Despite the odds, Obama cut through the political posturing at the health care summit and created some actual discussion at moments. Anyone could see and hear in those moments that all the pundits' previous coloring of this summit had been upended and made wrong.
Obama listened well and then spoke directly to Republicans, sparking a thread of actual dialogue that began with whether reform could be incremental -- whether preexisting condition and cost reforms could be done independently of comprehensive reform....
And then the discussion veered suddenly into the real issue of the summit.
In response to Obama's clear listening and response, Rep. Eric Cantor finally just desperately grasped at something substantive.
Cantor resorted to asserting the nub of this issue in many Americans' minds -- perhaps the most significant issue underlying all the political noise.
"We just can't afford this."
(Firefox users might need to watch this at the Kaiser page here.)
Cantor then used this presumption that America cannot afford bringing everyone into a basic minimum level of health insurance (which is most of the cost in the current proposed reform) to conclude that reform should be only step-by-step pieces focused on cost control and reducing health cost inflation.
(To which Obama pointed out that cost control needs most everyone insured. This is due to such cost-inflation causes for instance as undetected or untreated diabetes and other easy-to-treat illnesses not getting early treatment which costs less than waiting for Emergency Room visits.)
So, Cantor is asserting America cannot afford $120 or $150 billion a year (by 2017) to improve the health care of many tens of millions of Americans. This seems a plausible assertion (see why paying for reform is more complex than at first glance further below -- *).
Let's consider this.
We know that America will expend about 5% of its GDP, some $680 billion this year, in one year, on defense. Even while our active, genuine enemies number only in the thousands, and could be fought with well less than $100 billion/year.
Few Americans can estimate in their own minds just how much defense spending is truly needed. $100 billion and $500 billion are the same number to Americans in general. It's just a large number.
But the nearest possible competitor to American defense spending is China. Intelligence estimates of Chinese military spending are 2% of its GDP. Contrast this to current American spending at 5% of our GDP.
What could the U.S. do with that 3% of GDP difference, that we are spending, and China is not, on defense?
It could be strategically invested in our secure future -- education, worker health, science, and technology.
China is investing in its future.
Will we be secure if we invest less in our future than China?
In contrast to our current $680 billion/year for defense, the affordability subsidies (to allow Americans to afford health insurance) would likely cost about $150 billion per year in 2017, or in the neighborhood of 1/5th (or less) of expected defense spending in such coming years.
Yet, such basic health insurance for everyone would save far more lives than were lost on 9/11/2001 in the World Trade Center (Update: more than 275,000 adults nationwide will die over the next decade because of a lack of health insurance).
Reform could save huge numbers of lives through catching more illnesses early in doctors' offices, while treatments can still help. Reducing illness across the population also reduces the drags on the economy of lost productivity and lost skills.
Now, the proposed reform bills do have pilot programs to try out every known idea that has been thought up by health care economists and experts to reduce health cost inflation.
Still, Cantor has a point about costs. A point based in the real feelings of many Americans.
The unspoken real issue is that most American families feel on the edge financially (discussed here a year ago).
More than half of American households feel that increased taxes, even just modestly increased taxes, could be too much of a strain on their already tight budgets.
Now, we know that under reform average middle class families would not have increased total health and tax costs versus the status quo -- they would actually have decreased total costs, due to insurance premium subsidies middle and lower income households would receive in the individual market while those with employer-based insurance would likely see a slight decrease in premiums also under reform (CBO). Only wealthier families/individuals would have increased total costs (the sum of health premiums and new taxes) -- the wealthy would pay for many low and middle income families and individuals to be able to get the new minimum level of health insurance.
Still, we have a large federal budget deficit, so if a part (even a modest part) of our room to raise taxes is used up on health care reform, it makes intuitive sense to many Americans that less would then be available to close the wider federal deficit.
* --
Middle class families believe that if the deficit isn't sufficiently closed in future years, that other taxes will eventually be imposed on them.
Thus they consider the costs of the proposed health reform to be ultimately their own costs in the long run.
If you think about it, the implication of Eric Cantor's "We just can't afford it" is really that....
America cannot truly afford our current and projected defense spending, which is far more massive, a far larger cost, than this contemplated health care reform.
While it's common sense to question whether we should spend more than 5 times the cost of fully implemented health reform on defense annually when we are not in a true large-scale war (against a major nation), the question could become moot in coming years.
The hard fact is this current level of defense spending already in place is beginning to place the U.S. into serious financial straights, and into economic decline.
We can't afford to mould Iraq. We can't afford so many rich weapon systems as a normal ongoing cost.
That's what the numbers say.
But, if we became conservative on defense spending, like traditional conservatives in American history, then...
Then, we could afford to invest to gain the long-term cost savings of switching more uninsured and underinsured Americans' health care out of emergency rooms and into doctors' offices.
And, this, along with other parts of the proposed health care reform, would create overall national savings by setting us up to bend the cost curve over time, 7, 10 and 15 years out, and thus help with the most serious threat to the future federal budget: Medicare health care inflation.
In other words, middle-class American families cannot afford anything less than some kind of truly comprehensive reform, such as Obama's proposed reform, followed up by actually implementing the successful pilot programs created under Obama's plan across all of the massive Medicare health spending.
We can't afford not to.
Showing posts with label afford. Show all posts
Showing posts with label afford. Show all posts
March 1, 2010
June 29, 2009
Is Single Payer The Answer? (updated)
Most people think of Single Payer as a way to accomplish: a) dependable insurance, b) universal coverage, and c) savings of costs that private insurance companies incur without contributing to health care.
But of all health care issues, the most decisive for us all in the long run is cost.
Universal care can't be sustained if costs continue to rise. Rising costs help tip otherwise viable businesses into failure (GM's biggest handicap pre-bankruptcy), or force shifting the costs onto workers. We are seeing medical costs bankrupt more and more families, as the primary cause -- and most had insurance.
If costs are controlled, the general economy will function better. To thrive, the U.S. economy must compete successfully in world markets. This requires business expenses here in the U.S. are not far higher than our competitors pay, and that workers and technology remain top rate. But the ability of the nation to support education and research depends on available resources. If health care takes more and more of available resources, the national outlook dims.
The cost issue is central.
So the way Single Payer might reduce costs is the most convincing and important aspect of Single Payer (for thoughts on how to make a Public Option less expensive see here). I mean that without cost benefits, Single Payer would not have 2/3rds of its popular support.
The total costs of private health insurance administration, marketing, and profits together add up to roughly 12% of all health care spending in the U.S. (Update: Wendell Potter says here that private insurers are paying out in claims on average at roughly about 80% of revenues, implying the average sum of administration, marketing and profits run closer to 20%.)
That's significant. But even going to Single Payer and saving that 12% (or up to 20%) would not be enough to solve our problems here.
This is because health costs have spiraled much higher than only 12% or 20% upwards over the last decade, becoming far out of line with GDP. We don't get more for all this extra spending. (This NPR piece points out why high cost areas are high cost.)
The challenge is that a one-time reduction in overhead costs would not by itself stop the long-term upward spiral of health care costs due to natural and technological factors described here.
But...without clearly understanding or vocalizing it, many supporters of Single Payer instinctively sense a further outcome.
We correctly sense something more than only saving administrative costs private insurers incur in their work to limit payouts and pad their profits. (Here is a new NYTimes real-life story showing a common situation -- tricky policies).
One unspoken aspect of Single Payer is that if a Single Payer sets the rates, they have near-monopoly power, and most providers would just have to accept the rates they set.
So when the majority (or future majority) of Americans ask for Single Payer, they are really asking that health care costs be controlled, regulated. Set by government.
Then the sharp upward spiral in costs from unregulated fee-for-service health care would become instead a struggle between private providers and the Single Payer over whether to reimburse for ever-expanding treatments.
To which the Single Payer would reasonably respond by specifying more precise treatment paths, and requiring those paths be followed, to control costs. (This is "comparative" or "evidence-based" care, or one way to make a Public Option cost effective.) Or...without such fundamental change it would only a matter of years until we arrive into a new cost crisis (see 2nd comment below) -- leading to more profound reform: into pay-for-outcome (performance) or closely-similar incentive reforms such as those at the Mayo clinic.
All of this would work -- this highly regulated, controlled health care.
It's a feasible outcome.
...
This may be needed, if the key, proposed reform of Pay-for-Performance cannot be enacted.
Pay-for-Performance would naturally control rising costs, in the ways described in the post just before this one.
But if the current efforts for Pay-for-Performance are shot down by the industry lobbies, or weakened into ineffectiveness, so that costs continue to spiral upward, then it is reasonable to expect and anticipate the arrival of Single Payer.
Single Payer is the logical next step -- this is what more and more of the body politic will decide.
Most people will say "if you can't reform 'em, then you have to beat 'em."
This will happen as costs continue to spiral upwards without real reform.
...
Which is best -- Pay-for-Performance or Single Payer?
While Single Payer controls costs, it doesn't by itself encourage rapid innovation.
Pay for Performance encourages innovation, because the reward is proportional to the effectiveness of the treatment, and innovation could increase efficiency and thus the profitability of treatment. Finally, this innovation will also reduce public costs progressively over time for most health conditions since competition in providing new treatments leads to lower costs. First, if current treatments are effective (such as certain chemotherapies, antivirals, artificial joints, etc.), then a new treatment/technology must hit below the current price point to begin with to be of interest to providers under Pay-for-Performance; second, new treatments tend to become more cost-efficient with time, eventually lowering the insurance costs.
But there is nothing intrinsic in Single Payer that would prevent combining these two ideas.
A Single Payer that would only Pay for Performance would be a fearsomely effective health care cost improvement machine.
Either one of these two reforms would be very potent by itself.
But of all health care issues, the most decisive for us all in the long run is cost.
Universal care can't be sustained if costs continue to rise. Rising costs help tip otherwise viable businesses into failure (GM's biggest handicap pre-bankruptcy), or force shifting the costs onto workers. We are seeing medical costs bankrupt more and more families, as the primary cause -- and most had insurance.
If costs are controlled, the general economy will function better. To thrive, the U.S. economy must compete successfully in world markets. This requires business expenses here in the U.S. are not far higher than our competitors pay, and that workers and technology remain top rate. But the ability of the nation to support education and research depends on available resources. If health care takes more and more of available resources, the national outlook dims.
The cost issue is central.
So the way Single Payer might reduce costs is the most convincing and important aspect of Single Payer (for thoughts on how to make a Public Option less expensive see here). I mean that without cost benefits, Single Payer would not have 2/3rds of its popular support.
The total costs of private health insurance administration, marketing, and profits together add up to roughly 12% of all health care spending in the U.S. (Update: Wendell Potter says here that private insurers are paying out in claims on average at roughly about 80% of revenues, implying the average sum of administration, marketing and profits run closer to 20%.)
That's significant. But even going to Single Payer and saving that 12% (or up to 20%) would not be enough to solve our problems here.
This is because health costs have spiraled much higher than only 12% or 20% upwards over the last decade, becoming far out of line with GDP. We don't get more for all this extra spending. (This NPR piece points out why high cost areas are high cost.)
The challenge is that a one-time reduction in overhead costs would not by itself stop the long-term upward spiral of health care costs due to natural and technological factors described here.
But...without clearly understanding or vocalizing it, many supporters of Single Payer instinctively sense a further outcome.
We correctly sense something more than only saving administrative costs private insurers incur in their work to limit payouts and pad their profits. (Here is a new NYTimes real-life story showing a common situation -- tricky policies).
One unspoken aspect of Single Payer is that if a Single Payer sets the rates, they have near-monopoly power, and most providers would just have to accept the rates they set.
So when the majority (or future majority) of Americans ask for Single Payer, they are really asking that health care costs be controlled, regulated. Set by government.
Then the sharp upward spiral in costs from unregulated fee-for-service health care would become instead a struggle between private providers and the Single Payer over whether to reimburse for ever-expanding treatments.
