre-existing conditions.”

Moreover, when push came to shove, that was always the end game of the decades-long drive in Washington for “national health insurance,” which finally ended in the 2010 hybrid called ObamaCare. The core proposition of the latter, which finally gave it enough political traction to pass, was the elimination of pre-existing conditions in health insurance underwriting and thereby almost the entire scope for medically-based underwriting of premiums.

That is to say, the ObamaCare legislation essentially threw the baby out with the bathwater. After all, when you have bans on pricing for risk or for pre-existing conditions or health status of beneficiaries in favor of a homogenized “community rating” system, you have “insurance” in name only.

In fact, the only thing that ObamaCare permits that even resembles risk-based underwriting is premium variance based on age (limited to a 3:1 range), family size, rural versus urban geography, and the aforementioned token penalty for smoking.

In the wake of radically community-rated ObamaCare Exchange-qualified plans, of course, the rest of the pre-2010 individual and small group insurance market was essentially abolished. That’s because if you don’t meet the ObamaCare plan specs, your plan doesn’t get the huge tax credit subsidies, which are now pouring out of Uncle Sam’s busted checking account at a rate of nearly $100 billion per year.

In short, Uncle Sam is now deploying a $100 billion per year carrot to force the entire individual and small group medical insurance market into the ultimate one-size-fits-all Procrustean bed. Thus, unless you offer all of the features and conditions itemized below, it’s “no ticky, no washy” for the hard-pressed Main Street household not covered by a large employer-based medical plan (see Part 2).

Health-conscious households with only routine medical expenses might prefer to self-insure these routine costs, supplemented by a major medical plan carrying a large annual deductible and a small premium to underwrite the risk of a low-frequency catastrophic medical episode. This kind of catastrophic insurance plan for a healthy low-risk family of four could easily cost less than $10,000 per year or even $5,000 if the deductible is high enough, while still protecting against financial ruin.

By contrast, the actuarial cost of an ObamaCare qualifying plan for a family of four easily amounts to $25,000 per year in today’s inflation-ridden medical care markets. So the Washington-based solution is always the same: Bigger and more comprehensive taxpayer subsidies to bring down the out-of-pocket expense of bureaucratically specified and administered Cadillac plans to manageable cost levels.

Nor is it surprising, therefore, as to why even the supposedly lower cost “Bronze” plans under ObamaCare carry such high premiums. That is, the mandatory features that these plans must have in order to be certified as a Qualified Health Plan (QHP) on the ACA Marketplaces and therefore be eligible for premium tax credits and cost-sharing reductions run on and on like Tennyson’s brook:

• Guaranteed Issue: Plans must be offered to every applicant regardless of health status, gender, or other factors (no medical underwriting).
• No Pre-Existing Condition Exclusions or Waiting Periods: Coverage for pre-existing conditions must begin on day one with no exclusions or delays.
• Essential Health Benefits (EHB) must cover all 10 statutory categories with substantial actuarial value in each:
  • Ambulatory patient services 
  • Emergency services 
  • Hospitalization 
  • Maternity and newborn care 
  • Mental health and substance use disorder services (including behavioral health treatment) 
  • Prescription drugs 
  • Rehabilitative and habilitative services and devices 
  • Laboratory services 
  • Preventive and wellness services and chronic disease management 
  • Pediatric services, including oral and vision care
• Actuarial Value (Metal Level) Compliance: These requirements measure the percentage of average medical costs for a standardized population the plan pays for after all out-of-pocket deductibles, co-insurance, and co-pays. The levels are signified by metal-based category under which the policy pays an increasingly higher percentage of total medical costs:
  • Bronze ≈ 60%
  • Silver ≈ 70%
  • Gold ≈ 80% 
  • Platinum ≈ 90%
•  Beyond the above ratio, however, there is a further absolute limit called the Out-of-Pocket Maximum Limit that cannot be exceeded by total in network cost-sharing (deductible + co-pays + coinsurance). These caps for 2026 are currently $10,150 for individual plans and $20,300 for family plans.
• Thus, in the case of a Bronze plan where total medical costs amounted to $100,000 due to an extreme illness, hospital stay, or expensive course of treatments, the plan would ordinarily pay $60,000 and the beneficiary $40,000. But the maximum cap would limit beneficiary payments to roughly half that or $20,300. 
• And if the household had $80,000 of adjusted gross income under current law its maximum cost for the premium would have been 6% or $4,800. Essentially all the rest would be absorbed by Uncle Sam.
• No Annual or Lifetime Dollar Limits on Essential Health Benefits
• Preventive Services with Zero Cost-Sharing. All USPSTF “A” & “B” recommendations, ACIP vaccines, HRSA women’s preventive services, and Bright Futures pediatric services must be covered pre-deductible with $0 co-pay/coinsurance when in-network.
• Community Rating / Restricted Rating Factors: Premiums may vary only by:
  • Age (3:1 ratio max) 
  • Tobacco use (1.5:1 ratio max) 
  • Geographic rating area 
  • Family size
    → No variation by health status, gender, occupation, etc.
• Single Risk Pool: The issuer must pool all individual-market QHP enrollees (on- and off-exchange) into one risk pool for rating purposes.
• Network Adequacy & Essential Community Provider Standards: Plans must include sufficient number and type of providers, plus a minimum percentage of available Essential Community Providers (hospitals serving low-income, FQHCs, Ryan White, etc.).
• Accreditation: Plans must be accredited (or in process) by NCQA, URAC, or another HHS-recognized body on risk adjustment, quality improvement, etc.
• Meaningful Difference/Non-Discrimination: Plans from the same issuer must be meaningfully different from one another; no unjustified discrimination based on age, disability, or expected health needs.
• Standardized Benefit Design: If the Marketplace offers standardized options (most states do for 2026), the QHP must match exactly on deductibles, co-pays, drug tiers, etc., if the issuer chooses to offer a standardized plan.

