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Wall Chair in Corporate Law and Governance
University of Missouri Law School

Thomas A. Lambert is the Wall Chair in Corporate Law and Governance and Professor of Law. Professor Lambert’s scholarship focuses on antitrust, corporate and regulatory matters.

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An Honest Question for Obamacare Supporters

A number of opponents of Obamacare, such as Wall Street Journal columnist William McGurn, have criticized the President and his people for referring to pending proposals as “health insurance reform” rather than “health care reform.” I suppose these critics think the President is engaging in a sleight of hand in an effort to minimize the significance of the reform proposals — as in, “We’re not reforming the whole health care system, just health insurance. No biggie.” But Mr. Obama is right. This proposal is about insurance rather than the provision of health care itself. And that’s the main problem.

At the outset, the President claimed that a central goal of reform was to reduce the cost of health care itself. While Mr. Obama was always concerned with expanding health insurance coverage to the uninsured, he maintained that health care cost reduction is also key (and, in fact, necessary for expanding coverage without breaking the bank). For example, in a June 2009 radio address setting forth his goals for health care reform, the President insisted, “We must attack the root causes of skyrocketing health care costs,” and he reiterated his “belief that any health care reform must be built around fundamental reforms that lower costs, improve quality and coverage, and also protect consumer choice.” Similarly, his Council of Economic Advisers listed a reduction in actual health care costs as one of the two goals (along with insurance coverage expansion) of health care reform:

CEA’s findings on the state of the current system lead to a natural focus on two key components of successful health care reform: (1) a genuine containment of the growth rate of health care costs, and (2) the expansion of insurance coverage.

So I have a question for supporters of Obamacare (either the House bill, the Senate bill, or the President’s own proposal): What provisions of the proposed legislation will reduce the costs of health care itself? This is an honest question. I’m really trying figure out, if a reduction in health care costs is a primary goal of this legislation (and mustn’t it be?), what is the strongest possible case for the pending proposals?

Viewing the proposals in the most favorable light, I can see how they could conceivably lower the price of health insurance. By forcing everyone to carry insurance, even the healthy people who would otherwise forego it, the legislation could bring more healthy people into insurers’ risk pools, thereby reducing the average pay-out per insured and, accordingly, the premiums each insured must pay. This assumes, of course, that the legislation will succeed in driving healthier people into the risk pool — a highly questionable assumption for reasons I explained here — but I can at least see how the legislation might drive down average insurance prices if it really forces more healthy people to carry insurance. Of course, the folks who wouldn’t buy insurance but are forced by law to do so will experience a price increase, but the average price of purchased insurance policies would likely fall if adverse selection were reduced by an individual mandate. That, however, affects only insurance prices. It has nothing to do with lowering actual health care costs. And that’s where our real problem lies.

Other key cost/price-reducing provisions in the pending proposals seem similarly focused on reducing the cost or price of insurance, not the cost of health care services themselves. The Health Insurance Rate Authority created by the Obama proposal would employ rate regulation to keep insurance prices in check, but the regulators would presumably permit rate increases justified by rising health care costs (otherwise there’d be shortages), and the Authority would do nothing to constrain those costs. The proposed insurance exchanges would, according to Harvard economist David Cutler, “help curb underwriting and inefficient marketing practices that raise costs in the small-group and individual insurance markets.” But, again, this creates efficiencies only in the provision of insurance — it does nothing to reduce the costs of health care services, the costs that really drive the price of insurance in the first place. Proposed changes to Medicare (i.e., reimbursement reductions, changes in payment calculations to reflect value created rather than services performed, efforts to combat fraud and abuse) could reduce the government’s outlays on Medicare, but they do nothing to reduce the actual costs of the health care services being provided.

So what provisions of the proposals could really reduce actual health care costs? I see three: malpractice reform (which would reduce costly “defensive medicine”), improvements in information technology and comparative effectiveness research (which would allow doctors to share medical records more cheaply, to avoid costly mistakes resulting from a lack of knowledge about a patient’s history, and to select treatment options that have been shown to work effectively), and investments in preventive care (which would reduce total costs under the principle that “an ounce of prevention is worth a pound of cure”).

