« Florida's Public Option | Main | I have a bad feeling about this »
How well with the public option work?
Austin Frakt has a good post on this topic, excerpt:
I wonder how optimistic we can be about the degree of variation in spending predicted by risk adjustment models. I think the answer is “not very.” From the literature on health care risk adjustment (via this post):
Statistical models developed by scholars have relatively low predictive power. Predicting ten percent of the variation in [health] expenditure is considered good (e.g., Medicare Advantage’s risk adjustment model). That means ninety percent of the variation is unexplained by the model or chalked up to random error. An individual ought to be a better predictor of his or her health expenditures than a model that cannot include measures unobservable to the researcher. (How much better? I don’t know.)
Expenses for some specific services are more predictable. Drug expenses, for example, are persistent because individuals tend to use the same medications year after year. The best statistical models of drug spending can predict about 55% of the variation in next year’s drug expenses, leaving 45% to random error.
That puts a reasonable cap at 55%, but only for very persistent services, like drugs. Expect the best overall risk adjustment to be no worse than 10% and no where near as good as 55%.
Private insurers should not be so worried but taxpayers should. The public plan looks game-able.
The middle, double-indented quotation is also from Frakt.
I also view the public plan as game-able, though through a slightly different mechanism. I don't think individuals are such good judges of their future health expenditures (self-deception) and in this regard the adverse selection model has been over-promoted. That said, private insurance companies can and will find ways of keeping these people off their books -- poor service anyone? -- and many of them will end up in the public plan. The CBO confirms that the public plan will not be a major force for cost reduction. And if you think we will succeed in using taxes and fees to get the private insurance companies to take on their share of these people, as they do in the Netherlands, well...I believe that is a battle they will win, after the fact, when the public is no longer watching the implementation of the details of the legislation. It's one easy way of buying them off as a lobby.
Posted by Tyler Cowen on October 31, 2009 at 01:35 PM in Medicine | Permalink
Comments
For those interested in this post, and before commenting, I would go to Austin Frakt's site and look at the responses to his article.
Several points: 1. for large pools, modeling for risk adjustment is possible and gaming iteself can be modeled; 2) the Dutch example is predictive of 70%.
This post raises an interesting question, however,: if the audience of this website (Cowen's) is likely to have few readers who understand insurance, or are familiar with risk adjustment, and thus there are few respondents in the comment category, how likely will there be an informative dialogue or be able to critique it? Is it more likely that Austin's post will be critqued at his post (which is reviewed by persons interested and knowledgeable about health care finance) but not in this website, which has a more general audience? Does the audience on this site go back and look at the crtique in the comments section on Austin's site?
Posted by: Bill at Oct 31, 2009 1:57:08 PM
You might also ask this question: if risk adjustment were not possible, how is it that there is a reinsurance market? Carriers assume, purchase or sell risk pools to each other, and there is a valuation mechanism that exists for the transfer of that risk and that exchange.
Posted by: Bill at Oct 31, 2009 2:17:46 PM
I won't assume that you could not do risk adjustment. But, just for the sake of argument, let's assume you can't. Is there a mechanism that you could design that would minimize gaming because you assumed risk adjustment were not possible.
There is such a mechanism: distribute or swap to each carrier a percentage of the public option pool for an equal percentage of their pool based on their market share. If they gamed the system to push poor risk into the public option pool, then an exchange of a percentage of the public option insured based on their own market share would result in both the public option pool having the same risk profile as the private market. Or, you can create a phantom pool and do the same thing and equalize and assess later.
You might make this an exercise in game theory or mechanism design in addition to risk assessment.
Posted by: Bill at Oct 31, 2009 2:31:48 PM
It is shocking to me that after months of conservatives going all out to weaken the public option they now enjoy pointing out the public option we will get will be weak and less effective then promised by liberals. Shocking.
If we get a weak public option and it doesn't work that is a failure of a conservative-moderate plan.
If we get COOPs and they don't work it's a failure of an even more conservative plan.
If we get a trigger and it's ineffective that is a failure of an even more conservative plan.
If we do nothing we get more of the current (conservative) result which is a massive failure.