To which the Single Payer would reasonably respond by specifying more precise treatment paths, and requiring those paths be followed, to control costs. (This is "comparative" or "evidence-based" care, or one way to make a Public Option cost effective.) Or...without such fundamental change it would only a matter of years until we arrive into a new cost crisis (see 2nd comment below) -- leading to more profound reform: into pay-for-outcome (performance) or closely-similar incentive reforms such as those at the Mayo clinic.
All of this would work -- this highly regulated, controlled health care.
It's a feasible outcome.
...
This may be needed, if the key, proposed reform of Pay-for-Performance cannot be enacted.
Pay-for-Performance would naturally control rising costs, in the ways described in the post just before this one.
But if the current efforts for Pay-for-Performance are shot down by the industry lobbies, or weakened into ineffectiveness, so that costs continue to spiral upward, then it is reasonable to expect and anticipate the arrival of Single Payer.
Single Payer is the logical next step -- this is what more and more of the body politic will decide.
Most people will say "if you can't reform 'em, then you have to beat 'em."
This will happen as costs continue to spiral upwards without real reform.
...
Which is best -- Pay-for-Performance or Single Payer?
While Single Payer controls costs, it doesn't by itself encourage rapid innovation.
Pay for Performance encourages innovation, because the reward is proportional to the effectiveness of the treatment, and innovation could increase efficiency and thus the profitability of treatment. Finally, this innovation will also reduce public costs progressively over time for most health conditions since competition in providing new treatments leads to lower costs. First, if current treatments are effective (such as certain chemotherapies, antivirals, artificial joints, etc.), then a new treatment/technology must hit below the current price point to begin with to be of interest to providers under Pay-for-Performance; second, new treatments tend to become more cost-efficient with time, eventually lowering the insurance costs.
But there is nothing intrinsic in Single Payer that would prevent combining these two ideas.
A Single Payer that would only Pay for Performance would be a fearsomely effective health care cost improvement machine.
Either one of these two reforms would be very potent by itself.
June 25, 2009
(Update 9-22) -- Lowering Health Care Costs and Improving Outcomes via Incentives
(Update 9-22-09: How to implement pay-for-outcome-over-time incrementally, with low stakes, and no sudden changes. See update at the end of this post by searching on "9-22")
July Updates: Drug Costs and Setting Prices in a Public or private Plan
This post on exactly how to Pay-for-Outcomes-Over-Time combined with three other simple reforms linked here would constitute cost-effective Health Care Reform.
Also note: this method of payment (below) is a way to encourage and spread coordinated-care systems like the Mayo Clinic, Cleveland Clinic, and Bassett Healthcare by rewarding their effectiveness. Those wanting to go directly to the details can skip down past the 2nd excerpted quote below the video.
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=========================
July Updates: Drug Costs and Setting Prices in a Public or private Plan
This post on exactly how to Pay-for-Outcomes-Over-Time combined with three other simple reforms linked here would constitute cost-effective Health Care Reform.
Also note: this method of payment (below) is a way to encourage and spread coordinated-care systems like the Mayo Clinic, Cleveland Clinic, and Bassett Healthcare by rewarding their effectiveness. Those wanting to go directly to the details can skip down past the 2nd excerpted quote below the video.
----------------------------------------------
When you look across the spectrum from Grand Junction to McAllen—and the almost threefold difference in the costs of care—you come to realize that we are witnessing a battle for the soul of American medicine. Somewhere in the United States at this moment, a patient with chest pain, or a tumor, or a cough is seeing a doctor. And the damning question we have to ask is whether the doctor is set up to meet the needs of the patient, first and foremost, or to maximize revenue.
There is no insurance system that will make the two aims match perfectly.... -- Dr. Atul Gawande
There might be!....
I got a sudden idea today (6/25, below), which I'm mulling over. While I refine it, perhaps others can too. (Updates -- 7/9, 7/23 multiple refinements at this point. I think it's a good outline of how to set up incentives for both everyday and complex situations.)
First, for those wanting a more extensive, deeper look into costs, I encourage those who haven't seen the updates to the Health Care Cost Reduction post below to search (ctrl-f) on the words "effective" and "incentive" for the updates (or read the whole post if you really want a big picture look with issues like technology, psychology, end of life care, etc.).
My initial thinking on how to control costs was to limit a Public (or private) Plan to approved treatments (as existing private plans in fact do!) -- and specifically the most "effective" treatments (definition in this post), in sequence, according to actuarial data on what works best for specific, narrow diagnoses. This seems like a good idea in any case, but there is a more powerful, general way to get excellent care at lower costs and encourage innovation.
Not by specifying what kinds of treatments are used in the Plan. But by incentives alone!
Pay for outcome. Modest pay for trying. Better pay for succeeding. Effectiveness and innovation are rewarded.
I'm not proposing the previous idea of some extra pay (incentive) for a good result. More than that. Instead of a blend of fee-for-service and a little more for outcome, how about payment substantially for outcome.
Before I continue and lay out a plan that answers all the objections I could find to pay-for-outcome, let me illustrate how well-liked the basic idea is by many doctors. Here are only two examples of many:
Dr. Jack Lewin's 2nd point is the current incentives are for volume of care provided, not effectiveness.
Here's a good NPR piece on the same broad issue.
"The high-performing systems of this country are much more able to help manage patients as outpatients without having to be hospitalized, without having to be referred to the emergency room," he says. Doctors in lower-spending areas "are willing to see a patient in the afternoon, start some initial medications, follow them up later in the day to see how they're doing, and if they're doing fine, talk to them in the morning and keep them away from that unnecessary hospital stay."
But the way the government and most insurers pay doctors and hospitals works against the kinds of systems that are more efficient, Fisher says. Doctors don't get paid for things like making phone calls or sending e-mails. And hospitals lose money if patients don't come through their doors.
He and other experts want Congress to implement new payment systems that would encourage doctors and hospitals to work together and give them bonuses for keeping patients healthy, and thus using fewer expensive services. "And I think that if we're thoughtful about creating incentives for organized systems to form — that would allow them to really practice in the ways that physicians came to medicine to do, and the hospital administrators were trained to do — we could get the kind of performance that we want," he says.
This is the subject of this post -- how to structure incentives that will work in the complexity of the real world.
------------------------------------------------------------
Let me start by pointing out that paying for outcomes instead of designating approved treatments would actually increase "choice" -- doctors and patients could choose whatever treatment or innovation they like, even within a Public Insurance Plan.
As you will see below, the structure needed is a lot less than we might have guessed, as it is self-forming to a large degree.
Since we want to pay substantially more for good outcomes, we must carefully set or structure the market to set (as you will see) the initial treatment payments so that they defray most of the per-treatment marginal costs, but aren't high enough to be profitable without some success.
For example, for a certain specific condition (specific, narrowly-defined conditions could be listed in a criteria table; see below) the initial treatment payment for that condition might be set for instance at 62% of the full success fee for that condition. The initial payment is made upon treatment, and before the outcome has been determined.
After one or more time periods (listed in the table of criteria, for each condition) have passed and the outcome or intermediate outcome is determined, there would be a failure, partial success or full success, according to the table of criteria. If there is full success, the successful-outcome payment would be the remaining part of the full fee (another 38% payment in our example). For a partial success, the additional payment would be the intermediate-success portion of the fee as defined in the table. For "difficult" cases the overall full fee is increased -- see below. Well-defined levels of partial successes would have defined payments levels.
(update 7-23: establishing outcome criteria)
The tables of outcome criteria -- including time periods for partial to full outcome -- should ideally be formed by large panels of researchers and practitioners in their own specialities via participation in a polling process at the secure internet site where the criteria tables are maintained. This process can easily be formed to take advantage of the increased reliability of larger groups, and should be open to all researchers and practitioners in that speciality, so that participation could be widespread and include even hundreds for some specialties. First, criteria sets, including time-periods, for what would constitute full success and partial success(es) could be created by any participant during the pre-voting period. Participants could also vote on how many distinct levels of success to use for this condition -- 1, 2, 3, 5, etc. -- thus creating the number of partial-success levels. Then a voting period would allow all participants to choose which criteria (including time periods) are most reasonable for full-success, 2nd level success, etc. to the lowest level. There could even be a "run-off" for levels where no criteria set gains a majority on the first vote. After the sets of voting are complete, the results -- for instance the most selected (voted for) of competing criteria sets for a full success would be the result for "full success" criteria -- could then be displayed along with the voting sets (answers) of each participant (to encourage discussion). For narrowly defined conditions, a refined process of this sort could be accomplished in a cumulative 20 minutes or less from most participants as it involves simply listing one's own criteria, and then voting -- notification by email would move each step of the process along. Further, to encourage high standards and discourage vote-fixing these results could be fully visible, transparent, to the public. The resulting criteria tables should be renewed periodically by periodic re-votes and by adding more participants. In this way the criteria tables for most conditions will be an excellent, evolving guide for what constitutes a good outcome and what constitutes one or more levels of partial success. The process itself would be a way to spread knowledge and evolve standards.
Under this system the incentive for a provider -- hospital, doctor, clinic -- is to cure/heal/improve the patient as effectively and cost-efficiently as possible.
They get a initial payment for a treatment, but a nice payoff for a cure or reasonable success. (also see 7-10 update on how to set prices below)
...
A crucial part of the Plan must be recurring payments over time for successful preventative care, such as controlling high blood pressure or diabetes. Both the patient and the provider should gain from effective preventative care. We want to strongly incentivize cost-efficient care of all kinds, such as accurate emergency diagnoses for instance.
...
So, we have a basic principle to organize how to pay for medical services:
Pay for success.
(And partial payments for partial successes, according to tables).
The public or private plan could be structured in this way instead of by approved treatments, leaving doctors/providers free to innovate.
The idea is to accelerate treatments, efficiency, and innovation. There is little profit in care that doesn't accomplish much. Instead of repeated, largely-ineffective treatments, the incentives are to find real solutions quickly.
Let's work it out. Is there any reason this would not work well? Let's imagine some difficult situations.
For instance, if a doctor/clinic/provider believes it cannot meet the criteria for success or partial success for one diagnosis for a particular patient -- achieving a standard outcome for a specific condition: curing the cause of the symptoms, relieving some symptoms, or for certain conditions, palliative care -- they may turn down a patient, who is then motivated to search out a provider that believes they can succeed. The original provider that thinks they cannot succeed is not motivated to just try a few things for fees/profit. They are motivated to quickly admit to the patient they cannot succeed, and stop without excessive, expensive, wasted tests/treatments.
When one provider fails (or only gives a diagnosis and quits), the full-success payment for that particular patient would be increased by a fixed percentage (e.g.--another +15 percentage points, so that the full fee with success becomes 115% for this patient), which can be earned by other providers who have no remunerative relationship to the first provider, sweetening the pot, and making the patient more attractive as a customer in spite of their difficult condition. More failures or refusals to treat could lead to bigger jackpots for success (125%...then 135%...then 150% for success), but still only the original initial payment for failed treatments or an exam-only fee for exams without treatment. But, note that the partial-success payment levels would be increasing in proportion to the full-success fee (e.g.-- for instance, a partial-success payment of 18% of full fee amount for meeting certain criteria for a certain condition would increase in value as the full fee amount increases.))
Therefore, even a partial-success becomes more and more worth a try even for the least responsive patients.
...
Diagnoses themselves should be incentivized, with initial payments for tests, but substantial payments (according to table) for proven-correct diagnoses, contingent on treatment proving a diagnosis via treatment-response criteria. If the diagnosis indicates a certain condition, and the treatment results show a change that meets criteria that prove the condition was present, then the diagnosis was correct. The initial payments for diagnostic tests would be carefully structured to support the diagnostic test costs, but not make tests too profitable in the absence of correct diagnosis. The diagnosing doctor has an incentive to get the diagnosis right, and earns more per hour of work if he/she finds the correct diagnosis, or several correct diagnoses, sooner. The test costs are covered but not especially profitable, and the main payoff comes from getting correct diagnoses.
The patients themselves help police the system (along with the success incentives) -- wanting to be cured quickly and well, they will try to find the best providers available for their condition, and they have freedom to choose providers without plan restriction, since the cost control is built-in (also see pricing update below).
