As I've written here and elsewhere, Obamacare furthers a public misconception of what "health insurance" is meant to be. The law requires plans that are sold on health insurance exchanges to cover a vast array of benefits ("Essential Required Benefits") that include basic, inexpensive preventive care with no cost-sharing. And by doing so, the law mistakes what insurance actually is - a financial instrument to help individuals pay for costly, unexpected, events.

You want insurance that covers everything from an annual doctor's visit to the $9-a-month birth control pill? Then be prepared to pay more.

Ultimately, however, the insurance exchanges are likely to affect a relatively small share of Americans - at last count, about 25 million according to the CBO.

The majority of Americans - around 160 million - will continue to receive insurance through their employers (whether this is desirable or not is a whole different question - hint: most economists believe it isn't). But even here, Obamacare's miscalculation of what insurance should be, is creeping in.

Perhaps what's most noteworthy about Obamacare is that it offers a case study for Econ 101 students in unintended consequences.

Obamacare's major change to employer-sponsored coverage is that firms with 50 or more (full-time equivalent) employees will be required to offer health insurance to their full-timers, else pay a per-worker penalty of $2,000 (there is a separate penalty for workers who are offered "unaffordable" health coverage).

Because one goal of the health reform law was to disrupt as little as possible existing coverage (remember that "you can keep your coverage if you like it"), requirements for employer-sponsored insurance are significantly less onerous than those for plans sold on the exchanges. The only real requirement is that employer-sponsored plans have to cover preventive services with no lifetime benefit limits.

As can be expected, we've already seen employers discuss cutting hours and employment as ways of avoiding this mandate. But a WSJ piece out on Sunday offers insight into a third strategy: cutting benefits.

As the WSJ article points out, a number of businesses including two food-chains in Texas will offer "skinny," mini-med plans - relatively inexpensive form of health insurance. These types of policies have been around well before Obamacare and typically don't include coverage for surgeries or hospital stays, and when it comes to drug coverage, tend to only cover generics - they can often be priced at under $100-a-month.

For those of us concerned about health care costs and waste in the health care system, this is a mixed blessing. Perhaps few employers will embrace mini-med plans; maybe many will. The big picture, however, is what deserves attention. There appears to be a growing industry-level move that focuses more on insuring routine health events like doctor's visits along with (or, as in the case of mini-meds, instead of) expensive events like surgeries and hospitalizations.

This is exact opposite of what you'd want to see.  We should be encouraging people to pay for more routine costs out of pocket, rather than relying on insurance.  For really big ticket items - like hospitalization or expensive chronic illnesses, insurance should bear the cost.

Such is the law of unintended consequences that Obamacare is extending coverage for many services where the evidence on value is actually pretty weak.   

Before Obamacare, the American health care system was bifurcated (trifurcated, really - but that's a discussion for another day): those with health insurance and those without.

Underpinning the law was unambiguously a belief that when someone wants to see a doctor, they should be able to do so at minimum cost to them - costs to others be damned! That regular doctor visits are cheap (and getting cheaper courtesy of companies like Wal-Mart!), or that annual physical exams (that will now be effectively free) have not been shown to improve health outcomes was never a concern to the drafters of the law. But they missed something potentially worse - further fragmentation of the health care system.

Those receiving health insurance as a result of the employer mandate (or those whose employer-sponsored insurance will change its benefits package) might end up becoming "second-class" policyholders who can see a physician at no cost to them, but god forbid they land a kidney infection that requires a weeklong hospitalization. We know that this wasn't the intention of Obamacare's backers, but their preferences blinded them to another set of problems. It's understandable that the authors of the law missed such potential market shifts - after all, it's hard to see the forest for the trees when you're layering regulations on a market with very few signals thanks to other regulations.

"Reformers of the reform" should take heed and remember that insurance doesn't need to be comprehensive - covering the most unexpected events is all that's necessary. Direct Primary Care memberships - like Primary Care 1 in West Virginia - can be cost-competitive with mini-med plans, while offering a far wider range of services. Layering catastrophic insurance on top of that would help cover rare but expensive events that mini-meds don't. And in a bit of good news, Obamacare allows such plans to be sold on the exchanges and they even qualify for federal subsidies (albeit with a requirement that the DPC plan provide a "medical home" as well).

Those in Congress concerned about how the implementation of the law will play out should focus their energies on making the law more friendly to catastrophic plans on their own (for those who are healthy enough and don't need an annual doctor's visit, for instance) by allowing the use of premium subsidies for these low-cost plans.