Posted by: Steko at Oct 31, 2009 4:19:30 PM
I predict that a lot of people will choose the public option for the same reason they use credit unions when they could use banks instead: they trust their credit union isn't looking for traps and loopholes with which to screw them and they value avoiding the anxiety and the hassle. Note that this is true even though forbearing from the tricks means that the credit unions can't offer particularly attractive terms, especially to the people who are good at avoiding the traps. I think the public option will flourish for the same reason. It won't be particularly cheap, and you might even suspect that you could do better with a private insurer if you really tried, but you like knowing that when you get sick you won't have to deal with some hostile entity that you hate and fear and whose business model requires them to look to make you worse off.
Posted by: David J. Balan at Oct 31, 2009 4:32:29 PM
I predict that people will choose the public option for the same reason that they choose credit unions when they could use banks: they trust that the credit unions aren't looking for tricks and loopholes to screw them with and they value avoiding the anxiety and the hassle. Note that credit unions get business *even though* forbearing from such tricks means that they can't offer particularly attractive terms, especially to the kinds of people who are good at avoiding the tricks. I think people will choose the public option because they will like knowing that they are not dealing with an enemy who will try to exploit them at their weakest moment, and will be willing to pay a modest premium for that.
Posted by: David J. Balan at Oct 31, 2009 4:40:23 PM
"It won't be particularly cheap, and you might even suspect that you could do better with a private insurer if you really tried, but you like knowing that when you get sick you won't have to deal with some hostile entity that you hate and fear and whose business model requires them to look to make you worse off."
Clearly you have not had to deal with the Veterans Administration.
Posted by: Steve C. at Oct 31, 2009 5:30:41 PM
Interesting, but as was pointed out above, how do the reinsurance people manage? Also, they manage to run this in the Netherlands while still having lower costs than we do IIRC (meaning lower loss ratios).
Posted by: steve at Oct 31, 2009 7:19:13 PM
That said, private insurance companies can and will find ways of keeping these people off their books -- poor service anyone?
Are you saying that the private insurers in the small pool offered to those without insurance who earn too much for Medicare will offer policies that include only the worst doctors in their networks? Or will the insurers drive out the doctors in its network who have patients that are sick by rejecting valid payments and otherwise being hostile to such doctors?
But what doctors and hospitals will remain for their employer paid insurance plans which will be a far larger share of the insured?
The insurers serve the doctors, hospitals, and drug companies, not the patients. This is the point you and others have long made - the patients don't see the costs of their treatment because the insurers are the ones paying the doctors and hospitals and drug companies.
If the insurers piss off their real customers, the doctors and hospitals and drug companies, they will lose market share, and in general the doctors, hospitals, and drug companies have enough political power to get government to pay them when the insurers won't. Look at all the ways government pays these providers when insurers won't: Medicare, Medicaid, high risk government run and often subsidized pools, government payments to care providers for uncompensated care, tax subsidies for paying for uncompensated care (charity).
On the last point, think about it. If you give $30,000 to pay for medical for others, you get to exclude that money from income taxes. But if you give a new $30,000car to someone, you must pay income taxes on it, and sometimes pay a gift tax.
One really must remember that doctors and hospitals created what is now seen as health insurance to serve themselves, to increase their customer base, to make it possible for patients to be served by them without the doctors and hospitals going into the personal loan business. By selling groups on prepaid medical, they were able to get their future customers to "lay away" their medical treatment in a small weekly or monthly payment. In the years before WWII, the cost of a doctor or hospital stay was more than most people could pay for.
The problem the insurers face is the increasing risk of moral hazard: as employers stop paying the premiums of the healthy employee, increasingly the only people buying insurance are those who will make a claim. And those who don't buy insurance will get uncompensated care paid for by taxes or surcharges on insurance or health care, making delaying buying insurance a very low cost and risk option.
Posted by: mulp at Oct 31, 2009 7:31:11 PM
Clearly you have not had to deal with the Veterans Administration.
Congress driven by conservatives have done everything they can to cut VA costs, forcing VA to make access to the VA as hard as possible to access, imposing quotas on obtaining access to VA benefits to create waiting periods.
So, clearly, all those who sought VA care should be floaking to the supeior private sector to get their health care. So, why is anyone complaining about the poor VA customer service when the private sector is so superior? Is it because the private sector refuses to insure the vets, forcing them to fight the VA because they have some say over their VA system benefits?
Since 2007, Congress has been actively looking into the VA system problems, increasing funding, and proposing changes to the military services discharge procedures to eliminate the need for two disability reviews, one to declare a soldier unfit for service for medical reasons, and a second on to determine a former soldier discharged for medical reasons requires VA medical care.