===Update 7/8 --Drug Costs=====
A basic aspect to consider is drug costs. Today, we need effective law against the prescribing doctor receiving any kickbacks or participation in profits from prescriptions. But this need could become obsolete under a better system.
The central issue is getting the best drug choices for the dollar.
Providers should have an incentive to choose drugs wisely, balancing cost and effectiveness. A simple idea to incentivize smart drug choices is to require 1/2 (or perhaps even all) of the drug cost be paid by the prescribing doctor. This would then be a part of the full success fee, and the fee would be set accordingly by the price of the commonly effective drug; but the fee itself would also be independent of drug choice except when specific drugs fail or are ruled out (see below). The doctor has to choose what is cost-effective and works effectively, to get the best economic outcome -- the full success fee without undue drug cost. The doctor then has a strong incentive to find cost-effective drugs for his/her patients.
Sometimes a patient will not respond to one drug or family of drugs or cannot take that type of drug, and needs a different type of drug. If effective alternative drugs are significantly more expensive, then the full success fee would be appropriately higher for the condition of non-response or non-usability of the initial best-practice type of drug.
...
===Update 7-10, 7-17 -- Setting Prices===
One key practical question in a Public Option (aka Public insurance Plan) or a Private Insurance Plan is how the insurer sets its prices -- the fees paid to doctors/providers.
To understand this section, be sure to first read "establishing outcome criteria" above.
Whether the public or private insurer is paying for piecemeal treatments in an old-style (and costly) fee-for-service system or instead is paying for outcomes (based on specific, narrow diagnoses -- "conditions") in a fee-for-outcome system as described above, the insurer must have a rational way to set prices.
Either way, the answer is an auction.
The exact way to run an auction and set up incentives for bidding are practical questions. Below, I will offer some price setting ideas that can be tested and refined by experience over time by any insurer, public or private.
The Plan (public or private insurer) can simply solicit bids to perform specific treatments or bids for treating specific conditions (bidding is for the "full-success" fee -- see establishing outcome criteria above), and have a community or regional target of having a certain minimum number (or percentage) of providers in that area for each kind of treatment.
Doctors and providers need do no extra work to submit bids. They could simply submit their current pricing (for a fully-successful treatment or outcome) perhaps with a volume-discount of 10%-20% in anticipation of more patients (due to the more people having insurance). Thus little or no effort to calculate prices is needed.
No complex calculations are needed.
Even without submitting a bid or being in a network, any doctor can participate fully or partially in the Plan with little paperwork, or none (see below).
Once the sealed bids are in (via on-line submission), then the Plan will simply accept a bid level high enough to include roughly the target number of providers for each specific treatment or outcome. In this way, the low bidders don't lose, they gain -- they will get the accepted bid level, thus they gain the extra pay difference between their original low bid and the accepted price level.
One good bidding incentive would be to reward bidders that submit bids below the accepted final price with a bonus above that of the price difference they will already receive, perhaps another 5% of that difference. A further refinement is that once an average number of patients per doctor/specialist are treated by a provider during a time period, the low-bid bonus could be phased out for additional patients, gaining an extra price efficiency for the insurer and thus the policy holders. (Note that this is a suggestion of a method and bonus percentage that can be tested and refined over time through experience by the insurer.)
For instance if the bids for a specific treatment or outcome range from $105 to $287, and the target portion of providers is 50% in that region, then the bid at or below which 50% of the providers come in would be the new Plan price for that specific treatment or outcome. In this example, for our range of $105 to $287, this price level that includes 50% of providers might be at $172, thus the new Plan price would be $172 for all in-network providers. But this same payment would be paid to any doctor who chooses to accept a Plan patient, even without any prior paperwork or network status (more on this below).
Providers that submit bids below our example $172 would then would get both the full $172 plus a bonus percentage for submitting a bid below price. (Again, such details can be tested and refined over time by the insurer.)
This is done for all the specific treatments/conditions covered by the Public (or private) Plan in a computerized on-line pricing auction, thus effecting a complete set of Plan prices. Providers then can choose whether to become a Plan in-network provider at these prices.
A few simple rules could handle the question of all-or-nothing in-network status.
For instance, to be certified as a "Full (Public or private) Plan Provider" or a "Preferred Plan Provider", etc., a provider would accept all the Plan prices for the treatments they offer. But...a provider could choose to offer certain treatments at above-Plan pricing (and perhaps advertise as a "Partial Plan Provider" etc.) by giving clear notification to the patient at sign-in of those price premiums, and requiring the patient sign-off on a specific price premium they must pay out of pocket (or via supplemental insurance) before treatment in order for the provider to be fully reimbursed from the Plan for the portion paid by the Plan (lack of a price notification signed off by patient would result in the patient being only liable for 1/3 of the premium above Plan, this amount capped at 10% of the Plan price).
This is only an optional, pragmatic method to allow non-Plan providers to opt-in to widespread Plans with less paperwork and administration.
This allows 100% flexibility. The Plan (Public or private Plan) using this method does not exclude any provider. Any above-price provider could accept any Plan patient with simply a clear notification of their premium pricing the patient or supplemental insurance must cover.
(Another interesting possibility is to allow private insurers to use any Public Plan as a building block within their own plans, in addition to being able to offer "supplemental" insurance. This would allow individuals to purchase private insurance for less established or less reliable treatments which are not fully reimbursed by any particular Plan.)
This is 100% freedom of choice, and 0% interference in the choices of patients and doctors.
Treatments or treating conditions can be auctioned on an ongoing basis, annually or semi-annually. Providers would not need to change their existing bids unless they feel their pricing needs to change. Providers could gradually modify their bids as new ways of treating conditions emerge that are more cost-effective, thus gaining the additional small bonus percentage from lower-than-plan bids.
This promotes cost-improvement over time, as in other areas of service technology.
New Treatments -- providers could offer new unique bids for new possible outcomes. Once enough bids occur for a new type of outcome (a new successful treatment of a previously incurable condition), the Public or private Plan can then initiate an accepted bid level for this new type of treatment at its own discretion, thus including the new treatment into its benefits. Before new treatments/drugs or potential new outcomes are fully accepted as Plan-Established, they could have co-insurance requirements (patients must pay part of the cost out-of-pocket, or via private supplemental insurance).
=========================
In principle, this kind of pay for outcome could work quite well. It is widely used in a simple form we all are familiar with -- work guarantees.
Savings accumulate to the plan in three ways -- more preventative care due to incentives, fewer tests and wasted treatments due to incentives, and innovation leading to reduced costs for many conditions which will then over time gradually lead to some fees being reduced in the compensation tables.
Combined with the three other simple and easy reforms which involve increasing information to patients and encouraging preventive care, we have complete reform.
It's encouraging that "changing incentives" was one of Obama's major points on ABC the other night.
I'll update this preliminary post as I think of further aspects.
In its simplest form, the Public (or private) Plans would pay set fees for specific narrow diagnoses/ages in fixed regions. The patient could then find a provider willing to try to earn the success (or partial success) fee, in town, or nearby, or in some cases by traveling to a specialized center.
The Public (or private) Plan, and any private insurer choosing this method, would pay its successful-outcome payment after specified time periods for various conditions when a successful outcome is verified by an independent inspector. One key part of this plan is periodic payments for continued preventative success, perhaps annually.
Your thoughts?
---------------------------------
7-7: Just saw this great article by David Leonhardt on this whole question of costs and incentives. Highly recommended.
---------------------------------
Update 9-22:
Reading this brief Peter Orszag interview it occurs to me to point out an easy, low-stakes way to gradually move from pure fee-for-service towards more pay-for-outcome-over-time.
The objective is to transition with small changes anyone could like and which doctors universally (or near universally) could support.
Reform without big, sudden change would be much easier to implement politically.
Start with a very short list of only a few narrowly defined conditions (such as a severely arthritic knee which needs replacement, or certain heart conditions) and implement small success payments, such as 5%-15% of the normal full cost of complete treatment. The success payment would be made after the treatment is shown successful as indicated by no need for extra treatment(s) beyond the normal follow ups needed for that specific condition within a certain specified time period for each specific condition in the list.
The initial payment, made when the main treatment is complete, would be most of the full cost of complete treatment. For example, if the success payment is 10% (before we also add a bonus percentage for outcome quality), then the initial payment would be 90%. Thus the complete payment for a successful treatment in this example would be the total of 90% + 10% + the bonus percentage.
Another example, for clarity: for a certain condition, upon treatment an 88% initial payment (88% of the full fee) could be made, and if the patient does not need further treatment (other than normal follow up and normal therapy) for that condition during the specified success time period, a 12% success-over-time fee payment would be made after that time period. The outcome quality would then be used to also generate an additional bonus percentage payment. --- For instance, in our example of an 88% initial fee, the success payments might total 14%, for a grand total of a 102% successful treatment payment. For this condition, some patients might not be treated successfully and would thus result in a payment of only 88% of the full fee, while most patients on the other hand would be treated successfully and would result in a payment of 102%.
This outcome-incentive system could be implemented initially for a short list of 5-20 specific, moderately-expensive narrow conditions which have clear enough typical outcomes such that it is easy to specify what is a good outcome-over-time in terms of a no-relapse, or success, time period. Any success bonus percentage (above the normal full fee) can vary according to what is shown to work well over time by experience.
Gradually, several new conditions/success-criteria could be added each year to the list, for instance by vote of panels of doctors, or even better by the full process I described earlier in this post.
I recommend that the establishing outcome criteria internet-polling process as laid out above be implemented from the beginning, to gain several kinds of powerful advantages, such as spreading information about best-practice and new techniques, encouraging market-driven innovation, etc.
This is a simple, limited version of pay-for-outcome-over-time which would have low stakes, and allow a gradual implementation.
Slowly, over time, a pay-for-outcome system could come into being, improving quality and value.
June 20, 2009
Major Updates -- Healthcare Cost Reduction Ideas and Incentives -- Discussion Encouraged (Updates Ongoing)
Note: this was a brainstorming post, and more fully-developed ideas are here: Incentives-for-outcomes-instead-of-specifying-treatments, or for a broad summary post: best cost-control ideas.
Update 6/23 -- Incentives (see end of post)
Update 6/25 -- Preventative care incentives,
Refined definition of what is an "effective" treatment
7/7 -- See new post above for a detailed incentive plan as an alternative to approved treatments
7/10 -- Alternatives (bonus!)
-----------------------------------------------------------------------------------
Let's work on better ideas for health care.
For instance, the quandary of some people dying from lack of very basic care on the one hand versus the spiraling cost of care on the other hand is resolved in an idea I present below. The proposal also resolves the public vs. private debate.
Even if it only helps to choose between existing proposals, it is worthwhile to think of better ideas. I think we can inject new ideas into the current debate, which can be incorporated into existing proposals, or new proposals.
We can come up with good ideas for health care.
This is our choice.
As citizens paying taxes, we have the right to influence the debate and the new law.
It is never too soon or too late. Even if we came up with a better idea after a bill is passed in August or September, it will influence the reforms and practices later. But here on June 20th, I think new ideas we find in the next few days could be communicated to Congress and help influence the debate and outcome right now.
...
I encourage readers/visitors to just plain shoot from the hip or give your thought-out ideas, either one.
=======================================
One approach I like is to start from scratch -- what would be the best way to do health care, regardless of what has been done before.
So, blank slate time....
Here are my initial thoughts:
Even by 1980, most of us didn't expect we might well live to be 93 or 96. But it is more feasible for many now than it was 30 years ago. Our expectations of medical salvation have risen greatly.
Given some kind of reasonable chance to have a decent quality of life with new medical treatments, most people would indeed be willing to spend a lot of money if needed to make it happen. While some can afford to spend a lot, many cannot. The differences in ability-to-pay leading to too-large health care differences bothers many of us.
Next: Technology means that there is no real limit to what kinds of high-tech new treatments can be invented and tried to extend life. And there is no natural limit to cost except what can be paid from all available money, even if it is every cent, every last penny, people have.
