Jonathan Gruber


On Rosy Premium Scenarios

As the Senate starts its debate of the health-care bill introduced by Senate Majority Leader Harry Reid, the back-and-forth has intensified over what the legislation would do to insurance premiums and rising costs in the coming years.

Over the Thanksgiving break, M.I.T. economist Jonathan Gruber released a short paper in which he claimed the Reid bill would reduce premiums for people buying insurance in the individual market. It was clear from a story in Politico that the Obama White House was gearing up to argue the Gruber analysis was proof positive of the virtues of the Senate legislation. Unfortunately for Team Obama, Gruber’s paper was quickly shot down by a new study from the Congressional Budget Office (CBO). CBO estimates that the Reid bill would drive premiums up, not down, in the individual market — by 10 to 13 percent compared to current law. For family coverage, the Reid bill would increase premiums by, on average, $2,100 in 2016, according to CBO. So much for the argument that Obamacare will cut premium costs across the board. It clearly won’t.

But even this CBO analysis is terribly optimistic. For weeks, experts have been warning that the Senate legislation would lead to serious “adverse selection” in the individual and small-group insurance markets. Adverse selection occurs when, on average, the pool of insured lives becomes less healthy over time compared to a relevant comparison group. The Senate bill would require insurers to take all comers, with heavily regulated rates. These rules would help those with chronic conditions get less expensive coverage. But they would also drive up premiums for the young and healthy. If the healthier people left or stayed out the insurance risk pool, premiums for those who remained would go up quite dramatically. Indeed, that’s exactly what Wellpoint, a large national insurer, predicted would occur under the bill prepared by Senate Finance Committee Chairman Max Baucus, which formed the basis of much of the Reid plan. The Wellpoint actuaries estimated that, under the Baucus bill, premiums for a person at the average age and in average health would go up by more than 50 percent in the individual insurance market in California, and by more than 20 percent in the small-group market.

CBO argues that risk selection problems will be mitigated by the presence of new insurance subsidies, penalties for those who don’t get coverage, a once-a-year enrollment window which will limit the opportunity to come back into insurance, and the tendency for people to comply with mandates even if they are costly. But, as others have shown, even with subsidies, the cost of coverage for many low and moderate wage families will be very substantial. Many people could reduce their costs if they paid the penalty instead of premiums and signed up with insurance only when they really needed it. Would the fact that they might have to wait a few months before getting insurance be enough to keep them in coverage all year? Hard to predict. In fact, as pointed out here, it appears that none of most-cited models used to estimate the impact of health-reform plans, including CBO’s, has an explicit capacity to calibrate insurance take-up rates based on the penalties imposed on those who go without coverage. Apparently, the premium estimates are based as much on judgment as analytics, and CBO’s judgment is clearly on the optimistic side. But what if they are wrong? What if adverse selection is more pronounced, as many experts are predicting? At a minimum, before any votes are cast, CBO should make it clear how sensitive their premium estimates are to their assumptions about the risk pool. That way Senators could decide for themselves what to believe.

posted by James C. Capretta | 6:11 pm
Tags: CBO, Reid bill, Jonathan Gruber, adverse selection, risk pools
File As: Health Care

Is Government-Driven “Cost Containment” Our Only Option?

President Obama continues to argue that it is crucial for Congress to pass a health-care bill because it will help slow the pace of rising costs. Perhaps the president and his aides actually believe that to be the case. But, in recent days, it has become abundantly clear that virtually no one else does.

Today, in a column in the Wall Street Journal, the dean of the Harvard Medical School, Jeffrey Flier, says the bills under consideration in Congress are not health reform bills at all, but just access expansion proposals. As he puts it, “I find near unanimity of opinion that, whatever its shape, the final legislation that will emerge from Congress will markedly accelerate national health-care spending rather than restrain it.”

Flier is just the latest commentator to sound the alarm on costs. Robert Samuelson and David Broder made similar points in columns published in recent days in the Washington Post, as did David Leonhardt in the New York Times.

So what do Obama apologists say in response to this chorus of criticism?

Here, a friendly discussion between the Post’s Ezra Klein and MIT Economics Professor Jonathan Gruber is useful. Their counter-argument can be essentially boiled down to two points: there’s no real alternative to the kinds of government-driven cost controls favored by most Democrats, and, although the measures inserted into the House and Senate bills are perhaps weak, they’re directionally right and better than nothing.

Of course, in the current environment, with large Democratic majorities determined to pass a bill based on heavy, centralized governmental control, there is little prospect for bipartisan reforms that would rely on decentralized financial incentives and cost-conscious consumers to allocate resources in the health sector. But it is flat wrong to suggest there is no alternative to a clumsy and politicized governmental process for health-care cost control. There is. It’s just that Democrats don’t like it. They want full governmental control, not a functioning marketplace.

Indeed, that’s the debate we should be having this year. Are Klein and Gruber right? Or are their opponents? In other words, what process stands the best chance of bringing about continual improvement in the efficiency and quality of patient care? Can the federal government really root out wasteful spending in the health sector without harming the quality of American medical care?

Most Democrats seem to think so, but all of the evidence indicates otherwise. The federal government has been running the Medicare and Medicaid programs for more than four decades. There have been countless efforts to use the leverage of provider payment regulations to push doctors and hospitals to organize themselves differently and to change the way they care for patients. They haven’t worked. In fact, Medicare’s current payment systems are now rightfully seen as effectively underwriting the problems found in today’s arrangements. They encourage fragmentation and autonomy, not integration and coordination. The focus is on maximizing revenue from the government, not patient satisfaction. And yet, if the current bills in Congress were to become law, in ten years time, Medicare would look and operate pretty much just as it does today, except with even heavier reliance on fee-for-service medicine. In fact, the administration’s push for a new Medicare Commission with the authority to rewrite how providers are paid by the program is a tacit admission that neither Congress nor the executive branch can be trusted to run a governmental health insurance program efficiently. But there’s also little reason to assume a commission, accountable to its political patrons, would do any better.

The only thing the federal government can ever do well to cut costs is to impose arbitrary payment reductions. Of course, that’s exactly what the Democrats are proposing to do in the current health-care bills. These cuts aren’t calibrated based on the quality of patient care. All providers would get cut pretty much the same. If Obamacare passes, we can expect more of the same, just with worse consequences. At some point, price controls always lead to a reduction in the willing suppliers of services, which means queues and other barriers to accessing care.

There is an alternative, however. Congress could establish a decentralized approach to resource allocation — an arrangement in which consumers have strong financial incentives to pick lower-cost insurance and health delivery options, and in which insurers, hospitals, and physicians have strong incentives to reorganize for efficiency. Importantly, building such a marketplace would require converting today’s open-ended federal tax and entitlement arrangements into fixed contributions which the consumers, not the government, would control. That was the basic design of the prescription-drug benefit in Medicare, and it has worked far better to hold down costs than any other health program introduced in recent years.

The real debate in health care has always been the same: should the country adopt full governmental control, or can a market deliver better value at lower cost? There is a choice, even if those currently in power don’t want to admit it.

posted by James C. Capretta | 5:41 pm
Tags: Obamacare, Medicare Commission, Robert Samuelson, David Broder, David Leonhardt, Ezra Klein, Jonathan Gruber, cost control
File As: Health Care