Updated 5-18: Reverse Corruption And Breathe Easier

Some facts speak for themselves:

"Coal-fired power plants...produce more hazardous air emissions than any other industrial pollution sources....Over 386,000 tons of 84 separate hazardous air pollutants spew from over 400 plants in 46 states."

• Fine particle pollution from U.S. power plants cuts short the lives of nearly 24,000 people each year, including 2800 from lung cancer.
• The average number of life-years lost by individuals dying prematurely from exposure to particulate matter is 14 years.
• Hundreds of thousands of Americans suffer each year from asthma attacks, cardiac problems, and respiratory problems associated with fine particles from power plants. These illnesses result in tens of thousands of emergency room visits, hospitalizations, and lost work days each year.
• Power plant pollution is responsible for 38,200 non-fatal heart attacks per year.

This topic is so relevant that I prefer to update it for a while instead of rushing on to other topics.
(4-20 update at bottom of post)
(4-27 update at bottom of post)

(update 5-18: David Leonhardt at the NYTimes, and new papers on this true cost of power)


Logically, even if you are lucky enough to avoid much of this pollutant load where you live, you occasionally breathe it right into your lungs, when the wind direction happens to bring it to you. When that happens, your body takes in, among other toxins, mercury. Mercury damages the nervous system.

Understanding the true extent of coal burning pollutants will give the well-informed a lot more concern than the tiny extra radioactive particle load from Japan lately. The health effects are orders of magnitude more serious.

But no health costs created by the actions of businesses should be paid by the victims alone, while little or none of the costs are born by those making the profits from emitting these toxins.

When the utilities and businesses emitting toxins bear little or none of the costs, it is a form of corruption. And in fact, often such corruption has literally been enacted into law.

Liability limits are a prime example of such corruption enacted into law.

...

Consider whether nuclear power in the form we have subsidized and tolerated so long is a good idea to begin with.

This is a complex question, and without trying to review how we got here (but for those that wish to hear some on that: here's a good Fresh Air interview) -- we can instead apply a powerful concept to discriminate whether this kind of nuclear power, or future kinds, are really worthwhile.

It is the wisdom of the crowd combined with the maximization of utility and the internalization of externals.

Simply put, every source of electric power for businesses and consumers should have its true, full costs put into the final price the consumers of electricity pay. The same should apply to oil products like gasoline.

This would look very different than what we have now.

For example, about 45% of US electricity comes from coal, but that is in part because we subsidize coal electricity production by allowing coal burning utilities to emit harmful emissions without paying their true health and environmental costs. We subsidize coal burning profoundly.

The degree of subsidy would be a surprise to many, no doubt.

We know we have subsidized nuclear power in several ways also, including costs of emissions.

In short, we subsidize the wasting of energy by making energy prices artificially cheap compared to true costs.

The full costs of an energy source includes all the costs -- health costs such as asthma and deaths from coal burning, coal-emitted mercury contamination of soil and people, massive climate change costs of carbon burning, nuclear contamination and storage costs, the costs of naval fleets and operations in the Persian Gulf to protect oil shipping lanes, and....finally, direct subsidies.

If all the true costs of every energy source -- nuclear, coal, oil, wind, solar -- were fully included in the final prices consumers pay, then we would all be able to choose more wisely and choose how to conserve, and which source to use.

True pricing would drastically alter our energy use for the better, and greatly aid the environment, and greatly improve the lives of our children through direct health effects.

How to do this? End all subsidies of all kinds for all energy sources now, and include in oil taxes the true full costs of defense and climate change, and for coal the true costs of pollutants and climate change cost estimates directly as fees on the users (utilities) in proportion to emissions, all the costs of nuclear that haven't been included like disposal and health costs (one way to figure health costs for a reactor type is to use a global average of health costs per year to date for that reactor type), and for solar the costs of solar panel production pollutants, and for wind energy the electrical transmission build out costs. Simply include the costs in the price to each source!

Likely many existing nuclear plants in the US, having had so much of their costs paid via subsidies from taxpayers already, would be viable as they exist now. Current operational costs are low, while spent fuel storage costs for newly spent fuel are diluted due to the existing necessity to store large amounts of spent fuel from decommissioned reactors and military sources (the marginal cost for new electricity generation creating more spent fuel doesn't add much to the existing large (overhead) costs all nuclear activities have already incurred.). In short, the storage costs are already here, and a little more doesn't amount to much.

The more interesting and significant consequence would arise from including costs based on risk assessments. Risk-assessed insurance costs -- without a liability cap -- would force some reactor operators to do significant modifications to reduce risks so as to remain economically viable.

Some reactors might not be modifiable enough to sustain risk-costs and become uneconomic and get shut down. Imposing true costs would lead to a more thorough and rapid change in improving backup systems and strategies. It's one thing to be regulated, another thing to have to pay for risk-costs in actual dollars.

It's far, far stronger incentive.

Finally, as wind power transmission and storage technology improves some of the plants might become uneconomic and get shut down earlier than they would have before. True costs make this timing rational and economic.

Once we approach that true pricing, the wisdom of the crowd will take over and make wise choices. People will conserve due to higher costs becoming finally visible -- you pay in your electric bill instead of in your tax bill or in your health insurance bill.

Conservation would sharpen and quicken.

The environmental and health outcomes would amaze those skeptical of economics and markets, who typically don't realize how profound are the effects of corruption and subsidy on this scale.

------------
Update 4-20 PM:
I just visited the NYTimes and this caught my eye:

The new settlement between the Environmental Protection Agency, other plaintiffs and the Tennessee Valley Authority resolving clean air violations at 11 T.V.A. coal-fired power plants...

Under the deal, the federally run authority will close 18 of its oldest and dirtiest coal-fired boilers in Tennessee, Kentucky and Alabama, spend $3 billion to $5 billion over the next decade to install state-of-the-art pollution controls at about three dozen other units, and invest $350 million in energy efficiency and renewable energy projects.

The E.P.A. estimates that the agreement will reduce emissions of nitrogen oxides and sulfur dioxide by nearly 70 percent, preventing 1,200 to 3,000 premature deaths, 2,000 heart attacks and 21,000 asthma attacks annually.

When I started writing parts of this post earlier this month I had no idea such a negotiation was on. On one level, this is delightful. But when we compared this to the total emission load of coal burning in the US, these TVA changes will still be only a modest fraction of the problem.

That such a large step still falls far short of the overall problem shows how much benefit we would get from true pricing across the board.

Imagine if true pricing was imposed 12 months from now. Do you think it would take some large part of a decade for those modifications mentioned above? I'd bet more like 1-3 years.

-------------

4-27: NPR's Talk of the Nation goes over some of my points (listen below).