No matter how much money we spend, there are always more expensive cutting edge treatments left to try if one is willing and able.
So since we are willing to pay large amounts of money to extend life, and since industries of people are making a living making up new treatments --....the national cost will...always...rise...and...rise...until it hits the limit of every last penny that can be taken from all other areas of life.
Unless we impose limits on the publicly-supported portion of this choice.
Notice I say publicly. A limit on public support still leaves free choice on the personal/private side wide open.
Anyone can still purchase *any* additional health care (via supplemental private insurance) they want -- just like before.
Basically this idea only creates one fundamental change in the status-quo: more cost-effective universal basic care than the current emergency-room care disaster we have. This is a huge change that reduces costs yet allows for the private health care "freedom of choice" many say they like.
So....one thought that occurs to me is that a public plan cannot cover unlimited new treatments or even a lot of advanced new therapies-- the public plan would need to be conservative in order to avoid gigantic cost increases. Public support could cover everything that really pays off well (this is defined below). No one would die from lack of basic care.
"Basic" includes all well-proven, cost-effective care, preventative care and emergency care.
Publicly covered treatments need to be cost efficient -- a lot of result per dollar.
There are a great number of medical treatments that produce a lot of results per dollar spent. Part of a health-care law could be that all employers *must* provide a work-free day per year for a routine checkup, and having this provision actually enforced. In fact, the best health scenario for anyone is to treat problems early with well-proven early treatments that work well.
Early treatments like these cost less.
...
Now, part of the consequence of better basic care is exactly that more people live longer into old age, where illnesses of old age arise.
Currently we spend a huge amount of our health-care dollars treating the last 6 months of life.
Once a person lives to an advanced age, fewer and fewer effective treatments are possible. "Effective" treatments are treatments that extend life by more than a year at least, most people would agree.
(Remember, for those that don't agree, we leave them their free choice -- further treatment options that buy 2 or 6 months of life are up to them, just as now)
Treating a 30-yr old diabetic will extend life for a great many years. But some expensive and technological treatments for a 91-yr old might extend life by only months in many situations.
We need a way to choose what the public plan will support.
First, as above, the public plan should support first the most proven, effective therapies/procedures, which have success rates that are clearly higher than alternatives, by public data tables, according to clear and distinct diagnostic standards.
The public plan should only cover "effective" treatments, if they haven't yet been tried. I'd favor that more expensive treatments with success rates below 30% be considered "extended" or some such designation, and have significant co-pays (perhaps 30%-50% of their cost), so that patients have a realistic way to weigh their high cost versus benefits.
A public plan can only work if it has limited costs. Otherwise it would fail in time, and be cut back by force of financial crisis.
Of course, this will leave grey areas.
But the public plan isn't for grey areas. It is for proven basic care, where the situation is a clear statistical likelihood of success or reasonable chance of success.
Grey areas can be left to free choice -- private health insurance and such. (more on grey areas below)
So a public plan needs to have a very clear standard for treatments in old age -- the public plan (only) needs to provide just treatments that will significantly extend life, by at least a minimum period of time. Private plans can cover other situations.
I propose the public life extension time period be 1 full year -- the public plan can provide proven treatments that extend life at least 12 months where the statistical odds are at least 40%, according to governmental actuarial tables -- clearly defined statistical results with clear criteria.
When a treatment is close to the border, and a public inspector finds it falls outside the defined public criteria, the public compensation would be reduced by specific amounts after inspection. That is, the public inspector might find a doctor applied for public funds for a situation that wasn't fully within the public plan criteria, and then the public payment would be reduced according to precisely defined law in clear steps, such as 25% less (than the set public plan compensation), 50% less, 75% less. Only a few steps, and well-defined rules. Rules that clearly spell out what gets partial reimbursement. But specifying treatments precisely will hold the number of these grey situations to a minimum.
This overall approach allows enormous flexibility in actual treatment!
For instance, the public plan might cover an MRI and a certain specific surgery at defined payments, but if the patient and doctor choose to do additional steps, that's perfectly fine. The public plan covers what it covers, clearly and reliably.
But doctors/patients and private plans can do whatever further they want, flexibly, so that the total costs are covered in part publicly, in part privately.
...
Another idea that occurs to me is that there is no harm at all in making a public plan that is exceedingly conservative and....cheap!
It is necessary really. We have limited funds, and our goal isn't ultimate health care -- it's universal health care.
There are a lot of basic treatments that are effective and less costly, so we could choose to just create a public plan that does exactly only the most proven, effective treatments, and nothing more. The lower-rated treatments would never be covered by the public plan in this scenario.
In other words, instead of more comprehensive, we could aim for more cost-effective.
The whole point is to help everyone, every time, that can be helped in well-established, basic ways at a cost that almost all households can afford to pay for themselves.
The public plan would be well-defined and well-publicized.
The public plan could gradually take on new therapies/treatments over the years according to well-defined standards of cost-effectiveness in extending life.
No one would die from lack of basic care. Except by failure to act.
Anyone could then buy private insurance (see, we still have full-fledged, free-enterprise, private health care and private insurance here) to cover further treatment above that basic limited list on the public plan. Likely private plans would offer a great variety of options to extend coverage to various levels of less certain treatments.
Voila!
The conflicts of public vs. private insurance solved!
We don't have to choose between "fairness" and "freedom."
We can have basic health care, just like basic education. Basic, defined, limited, universal.
Yes?
....
Your ideas???
--------------
NPR continues their excellent coverage of health care with this worthwhile segment on health care costs by Robert Siegel. Highly recommended. It is rife with examples the idea here would address.
-------------
Paying for the Plan:
No matter whether public or private, we all will pay for health care.
My initial suggestion for how best to run this public plan is by premiums, and a mandate.
Private insurance plans could, by choice, purchase the public plan as a building block for their own plans (at the same standard rate individuals pay). A free market in that regard.
So all individuals would either buy the public plan, or a private plan that incorporates the public plan, or pay a set annual fee to be excluded.
This plan would be tax-neutral, requiring no new revenue, and having no net public cost.
Since this public plan would be basic care only with limits as described above, it's cost would be quite low, affordable.
For this reason it may not be necessary to provide a subsidy for most lower-income households. The premiums could be *very* low.
In fact, another way to help set limits for the public plan is to let it buy whatever it can for a set low premium, like about $100-$200/month per person age 25-61, $50/month under age 25. Age 62 and over probably needs a careful consideration for premium level.
The virtue in this particular method of cost-control is that the chosen treatments would be determined by mathematics -- cost/benefit, and not by politics.
In order to extend this kind of plan, politicians would have to raise it's premiums.
That removes a lot of the forms of political kickbacks that can occur, where contributions lead to Congressional interference.
Next, I'd favor a pay-for-performance incentive -- according to detailed actuarial tables. Payments to providers would be higher by a set amount, such as 20%, for a successful outcome versus an unsuccessful outcome (in the well-defined treatments the plan is designed to cover).
I'm confident though that a premium of only $100/month to $200/month for a 45-yr-old adult could indeed buy quite impressive basic health care with cost-effective, well-defined benefits and reasonably low co-pays, such as $25 office visits and drug co-pays of $10-$25 for most drugs, and $50-$100 for more expensive drugs. Most people would then just supplement this basic care coverage with private insurance for extended benefits.
The whole point of the public plan is to provide affordable basic health care. Affordable means the cost would be quite low, so that a family with an income of even just $35,000/yr could actually pay the premiums. Thus the plan doesn't rely on large federal subsidies.
-------------
This post will be repeatedly updated. It is a brainstorming post.
=====================
UPDATES:
=====================
Incentives
James Kwak offers a good discussion of the other major cost-increasing force in health care: providers would like to earn more money.
This is a problem of incentives. The financial incentives for doctors/hospitals/health-care-providers are to do more, even if less is just as good.
We need to change the incentive structure to paying in part for outcomes, instead of only for services.
This could be accomplished without interfering much with doctors simply by laying out the basic treatment services covered for various precise diagnoses, which is what basic care is about. When a treatment doesn't work, it shows an additional condition, such as a doesn't-respond-to, which then would lead to a further course of treatment, etc. Once treatments are specified for these basic care situations, then only diagnostic services are difficult to incentivize correctly. I'd suggest we consider paying a significant up-front payment for diagnosis itself -- a diagnosis fee payment -- and then reduce the payments for specific tests, thus incentivizing some efficiency in choosing and giving tests. If initial tests did not determine the likely cause of illness, further tests would still be paid for, but the profitability of doing a great number of tests would be modest.
A few more simple rules would flesh out the incentives, such as making half the diagnosis fee contingent on diagnostic success, so that sending the patient on to associated providers for more testing means giving up a part of the profit. Kickbacks for referring patients in general need to become illegal.
One good incentive would be a successful-outcome incentive.
Many specific illnesses and injuries have fairly clear criteria of what constitutes curing/healing. In these cases, a successful treatment bonus is a very good kind of incentive. Even for pains that have less clear causes, some kinds of incentives are possible -- success in these cases could be relief that last a certain length of time, or even two incentives, for two different lengths of time.
Successful-outcome incentives encourage providers to effectively treat the patient, and make room for more patients in their system.
A final category of incentives we need are powerful incentives for preventative care. Good reimbursement for providers is a basic necessity. But there's more. Patients themselves need incentives. Along with the mandatory day-off for a wellness checkup mentioned above, we could require the wellness checkup as a condition of the low premium cost, or even give a direct payment to the individual for meeting their wellness checkup requirement.
One possible version of an incentive for individuals to follow through on a wellness checkup -- after missing a wellness checkup, a bill would be sent to the individual for $250 as a supplemental annual "risk-premium" cost, with a note that the individual can choose among three options:
a) have a wellness checkup during the time period remaining in lieu of the $250
b) elect to pay an extra $250 annual premium within 60 days
or
c) default to an increase in their automatic monthly premium of $21 in the case of no-response (refunded later if the wellness checkup is done within the annual period).
This extra annual risk-premium for not accomplishing a wellness checkup can increase after more than two years of missing wellness checkups to $500/yr ($42/month). This is simply a "risk-premium" and should be named correctly for clarity.
---------------------------------------------------------------
7/10 Update -- Bonus section for Geeks and those who like to consider further alternatives.
Alternatives
I think it's fun to think outside the box, and if no good health care reform comes out in the next month or two it could be worth thinking further -- there are more than one or two ways to get to a good health care outcome.
For instance, Universal Coverage with guaranteed acceptance (no preexisting condition exclusions) doesn't absolutely require a Public Plan or Single Payer. The public methods are ways to get things done, but there are further ways....
Our ultimate goals are only a few:
Call this "Automatic Insurance." Make it refundable if the individual then chooses to buy their own policy.
Second, basic, is to require policies to be fully clear about what they cover, and to meet at least a very limited, basic level of coverage such as all preventative care, emergency care, and well-established treatments (any treatment in use for more than 18 years.) Yes, basic, limited, clear, cheaper.
Co-pays could be required and also limited by law to $0 for preventative care, $25 office visits, $100 for emergency care, and to 20% of lab and test costs (with legally required on-the-spot price information). Deductibles and out-of-pocket maxes could be capped by law at $500, or the total amount an insured individual or family has in a HSA (health savings account). Keep this very simple -- proof of HSA account balance is enough, once/year -- almost zero paperwork. These steps could stop fake insurance policies that trick buyers.
The electronic record of insurance would be at a Government database, allowing providers to ascertain the insurer of anyone walking in the door who is a citizen or pays taxes, or is a dependent of those.
The second piece of legislation is simple disclosure -- requiring providers to fully disclose costs for patients in real-time (to the patient, immediately) of care/options they are offering -- the amount that particular patient will pay out of pocket for that particular treatment.
That's how to generally keep our current system while eliminating most of its worst aspects. The cost spiral problem would continue to some extent....for a while, until the too many customers (you and I) finally get tired of over-paying and *choose* changes in providers/insurance. Private insurers could set up pay-for-outcome if they like, and increase incentives for cost-efficient preventative care. Those doing so could increase their own profits.