Should we expect much from these three sources of cost-reduction? Almost certainly not. First, the proposed malpractice reforms are anemic at best. As the Los Angeles Times reports, meaningful malpractice reform is essentially missing from the House and Senate bills (and the House bill might even weaken state tort reform efforts, as it would award certain grants only to states whose new tort reforms “do[] not limit attorneys’ fees or impose caps on damages”). The Obama proposal purports to reduce medical malpractice claims and the high-cost defensive treatments they encourage through a competitive grant program for States to develop alternative dispute resolution mechanisms for malpractice claims, and it provides up to $25 million — an average of $500,000 per state! — for these grants. Does anyone really expect this puny program to reduce the incidence of high-cost, defensive medical treatments aimed solely at avoiding massive malpractice claims?

Investments in comparative effectiveness research and preventive care could reduce total health care costs, but how significant would this cost reduction really be? Comparative effectiveness research will lower costs only if health care providers actually use the research findings in making treatment decisions, and this seems somewhat unlikely given that (1) doctors tend to think their patients are unique and should not be confined to “off the rack” treatments, and (2) insured patients have little or no incentive to pressure their physicians to follow the most cost-effective treatment regimens. I’m not saying cost-effectiveness research won’t reduce costs at all, and I do think this sort of “information gathering/dissemination” is an appropriate effort for the government (given the positive externalities of research, etc.). I just doubt the cost-savings will be that great. The same goes for the investments in preventive care, which, as detailed here (click through to see summaries of the provisions) amount mainly to grants for demonstrations, etc.

So am I missing something? Are there other provisions in these proposals that will actually reduce health care costs? If so, I’d really like to know.

If not, then how much sense does it make to move forward with this 2400+ page legislation? To focus on reducing the cost of health insurance without focusing on reducing the cost of health care services themselves — by far the largest component of health insurance costs — is to try to squeeze water from a rock. There just ain’t much there! The health insurance industry doesn’t display supracompetitive profits that can be reduced via creative regulation. As John Calfee explained in last Friday’s Wall Street Journal:

Fortune 500 data show that of the 43 industries that actually made a profit in 2009, health insurance ranked 35th, with profits of only 2.2% of revenues.

More fundamentally, premium increases are driven not by profits but by costs, as WellPoint has made abundantly clear in California. When HHS issued “Insurance Companies Prosper, Families Suffer,” its Feb. 18 report on firms that implemented “excessive” premium increases, plenty of nonprofit firms (such as Blue Cross/Blue Shield of Michigan, Regency Blue Cross/Blue Shield of Oregon, and Blue Cross/Blue Shield of Rhode Island) made the list.

But rather than argue over accounting data—which never show that profits amount to a significant portion of health-care costs anyway—let’s listen to what the marketplace is telling us. If health insurance is so lucrative, why aren’t giant companies jumping in?

MetLife has chosen to invest billions of dollars of free cash not in the health-insurance business but in a risky acquisition of the international life insurance business of beleaguered conglomerate AIG. And what about firms like Microsoft, General Electric, Google and Wal-Mart? They know how to enter new markets and make a profit. Why aren’t they selling health plans?

Those who know best are persuaded that far from being easy, making money selling health insurance is tough. It is no wonder Warren Buffett told CNBC on March 1 that health insurance is one part of the vast insurance market in which he has avoided investing.

Rather than trying to reduce the costs of health insurance only, Congress would do much better to enact reforms calculated to reduce the cost of health care itself. As I explained in this post, the starting point would be the elimination of the tax advantage afforded to employer-provided health insurance, an advantage that has transformed health “insurance” into pre-paid health care and has, in the process, decimated effective price competition for medical services. Unfortunately, President Obama — in a shamefully disingenuous attack during the presidential campaign — effectively took that sensible option off the table.

So, Obamacare supporters, what am I missing? Tell me how this thing is going to reduce actual health care costs? Surely you can do better than Paul Krugman, who recently assured New York Times readers that there’s plenty of cost-saving efforts in there, even if “nobody knows how well any one of these efforts will work.” It’s a little like drilling for oil, he says: “any individual test hole … will probably come up dry,” but “the odds are, in fact, that some of the test holes will pan out, and produce big payoffs.”

For Pete’s sake, Obamacare supporters, please tell me that’s not the best you’ve got!

Filed under: economics, health care reform debate, markets, politics, regulation