Estimates of Americans without health insurance hover between 15 and 20 percent - depending on the source (much of this is a difference in whether you ask about being uninsured presently or being uninsured at any time during the past year). According to the CBO, Obamacare will expand coverage to some 25 million people through exchanges and 12 million people through Medicaid expansion (a net of 27 million fewer uninsured because some people will lose employer coverage and others will lose existing non-group coverage). By CBO's estimates, this cuts the number of uninsured down to around 10 percent - about 30 million people.

This coverage expansion, however, masks some confusion about what health insurance really is. Beth Haynes, Executive Director of the Benjamin Rush institute points out the underlying problem:

Think about your auto, life and homeowner's insurance. Each of these is designed as a means to pay for unexpected, unpredictable, very expensive occurrences outside of the control of the policyholder... So what is it we have that we call health insurance but isn't? We have the prepayment of medical expenses. We expect our "insurance" to cover predictable, relatively inexpensive events like health maintenance checks, minor illnesses and injuries -- and to pay for them with minimal out of pocket spending.

Unfortunately, almost none of the discussion about America's health care woes attempts to clarify the point that insurance is designed to protect against catastrophic events - not cover every day, basic expenses. As Paul Howard and I have written previously, there isn't much logic in forcing "Cadillac" coverage (comprehensive coverage with little out-of-pocket spending) on a person that only needs coverage for the most catastrophic events (a young, healthy person, who can afford to cover a basic doctor's visit once a year but wants to hedge his bets against an unexpected cancer, for instance).

Because insurance companies are required - currently by states, and come 2014 by federal regulations - to cover basic expenses with minimal cost to the individual, the only place to shave costs remains in covering catastrophic episodes - the ones that tend to cause medical bankruptcies.

The problem is rooted in the idea that we can cut costs while offering more expansive coverage - you can't have your cake and eat it. More expansive coverage by definition means spending more money, regardless of who is paying. The fact that many people under Obamacare won't bare the full weight of their medical costs doesn't change the underlying price being paid for an inflated "insurance" product.

Think of it this way: you can get cheap auto insurance for under $100 a month; it will likely have a high deductible (say, $2,000) and no auto insurance covers maintenance like oil changes and tire rotations. But if your car gets totaled in an accident (which shouldn't happen often), you shell out the $2,000 deductible and the insurance company pays for the rest. That's how insurance works - except in the health care sector. Subsidies under Obamacare will mask the true cost of the law, but won't fundamentally change the fact that American health insurance isn't real health insurance at all.

One of the many objections to President Obama's health care reform law echoed philosophical beliefs rather than explicitly appealing to empirical evidence; the refrain is that Obamacare is a government takeover of our health care system, and as such, infringes on our freedom. While the reality isn't quite that gloomy, the law does significantly increase government involvement in health insurance - through subsidies, Medicaid expansion, and new regulations for health care providers and insurers.

In a recent column, Paul Krugman argues in his usual lofty tone that these concerns are little more than typical conservative attacks, trying to dismantle the benefits that the underprivileged truly need. Indeed, Dr. Krugman flips the conservative point around in defense of Obamacare:

Over time, as people come to realize that affordable coverage is now guaranteed, it will have a powerful liberating effect.

This line of reasoning argues that those at the bottom rung of the income ladder, particularly those stuck in a job because they fear losing health care coverage, are far from free now. Insuring access to affordable coverage liberates people to make life decisions - such as changing jobs - without worrying about losing the valuable (and possibly life-saving) health coverage. The solution is, of course, to subsidize expansive, one-size-fits-all coverage for the poor-to-middle-income population.

There are, of course, merits to this argument. However, the reasonable conclusion is far from where Dr. Krugman arrives.

Addressing Obamacare within the context of freedom - particularly freedom to work where you please - requires going back half-a-century to the Economic Stabilization Act of 1942. This Executive Order, signed by FDR, forcibly "stabilized" wages and salaries, preventing companies from raising or cutting workers' salaries (it explicitly excluded insurance from this regulation). So, in order to attract workers, companies began offering health insurance and deducting its cost from their taxes as they did with wages. 

Ironically, it's precisely this situation that creates what economists call (and what Obamacare would fix, according to Dr. Krugman) "job lock." When health insurance coverage is contingent on a particular job, an employee would be less likely to leave that job for another that may not have the same level of coverage, if any. Because of this, workers can be stuck in a situation with a job they'd like to leave, but are unable to because they would lose their health care coverage (this is especially a problem with lower-income households that may not qualify for Medicaid).