Of course, what this is revealing is the deficiencies in the services health care system, where the soldier is discharged to save the service the cost of providing health care. But if we look at the private sector military, we see the mercenary forces actively design their contracts with soldiers to deny them medical care as well, forcing them to seek US government funded health care, because the private insurers won't serve them either.
Really, if the private sector were solving the many health care problems, no one would be seeking government involvement.
Posted by: mulp at Oct 31, 2009 7:51:23 PM
"Really, if the private sector were solving the many health care problems, no one would be seeking government involvement."
Really, if the government hadn't horribly skewed the medical insurance markets through tax policy and regulatory interventions, there wouldn't be a problem today.
For a comparison of costs and efficiency, one may refer to fields of medicine that aren't covered by insurers (cosmetic surgery, laser vision correction, veterinary medicine) and have thus escaped government intervention.
Posted by: Russ R at Oct 31, 2009 9:17:15 PM
I predict that a lot of people will choose the public option for the same reason they use credit unions when they could use banks instead: they trust their credit union isn't looking for traps and loopholes with which to screw them and they value avoiding the anxiety and the hassle. Note that this is true even though forbearing from the tricks means that the credit unions can't offer particularly attractive terms, especially to the people who are good at avoiding the traps. I think the public option will flourish for the same reason. It won't be particularly cheap, and you might even suspect that you could do better with a private insurer if you really tried, but you like knowing that when you get sick you won't have to deal with some hostile entity that you hate and fear and whose business model requires them to look to make you worse off.
The supply of health care will never meet demand. The fundamental task in managing a health care system is determining who will be denied care. In a market system, when demand is greater than supply, something becomes expensive, and then an insurance company denies that care because of "cost" (in essence, rationing). In a non-market system, when demand is greater than supply, there is a shortage, and the public option denies that care because of "shortages" (in essence, rationing).
But the basic function of either system is to deny health care. That is what all health care systems do.
Of course, you will say "But private insurance companies are driven by a profit model!". Well, sorry, the "public option" is driven by a profit model as well. If every treatment denied by a private insurance company goes into the pocket of insurance shareholders, well then every treatment denied by the public option goes into the pocket of Boeing and Lockheed Martin shareholders. Every dollar saved by a public option is more money that a politician can drop into some other pork project to buy votes and get contributions.
Congress driven by conservatives have done everything they can to cut VA costs, forcing VA to make access to the VA as hard as possible to access, imposing quotas on obtaining access to VA benefits to create waiting periods.
Given that the balance of power tends to shift between Republicans and Democrats pretty evenly, then what you are saying is that the public option can expect to have all the same problems as the VA?
It really doesn't matter if "Conservatives" are to blame for the problems in the VA. "Conservatives" being elected is a fact of life. In a democracy, sometimes the "other guys" will get into power and do their thing. If those "Evil Republicans" can screw up public systems, then that is a serious flaw in the public system regardless of whose fault it is. Given that the Republicans will do everything to cut VA costs (and implicitly, the public option costs)... and given that the Republicans will tend to have the balance of power about 50% of the time... then you admit that at least 50% of the time the public option will suck, right?
If your public option isn't politically viable, then it isn't viable. It doesn't really matter whose to blame for a system not working... if it doesn't work, it sucks.
Or, are you imagining a one-party system to go along with your public option? It wouldn't surprise me.
Posted by: Vehical Driver at Nov 1, 2009 1:55:27 AM
Bill. Unpredictability is why we need insurance. Predictability is why we need savings.
If the government pays as they go for medical, there can be no savings. In fact, by mucking up the incentives there will be increases in costs. If people are overpaying for their risk profile, and the "public option" is actually actuarial, then maybe there could be savings.
Steko. Please.
Posted by: Andrew at Nov 1, 2009 4:30:28 AM
"
"For a comparison of costs and efficiency, one may refer to fields of medicine that aren't covered by insurers (cosmetic surgery, laser vision correction, veterinary medicine) and have thus escaped government intervention."
Apples and oranges. You do not have to have laser vision surgery or cosmetic surgery. Both sides of the deal can walk away. They can be delayed forever, or just not done. This does not even begin to compare with the most common health problems we face, heart disease (including hypertension) and cancers. I really wish you guys would lay off this extremely poor analogy. You need to find a good libertarian and have him explain how markets work.