Doctors and insurers wanting more profits could simply do some planning, modest investing, and aim for cost-efficient care and higher numbers of patients. It's called free enterprise.
It would be easy for providers/insurers to hire reasonably smart people to actually improve their own health-care efficiency and cost-effectiveness. Even consultants. Ultimately, the free market can drive the unattractively overpriced providers out of business and replace them with more efficient competitors. That's called free-enterprise too.
It's an economic fact that if you get too overpriced in a market, you can go out of business.
Some kind of change is needed at least because of the form of cost-spiral castastrophe where the uninsured, including those able to pay for insurance, can walk into an emergency room without paying and the costs be put on taxpayers and the insured. That's why Government collecting premiums through taxes makes sense in terms of fairness. Even poor people can pay a little.
A Public Plan is ultimately only a way to accomplish similar goals (Universal acceptance) a little faster.
A Public Plan won't have extra costs unless it is poorly designed. Poorly designed, though, is a quality too many of our current private (and public) health care funding systems.
Update 6/23 -- Incentives (see end of post)
Update 6/25 -- Preventative care incentives,
Refined definition of what is an "effective" treatment
7/7 -- See new post above for a detailed incentive plan as an alternative to approved treatments
7/10 -- Alternatives (bonus!)
-----------------------------------------------------------------------------------
Let's work on better ideas for health care.
For instance, the quandary of some people dying from lack of very basic care on the one hand versus the spiraling cost of care on the other hand is resolved in an idea I present below. The proposal also resolves the public vs. private debate.
Even if it only helps to choose between existing proposals, it is worthwhile to think of better ideas. I think we can inject new ideas into the current debate, which can be incorporated into existing proposals, or new proposals.
We can come up with good ideas for health care.
This is our choice.
As citizens paying taxes, we have the right to influence the debate and the new law.
It is never too soon or too late. Even if we came up with a better idea after a bill is passed in August or September, it will influence the reforms and practices later. But here on June 20th, I think new ideas we find in the next few days could be communicated to Congress and help influence the debate and outcome right now.
...
I encourage readers/visitors to just plain shoot from the hip or give your thought-out ideas, either one.
=======================================
One approach I like is to start from scratch -- what would be the best way to do health care, regardless of what has been done before.
So, blank slate time....
Here are my initial thoughts:
Even by 1980, most of us didn't expect we might well live to be 93 or 96. But it is more feasible for many now than it was 30 years ago. Our expectations of medical salvation have risen greatly.
Given some kind of reasonable chance to have a decent quality of life with new medical treatments, most people would indeed be willing to spend a lot of money if needed to make it happen. While some can afford to spend a lot, many cannot. The differences in ability-to-pay leading to too-large health care differences bothers many of us.
Next: Technology means that there is no real limit to what kinds of high-tech new treatments can be invented and tried to extend life. And there is no natural limit to cost except what can be paid from all available money, even if it is every cent, every last penny, people have.
No matter how much money we spend, there are always more expensive cutting edge treatments left to try if one is willing and able.
So since we are willing to pay large amounts of money to extend life, and since industries of people are making a living making up new treatments --....the national cost will...always...rise...and...rise...until it hits the limit of every last penny that can be taken from all other areas of life.
Unless we impose limits on the publicly-supported portion of this choice.
Notice I say publicly. A limit on public support still leaves free choice on the personal/private side wide open.
Anyone can still purchase *any* additional health care (via supplemental private insurance) they want -- just like before.
Basically this idea only creates one fundamental change in the status-quo: more cost-effective universal basic care than the current emergency-room care disaster we have. This is a huge change that reduces costs yet allows for the private health care "freedom of choice" many say they like.
So....one thought that occurs to me is that a public plan cannot cover unlimited new treatments or even a lot of advanced new therapies-- the public plan would need to be conservative in order to avoid gigantic cost increases. Public support could cover everything that really pays off well (this is defined below). No one would die from lack of basic care.
"Basic" includes all well-proven, cost-effective care, preventative care and emergency care.
Publicly covered treatments need to be cost efficient -- a lot of result per dollar.
There are a great number of medical treatments that produce a lot of results per dollar spent. Part of a health-care law could be that all employers *must* provide a work-free day per year for a routine checkup, and having this provision actually enforced. In fact, the best health scenario for anyone is to treat problems early with well-proven early treatments that work well.
Early treatments like these cost less.
...
Now, part of the consequence of better basic care is exactly that more people live longer into old age, where illnesses of old age arise.
Currently we spend a huge amount of our health-care dollars treating the last 6 months of life.
Once a person lives to an advanced age, fewer and fewer effective treatments are possible. "Effective" treatments are treatments that extend life by more than a year at least, most people would agree.
(Remember, for those that don't agree, we leave them their free choice -- further treatment options that buy 2 or 6 months of life are up to them, just as now)
Treating a 30-yr old diabetic will extend life for a great many years. But some expensive and technological treatments for a 91-yr old might extend life by only months in many situations.
We need a way to choose what the public plan will support.
First, as above, the public plan should support first the most proven, effective therapies/procedures, which have success rates that are clearly higher than alternatives, by public data tables, according to clear and distinct diagnostic standards.
The public plan should only cover "effective" treatments, if they haven't yet been tried. I'd favor that more expensive treatments with success rates below 30% be considered "extended" or some such designation, and have significant co-pays (perhaps 30%-50% of their cost), so that patients have a realistic way to weigh their high cost versus benefits.
A public plan can only work if it has limited costs. Otherwise it would fail in time, and be cut back by force of financial crisis.
Of course, this will leave grey areas.
But the public plan isn't for grey areas. It is for proven basic care, where the situation is a clear statistical likelihood of success or reasonable chance of success.
Grey areas can be left to free choice -- private health insurance and such. (more on grey areas below)
So a public plan needs to have a very clear standard for treatments in old age -- the public plan (only) needs to provide just treatments that will significantly extend life, by at least a minimum period of time. Private plans can cover other situations.
I propose the public life extension time period be 1 full year -- the public plan can provide proven treatments that extend life at least 12 months where the statistical odds are at least 40%, according to governmental actuarial tables -- clearly defined statistical results with clear criteria.
When a treatment is close to the border, and a public inspector finds it falls outside the defined public criteria, the public compensation would be reduced by specific amounts after inspection. That is, the public inspector might find a doctor applied for public funds for a situation that wasn't fully within the public plan criteria, and then the public payment would be reduced according to precisely defined law in clear steps, such as 25% less (than the set public plan compensation), 50% less, 75% less. Only a few steps, and well-defined rules. Rules that clearly spell out what gets partial reimbursement. But specifying treatments precisely will hold the number of these grey situations to a minimum.
This overall approach allows enormous flexibility in actual treatment!
For instance, the public plan might cover an MRI and a certain specific surgery at defined payments, but if the patient and doctor choose to do additional steps, that's perfectly fine. The public plan covers what it covers, clearly and reliably.
But doctors/patients and private plans can do whatever further they want, flexibly, so that the total costs are covered in part publicly, in part privately.
...
Another idea that occurs to me is that there is no harm at all in making a public plan that is exceedingly conservative and....cheap!
It is necessary really. We have limited funds, and our goal isn't ultimate health care -- it's universal health care.
There are a lot of basic treatments that are effective and less costly, so we could choose to just create a public plan that does exactly only the most proven, effective treatments, and nothing more. The lower-rated treatments would never be covered by the public plan in this scenario.
In other words, instead of more comprehensive, we could aim for more cost-effective.
The whole point is to help everyone, every time, that can be helped in well-established, basic ways at a cost that almost all households can afford to pay for themselves.
The public plan would be well-defined and well-publicized.
The public plan could gradually take on new therapies/treatments over the years according to well-defined standards of cost-effectiveness in extending life.
No one would die from lack of basic care. Except by failure to act.
Anyone could then buy private insurance (see, we still have full-fledged, free-enterprise, private health care and private insurance here) to cover further treatment above that basic limited list on the public plan. Likely private plans would offer a great variety of options to extend coverage to various levels of less certain treatments.
Voila!
The conflicts of public vs. private insurance solved!
We don't have to choose between "fairness" and "freedom."
We can have basic health care, just like basic education. Basic, defined, limited, universal.
Yes?
....
Your ideas???
--------------
NPR continues their excellent coverage of health care with this worthwhile segment on health care costs by Robert Siegel. Highly recommended. It is rife with examples the idea here would address.
-------------
Paying for the Plan:
No matter whether public or private, we all will pay for health care.
My initial suggestion for how best to run this public plan is by premiums, and a mandate.
Private insurance plans could, by choice, purchase the public plan as a building block for their own plans (at the same standard rate individuals pay). A free market in that regard.
So all individuals would either buy the public plan, or a private plan that incorporates the public plan, or pay a set annual fee to be excluded.
This plan would be tax-neutral, requiring no new revenue, and having no net public cost.
Since this public plan would be basic care only with limits as described above, it's cost would be quite low, affordable.
For this reason it may not be necessary to provide a subsidy for most lower-income households. The premiums could be *very* low.
In fact, another way to help set limits for the public plan is to let it buy whatever it can for a set low premium, like about $100-$200/month per person age 25-61, $50/month under age 25. Age 62 and over probably needs a careful consideration for premium level.
The virtue in this particular method of cost-control is that the chosen treatments would be determined by mathematics -- cost/benefit, and not by politics.
In order to extend this kind of plan, politicians would have to raise it's premiums.
That removes a lot of the forms of political kickbacks that can occur, where contributions lead to Congressional interference.
Next, I'd favor a pay-for-performance incentive -- according to detailed actuarial tables. Payments to providers would be higher by a set amount, such as 20%, for a successful outcome versus an unsuccessful outcome (in the well-defined treatments the plan is designed to cover).
I'm confident though that a premium of only $100/month to $200/month for a 45-yr-old adult could indeed buy quite impressive basic health care with cost-effective, well-defined benefits and reasonably low co-pays, such as $25 office visits and drug co-pays of $10-$25 for most drugs, and $50-$100 for more expensive drugs. Most people would then just supplement this basic care coverage with private insurance for extended benefits.
The whole point of the public plan is to provide affordable basic health care. Affordable means the cost would be quite low, so that a family with an income of even just $35,000/yr could actually pay the premiums. Thus the plan doesn't rely on large federal subsidies.
-------------
This post will be repeatedly updated. It is a brainstorming post.
=====================
UPDATES:
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Incentives
James Kwak offers a good discussion of the other major cost-increasing force in health care: providers would like to earn more money.
This is a problem of incentives. The financial incentives for doctors/hospitals/health-care-providers are to do more, even if less is just as good.
We need to change the incentive structure to paying in part for outcomes, instead of only for services.
This could be accomplished without interfering much with doctors simply by laying out the basic treatment services covered for various precise diagnoses, which is what basic care is about. When a treatment doesn't work, it shows an additional condition, such as a doesn't-respond-to, which then would lead to a further course of treatment, etc. Once treatments are specified for these basic care situations, then only diagnostic services are difficult to incentivize correctly. I'd suggest we consider paying a significant up-front payment for diagnosis itself -- a diagnosis fee payment -- and then reduce the payments for specific tests, thus incentivizing some efficiency in choosing and giving tests. If initial tests did not determine the likely cause of illness, further tests would still be paid for, but the profitability of doing a great number of tests would be modest.
A few more simple rules would flesh out the incentives, such as making half the diagnosis fee contingent on diagnostic success, so that sending the patient on to associated providers for more testing means giving up a part of the profit. Kickbacks for referring patients in general need to become illegal.
One good incentive would be a successful-outcome incentive.
Many specific illnesses and injuries have fairly clear criteria of what constitutes curing/healing. In these cases, a successful treatment bonus is a very good kind of incentive. Even for pains that have less clear causes, some kinds of incentives are possible -- success in these cases could be relief that last a certain length of time, or even two incentives, for two different lengths of time.