By the way, I was reading James Fallows when I was in my early twenties (in The Atlantic probably). That was 25 years ago. It seems like he's been around forever. Wouldn't it have been fun if he, say, referenced my blog. No doubt, many sources have pointed out various of these points, but it's better in a consistent economic framework, as I've tried to lay it out above. While the talk show is worthwhile, the needed insight comes across better in a broad view presented all together.

Heh, perhaps I should try to be a blogger at The Atlantic. Anyone know Fallows personally?

Health Care Reform Perceptions

Imagine a old neighbor you know only from a few sidewalk conversations, a Mr. P., comes by and tells you that a new neighbor, a man that has just moved in a few doors down, seems suspicious, that he seems too friendly to the neighborhood kids. Suppose Mr. P. says:

"I don't know. It just makes me a little uncomfortable, you know. I think we need to watch, you know, and make sure we know what's going on."

Now, you might, depending on your worldview, be concerned.

Or you might, depending on your experience and way of seeing the world, avoid jumping to conclusions and simply continue to keep an eye on the kids, as you always have, without any prejudgments or expectations.

But suppose instead that your neighbor, Mr. P., said something like this:

"This guy is a fag. I just know it. I saw him saying hello to Johnny this afternoon. He was smiling at Johnny, you know. Would you go smiling at a kid you don't even know? It gave me the creeps. I couldn't find him on the sexual predators list, but I know one when I see 'em, and there are a lot of 'em around. We got us one right here, and we need to get together and do something about it."

Now, most of us at this point might guess that our old neighbor, Mr. P., could have some psychological problems. But...we'd not be 100% sure about our new neighbor also....

We'd wonder about the new man down the street. We'd be wary.

Most of us would be watchful, and might even wonder at a friendly smile, when we never would have otherwise.

Now...suppose that in fact the new man, the new neighbor, is the salt of the earth, a great guy, whose wife or partner had died in an auto accident, and who is looking to get a new start in a new place. Or suppose he's just a bachelor that's had trouble finding a relationship yet, and is in fact a friendly, open person that has moved into the area for a new job and is hoping to meet some neighbors soon and make some new friends.

You wouldn't know any of that.

You only know what Mr. P. has said, at this point.

That's the problem with gossip, or it's ugliest form -- bearing false witness.

There's a reason that one made it into the Ten Commandments.

...

The problem with health care reform is that it is truly complex (even for those that deal in complexity) and only a small portion of the electorate knows much about it, and most feel they don't know enough.

Instead, they know what Mr. P. has said.


......


Much discussion about our new health care reform centers on slanted political talking points, like the label "socialism," which takes the debate away from real issues that need examination.

"Socialism" has had a stable, clear definition for decades -- public ownership of industries.

Socialism is altogether different from the typical American practice of regulating industries. This health care reform does regulate the health insurance and health care industries. It does not nationalize (or "take over") health care.

When you walk into your local grocery store, you are entering a regulated marketplace, where the products on the shelves are controlled by public laws for the common good. For instance, you can find out what you are buying by looking on the package. The ingredients are listed by law. In the coming health insurance exchanges, the insurance policies will be required to meet standards that prevent tricky loopholes that fool policy holders. Instead of insurance with holes that fails to cover in time of serious need, the policies will be sound.

This is regulation.

The other new "socialism" is labeling any public benefit that isn't paid for fully by those receiving the service as socialism. By this standard though, free public libraries are socialism in action. Public parks would be...socialism. Payments to foster parents -- socialism. Public roads -- socialism. Public schools -- socialism. Since every nation has many such elements, everywhere on earth, at all times, this usage simply empties "socialism" of all meaning.

Any and all government would be "socialism" by this new standard.

What we have is an attempt is to smear reform and political opponents. While many people now newly parrot this use of the word "socialism" in simple ignorance of its meaning, some commentators and politicians must have known better.

Do they still?

To create an illusion that commonplace public benefits (public provisions for health care are common around the world) are real "socialism" like that in modern-day Venezuela under Chavez, with all the evils that implies -- this is a smear campaign.

It takes us away from genuine discussion and debate (about actual reality).

It isn't real debate or discussion if the topic is an illusion.

In similar fashion to the misuse of the word "socialism," we have made-up scare tactics like "death panels" and Medicare "rationing" (Medicare rationing is explicitly prohibited in the legislation.).

...

But...there is one significant, plausible concern about reform for many people which has been raised in the same forums.

It's the expectation/calculation that if the deficit isn't sufficiently closed in future years, and with some part of the ability to raise taxes used up on health reform, then other taxes will eventually be imposed on the middle class to help close the broader deficit.

(Update: Rasmussen polling (Republican), which does not always use neutrally-phrased questions, nevertheless blunders onto this central issue: "Voters strongly believe the health care reform plan will cost more than official estimates, and 78% expect an increase in taxes on the middle class to pay for it.... Sixty-six percent (66%) of voters believe America is already overtaxed." Rasmussen puts words in peoples' mouths, but if people had the choice they'd pinpoint the issue more clearly in polls -- we fear that *other* taxes will be needed to close the *broader federal deficit*, which has nothing to do with health care reform except for the simple connection that *some* of our ability to tax is being used up in health care reform.

This pragmatic worry about future taxes is a real issue, and I've addressed it more fully here (click here).

There are plenty of places to find out more about the real elements -- the actual reality -- of health care reform, from good table summaries to good overviews.

------------------------
This blog will address the mythologies (belief systems) behind our broader public debate about government itself, in a coming post.

Health Care Reform Passes

The final version of this reform passed the house 220-207 this evening, completing a momentous change in the American social safety net.

The reform embodies the principle that all American citizens should have an opportunity to purchase health care insurance policies that are comprehensive, regardless of existing health problems or level of income.

Democrats have plenty of reason to smile.

Americans have plenty of reason to smile, though some may not realize this for years due to getting their news and information from ideological sources.

Republicans transported through time from the 1970s or the 1990s would feel largely satisfied with this reform. There is good reason for celebration among those who know small businesses and startups are the engine of America.

Americans need no longer fear losing their job means losing health care, or that striking out on their own to start a new business means losing health care.

Starting in 2014, all income levels will be able to afford to purchase health insurance of good quality, with subsidies for those of modest incomes.

This reform establishes several mechanisms to test out and implement changes to improve quality and value so as to make Medicare and American health care in general more sustainable. To see these efforts succeed we must see Medicare actually implementing real changes, but the means will be in place to allow the search for delivery reforms that work.

Count me satisfied with this reform, this current version. This reform will test most of the ideas I consider the most promising to improve American health care sustainability and quality.

There is good reason to be optimistic.

Success in finding better models of health care won't remove all health questions from our lives. Americans will still face deep questions about how much health care we want, as do peoples in all nations -- questions such as just how far to go to extend life, as technology makes more and more treatments possible.

But when reform is in full flower, such questions will no longer be decided solely by income, by personal wealth, or by an insurance company seeking to cut costs.