Posted by: Ralph at Nov 1, 2009 8:30:32 AM
Hmm, the simple null hypothesis is that future HC costs are relatively unpredictable by anyone (modelers and consumers alike.) Thus it is an ideal area for universal coverage (unlike, say, fire insurance.)
Posted by: gorobei at Nov 1, 2009 9:43:11 AM
gorobei - That's not the null. The null is that the risk adjustment system we get under Medicare--a product of captured regulators--is not very good. On what basis should we expect a better one under health reform? How likely is it there would be one that isn't game-able? And, to go beyond the original post, even if it is game-able how big a problem is it? Does it really condemn the whole enterprise? That's not a foregone conclusion.
Posted by: The Incidental Economist at Nov 1, 2009 12:47:10 PM
"The supply of health care will never meet demand. The fundamental task in managing a health care system is determining who will be denied care. In a market system, when demand is greater than supply, something becomes expensive, and then an insurance company denies that care because of "cost" (in essence, rationing). In a non-market system, when demand is greater than supply, there is a shortage, and the public option denies that care because of "shortages" (in essence, rationing)."
It is true that there must be rationing, and that goes for the public option too. In a public option, just exactly what will get paid for and what won't will be the product of some combination of competition with private insurance firms and political negotiation (and yes there is a risk that political pressure will cause things to be paid for that shouldn't be). But at private insurance companies, what gets denied is driven by what the insurance company thinks it can get away with denying, and absent an implausibly strong theory of reputation effects, this process will be much less rational and much less fair than what the government will do.
Posted by: David J. Balan at Nov 1, 2009 2:33:28 PM
Incidental economist,
Asserting the null is a derivative (the Medicare risk adjustment system is poor) is pretty bold.
The simple model is a population of equally healthy people with the four horsemen randomly inflicting harm on individuals. Until you have rejected that, it's pointless to talk about free-rider issues.
Posted by: gorobei at Nov 1, 2009 10:50:25 PM
For a comparison of costs and efficiency, one may refer to fields of medicine that aren't covered by insurers (cosmetic surgery, laser vision correction, veterinary medicine) and have thus escaped government intervention.
Let's see, people who are disfigured and don't have sufficient income remain maimed. Those have poor sight or who are blind and have no money do without any vision correction at all, even if it prevents them from working. If the owner of an animal can't afford treatment, the animal i put down.
So, I guess you are suggesting a system of health care where those without the means to pay for health care are euthanized just like your cat or dog or horse when its needs are beyond what you can afford.
From http://prescriptions.blogs.nytimes.com/2009/10/30/lacking-insurance-hospitalized-children-more-likely-to-die/?hpw
Uninsured children who wind up in the hospital are much more likely to die than children covered by either private or government insurance plans, according to one of the first studies to assess the impact of insurance coverage on hospitalized children.
:
...uninsured children were in the hospital, on average, for less than a day when they died, compared with a full day for insured children. Children without insurance incurred lower hospital charges — $8,058 on average, compared with $20,951 for insured children.
In children who survived hospitalization, the length of stay and charges did not vary with insurance status.
Of course, this is the situation in most of the nations of the world where government doesn't play a major role in health care. People die when they become ill and can't afford to pay for care. And that was the case in the US before WWII for the most part, with the government dealing with the major systematic health risks, like small pox and typhus. Otherwise, government supported hospitals where the poor and homeless were taken to die.
Which was the primary purposes of hospitals as I understand it, for the poor to die, until a Texas hospital seeking to make hospitals a place of life came up with the idea of prepaid hospitalization. With a teacher union as the first customer of the plan. It was hospitals and doctors who set up the plans and sold them to employers before WWII that began the system of employer based prepaid health insurance. While WWII accelerated it, and an IRS ruling even later entrenched it, the government has always been involved in dealing with illness and employers became to means of providing health care to those who weren't wealthy.
Of course, it was hospitals and doctors who pushed the system that became the system we hve today because without prepayment, few could afford the cost of the providers and the providers wanted to get paid so they could expand their business.
Now if you think the US has a messed up system because of government, point to one example of your ideal health care system in a nation without government involvement. But of course, you expect the free lunch of claiming you know how a health care system should work without any requirement to prove it by showing it in operation. Two hundred nations give you two hundred examples, and if your superior system isn't operating wonderfully in one of them, then I suggest your system isn't feasible.
Posted by: mulp at Nov 1, 2009 11:14:37 PM