A plan that fails any one of these requirements cannot be sold on the ACA Marketplace and cannot receive premium tax credits or cost-sharing reductions — even if it is HSA-eligible, low-cost, or otherwise attractive. This is why short-term plans, fixed-indemnity, association plans, etc., are almost never subsidy-eligible.

As we will amplify in Part 2, the inflationary consequences of these requirements are enormous, and the political pressure to have these soaring costs absorbed by Uncle Sam is insuperable. So Trump is truly on to something: Give every American the cash equivalent of their Medicare, Medicaid, ObamaCare, or employer plans and let the free market attack on the inflation, waste, excess, and stupidity built into the current system begin!

In the meantime, here is a spoiler alert for Part 2. During the last 64 years, inflation-adjusted (2024 $) health care spending in the US has risen by 18X, from $283 billion in 1960 to $5.127 trillion in 2024. And on a per capita basis, the gain has been more than 10X, from about $1,500 in 1960 to more than $15,000 today (again in 2024$), while the share of GDP has exploded from 5.2% to 18.9%.

That is to say, the runaway health care freight train needs to be stopped and soon. Trump is indeed barking up precisely the right tree.

Trump would be doing the American economy a solid if he sticks with his attack on Fake Health Insurance. After all, it is the fundamental driver of America’s wildly inflationary health care system—so it needs to be thoroughly and aggressively exposed.

To begin, when you set aside outlays for health research, fellowships, direct public health delivery programs, and the like from the $5.267 trillion of total US health expenditures, there is currently nearly $3.7 trillion of spending for personal medical care services and plans, as shown in the table below. Yet the overwhelming share of this personal medical care spending is channeled through third-party payers that per Trump’s recent missive inherently deny beneficiaries the right to—

……..NEGOTIATE AND BUY THEIR OWN, MUCH BETTER, INSURANCE. POWER TO THE PEOPLE! WITH NOTHING GOING TO THE BIG, FAT, RICH INSURANCE COMPANIES, WHO HAVE MADE $TRILLIONS, AND RIPPED OFF AMERICA LONG ENOUGH.

In fact, fully 82% or $3.0 trillion of personal medical care spending (2024) is funded by third-party payers. More importantly, although these payers are frequently referred to as “medical insurance” vendors, they provide insurance in name only. As we amplified in Part 1, the vast bulk of these third-party dollars is provided via government entitlements or community-rated private and employer payment pools that do not set prices on a medical risk-adjusted basis, and therefore do not implicate beneficiaries in the cost of service that their own health status and practices generate.

Accordingly, current annual personnel health care spending amounts to $10,934 per beneficiary but just $2,018 of this represents out-of-pocket costs for premiums, deductibles, and co-pays absorbed by consumers. Health care consumers never see, feel or have the foggiest idea about the $8,916 balance.

Now, whether this $8,916 balance per beneficiary paid through plan pools is making insurance companies rich, as Trump has claimed, or government bureaucracies fat, as political conservatives often charge, is really beside the point.

What actually matters is that unlike the case in every other economic market, neither medical care consumers nor providers see the costs and prices of the services and care delivered to or by them. Consequently, they have no economic incentives to respond to marketplace signals. That is, to shop around if they are price-sensitive consumers or to improve their price/service proposition relative to their competitors if they are providers.

Notes:

• Per Benef $ = Total Expenditure /# of total beneficiaries
• OOP/Benef $ = Beneficiary OOP /# of total beneficiaries 
• OOP% = Beneficiary OOP / Total Exp (overall 18.4%) 
• Beneficiary total 336.8M includes ~7M dual-eligible counted twice 
• Covers personal health care only; full NHE = $5.267T (remaining $1.58T = other payers + non-personal)

The above table makes clear that 55% or $2.26 trillion of personnel medical care spending is owing to the two big, traditional government entitlements—Medicare and Medicaid. Yet both of these massive government funding pools are almost completely opaque to the consumer. The 147 million (net of dual 7 million eligibles) beneficiaries of these entitlements never see the medical bill or experience the financial cost, save for modest copays in the case of Medicare.