Instead, under reform, these questions will be decided by doctors who will have more information than before, and by patients with good insurance the enables them to receive the care that most others receive.

Can We Afford This Health Care Reform?

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.

Medicare Buy-In: Popular and Saves Money...It Will Be Back

A new poll shows the Medicare buy-in for 55-64 yr olds is quite a popular idea in the electorate:

24. Do you support or oppose allowing Americans ages 55 to 64 to purchase Medicare coverage?

             Tot    Rep    Dem    Indep   Men   Women

Support      64%    50%    81%    57%      64%    63%
Oppose       30     44     14     36       32     29
DK/NA         6      6      5      7        4      8

Even the majority of Republicans like this idea. Throughout the electorate it has a huge 2-1 popularity advantage.

This makes sense. A Medicare buy-in is clearly a good idea. It would lower the cost of health reform, since it would lower the absolute cost (including total cost sharing) of insuring 55-64 yr olds.

Joe Lieberman was entirely wrong on this.

Since Medicare has lower costs, the total federal subsidies to help people pay for health insurance premiums would be lower overall (nationwide, public and private together, in total) since direct health care costs for that age bracket would be lower (due to Medicare administrative efficiency!).

Further, since more people in that age bracket would get excellent Medicare coverage, more preventive care delivered to the 55-64 age bracket would then lower Medicare costs over time as that group with better early preventive care ages over 65. (This is a profound structural advantage of Medicare -- Medicare knows its policy holders will stay in Medicare, therefore it can invest in long term preventive care and wellness efforts that take years to break even and payoff.)

So Medicare buy-in would strengthen the financial soundness of Medicare.

Two large benefits.

Joe is wrong six ways to Sunday.

And the American people clearly like this good idea.

The reason the current version of health care reform has lost some of its popularity is exactly because the public option and the Medicare buy-in were taken out.

The current version of reform has lost popularity among some of those that believe reform is deeply needed and right. The loss of popularity has been because reform has been weakened.

I think this idea will be making a comeback.

The only question is when...

Will we do this addition to reform in 1-2 years? In 5?

We will do it, or some version of additional reform that is very similar, unless Congress keeps its spine and strengthens the measures still inside the current version of reform to improve efficiency and slow health care cost inflation. Elements such as the final medical loss ratio regulation, and the strength and functionality of the panels that will guide Medicare innovation and the applicability of their innovations to Medicare providers, including hospitals.

The bottom line is that the people want powerful reform.

This desire will only grow as medical inflation continues.

Watch Reform For The Medical Loss Ratio

Health care reform will likely pass and be enacted into law.

Many think this is a bailout of health care in America.

They are correct.

Further, many think this is a bonanza, a windfall, for health insurers.

But this last proposition depends entirely on the "medical loss ratio" -- the percentage of total annual premiums insurers collect that they pay out for actual health care.

The medical loss ratio is the most important measure of how much premium money insurers keep for themselves. A 80% ratio means that insurers keep the other 20% for themselves.

There will be numbers established in the final bill for the required minimum medical loss ratio.

In the 1990s the average medical loss ratio was well above 90%.

Lately it has been near 80%.

Medicare itself is efficient, and it's medical loss ratio is between 94% and 97% (depending on what parts of health-related spending by other federal agencies are included).

The appropriate medical loss ratio regulation under reform for the year 2014 would be 90% to 92%.

Part of the reason the ratio should return to levels last seen in the 1990s is that private health insurers will no longer need so many administrative workers working hard to deny claims and cancel policies for people that get sick.

I've written important details about how to regulate the medical loss ratio at the end of this post. Establishing a number is only one crucial piece of regulating the medical loss ratio. Regulation must also encourage innovation (under a simplistically rigid ratio, cost-reduction innovations could temporarily reduce profits and thus reduce the motive for such innovation), and I offer a clear, effective method in the link to gain the best of both worlds -- good ratio levels and good incentives for innovation which reduce medical costs.

Excellent Health Reform Compromises Emerge

Imagine my surprise to see that 3 major compromises being worked out in health care reform all actually improve reform as it stands at the moment.

1. The excellent Federal Employees Health Benefits Program (FEHBP) will be used as the exchange model so that well-regulated private insurance in a FEHBP-like exchange with community rating will bring the far-superior Federal Employees types of insurance to the individual and small group market. This is a much better alternative than less-regulated exchanges with very weak public options.

2. The "health benefits ratio", aka "medical loss ratio" -- the portion of annual health insurance premium income insurers pay out for actual health care -- sounds like it will be regulated to be 90%. This is an excellent number. Vastly better than the 80% we heard only a week or so ago. Compare this ratio to the current average of 80% in the private market (and less in the individual market), and compare to average payout ratios that were above 90% during the 1990s.

3. Perhaps one of the most dramatic improvements possible: Instead of expanding the stigmatized Medicaid so broadly (as previously proposed to everyone up to 150% of poverty level), Medicare itself would be opened up for buy-in to everyone 55 and older (instead of only available at age 65 as now). Individuals age 55 to 64 could pay premiums to buy-in to Medicare coverage (with low-income people still receiving the previously proposed premium subsidies.) The significance? Medicare is highly cost-efficient, with a "health benefits ratio" between 94-97%. This means reform gets more bang for the buck, and thus the premium subsidies can be more sustainable.

These are just simply very, very good outcomes.

I would not have dared to hope for such good compromises.

Those who like to write Congress might find it a good moment to say "Yes!" to their representative and Senators on this compromise.

(Update 11-16) Bend the Cost Curve with Easy, Incremental Changes

There is a way to get politically-favorable reform that will have profound effects in just a few short years.

I say "favorable" since currently a significant part of Congress and America is quite concerned about reform that does not bend the cost curve (reduce health care inflation). Right now, health care reform is a challenging situation only because this group concerned with health care inflation is not confident in the proposed reforms.

It would help greatly if the proposed pilot programs in Medicare were aimed in the legislation to arrive at real outcomes in specified time periods, such as moving Medicare 100% to "paying for quality" within 8 years.

Below is a specific way a pilot program could proceed to accomplish exactly that.

Reforms to reduce health care cost inflation in Medicare have often been shot down by providers and medical suppliers over the years, since the reforms are seen as significant change and seem threatening to easy profits.

Medicare sets the practices for health insurance, as private insurers follow its lead in implementing changes in payment.

So it's a good time to highlight the last new idea I added to the bottom of How to Pay for Outcomes Over Time.

Instead of comprehensive payment reform all at once, which is politically impossible.... Why not just make a few small but effective changes in how Medicare pays for certain treatments each year.

Incremental change would provoke little or none of the type of opposition that has shot down reforms in the past.

In fact, Medicare could make quite small changes that the great majority of doctors would consider reasonable and support.

And these little changes would slow health care inflation within 1-3 years.