Successful-outcome incentives encourage providers to effectively treat the patient, and make room for more patients in their system.
A final category of incentives we need are powerful incentives for preventative care. Good reimbursement for providers is a basic necessity. But there's more. Patients themselves need incentives. Along with the mandatory day-off for a wellness checkup mentioned above, we could require the wellness checkup as a condition of the low premium cost, or even give a direct payment to the individual for meeting their wellness checkup requirement.
One possible version of an incentive for individuals to follow through on a wellness checkup -- after missing a wellness checkup, a bill would be sent to the individual for $250 as a supplemental annual "risk-premium" cost, with a note that the individual can choose among three options:
a) have a wellness checkup during the time period remaining in lieu of the $250
b) elect to pay an extra $250 annual premium within 60 days
or
c) default to an increase in their automatic monthly premium of $21 in the case of no-response (refunded later if the wellness checkup is done within the annual period).
This extra annual risk-premium for not accomplishing a wellness checkup can increase after more than two years of missing wellness checkups to $500/yr ($42/month). This is simply a "risk-premium" and should be named correctly for clarity.
---------------------------------------------------------------
7/10 Update -- Bonus section for Geeks and those who like to consider further alternatives.
Alternatives
I think it's fun to think outside the box, and if no good health care reform comes out in the next month or two it could be worth thinking further -- there are more than one or two ways to get to a good health care outcome.
For instance, Universal Coverage with guaranteed acceptance (no preexisting condition exclusions) doesn't absolutely require a Public Plan or Single Payer. The public methods are ways to get things done, but there are further ways....
Our ultimate goals are only a few:
- Cost efficiency for the sake of the general U.S. economy
- Universal coverage -- preexisting condition coverage
- More Preventative Care (for both quality of life and cost effectiveness)
- Reasonable flexibility/freedom for doctors and patients
- Continued innovation
Call this "Automatic Insurance." Make it refundable if the individual then chooses to buy their own policy.
Second, basic, is to require policies to be fully clear about what they cover, and to meet at least a very limited, basic level of coverage such as all preventative care, emergency care, and well-established treatments (any treatment in use for more than 18 years.) Yes, basic, limited, clear, cheaper.
Co-pays could be required and also limited by law to $0 for preventative care, $25 office visits, $100 for emergency care, and to 20% of lab and test costs (with legally required on-the-spot price information). Deductibles and out-of-pocket maxes could be capped by law at $500, or the total amount an insured individual or family has in a HSA (health savings account). Keep this very simple -- proof of HSA account balance is enough, once/year -- almost zero paperwork. These steps could stop fake insurance policies that trick buyers.
The electronic record of insurance would be at a Government database, allowing providers to ascertain the insurer of anyone walking in the door who is a citizen or pays taxes, or is a dependent of those.
The second piece of legislation is simple disclosure -- requiring providers to fully disclose costs for patients in real-time (to the patient, immediately) of care/options they are offering -- the amount that particular patient will pay out of pocket for that particular treatment.
That's how to generally keep our current system while eliminating most of its worst aspects. The cost spiral problem would continue to some extent....for a while, until the too many customers (you and I) finally get tired of over-paying and *choose* changes in providers/insurance. Private insurers could set up pay-for-outcome if they like, and increase incentives for cost-efficient preventative care. Those doing so could increase their own profits.
Doctors and insurers wanting more profits could simply do some planning, modest investing, and aim for cost-efficient care and higher numbers of patients. It's called free enterprise.
It would be easy for providers/insurers to hire reasonably smart people to actually improve their own health-care efficiency and cost-effectiveness. Even consultants. Ultimately, the free market can drive the unattractively overpriced providers out of business and replace them with more efficient competitors. That's called free-enterprise too.
It's an economic fact that if you get too overpriced in a market, you can go out of business.
Some kind of change is needed at least because of the form of cost-spiral castastrophe where the uninsured, including those able to pay for insurance, can walk into an emergency room without paying and the costs be put on taxpayers and the insured. That's why Government collecting premiums through taxes makes sense in terms of fairness. Even poor people can pay a little.
A Public Plan is ultimately only a way to accomplish similar goals (Universal acceptance) a little faster.
A Public Plan won't have extra costs unless it is poorly designed. Poorly designed, though, is a quality too many of our current private (and public) health care funding systems.
June 7, 2009
Marketplace Steps Up on Debt and Reality
Marketplace's weekend program stepped up it's game this week to something I'd actually recommend.
Most of the program is focused on debt, savings, and living in the New Reality.
The New Reality (one nice description) and what to do about it were addressed here on this blog.
This New Reality is finally starting to become visible to more people than only a small minority.
Most of the program is focused on debt, savings, and living in the New Reality.
The New Reality (one nice description) and what to do about it were addressed here on this blog.
This New Reality is finally starting to become visible to more people than only a small minority.
May 19, 2009
Usury is OK, and Guns in Parks...
The Senate passed its version of credit card reform today. Several current tricks of credit card issuers will be out of bounds...in the future....eventually...when the rules finally come into effect. But if your card issuer just hiked your rate in a big way, well....
Current usurious rates aren't even on the table. 18%, 25% or 29.99% are all just fine.
One article mentioned that about 1/5 of card holders pay over 20%. Was that data from today?
One of our rate hike notices, which arrived a few weeks back, will raise one card of ours from 12% to about 19%. While these hikes won't affect us much at our house, it's quite easy to imagine the effect on other households. But compare this to the above seemingly reassuring statistic. Our new rate will be below 20%, and isn't in effect yet.
In 6 months, we may find that the above statistic of 1/5 has increased....
The elephant in the room is the question of the rate hikes that have just recently occurred or are on the way, since the card industry could see the new rules coming for miles. Card rate hikes are on the way, notices already sent, and these will slow the economy.
You can check out how your own Senators voted on the question of how many more of your dollars should go to the card industry right now, instead of, for instance, to local businesses where you live. If you are just now starting to pay an extra $40 or $80 a month in interest (a 12 percentage point rise in interest rate on an $8000 balance costs $80/month), will you spend the same amount on local goods and services that you have recently?
If you pay $40 a month more in interest now, will you tip the waiter the same amount? For that matter, will you cut back on eating out even further?
But, while usurious rates are OK with Congress, it's still up in the air whether the guns we need in parks can be loaded:
Current usurious rates aren't even on the table. 18%, 25% or 29.99% are all just fine.
One article mentioned that about 1/5 of card holders pay over 20%. Was that data from today?
One of our rate hike notices, which arrived a few weeks back, will raise one card of ours from 12% to about 19%. While these hikes won't affect us much at our house, it's quite easy to imagine the effect on other households. But compare this to the above seemingly reassuring statistic. Our new rate will be below 20%, and isn't in effect yet.
In 6 months, we may find that the above statistic of 1/5 has increased....
The elephant in the room is the question of the rate hikes that have just recently occurred or are on the way, since the card industry could see the new rules coming for miles. Card rate hikes are on the way, notices already sent, and these will slow the economy.
You can check out how your own Senators voted on the question of how many more of your dollars should go to the card industry right now, instead of, for instance, to local businesses where you live. If you are just now starting to pay an extra $40 or $80 a month in interest (a 12 percentage point rise in interest rate on an $8000 balance costs $80/month), will you spend the same amount on local goods and services that you have recently?
If you pay $40 a month more in interest now, will you tip the waiter the same amount? For that matter, will you cut back on eating out even further?
But, while usurious rates are OK with Congress, it's still up in the air whether the guns we need in parks can be loaded:
One amendment attached to the Senate bill by Senator Tom Coburn, Republican of Oklahoma, would restore a Bush administration policy allowing loaded guns in national parks. That provision is not in the House version, so there may be discussions between the two chambers over the issue.
May 15, 2009
Check to See How Your Senators Voted on Credit Card Reform (Updated)
Here is the first vote to check:
A Yes vote supported a 15% cap on credit card interest rates, limiting usury. A No vote was against the 15% limit on credit card interest. (note that this vote was on whether to include amendment 1062 in HR 627)
Senate Vote on H.R.627: Motion to Waive CBA Sanders Amdt. No. 1062; To establish a national consumer credit usury rate.
People, let's hold them accountable. Let's pay attention. Let's know how they voted, and let's remember and tell our friends.
---------Somehow it doesn't occur to all our Senators that 20% or 25% interest is a bad thing.
Bad for the nation.
One can imagine the lobbying arguments they heard, probably carefully targeted to individual Senators, depending on their temperament and beliefs.
Here are a couple I can imagine:
For a Senator that is a "staunch" "free enterprise" "pro-market" person, but doesn't really understand the basic necessities of markets or enterprise (non-finance enterprise) -- the necessity of having enough potential customers with disposable income left over to buy your product(!) -- an effective pitch could go:
"We gave them a low introductory rate, and planned our business on the premise that the rate later would be higher. Now that defaults are up everywhere, we need higher rates."
For a Senator that is more realistic and down-to-earth, perhaps he'd hear:
"Senator, we'd really like to help you again during your next campaign, but we need your help now."
The 2nd hardly needs any further examination here, but the first pitch is worth batting down.
If a credit card issuer cannot make enough profit at 15% even with a background default rate rising towards 8%-11% for instance (some credit issuers are more careful than others), if that company cannot make it on a 4%-7% spread, then....that isn't a well run company. For issuers that fold at a 15% cap (if any would), we should pleased to let the free market run them out of business and replace them with a company that can live on a 5% or 7% spread of interest (more if the issuer is prudent), which the market would indeed quickly do, in only months. Prohibiting 20%+ interest credit card rates is similar to outlawing an addictive substance that is harmful to health.
---------
Let's illustrate how 20% or 25% interest is ruinous.Consider a typical family carrying a commonplace level of household credit card debt of about $7,000 who then suffer a few (commonplace) financial hits -- too many major expenses at one time, such as multiple large auto repairs in a few months, and some expensive dental work and all of this just after a major replacement expense for a quality refrigerator or money sent to help a kid or relative. (Of course some households could have a previous balance on their cards from items such as furniture before the new expenses...but less discretionary expenditures are also common in debt ramp-ups.) It could easily be the case that after some bad luck for a few months they could end up carrying a significant credit card balance, perhaps even as much as 40% of their annual income for instance.
Let's suppose a family with a household income of $50,000 ended up with a temporary balance on their credit cards of $20,000. Otherwise they are quite average, with a house costing $160,000 at purchase (just a bit over 3 times their annual income) which they bought with 10% down and a good prime mortgage at a nice low fixed 30-year rate of 5.25%.
In other words, a financially responsible family that pays their bills, with excellent credit, who just had some large bills all at once, and not really more than they could handle over time...
...given a normal, reasonable interest rate, such as they expected they would have, due to the advertising of the credit card issuers.
Normally, a credit-worthy family could expect to carry such a balance on a few cards and at an interest rate in the range of 11%-14%.
First, clearly the credit card companies are making a nice, fat profit on balances carried at 12% or 14% interest that are paid over time (account holders that pay on significant balances without defaulting are very profitable for card issuers). In fact, you'll see that shortly.
Do the credit card companies need a higher rate here? Can the family handle a significant rate hike on this existing balance, a practice that is now commonplace according to the news.
So, let's imagine the outcome for this family financially if the $20,000 is carried at 12% in one scenario, and at 22% (21.99%) in the alternative scenario.
What will happen?
Suppose our responsible family with excellent credit spends quite carefully during the next few years, and even gives up their previous plan for a ski trip, settling for a much less expensive trip to SeaWorld once a year.
So, the family is cutting back, paying what they can.
What will happen?
Let's see.
A plan that reduces financial risk is to aim to pay back a high balance like this in around 4 years, because it is likely there will eventually be further expenses, and the family needs to be making real progress reducing debt before those unpredictable future expenses hit.
Putting our balance of $20,000 into the calculator for a 4-year payoff at 12% and 22% yields the following monthly payments:
12% -- $527/month
22% -- $630/month
So, only a difference in our scenario of $103/month more. Is that enough to matter?
Let's see, over 4 years, the roughly $103/month extra adds up to about $4,944 in extra payments (all interest).