In the case of Medicaid, in fact, it’s upwards of 84.5 million Medicaid beneficiaries who pay virtually nothing out of pocket for their services. As shown below, out-of-pocket expense for Medicaid co-pays and other charges amounts to just 1.1% of total Medicaid outlays or $118 per beneficiary per year. By contrast, the third-party government payer absorbs upwards of $10,844 per beneficiary of costs. That’s a ratio of 92:1 on the account of Uncle Sucker and his state and local government auxiliaries.

Yes, Medicaid was originally established as a form of in-kind income transfer payment for the low income population. But now fully 25% of the total US population is covered by Medicaid, and in that capacity effectively receives free medical care. The only thing that holds down prices, utilization rates, and costs is bureaucratic price and use controls that amount to a blunt instrument that does little to contain the rampant inflation of the underlying arrangement.

For want of doubt, here is the cost level, number of Medicaid beneficiaries, and costs per beneficiary in real terms since 1980. There can be little doubt from this data that free health care is an inflation mill like no other.

To wit, total enrollment has risen from just under 20 million in 1980 to a recent pandemic-period peak of nearly 100 million. At the same time, the constant dollar cost (2024 $) has surged from $4,857 per beneficiary in 1980 to $10,959 in 2024.

When the beneficiary rolls rise nearly fivefold and costs per beneficiary increase by a factor of 2.2X over a 45-year period, total outlays erupt skyward. Thus, the “runaway” Medicaid cost of $95 billion per year that the Reagan administration attacked in 1981 had already reached $173 billion by 1990 and $578 billion on the eve of ObamaCare enactment in 2010.

Since then, owing to expanded eligibility and liberalized benefits, the rolls and constant dollar costs have nearly doubled to 85 million and $926 billion, respectively. Then again, the laws of mathematics will eventually not be mocked.

During the last 44 years constant dollar Medicaid spending has grown at 5.31% per annum or double the 2.7% per annum real GDP growth. So as the man said, trends which are unsustainable tend to stop.

That’s what free stuff does. Trump hit the nail on the head, even if he didn’t exactly have Medicaid in mind when he issued his “medical spending power to the people” ukase earlier this week.

Notes:

• Nominal costs from MACPAC FY data (approx. calendar); 2023/2024 adjusted to CMS NHE ($872B 2023, $926B 2024 proj.). 
• Beneficiaries: Average annual enrollment (M). 
• Real values deflated to 2024$ using CPI-U (2024=313.689). 
• Plain text for copying.

Actually, POTUS should have had Medicare in mind, as well. There is absolutely no medically underwritten “insurance” aspect to it.

In the first place, 84% of its staggering $1.1 trillion annual cost is accounted for by direct government payments to vendors. Consumers were therefore obviously free to run up $920 billion worth of services and charges in 2024 with no real visibility as to the cost of the tens of billions of items billed to Medicare on behalf of its 66 million beneficiaries.

Moreover, even the $180 billion of out-of-pocket costs absorbed by Medicare beneficiaries didn’t really convey much meaningful information about the cost of service and the financial consequences of high utilization rates or Cadillac treatment and service options. That’s because fully $150 billion of the amounts absorbed by beneficiaries were for Part B ($130 billion) and Part D ($20 billion) “insurance premiums.”

Again, there are no insurance characteristics whatsoever about these premium payments. The latter are simply arbitrary fiscal mechanisms that were designed to reduce the cost of physicians and drug prescription costs on the government’s general fund, and have varied considerably relative to costs over time. Effectively, the premiums are just a form of beneficiary tax that has no relationship to the price and quantity of Part B and Part D services consumed.

Accordingly, the only real use and price-based element to the entire $1.1 trillion Medicare payments pool is the roughly $30 billion worth of co-pays and deductibles absorbed by beneficiaries in 2024. That is to say, just 2.7% of Medicare outlays are funded in a manner that conveys to consumers any sense at all of the out-of-pocket cost impact of the medical services utilized.

For all practical purposes, therefore, the massive outlays for Medicare also amount to “free stuff” at the beneficiary level.

When it comes to the balance of the third-party payments pools, the out-of-pocket portion of total expense is considerably higher than under the two big government health care entitlements. In the case of ObamaCare, the 21.3 million beneficiaries paid $120 billion or 56% of the cost in 2024.

But $54 billion of the latter was for ObamaCare Exchange “insurance” premiums, net of premium credits. This means the out-of-pocket impact on consumers was mainly a function of their income, not the utilization of health care services or any sense of the medically underwritten cost of the mandatory package of coverages that they are forced to buy on the exchanges in order to get the premium credits.

Likewise, in the case of the $1.4 trillion medical services expense incurred by the 155 million beneficiaries of employer-based health plans, only 25% was actually paid by beneficiaries.

In truth, therefore, the actual functioning of the $1.6 trillion segment of the market covered by ObamaCare and Employer Plans is thoroughly designed to minimize consumer knowledge of their own health care costs and to shield them from the impact that their behavior and choices have on the total costs, as we will amplify later.

Reposted from Stockman’s private service

Steps Toward Fixing Health Care
by David Stockman at Brownstone Institute – Daily Economics, Policy, Public Health, Society

The post Steps Toward Fixing Health Care was first published by The Brownstone Institute, and is republished under a Creative Commons Attribution 4.0 International License. Please support their efforts.