You can find out how to implement paying for outcomes over time incrementally in the 9-22 update at the end of this post.

Here's the section in brief:
--------------------------------

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 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 the remainder 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, perhaps by vote of panels of doctors.

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.

Note: Several ideas from comments have been incorporated into the Pay-For-Outcome-Over-Time system, which was developed over several months. Note also that comments are forwarded to me, and I respond usually. Also, anyone can contact me via email at: halbhh45@gmail.com

Health Care Around the World

The Great Debate is Ongoing

C-span broadcast the frothy surface of the Great Debate on health care reform.

The superficial debate in the House isn't the Great Debate I refer to, though it can be interesting to see just what your own representative is saying. Neither is the Great Debate those discussions and debates conducted in blogs and think tanks and staff meetings.

The real Great Debate is still progressing within the minds and hearts of many Americans across the country.

If you ask a neighbor what should be done about health care, and if neither of you are in a hurry and you show a willingness to listen, you may well hear a more nuanced view than many of the two minute shots from Congress. Often, deeper philosophical points will be raised. None of us live forever. You can't take it with you. And that's only the beginning.

It is one of the greatest debates that can happen, because it is a debate about whether or not we want to be a community as a nation. Will we be only an alliance of loosely related and separate communities, or will we think of all Americans as a part of our own personal community?

Do we want to join together, as a nation, to include everyone in our community and take care of them in terms of health care?

This is the real debate.

This reminds me of a famous question along these lines asked long, long ago.

It is one of the ultimate human questions, and it was asked directly to the deity:

"Am I my brother's keeper?"

Republican Rationing Rhetoric

One Republican Representative during the grand House debate on the reform bill today just spoke of going fishing not long ago with his 82-yr old father, who recently had triple-bypass surgery.

Having asserted that reform is trying to make American health care like Canadian and British health care, he concluded that under the coming reform he might not have been able to go fishing with his father if his father had faced a system like this, like British health care.

He finished with a crescendo against "rationing," etc.

There's a problem with this line of argument.

1. There is no rationing anywhere in reform, nor any mechanism that would allow it.

While there is no rationing scheme anywhere in proposed legislation, the most plausible assertion about rationing is that the IMAC panel, which suggests reforms for Medicare, could potentially suggest some sort of rationing scheme someday. But, the legislation explicitly forbids IMAC from even considering rationing. Rationing is disallowed. It's not in sight. It's not on the horizon.

I wrote a scathing post against rationing here months ago.

Rationing: A failure of Knowledge...

A few weeks later I had a lengthy discussion with a very skeptical ideologue about whether and how there could be any rationing. Finally, rationing via IMAC proposals was his most plausible scenario.

But then Congress explicitly prohibited IMAC from considering rationing in its legislation.

So not only is there no rationing proposed, it is even prohibited for future consideration.


2. The British system actually is nationalized health care, where the government owns most hospitals and employs most doctors.

Nothing remotely like that is anywhere in this reform.

Hospitals and doctors remain private, as now.

Neither is single payer in this reform. Nor is there a slippery slope towards single payer. Analytic experts believe this form of "level-playing-field" public option has little chance of crowding out private insurers if such insurers choose to be efficient.


Essentially the problem with Republican rhetoric is they are arguing against stuff that isn't there, just like before with the "death panels."

It hasn't changed. They are still arguing against imaginary stuff that isn't there.

Republicans would be doing great if the things they are arguing against were actually in the legislation!!

If we faced actual socialism, they would be doing a fine job defending us against it.

Instead, many Republicans currently are like Don Quixote, full of passion, seeing dangers everywhere and tilting their lances at windmills.

Will this matter?

Can't Republicans just argue against straw men, imaginary reform, that isn't in the legislation?

I think that's actually an open question. This is the age of the Internet.

Bloggers, both individual and those associated with major news sites, can just paste the videotaped comments of representatives in a blog post and then lay open the distortions, lies or incompetence...and more and more people are looking to see such reporting...

I think Republicans can get away with this practice less and less.

Non-ideological bloggers like yours truly will pin them to the wall.

Why?

Because I believe in America.

See, I know that a national drift towards defamatory ideological rhetoric is far more dangerous to America than more government regulation of health insurance.

The danger in such speech is its corrosion of the national character.

(Update 11-5) The Great American Health Care Bubble (and why we spend twice as much as Europe per person)

Sometimes it pays to step back and look at the big picture in a fresh way -- sometimes you see something new.

Sometimes the air clears and you see the mountain.

A new thought about health care costs hit me recently.

I'll lay out a broad insight which has profound implications in the second half of this post, but first I'd like you to see how certain commonly reported numbers about health care in America fit together.


Why American Care Costs Twice As Much

We often hear health care costs Americans "about twice as much as the high quality care in Europe."
Here is a graph showing health care spending by nation. (click here for more) (Source: Organization for Economic Cooperation and Development via the NYTimes Prescriptions blog)
(click on graph for larger version)


So European health care costs roughly 1/2 as much as American health care and has similar (high) quality.


Wasted Procedures

Now, many will have heard that about 30% of health care in America is for wasted procedures.

For example this NPR piece: "Of the $2 trillion-plus spent on health care in this country each year, about 30 percent, or $660 billion is wasted."

Or from the Health Care Blog: Fee-for-service incentives are a key reason why at least 30% of the $2.5 trillion expended annually for American health care is unnecessary. (I like Maggie Mahar's version here.)
Here's a RAND report: "On average, it appears that one-third or more of all procedures performed in the United States are of questionable benefit."
It is not always obvious to non-scientists just what is of "questionable benefit." I recommend to everyone the NPR story about hysterectomies in Maine.
Once you read or listen to that, you'll begin to suspect what is going on.
For those wanting a broad and precise picture, I strongly recommend this brief summary article. For a quick glance only see this graph (note the shockingly higher costs in Miami are adjusted for age, community health, etc., so the pattern of health care practices in some cities or areas doing more procedures for certain health conditions than is done in other localities -- more treatment without better results -- isn't about age or gender, etc. It's about local medical cultures and practices).
So we lose about 30% of health care dollars in this way. Another way of expressing this is that only 70% of American health care procedures are medically needed as demonstrated by health outcomes versus other treatment regimens.