Leaving aside for a moment what that $4,944 could have bought, such as two years of $2,470 contributions to an IRA, or $4,944 put into a 529 plan for college for the kids, while the years until college are still enough to earn some returns on the contribution, or....say a replacement used car when the old wagon goes.
Well....the last isn't a trivial example (though neither are the first). Because, in our example this frugal and responsible family has already chosen to repair their old car instead of buying a replacement, because the repair was still cheaper than buying another used-car as replacement....but, in several years, that old car is going to need some more repair, or replacement finally with a newer used car.
hmmm.....
So, there is already a danger this budget difference could put the family on a "crash" course.
But, let's go ahead and look at the budget numbers carefully.
For their monthly mortgage payment on the house described above with $2000 in annual property taxes and a quality $700/year homeowners insurance policy, and PMI (loan to value is 90%) of about $60/month, we arrive at a monthly house payment of $1,080/month.
Let's suppose our family has 1 child, 2 cars, one with a payment of $420/month for another 2 years, and the other older car paid off.
While both parents work, they pay $500/month for daycare for their 3 year-old.
While neither employer provides health insurance, the family has a good quality blue cross policy with a $3500 deductible for which they pay $750/month. To cover their deductible in case of a major medical expense (their regular office visits are covered at a $25 co-pay and no deductible), they funded an traditional IRA last year with $2500, as an emergency fund for medical care (IRA withdrawals are allowed for medical expenses).
For comparison note that the national average health insurance cost for a family is $12,000/year. This family is carefully aiming at a lower cost, but using a significant deductible, for which they have saved up money to help cover.
This is a frugal, money-careful family.
Normally, they contribute $2000/year to a Roth IRA, and this is the only retirement savings they have.
Being an old hand at Turbotax, I ran through all of this family's 2008 tax year. They were able to itemize deductions, due to the costs of medical insurance and home mortgage interest.
With only 5 $25 office visits during 2008, the family had no major medical expenses other than just the basic cost of health insurance. They are healthy and lucky, and don't have significant health costs other than the braces they just had to get for their kid's teeth.
Turbotax revealed they received $600 for their child tax credit, and also a significant child-care tax credit of $1,000, which was a major help, reducing their family federal taxes from about $2800 down to under $1200.
We'd like to list the federal income taxes in our budget, so to figure the family take home pay, we'll subtract only FICA taxes (social security and medicare taxes), and nothing else. All other expenses -- income taxes, health insurance, and retirement will not be withheld, but paid in our budget below.
Take home pay after FICA for our family is then $46,175 or $3848/month.
Also, our lucky family lives in a state with no income tax.
Nice. So this careful, prudent family, who are in many ways lucky and who Uncle Sam has treated very well in 2008, how will things turn out for them financially?
So, with all these advantages, with all these favorable basic facts, but with a few typical large expenses all at once of $20,000, will our family make it financially???
Let's suppose the family doesn't mind sweating some in the summer and is lucky enough to choose a low-cost electricity plan at only 10 cents/KwH. Nice. Their electric bill will average out over a year to only $120/month.
This is a careful, conservative, prudent family, remember?
So here are the budget results (on a few items like gasoline I just use some commonplace amounts):
Monthly Expenses before Credit Card Payments:
Housing Payment: $1080
Health Insurance: $750
Roth IRA Savings: $167
Auto Payment: $420 (5-yr, 6% auto loan for a car just under $22K)
Auto Insurance: $80 (they have good $100K/$300K insurance but comprehensive on 1 car).
Auto tags/inspections: $12 (about $140/year)
Child Care: $500
Federal Taxes: $100
Electric Utility: $120 (average over year)
Gas Utility: $35 (average over year)
Trash/sewer/water: $65
Grocery Budget: $600
Eating Out: $80 (yes, that's only $80 for a whole month -- they cook a lot at home)
Gasoline: $110
Phone and Internet: $75 (our frugal family forgoes cable TV and uses an antenna)
HOA fees: $20
Cell Phones: $65 (this may seem low, but these people are frugal)
Movie Rentals: $15 (cheap entertainment)
Clothing: $35 (some work clothes, some GoodWill clothes)
Dog food: $30 (most families have a pet)
Haircuts, cosmetics, toiletries: $45
Life Insurance: $50 (both parents, prudent, are insured with term life insurance)
Health Club: $20 (they have a deal!)
Babysitter: $25 (obviously, this is about 1 night's worth, again: think frugal)
Ok....let's see where we are at with this very basic, frugal family budget
-----------------------------------------------
Basic Frugal Budget $4499
....
UH OH
(it seems paying the full cost of health insurance has shot this family's budget)
....
It seems our family can't quite....live....this basic budget on $50,000/year.
OK, let's suppose the parents have been working quite hard at their jobs, and are great at them, and they just got BIG raises....(perhaps in part due to their employers canceling health insurance benefits).
Let's revise the family income upwards to a very average family level of $60,000
$10,000 is a nice raise, yes?
But...we'll keep that credit card debt unchanged at $20,000, now about 1/3 annual income.
Federal taxes increase (TurboTax says) to about $232/month.
Take home pay after FICA withholding only is now increased to $55,410 or $4618/month.
The basic budget though is increased by only the new income tax increase, or another $132/month:Basic Frugal Budget $4631
whew....not so good...
It seems $60,000 is not enough for our "frugal budget" above.
Notice that some or several of the items are *less* than your own family spends?
Ok, let's cut costs to the bone, and put on a 2nd job for dad.
Of course, some families don't have a $420/month auto payment.
Let's give them a cheaper car there.
Let's cut that car payment to $350/month -- they bought a cheaper car to begin with, say. This cuts the basic Budget by $70/month.
Dad is now working 55/hours week (40hrs + 15 hours on the 2nd job at $9/hour) and brings in an extra $6750/year now in 50 weeks.
The little boy sees less of dad now, but....life is sometimes hard (and sometime made harder by decisions of other people though), and that's a reality.
Of course, another job will require a little more gasoline, and probably the family will need fast food a few times also, being too exhausted to cook sometimes. Let's suppose $20 more for gasoline, and $25 more for fast food.
This brings home another 6233/year after FICA, or $520/month, for a total of $5,137/month. Federal taxes increase by another $91 to $323/month now. Against the increase of $91/month in taxes we decrease the car payment by $70, then add $45 for more fast food and gasoline for a net increase of $66 in the budget:
Basic Frugal Budget $4697/month
Ok, now with 3 jobs and a cheaper car the family is bringing in enough for their basic frugal budget and will have
$440/month left to pay on... credit cards.
hmmm.....
remember this payment amount on the $20,000?:
12% -- $527/month
22% -- $630/month
We are still not making it here...
ok, we have to be somehow more favorable, less desperate. Let's say that that credit card balance for those unexpected expenses all at once was only $15,000.
We are now under 1/4th of family income from that expensive, unlucky 4 months.The new 4-year payment amounts (on $15,000) are:
12% -- $395/month
22% -- $473/month
Ok, now we've made it. The family can pay the credit cards. Sort of.
They can pay about $400/month at 12% interest. Or with the help of Congress, they can pay more, about $470/month, lining the pockets of bank executives and investors. Perhaps they can save somewhere else in the budget to close that $33 a month gap needed to make the $473 payment when the interest rate is 22%.
Is one scenario better for the economy than the other?
I'm not just being rhetorical with that question. The $78 more each month the family has available under the lower interest rate is sustainable (non-credit) money that will be spent, sooner or later (more later if saved first), in the ordinary economy -- giving a waitress an extra tip, or buying a little iPod. It's discretionary money like this that ultimately provides you and I with our jobs. If that is sent off instead as extra interest, it can go to investors overseas, or into an U.S. high-wealth portfolio of securities somewhere, and be socked away for decades.
-----------
Update: A helpful reader pointed out that the example of buying a couch (in addition to medical and repair bills) suggested the example family wasn't prudent enough, so I substituted an equally realistic example without a couch. But ultimately the issue wasn't what a family chose to buy in piling up debt, so much as just simple usury, and worse usury after the fact.
I liked this metaphor from Austan Goolsbee in a NYTimes article on the credit card reform bill to describe the practice of raising rates exorbitantly on existing balances:
A Yes vote supported a 15% cap on credit card interest rates, limiting usury. A No vote was against the 15% limit on credit card interest. (note that this vote was on whether to include amendment 1062 in HR 627)
Senate Vote on H.R.627: Motion to Waive CBA Sanders Amdt. No. 1062; To establish a national consumer credit usury rate.
People, let's hold them accountable. Let's pay attention. Let's know how they voted, and let's remember and tell our friends.
---------Somehow it doesn't occur to all our Senators that 20% or 25% interest is a bad thing.
Bad for the nation.
One can imagine the lobbying arguments they heard, probably carefully targeted to individual Senators, depending on their temperament and beliefs.
Here are a couple I can imagine:
For a Senator that is a "staunch" "free enterprise" "pro-market" person, but doesn't really understand the basic necessities of markets or enterprise (non-finance enterprise) -- the necessity of having enough potential customers with disposable income left over to buy your product(!) -- an effective pitch could go:
"We gave them a low introductory rate, and planned our business on the premise that the rate later would be higher. Now that defaults are up everywhere, we need higher rates."
For a Senator that is more realistic and down-to-earth, perhaps he'd hear:
"Senator, we'd really like to help you again during your next campaign, but we need your help now."
The 2nd hardly needs any further examination here, but the first pitch is worth batting down.
If a credit card issuer cannot make enough profit at 15% even with a background default rate rising towards 8%-11% for instance (some credit issuers are more careful than others), if that company cannot make it on a 4%-7% spread, then....that isn't a well run company. For issuers that fold at a 15% cap (if any would), we should pleased to let the free market run them out of business and replace them with a company that can live on a 5% or 7% spread of interest (more if the issuer is prudent), which the market would indeed quickly do, in only months. Prohibiting 20%+ interest credit card rates is similar to outlawing an addictive substance that is harmful to health.
---------
Let's illustrate how 20% or 25% interest is ruinous.Consider a typical family carrying a commonplace level of household credit card debt of about $7,000 who then suffer a few (commonplace) financial hits -- too many major expenses at one time, such as multiple large auto repairs in a few months, and some expensive dental work and all of this just after a major replacement expense for a quality refrigerator or money sent to help a kid or relative. (Of course some households could have a previous balance on their cards from items such as furniture before the new expenses...but less discretionary expenditures are also common in debt ramp-ups.) It could easily be the case that after some bad luck for a few months they could end up carrying a significant credit card balance, perhaps even as much as 40% of their annual income for instance.
Let's suppose a family with a household income of $50,000 ended up with a temporary balance on their credit cards of $20,000. Otherwise they are quite average, with a house costing $160,000 at purchase (just a bit over 3 times their annual income) which they bought with 10% down and a good prime mortgage at a nice low fixed 30-year rate of 5.25%.
In other words, a financially responsible family that pays their bills, with excellent credit, who just had some large bills all at once, and not really more than they could handle over time...
...given a normal, reasonable interest rate, such as they expected they would have, due to the advertising of the credit card issuers.
Normally, a credit-worthy family could expect to carry such a balance on a few cards and at an interest rate in the range of 11%-14%.
First, clearly the credit card companies are making a nice, fat profit on balances carried at 12% or 14% interest that are paid over time (account holders that pay on significant balances without defaulting are very profitable for card issuers). In fact, you'll see that shortly.
Do the credit card companies need a higher rate here? Can the family handle a significant rate hike on this existing balance, a practice that is now commonplace according to the news.
So, let's imagine the outcome for this family financially if the $20,000 is carried at 12% in one scenario, and at 22% (21.99%) in the alternative scenario.
What will happen?
Suppose our responsible family with excellent credit spends quite carefully during the next few years, and even gives up their previous plan for a ski trip, settling for a much less expensive trip to SeaWorld once a year.
So, the family is cutting back, paying what they can.
What will happen?
Let's see.