Dr. Krugman's reasoning is that because Obamacare effectively creates a market for nongroup health insurance (by mandating coverage and providing subsidies), people are liberated from having to stay in a job simply for the health coverage. This is certainly one way of looking at it, and it's very possible that Obamacare may marginally remedy job lock.

Let's consider another perspective, however. If the goal was really to "liberate" people from job lock, a more effective and direct approach would be to eliminate the very deduction that creates job lock. Not only would this nullify the incentive to remain at a job because of insurance coverage, it would likely increase actual wages as companies would shift compensation away from benefits and towards salary. With this extra money, along with basic reform to create a truly national health insurance market (think Obamacare exchanges, but on a national rather than state level, with one set of fairly unobtrusive regulations for the country as a whole and a focus on catastrophic coverage paired with HSAs), individuals could very well purchase coverage that is appropriate for them without the massive subsidies under Obamacare.

Under this second perspective, people have more money in their pockets at the end of the day, have more control over their health insurance, and are free to work where they want without fear of losing health insurance.

While we don't yet know exactly what impacts Obamacare will have, portraying it as liberating workers is at best a stretch. It merely substitutes reliance on a job for reliance on government subsidies - not exactly "liberating." 

In a brilliant op-ed at the Wall Street Journal, Harvard Business School professor Clayton Christensen &co. make the point that the American healthcare system needs a strong dose of disruptive innovation to start addressing the issue of costs. At the core, he writes, the problem with the ACA is that Accountable Care Organizations "most assuredly will not...deliver [this] disruptive innovation."

Christensen is definitely on to something - particularly when he recognizes the importance of technologies that allow price and quality competition (such as telemedicine) to give more control over health care decisions to patients. And it shouldn't be surprising that a recent foray into this market has arrived at Wal-Mart.

The super-retailer already offers retail walk-in clinics at many locations, with low-cost services that include vaccinations, blood sugar testing, and cholesterol screenings. But it seems this was only the beginning for Wal-Mart. The cheaper a technology is (assuming equivalent quality), the more disruptive it is. What's cheaper than free? In October of last year, the retailer partnered with Solohealth, a company that develops retail "health stations" that offer basic medical tests, to install hundreds of the health stations at its retail locations.

These health stations will allow Wal-Mart customers to run basic tests like a vision and BMI check at no cost. Based on the test results, the health station will spit out a list of doctors in the surrounding area that the customer can go see. Certainly, this is a brilliant move on Wal-Mart's part - you probably rarely go to the doctor, but you're at Wal-Mart pretty often. But more than that, this echoes Christensen's point about disruptive health care innovation - while these health stations won't replace a doctor (and are not a panacea for growing health care costs), they're a great step towards more efficient use of health care resources. It isn't a stretch to imagine similar health stations offering quick and cheap video calls with doctors to answer some basic questions. Looking further down the line is even more exciting - algorithms and whole language machine learning are making computers as smart (or smarter) than the best human doctor (think of the holographic doctor in Star Trek Voyager).  And the cost of sending these "doctors" to medical school is essentially zero for the marginal patient. But one step at a time.

By ensuring that these health kiosks will be at one of the world's largest retailers, people may even start thinking about health care a little differently. Right now, when someone thinks about health care, they don't think of it as a commodity - you don't pay for it; your insurance company does. When you see your doctor and he tells you that you have a cold but he'll prescribe antibiotics anyway "just to be safe" - you don't ask why. And part of this is due to the informational asymmetry inherent in health care - let's face it, the doctor is a professional and holds a wealth of knowledge about human physiology that you, as a consumer, likely don't have. But that doesn't mean you can't be a little more educated. When you go to get your car fixed after a fender-bender and one body shop quotes you $500 and another quotes you $1,000, you'll probably feel comfortable enough asking why. When it comes to medicine and health care, we don't have that same comfort. And though it may be too early to start jumping for joy, greater commoditization of health care is a terrific way to slow future cost growth and maybe, just maybe, have more educated patients.

Image source: http://conflicthealth.com/robo-medics/

I wrote a few weeks ago on the massive backfire that is electronic medical records, i.e., driving costs up rather than down. Via Meadia has a great post yesterday on a related topic: Washington's perennial confidence in wonky schemes to revolutionize health care.

The wonks in Washington have no shortage of miracle fixes for America's health care system. One is performance rewards, where doctors are rewarded for the quality and efficiency of their treatments. As usual, the theory is sound: paying doctors based on outcomes rather than treatments should reduce the use of expensive or unnecessary medical procedures.