High Prices (are only a piece of a broader measure)
Next one might ask, what of the fact U.S. medical prices for procedures are generally higher than those in other nations?
At first it may seem the fact that many individual health care procedures cost more in the U.S. than in other countries is an additional, separate factor in costs.
But the cost of a procedure is only a fragment of a more complete measure of cost -- the total cost to effectively treat a specific condition.
We know that other countries have wasted medical procedures also. Might there sometimes be a good reason American doctors cost more? If a doctor is more effective, so that he's on target with his diagnoses and treatments and finishes treating a patient successfully sooner, then such a doctor should be paid more per procedure than one who is less effective on average.
A doctor that treats a certain narrow condition successfully 90% of the time in 2 hours is delivering more value per hour than a doctor that treats the same narrow condition successfully 60% of the time in 2 hours. (See how to structure payment to increase quality instead of quantity of care.)
Talking about the expense of wasted procedures is another way of talking about the relation of effectiveness and pay rates (e.g. -- which higher pay rates correspond to relatively effective treatments and consultations?).
More highly skilled workers earn more because they produce more (more good results in the same hours of work). If many U.S. doctors are going to earn relatively high pay per hour, eventually some insurers will begin to require that they are highly effective -- as prices get high enough the practical cost will eventually bring comparisons and valuing. One change that may aid the valuing of treatment will be the increased number of patients reform will bring, which will allow doctors to increase revenue by treating more patients instead of doing more treatments per patient.
If a doctor or group of doctors quickly treat patients in an effective manner (various successful or good outcomes with less total treatment than other providers), then their high rate of pay per hour is justified.
Under the coming move from paying for services (fee for service) to paying for quality (such as paying for outcomes over time) to talk of both pay rates and of wasted procedures is to discuss the same issue (value, or the cost to treat a certain condition) from different angles. It is the most realistic and practical to work towards increasing health care providers true productivity (the proportion of successful treatments and number of patients benefited).
Treating more patients nationwide for only a little more total health spending can be done if incentives and innovation raise the average level of treatment effectiveness.
The best way to balance the system is to pay for outcomes instead of simply for services.
This kind of reform is actually the direction the health care market is moving towards in scattered locations. Some providers are already adopting their side of such changes. Insurers, including Medicare, need to catch up. Medicare is a big force, and the progress of Medicare in adopting already existing innovations will help greatly.

Administrative Waste (it's bigger than you'd guess)
Now, many of you will also have heard that we waste about a quarter (-25%) of health care dollars on administration and overhead for insurers and medical providers to fight with one another over reimbursements, and also for insurers to screen out preexisting conditions, etc.

For instance here: HASC estimates that as much as a quarter of U.S. healthcare spending goes to administrative functions, not patient-centered services.
There are other studies on administrative costs (update: Reuters offers another overview of waste), and they reach somewhat different (but still large) numbers, so I'll demonstrate a broad numerical conclusion myself as follows:
First, consider the known average payout ratio (also called the medical loss ratio) -- that portion American private insurers take in from premiums which they then pay out for actual health care: about 80%. So, private insurers keep on average about 20% of incoming premiums for administration, profits, and the costs of screening out (dropping and excluding) sick people, etc. Next, compare this to the administrative costs of Medicare, which are about 3% to 6%, depending on whether related spending by other federal agencies is included (including the spending from other agencies raises the total Medicare administrative costs to that 6% region).
These two numerical facts together give a rough but clear indication of the non-health-care costs above essential administration diverted by private insurers away from health care.
Compare the total non-medical private insurance costs of 20% to Medicare's broadly-inclusive costs of about 6%, and we get a difference of about 14%.
So for private insurers, roughly 14% of health care dollars are spent in ways that do not pay for or help to organize or administer health care. The remaining 6% of private insurer costs we'll consider necessary for needed administration.
Finally, we must add in the costs that doctors and hospitals pay to deal with the blizzard of insurance claim forms. It takes a lot of administrative workers at hospitals and doctors offices to try to get paid from private insurers for what doctors and nurses do. Insurers often initially deny certain cost items for confusing reasons, and...well, these insurance claim paperwork costs inside doctors' offices and hospitals add up, as numerous articles point out. Put these costs together with the roughly 14% excess costs inside private insurers....and that 25% total administrative waste in the U.S. found by HASC starts to sound entirely plausible, if not low.
Ok. Let's remember this rough number of -25% for administrative waste. Another way of expressing this is that only about 75% of the dollars spent on health care are actually spent on health care and it's organization and needed administration.
Putting Together the Numbers -- How Much Waste Is There?
By this time, those of you that think about numbers and percentages every day in a habitual way like I do will begin to see where I am going with this...
So I'll cut to the chase.
Let's do the math, and get a ballpark look at American health care without all the waste -- without excess overhead, and without medical providers being paid to do unneeded treatments that don't improve health outcomes.
0.75 (rough portion of health care dollars actually spent on care and needed organization) * 0.7 (rough portion of care actually medically indicated by best practices) = about 0.5 (rough portion of health care dollars spent to achieve health outcomes)
Hmmm.... That looks familiar. About 1/2.
That's the same ratio as European health care costs versus American health costs.
Hmmm....
I think we have a winner -- Europe: Point. Set. Match.
But...it appears American doctors and hospitals are reasonably efficient and effective when they get down to it!
Simply reducing administrative waste and treatments that have little benefit compared to alternatives would allow American doctors to deliver European-level costs with American-level take home pay!
Altogether, the real cost problem comes from the way we pay for care and the perverse incentives this structure sets up.
(Update: This American Life examines some of the issues discussed in this post.)

Part II:

The Great American Health Care Bubble (and the beginning of collapse)