A plan that reduces financial risk is to aim to pay back a high balance like this in around 4 years, because it is likely there will eventually be further expenses, and the family needs to be making real progress reducing debt before those unpredictable future expenses hit.
Putting our balance of $20,000 into the calculator for a 4-year payoff at 12% and 22% yields the following monthly payments:
12% -- $527/month
22% -- $630/month
So, only a difference in our scenario of $103/month more. Is that enough to matter?
Let's see, over 4 years, the roughly $103/month extra adds up to about $4,944 in extra payments (all interest).
Leaving aside for a moment what that $4,944 could have bought, such as two years of $2,470 contributions to an IRA, or $4,944 put into a 529 plan for college for the kids, while the years until college are still enough to earn some returns on the contribution, or....say a replacement used car when the old wagon goes.
Well....the last isn't a trivial example (though neither are the first). Because, in our example this frugal and responsible family has already chosen to repair their old car instead of buying a replacement, because the repair was still cheaper than buying another used-car as replacement....but, in several years, that old car is going to need some more repair, or replacement finally with a newer used car.
hmmm.....
So, there is already a danger this budget difference could put the family on a "crash" course.
But, let's go ahead and look at the budget numbers carefully.
For their monthly mortgage payment on the house described above with $2000 in annual property taxes and a quality $700/year homeowners insurance policy, and PMI (loan to value is 90%) of about $60/month, we arrive at a monthly house payment of $1,080/month.
Let's suppose our family has 1 child, 2 cars, one with a payment of $420/month for another 2 years, and the other older car paid off.
While both parents work, they pay $500/month for daycare for their 3 year-old.
While neither employer provides health insurance, the family has a good quality blue cross policy with a $3500 deductible for which they pay $750/month. To cover their deductible in case of a major medical expense (their regular office visits are covered at a $25 co-pay and no deductible), they funded an traditional IRA last year with $2500, as an emergency fund for medical care (IRA withdrawals are allowed for medical expenses).
For comparison note that the national average health insurance cost for a family is $12,000/year. This family is carefully aiming at a lower cost, but using a significant deductible, for which they have saved up money to help cover.
This is a frugal, money-careful family.
Normally, they contribute $2000/year to a Roth IRA, and this is the only retirement savings they have.
Being an old hand at Turbotax, I ran through all of this family's 2008 tax year. They were able to itemize deductions, due to the costs of medical insurance and home mortgage interest.
With only 5 $25 office visits during 2008, the family had no major medical expenses other than just the basic cost of health insurance. They are healthy and lucky, and don't have significant health costs other than the braces they just had to get for their kid's teeth.
Turbotax revealed they received $600 for their child tax credit, and also a significant child-care tax credit of $1,000, which was a major help, reducing their family federal taxes from about $2800 down to under $1200.
We'd like to list the federal income taxes in our budget, so to figure the family take home pay, we'll subtract only FICA taxes (social security and medicare taxes), and nothing else. All other expenses -- income taxes, health insurance, and retirement will not be withheld, but paid in our budget below.
Take home pay after FICA for our family is then $46,175 or $3848/month.
Also, our lucky family lives in a state with no income tax.
Nice. So this careful, prudent family, who are in many ways lucky and who Uncle Sam has treated very well in 2008, how will things turn out for them financially?
So, with all these advantages, with all these favorable basic facts, but with a few typical large expenses all at once of $20,000, will our family make it financially???
Let's suppose the family doesn't mind sweating some in the summer and is lucky enough to choose a low-cost electricity plan at only 10 cents/KwH. Nice. Their electric bill will average out over a year to only $120/month.
This is a careful, conservative, prudent family, remember?
So here are the budget results (on a few items like gasoline I just use some commonplace amounts):
Monthly Expenses before Credit Card Payments:
Housing Payment: $1080
Health Insurance: $750
Roth IRA Savings: $167
Auto Payment: $420 (5-yr, 6% auto loan for a car just under $22K)
Auto Insurance: $80 (they have good $100K/$300K insurance but comprehensive on 1 car).
Auto tags/inspections: $12 (about $140/year)
Child Care: $500
Federal Taxes: $100
Electric Utility: $120 (average over year)
Gas Utility: $35 (average over year)
Trash/sewer/water: $65
Grocery Budget: $600
Eating Out: $80 (yes, that's only $80 for a whole month -- they cook a lot at home)
Gasoline: $110
Phone and Internet: $75 (our frugal family forgoes cable TV and uses an antenna)
HOA fees: $20
Cell Phones: $65 (this may seem low, but these people are frugal)
Movie Rentals: $15 (cheap entertainment)
Clothing: $35 (some work clothes, some GoodWill clothes)
Dog food: $30 (most families have a pet)
Haircuts, cosmetics, toiletries: $45
Life Insurance: $50 (both parents, prudent, are insured with term life insurance)
Health Club: $20 (they have a deal!)
Babysitter: $25 (obviously, this is about 1 night's worth, again: think frugal)
Ok....let's see where we are at with this very basic, frugal family budget
-----------------------------------------------
Basic Frugal Budget $4499
....
UH OH
(it seems paying the full cost of health insurance has shot this family's budget)
....
It seems our family can't quite....live....this basic budget on $50,000/year.
OK, let's suppose the parents have been working quite hard at their jobs, and are great at them, and they just got BIG raises....(perhaps in part due to their employers canceling health insurance benefits).
Let's revise the family income upwards to a very average family level of $60,000
$10,000 is a nice raise, yes?
But...we'll keep that credit card debt unchanged at $20,000, now about 1/3 annual income.
Federal taxes increase (TurboTax says) to about $232/month.
Take home pay after FICA withholding only is now increased to $55,410 or $4618/month.
The basic budget though is increased by only the new income tax increase, or another $132/month:Basic Frugal Budget $4631
whew....not so good...
It seems $60,000 is not enough for our "frugal budget" above.
Notice that some or several of the items are *less* than your own family spends?
Ok, let's cut costs to the bone, and put on a 2nd job for dad.
Of course, some families don't have a $420/month auto payment.
Let's give them a cheaper car there.
Let's cut that car payment to $350/month -- they bought a cheaper car to begin with, say. This cuts the basic Budget by $70/month.
Dad is now working 55/hours week (40hrs + 15 hours on the 2nd job at $9/hour) and brings in an extra $6750/year now in 50 weeks.
The little boy sees less of dad now, but....life is sometimes hard (and sometime made harder by decisions of other people though), and that's a reality.
Of course, another job will require a little more gasoline, and probably the family will need fast food a few times also, being too exhausted to cook sometimes. Let's suppose $20 more for gasoline, and $25 more for fast food.
This brings home another 6233/year after FICA, or $520/month, for a total of $5,137/month. Federal taxes increase by another $91 to $323/month now. Against the increase of $91/month in taxes we decrease the car payment by $70, then add $45 for more fast food and gasoline for a net increase of $66 in the budget:
Basic Frugal Budget $4697/month
Ok, now with 3 jobs and a cheaper car the family is bringing in enough for their basic frugal budget and will have
$440/month left to pay on... credit cards.
hmmm.....
remember this payment amount on the $20,000?:
12% -- $527/month
22% -- $630/month
We are still not making it here...
ok, we have to be somehow more favorable, less desperate. Let's say that that credit card balance for those unexpected expenses all at once was only $15,000.
We are now under 1/4th of family income from that expensive, unlucky 4 months.The new 4-year payment amounts (on $15,000) are:
12% -- $395/month
22% -- $473/month
Ok, now we've made it. The family can pay the credit cards. Sort of.
They can pay about $400/month at 12% interest. Or with the help of Congress, they can pay more, about $470/month, lining the pockets of bank executives and investors. Perhaps they can save somewhere else in the budget to close that $33 a month gap needed to make the $473 payment when the interest rate is 22%.
Is one scenario better for the economy than the other?
I'm not just being rhetorical with that question. The $78 more each month the family has available under the lower interest rate is sustainable (non-credit) money that will be spent, sooner or later (more later if saved first), in the ordinary economy -- giving a waitress an extra tip, or buying a little iPod. It's discretionary money like this that ultimately provides you and I with our jobs. If that is sent off instead as extra interest, it can go to investors overseas, or into an U.S. high-wealth portfolio of securities somewhere, and be socked away for decades.
-----------
Update: A helpful reader pointed out that the example of buying a couch (in addition to medical and repair bills) suggested the example family wasn't prudent enough, so I substituted an equally realistic example without a couch. But ultimately the issue wasn't what a family chose to buy in piling up debt, so much as just simple usury, and worse usury after the fact.
I liked this metaphor from Austan Goolsbee in a NYTimes article on the credit card reform bill to describe the practice of raising rates exorbitantly on existing balances:
Austan Goolsbee, an economic adviser to President Obama, said that while the credit card industry had the right to make a reasonable profit as long as its contracts were in plain language and rule-breakers were held accountable, its current practices were akin to “a series of carjackings.”“The card industry is giving the argument that if you didn’t want to be carjacked, why weren’t you locking your doors or taking a different road?” Mr. Goolsbee said.
April 16, 2009
NPR Jewel on the "New Normal"
I've had this jewel in a window for several days, and after listening again tonight, I thought I should offer it here:
NPR: Economic Downturn Signals a New Normal
NPR: Economic Downturn Signals a New Normal
April 6, 2009
Poll: 70% Have Cut Back on "Luxuries", 40% on Necessities
Forty percent said they had cut spending on luxuries, and 10 percent said they had cut back on necessities; 31 percent said they had cut both. -- New York Times/CBS PollOf course, if 40% have cut back on luxuries, and another 31% on both luxuries and necessities, then 71% have cut back on luxuries.
But the stark number is the total of about 40% that have cut back on necessities.
This leaves open the question of whether eating out is considered a luxury or a necessity by respondents. But if eating out is a luxury for many now, then what necessities might be cut by as many as 40% of Americans? Variety of food eaten at home might be one necessity that could be cut back on. Auto maintenance might be another. Health care is certainly being cut back on by many.
We can only hope that the necessity of good nutrition is not being cut back too much by too many.
Americans took on an additional $5 trillion in mortgage debt from 2001 to 2007. Since roughly 51 million homes had mortgages at the end of 2008, this amounts to roughly $100,000 more mortgage debt owed on the average home than in 2001. Even at a favorable mortgage rate of 5.25% for instance, that $100,000 costs about $550/month in extra mortgage payments vs. payments levels of 2001, for an average home. Of course, some owe the same payment as in 2001 (not having moved or refinanced or taken money out), but many owe an extra amount considerably more than this average.
The interest cost of $5 trillion at 5.25% is some $260 billion per year.
That $260 billion per year (eased down a small bit with every foreclosure) is money that could have been spent in the economy on other goods and services, resulting in diverse and lasting employment for many millions of Americans.
This extra mortgage interest over just 3 years is about as large as the stimulus package.
This is what we are up against.
But there is one form of great relief and source of new strength for the U.S. economy in this dark reality.
With as many as 8 million foreclosures by 2012 (one estimate), possibly as much as $2 trillion of this debt burden could be removed from households (who become renters at typically much lower monthly costs).
Such a large amount of debt-relief (monthly living cost relief) would help the economy immensely.
We have a ways to go yet, as only 1.4 million foreclosures have accumulated since July 2007.
But Congress, which appears at times in thrall to vested interests or under the spell of clever lobbyists, does not appreciate the crucial economic stimulus foreclosure debt-relief brings to the U.S. economy. House prices return back to normal levels sooner due to foreclosures, allowing a recovery in buying (and eventually building) sooner.
We need a clearing, a chance for people to get out of homes far too expensive for them. We need these Americans back -- back in the economy -- able to live in a more economically participating way: with money to spend on more than only a gigantic mortgage payment (any payment more than around 1/3 of income). We have yet to see whether large numbers will benefit from Obama's foreclosure prevention plan to ease payments down to 31% of income. But many underwater home owners would often be better off, and the economy in turn, to let go of a home that is too expensive, lowering their monthly shelter costs even further, and have more money to spend on the other parts of life.
Such as the necessities.
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