Alas, the P4P programs tested so far have largely failed to deliver on their promise to raise quality and control costs.

The largest public experiment happened between 2003 and 2009, when the administrators of Medicare teamed up with Premier Hospitals nationwide to see if financial incentives would improve the quality of care for Medicare patients with certain ailments.

Studies of the program have shown mixed results.

Participating hospitals initially improved, but after five years there was no significant difference between them and the hospitals without the incentive, according to a University of Pennsylvania study.

A separate study from the Harvard School of Public Health found that there was no significant difference in the mortality rate for heart attacks, heart failure, bypass surgery or pneumonia between patients treated at hospitals participating in the program and those that were not.

There is no shortage of exceptionally bright, talented, smart people in health care with great ideas on how to improve the system - people working for government, insurance companies, and hospitals. And some organizations - like Geisinger or Intermountain Healthcare - really seem to work effectively to drive high quality at lower cost .

But health policy wonks too often ignore the massive disincentives that distort behavior across the health care system in favor of instituting a few "best practices" based on pilot programs or oranizations with unique cultures. As David Goldhill puts it in his exceptional new book, Catastrophic Care, health care wonks on both the left and the right are "confined to the impossible task of overcoming the negative effects of bad incentives without changing the fundamentals of the system."

What would change the fundamental incentives of the system? Goldhill thinks (and I agree with him) that real change won't be accomplished until health care operates much more like the rest of the economy. He explains:

Modern economies handle the extraordinary complexity of balancing the diverse needs and preferences of large populations and massive but varied production resources by relying on the diaggregated decision making that implicitly arises from trillions of individual market decisions. This is also known as the free market.

Today, patient's needs and preferences are suffocated by the demands of payors (governments, employers, insurers). What gets done is what gets reimbursed, even if what gets done is expensive, unsafe, and downright crazy.

Normal market mechanisms that punish bad quality or terrible customer service
are short-circuited in health care because the person using the service isn't really paying for it. Regulations and rules try and compensate for this basic asymmetry in power between the user and the provider, but the proliferation of rules leads to rent seeking, complexity, and waste.

A truly consumer oriented health care system would turn this on its head. Who wants to be treated in a hospital with terrible infection scores? Or that is twice as expensive as its competitor across the street?

Critics of consumer oriented health care reforms argue that health care spending is concentrated in a small number of patients with high costs, often who may be less than rational. But people are always irrational, including across the rest of the economy, and yet market forces work pretty well everwhere else.

Some patients - the homeles, the mentally ill or disabled, and other disadvantaged people - may need more help than others. But this is hardly an argument for designing the health care system to meet their needs rather than the 90% of the population who can navigate the system effectively on their own (or with help from intermediaries like Best Doctors.)

On the contrary, a consumer driven system would free up massive amounts of resources and attention to focus on the small number of high needs cases rather than trying to micromanage the vast majority of people who can manage their own care.

This isn't the direction the country is going in today. Instead, we're seeing a massive controlled experiment in top-down health care management - at the federal level and in states like Massachusetts and Vermont. With enough well meaning experts, maybe everything will turn out all right.

Count me skeptical. And maybe when this latest experiment in top down social planning goes awry, we'll finally be willing to try something a little different.

Offering something that resembles a real market for healthcare (with clear prices, for instance), retail clinics have grown exponentially since 2000 to somewhere around 1,200 by 2010. For many uninsured, particularly those who can't afford insurance, these clinics allow low-cost access to routine medical care - shots, primary care, and even more urgent problems like broken bones - without the long wait at the emergency room.

A somewhat unique turn for retail clinics has been the growth of "Bodega Clinicas" in California, according to Kaiser Health News. These health clinics predominantly cater to the low-income and often undocumented populations of major cities like Los Angeles. Because they manage to remain under the radar of the cities' departments of health, the clinics can offer clear, low prices for many routine services like a check-up.

This brings a slew of concerns, however, since the qualifications of the physicians practicing at such clinicas may be suspect. From KHN:

Kimberly Wyard, chief executive of Northeast Valley Health Corporation, a non-profit group [:] "They are off the radar screen," said Wyard of the clinicas, "and it's unclear what they're doing."