Now it's time to lay out an insight that has come to me over the last couple of weeks.
How could American health care costs have skyrocketed so wildly?
Remember the first graph here?
As you can see in that first graph, starting in about 1980 American health care costs took off and left the rest of the advanced nations behind. American health spending shot into the sky.
1980. That's not long after 1978.
Does 1978 ring a bell?
That's when credit card laws effectively changed:
...the 1978 Supreme Court decision Marquette Vs. First Omaha Service Corp. affected the locations of the top 10 credit card issuers. Today, all are located in states with very high interest caps or none at all.
Basically, state usury laws capped credit card interest rates before 1978. With the new Supreme Court ruling in 1978, credit card issuers in the states with the highest allowed rates could now send out cards that could use those higher rates across the nation for the first time.
Armed with the power to gain huge profits via these newly freed interest rates, credit card companies began to look for a lot of new customers. Thus, slowly and inevitably began the Great Credit Bubble, increased over the decades by more and more easy money from around the world.
The means by which health care costs could escalate so wildly over the last 30 years is via the same fundamental enabler which led to the 1980s housing bubble, the 1990s stock market bubble, and the huge 2000s-era housing bubble.
These bubbles have all been enabled by the widening availability of easy money in more and more forms, from credit cards to piggy-back mortgages.
If your health insurance payments or out-of-pocket costs became too large, you could just buy more on your credit cards today and then refinance or take a 2nd mortgage tomorrow.
When there is more and more easy money available, then things that are especially valued like health care or housing tend to suck up that easy money like vacuum cleaners.
Along with the great housing bubble, we've had the Great American Health Care Bubble.
Of course...bubbles normally pop.
For health care, which is powerfully supported by insurance (slowly paying over time), the eventual bursting of the bubble requires a serious recession and time. Time for more and more people to lose their insurance or not to be able to pay for as much insurance.
The bursting of the Health Care Bubble would naturally be in slow-motion, more like the Titanic just after the iceberg -- for quite a while it's not obvious to many on ship what's going to happen....
Senator Olympia Snowe just before the decisive, final Senate Finance Committee vote: “It’s akin to the Titanic — turning the Titanic around before it hits an iceberg.”
But the great ship American Health Care has already hit the iceberg (the recession). Now it's a matter of whether we have the cleverness to do something, or whether most people will just end up out at sea.
The outcome of the health care bubble would naturally be more and more bankruptcies. First progressively more individuals and families, then eventually more and more doctor's offices and hospitals. Bankruptcies spreading and accelerating, everywhere across American health care.
Just like the housing price collapse, we'd have a medical "crisis" starting to really accelerate I believe in 2010.  (but note this perspective is in 2009, and the passage of Health Care Reform is a big unknown, as is the question of such huge supports as Obama's idea of paying 65% of COBRA costs for those losing their jobs....)
Just like the "credit crisis" and housing collapse, we are close to a medical cost "crisis" (a sudden change), where all at once a lot of hospitals and doctors will be facing radical cuts in staff and/or bankruptcy. Insurance does make this happen in more of a slow motion way. But the slow motion will only stretch out the sudden shift out to a period of 6-18 months I think.
A year from now, we could be looking at very different news headlines about the health care system.
Unless...unless government steps in and saves hospitals and such by diverting more money from elsewhere into the health care sector, propping up the high-cost providers of health care. When government steps in during the bursting of a bubble, taxpayers become the ones that take the hit.
Even now, government has already stepped in to significantly slow the sinking of the ship.
Normally, when a person loses their job, they lose their existing health insurance unless they can pay the full health insurance premium themselves without a job, using up savings. Keeping your existing insurance by paying the full premium yourself is allowed under COBRA for up to 18 months. The high cost of COBRA health insurance premiums are a surprise to many people, who do not realize how much their health insurance actually costs until they suddenly bear the full cost by themselves. This high cost that employers have been paying under sharp health care inflation has eaten so much money that pay raises have barely exceeded inflation for many years now.
The stimulus bill included a special provision to pay 65% of the cost of COBRA health insurance for 9 months.
Only this has slowed the sudden crisis of a collapsing health care bubble in the Great Recession.
This delay is temporary.
In fact, the collapse has begun (new nurses are having "sudden" trouble finding jobs).
The fact that American health care costs are unsustainably high today (before any further cost inflation) is yet another reason why Congress should prioritize and emphasize bending the cost curve (and here's how to).
We already send a huge amount of money in our economy to health care. Enough to give everyone excellent care.
If Government props up American health care spending, for instance by extending the COBRA subsidy to a longer time period, and later by subsidizing premiums for many Americans under reform, it also needs to effectively stop health care inflation soon by encouraging Medicare to adopt already existing innovations in payment.
Such change is easy to do incrementally, starting with the treatment of certain common, specific conditions using some method of pay for outcome such as by bundled payments with incentives or other methods already in use. The pay-for-outcome-over-time system I offer on this blog can be used incrementally (starting with certain specific conditions and modest incentives), and is similar in some ways to a bundled payment system with incentives. "Pilot programs" can be an avenue for such modernization of Medicare, if they are set up with the clear understanding that they are meant to be a working process to transform payment over a defined period of time. The goal of payment reform is to improve "Quality" -- to set up incentives that depend on the outcomes of treatment.
The alternative of just supporting the status quo would not be pretty.
Meanwhile....perhaps it is indeed good that most of health care reform happens years from now, and cannot be blamed for the coming massive financial crisis and fallout of the bursting Great American Health Care Bubble.
The natural (and dramatic) deflation (collapse) of the bubble will help bend the cost curve.
The best fact to communicate to the American people is that health care itself has been in a price bubble, and will have to correct.

AHIP Says Premiums Will Rise

Costs will rise? Tell us what else is new. We already learned premiums for small business will rise about 15% in 2010.

America's Health Insurance Plans (AHIP) tells us that premiums will rise under reform.

But we already know that premiums must rise under reform because insurance will have to begin to cover health care without tricky loopholes, won't be able to exclude sick people, and can't drop policy holders that become sick.

When Americans will have more of the significant health care costs (the bigger bills) covered by insurance under reform, they will therefore have to pay for this newly-improved coverage through additional premiums, instead of paying those same costs out-of-pocket.

For lower income people, federal subsidies will help pay those premiums. Instead of some dying from lack of basic care, and some going bankrupt or losing their homes, they be able to get good, basic coverage. Some will get coverage for the first time.

For upper-middle-income households (north of $80,000/yr), the increased health insurance premiums will be like taking money from one pocket and putting it in the other. More spent on premiums, less spent out-of-pocket. As this true insuring for health costs occurs, the long term costs of health care become more visible.

This is similar to how the current administration reversed the Bush policy of counting the costs of the wars in Iraq and Afghanistan off-budget (as if the wars didn't count as part of federal spending), and began instead to count the war spending as part of the federal spending and deficit.

Reacting to the House health reform bill, AHIP put out a statement hoping to undercut the public option in the bill by trying to associate the reality of already skyrocketing costs (before reform) with the future under reform as proposed with a public option.

Let me offer the AHIP statement (in red) with my illuminations:

AHIP says:
“The promise of health care reform has been that if you like your current coverage, you can keep it. We are concerned that this proposal will break this promise by increasing health care costs for families and employers across the country and significantly disrupting the quality coverage on which millions of Americans rely today.

My interpretation: We know people change their current coverage often, even every year, and employers are now rapidly dropping coverage or changing coverage, so let's take advantage of the political rhetoric about "keeping your current plan." Our payments to doctors/hospitals/labs are skyrocketing, and the new 2010 premium increases are huge. We don't want a public option competitor, so we'd like everyone to associate the current reality into the future, and imagine it is happening because of coming health reform. We want you to feel that the coming health care reform is responsible retroactively for what is happening to you right now and will soon happen as the new 2010 premiums are unveiled.

“The lack of system-wide cost containment is a missed opportunity. Without a greater focus on health care costs, families and employers will not be able to afford coverage and health care costs will rise at a rate much faster than the overall economy is able to sustain.

We'd love health cost inflation to somehow be controlled by federal regulation, so we wouldn't have to work hard to create new efficiencies and care-coordination innovations on our own. {See my footnote about cost containment at the end of this post}

“We share the concerns that doctors, hospitals, employers, and patients have all raised about the significant disruption a new government-run plan would have on the current health care system. A new government-run plan would bankrupt hospitals, dismantle employer coverage, exacerbate cost-shifting from Medicare and Medicaid, and ultimately increase the federal deficit.

We know that the current finances of health care are already a train wreck, worse than the public realizes. We know this news will be coming in 2010, so let's try to associate this coming reality to the public option, if we can. Many hospitals are already in serious financial trouble -- let's pin that on having a public option in the health care reform somehow. Let's use the disproven canard of "cost-shifting" again. Let's try to use financial fear to fight the public option.

“Estimates show that a government-run plan would cause millions of people to lose their current coverage. Moreover, massive Medicare Advantage cuts would cause millions of seniors to lose their Medicare Advantage coverage altogether, while millions more would face benefit cuts and higher out-of-pocket costs.

We already know for sure that "millions of people to lose their current coverage" is going to happen, no matter what. It's underway. We'd like for Medicare recipents to be afraid of reform. We DO NOT want to lose our Medicare Advantage subsidy, because we pocket 86% of that extra federal subsidy as pure profit for ourselves, and only pay out 14% of that extra money for actual benefits. We'd like people over 65 to falsely think reform will lessen their health care.

“Health plans strongly support comprehensive, bipartisan health care reform and have proposed sweeping insurance market reforms and new consumer protections to ensure that every American has guaranteed access to affordable health care coverage. Experience in the states has shown that insurance market reforms must be paired with an effective personal coverage requirement for these reforms to work. While this legislation recognizes the key linkage of market reforms and a personal coverage requirement, more needs to be done to ensure coverage is affordable and our health care system is sustainable.

Listen, "insurance market reforms must be paired with an effective personal coverage requirement [a mandate] for these reforms to work" -- people, we are actually telling you the truth on this one! If people can just wait until they are sick to buy real insurance, the whole health insurance system is in great danger. But...we'd love it if the main solution for this is to increase the subsidy levels, since that provides the most headroom for us to keep profits stronger.

“As the process progresses, health plans will continue to work to advance bipartisan legislation this year that will cover all Americans, make coverage more affordable, and improve quality.”

We like the "bipartisan" approach, because it has no public option. Please, let's just do some kind of reform, any kind! without a public option. And, let's be sure to increase the premium subsidies for health insurance!

----------------------------------

"Cost Containment"

The "missed opportunity" for cost containment is about what is possible politically, and just exactly how deeper health care delivery reforms could be designed.

Legislators should not feel confident enough to try to specify everything. Indeed, it's better to set up systems that encourage the needed innovation.

Congress has proposed some helpful pieces of cost-reduction, some pilot programs for delivery reform (to change away from fee-for-service) and a panel of experts to recommend changes in Medicare -- IMAC. But even these cautious but good moves toward controlling costs could become a "missed opportunity" if lobbyists can weaken and betray these proposed cost-containment measures in the details of the legislation.

If the currently proposed cost-containment measures are weakened it will be due to influence buying --in plain language, corruption.

Buying influence with money.

Americans call this "bribery" most of the time.

The trillion dollar question now is whether Congress will be bribed this time, now, today, under the spotlight of public attention.

Health care inflation is a bigger issue than the Public Option or even Single Payer. Some of the most crucial kinds of change that will counter the health care inflation are in the way health care is paid for, and proposed legislation attempts to make avenues for significant reform over time by such mechanisms as giving IMAC (modeled on the existing MEDPAC) leeway to innovate. IMAC isn't unchecked -- its proposals would not be enacted unless accepted by Congress and the President. Since future IMAC proposals might limit some forms of easy profit (based on non-market-like structures), the challenge for Congress is to avoid corruption.

The danger is that vested interest groups making contributions here and now -- direct payments (contributions) to Congress from entities that profit from current non-market-like structures likely to eventually be reformed -- will be bribes meant to pay representatives to cripple or reject the proposed legislation.

I'm not sure one way or the other how this will turn out -- whether Congress will resist the bribery this time.

Ranking the Public Options (updated)

There are a lot of essential pieces to health care reform. First, before ranking the various Public Options, here are the brief fundamentals of reform (familiar to some already):

Reform Necessities

1. Effective Coverage without loopholes/Individual Mandate/Individual-Family affordability subsidies (These pieces require each other in order to work well)

2. Beginnings of move away from paying for quantity (fee-for-service) to Paying for Quality.

3. Exchanges that allow individuals and small groups to obtain the insurance prices that larger groups obtain, such as by enforcing Community Rating (everyone in a local area (community) pays the same rates as all other members of their age group, regardless of status).
Exchanges can also increase competition and reduce cost inflation if they are set up to allow more people to participate and if they have defined benefits plan levels required ("bronze," "silver," etc.) so that insurance purchasers can compare plans in an apple-vs-apple manner.

4. Permanent Reinsurance (sharing the cost of the most expensive patients among all insurers, without an expiration, as compared to the proposed 3 years expiration. The best form of reinsurance is based on the number and type of conditions instead of total costs).

and finally...
5.0 Comprehensive Insurance Reform
AND/OR
5.1 A widely available Public Option.

(note that the current proposals limit who can access a Public Option, since the Option would only be available in the new exchanges, which themselves are only open to certain people. Senator Wyden has proposed to open up the exchanges more widely to more people. Update: many people don't realize the limited availability being proposed. Finally, note that even though a Public Option as currently proposed would be initially available to only a limited portion of the population, the exchanges and thus any Public Option will become available to more people over time. Getting the structure right at the beginning is a plus.

Comprehensive Insurance Reform done correctly has the outcome that insurance would not discriminate even indirectly in benefits or premium prices against individuals or small groups by any quality of any kind except age, community location, and tobacco use.

Further, good insurance reform would allow insurers to offer health incentives such as vouchers for certain health purchases such as exercise equipment/gym membership. The real health costs incurred by unhealthy foods and second-hand smoke can be handled separately via special sales taxes, with the sales-tax revenue sent into the federal health care budget.

But for Comprehensive Insurance Reform to actually work, a lot of necessary pieces must be set up correctly.

That might not happen.

An alternative that seeks to eliminate the uncertainty of relying on insurance reform is the Public Option. The point of the Public Option is to use a powerful competitor to prevent insurers from taking as much advantage of policy holders and the public as they might under mixed reform.

Why can't private competitors work just as well?

Because insurers negotiate payment rates to doctors and hospitals, and since big insurers win better rates by virtue of their bargaining power, the biggest insurers therefore gain more and more market share, eliminating competition gradually until they have a near monopoly.

Note that establishing a Public Option still requires risk sharing (sharing the cost of very sick patients) among all insurers (including the public option insurer) in proportion to the number of insured. Correctly set up reinsurance would accomplish this risk sharing.

Below, I rank the forms of Public Option in terms of their overall quality, accounting for their cost, effectiveness, and their long-term effects on the quality of health care.

A popular alternative is Single Payer -- which could work well if specifically set up to allow, encourage and reward innovation by medical providers. While this is not currently on the table, a well-devised Single Payer system can be thought of as a fallback position.

Okay. To the rankings!

In the list below, "national" refers to a Public Option that is run as a single national organization; "State-based" refers to state based public options without any national public option.
"rates" refers to payment rates to providers such as doctors, hospitals, labs, clinics;
"negotiated" refers to the public plan establishing payment rates by negotiating with health care providers as private insurers do (these rates typically vary by region and locality);
"medicare+5%" refers to payment rates that are set to be equal to medicare rates plus 5% (Medicare rates vary by location already, but the effective costs also depend on the quantity of medical care use for a medical condition, which also varies by location);
"modified by states" refers to individual states having the option to themselves modify the rates in their own state by adding or subtracting a fixed % onto the nationally determined rates (which already have regional and local variations); such modifications create a need for:
"net cost balancing" -- if a state modifies a nationally-set provider rate structure in a "modified by state" option, it should be required to pay to or be refunded from the federal insurance premium subsidy program the difference in cost this modification creates on the total state-wide affordability subsidies (that subsidize individuals purchasing health insurance), to balance the fiscal effect on the federal affordability subsidies of it's provider rate modifications;
"opt-out" refers to a national plan set up in all states by default, to which a state may formally choose to opt out of;
"opt-in" refers to a national plan that states may join only by formally choosing to join.


Rank ---- Public Option Variation

1. National Plan, Medicare rates modified by states by a % level w/net cost balancing, with opt-out
2. National Plan, Medicare rates modified by states by a % level w/net cost balancing, with opt-in
3. National, nationally negotiated local rates, w/opt-out
4. National, nationally negotiated local rates, w/opt-in
5. National, state-set-or-negotiated rates w/net cost balancing, w/opt-out
6. National, state-set-or-negotiated rates w/net cost balancing, w/opt-in
7. State-based (states may also form regional groups), state-set rates, opt-in
8. National, Medicare+5%, with opt-out
9. National, Medicare+5%, with opt-in
10.... Trigger type variations of the above. (With an effort to make the Trigger real)

Clearly there are more permutations and combinations, but this is illustrative. If a generic opt-out plan is enacted, further modifications years later are likely, so this list may be relevant after this round of reform. The principles used to rank the qualities of the Public Options are that:

a) A National Plan is less likely to be corrupt or have as much revolving-door problems as state-based Plans. Laws, regulations, or plan administration are corrupt if and when they benefit for-profit groups or entities at the expense of the general citizenry.
b) Negotiated rates can have advantages in that the public insurer can make providers compete on price to meet the percentage of providers in an region it wants to have as plan providers, via a bidding process, which would tend to encourage value-oriented innovations (see the "Setting Prices" section in this post).
c) Opt-out allows states to choose and helps make the Public Option more legitimate (more a matter of local choice). Opt-in does the same, but is a more of a hurdle, since it requires a formal state effort to join the public plan. By increasing political legitimacy, opt-out and opt-in strengthen the Public Option initially and over time.

A Trigger is considered likely to be gamed by insurers over time to make it ineffective -- it might rarely or never be invoked, even if needed. One of the qualities that makes a Trigger so problematic is that the numerical (or worse, subjective) criteria by which it would be triggered are themselves subject to manipulation and massaging over time.

Many consider a Trigger to be a way to pretend to have a Public Option on the horizon, but in fact prevent a Public Option from occurring even in circumstances the original spirit of the legislation would have intended.

The alternative to all Public Options remains Comprehensive Insurance Reform -- itself no small thing -- which must have all of its many details working to prevent insurers from gaming the system, of which risk sharing (reinsurance based on patient condition) is most crucial. Those aiming at Comprehensive Insurance Reform should look to European nations where it is in effect.

Support Increases for a Good Version of the Public Option.

The leading versions of the Public Option (a government-run health insurance option) are "level-playing field" versions, where the public option insurance plan is supported after startup only by the premiums from its policy holders. It gets no ongoing subsidy.

The only ongoing subsidies are to individuals and families for purchasing health insurance, regardless whether that insurance is private or publicly-run.

If you qualify for this subsidy, you get help to pay your health insurance premium. You can use your subsidy to buy any qualifying insurance plan (a plan that qualifies because it has no tricks or loopholes to deceive you). You get the same subsidy whether you buy a public or private insurance plan.

(note, as currently proposed, the Public Option would only be available in the coming new exchanges, which themselves are only open to certain people -- small businesses and those buying insurance in the individual market. Senator Wyden has proposed opening up the coming exchanges to more Americans, a great idea regardless of whether there is a Public Option.)

The other way the playing field is level is via the public option plan using "negotiated rates," where the public plan must negotiate with health care providers for what rate they are paid, just like private insurers. (The non-level rates would be rates tied to Medicare rates, such as Medicare rates + 5%.)

With these two qualities the Public Option is on a level playing field -- it has all the same conditions and limitations private insurers do, except for a need to pay profits to shareholders (because taxpayers are the shareholders!) or to pay gigantic multi-million dollar "bonuses" to executives.

Finally, the idea of letting states opt-out of this national Public Option is gaining momentum.

This is the best version of a Public Option -- national, negotiated reimbursement rates, and with a state opt-out clause (which implies a state could also later reverse and opt-in).

It will allow everyone to see over time how states with the Public Option perform versus states without the Public Option.

States without the Public Option will get the same level of subsidies as states with the Public Option, since the subsidies are to individuals and households.

-------------
Update: More on individuals Senators about the Public Option today.

One of the centrists, Senator Mary L. Landrieu, Democrat of Louisiana, said: “I am pressing to get a government-run, taxpayer-supported public option out of the bill. I want to rely on a reformed private marketplace — not the current wasteful, abusive, unaffordable private market.’’

Now, if a genuinely effective “reformed” marketplace happened, that would be great. It takes a lot of pieces. Not only risk-sharing reinsurance (to prevent the harm of adverse-selection) to last more than only 3 years, but also well-defined standard defined plans: “bronze,” “silver,” etc. that insurers must offer (to allow us to compare plans and avoid tricky loopholes), and..that insurers must price the same in and out of the exchange (to avoid tricky games by insurers to get only healthy people and avoid risky people), and…that something like the Wyden free choice amendment or similar rules would open the exchanges to more people, and…etc.

A lot of ifs are needed to establish a well-functioning reformed market that would actually work to help control costs.…

But the most telling part of Landrieu’s rhetoric (which seems political, about votes) is the phrase: “taxpayer-supported public option.”

This implication is flatly false.

The proposed public option will be supported by insurance premiums alone after startup. The subsidies are to individuals and families to help pay their premiums, whether they chose public or private insurance.

This rhetoric reveals the main trick being played politically — to intentionally confuse the subsidy to help individuals and families buy insurance for a imagined subsidy to the public option itself, a subsidy that does not exist.