This creates a tough choice for public health officials, particularly with the Affordable Care Act fully taking effect in 2014 - most of these clinicas are cash-only businesses that don't accept insurance. And under the ACA, undocumented immigrants will be unable to purchase insurance through the exchanges; and the affordability of insurance will still e an issue for documented, low-income families for whom the subsidies may simply not be enough. If the clinicas are forced to change their business models because more of their patients have insurance, the prices will likely increase, potentially making them irrelevant.

The alternative to clinicas may not be palatable from both a public health standpoint and a financial standpoint - if those currently served by clinicas are left without affordable insurance and without access to the clinicas, many will likely seek care at emergency rooms - where a diagnosis of a simple cold may take hours, and the bill is ultimately covered by taxpayers.

So while bringing bodega clinicas into the fold may be desirable, officials should be careful of how they approach this thorny issue. Officials should get a better understanding of the quality of care delivered at these clinics before subjecting them to regulation. If the quality of care is no worse than the multitude of retail clinics around the country, then this should be seen as an effective model of care, for one of the most vulnerable populations. 

From yesterday's New York Times:

The conversion to electronic health records has failed so far to produce the hoped-for savings in health care costs and has had mixed results, at best, in improving efficiency and patient care, according to a new analysis by the influential RAND Corporation.

The study was widely praised within the technology industry and helped persuade Congress and the Obama administration to authorize billions of dollars in federal stimulus money in 2009 to help hospitals and doctors pay for the installation of electronic records systems.

Kudos to RAND for doing a follow up study to see whether or not their predictions were coming true. But are the latest headlines really all that surprising?

Call it the fallacy of the Next Really Big Thing (NRBT). Industry lobbyists seize on one promising study or report and tell Congress that if they just spent more money to subsidize the NRBT (wind energy, electronic health records, solar panels, biofuels, etc.) massive savings accrue and jobs will blossom.

For the most part, this doesn't ever really happen. In complex economic systems (like health care) pulling switch A often results in unintended result B (along with C, D, F and Q). Data from pilot projects, or existing health systems (like the Mayo Clinic or Geisinger) are often extrapolated far beyond the soil in which they originally flourished.

Subsidies for solar energy have turned into a massive boondoggle because the technology isn't competitive without massive subsidies, and the Chinese are subsidizing them even more heavily than we are. Biofuels are leading farmers to shift from food crops to fuel crops, hurting the poor by raising prices for dual-purpose crops (like corn). (And, from an environmental perspective, they're actually worse for the planet than the much maligned fossil fuels.)

And electronic health records mandated by Congress appear to induce more, not less, health care spending without driving the hoped for efficiency gains.

Last month, Megan McArdle, at the Daily Beast, wrote an excellent blog post explaining why the road to Hell is paved with pilot projects:

This is one more installment in a continuing series, brought to you by the universe, entitled "promising pilot projects often don't scale". They don't scale for corporations, and they don't scale for government agencies. They don't scale even when you put super smart people with expert credentials in charge of them. They don't scale even when you make sure to provide ample budget resources. Rolling something out across an existing system is substantially different from even a well-run test, and often, it simply doesn't translate. ...

Sometimes the success was due to the high quality, fully committed staff. Early childhood interventions show very solid success rates at doing things like reducing high school dropout and incarceration rates, and boosting employment in later life. Head Start does not show those same results--not unless you squint hard and kind of cock your head to the side so you can't see the whole study. Those pilot programs were staffed with highly trained specialists in early childhood education who had been recruited specially to do research. But when they went to roll out Head Start, it turned out the nation didn't have all these highly trained experts in early childhood education that you could recruit....

Megan cites a number of other excellent examples for why early results turn out to be much less promising then they first appeared (my favorite being the failure of New Coke).

But I'd add one other factor to Megan's many good observations.

In the private market, failure is the rule, success the very rare exception. Most new restaurants fail. Most new drug trials fail (at enormous cost). Most new small businesses fail.

And that failure is a good thing. It's one of the best features of market-driven economies. It means that investors, consumers, and taxpayers don't spend money on the NRBT that turns out to be a colossal billion-dollar bust.

Failure is what drives market efficiency, and what makes markets so incredibly adaptive. Markets represent the evolution of ideas and technologies in real time - rife with unintended and emergent consequences.

Ironically, liberals and conservatives often switch ideological roles when it comes to markets. Skeptics of intelligent design in nature, liberals often turn into proponents of intelligent design when it comes to public policy. If we have enough smart minds at the top, or so the theory goes, we can predict the consequences at the bottom, millions of minds and miles away. Alas, it doesn't work like that.

The temptation to assume that the NRBT will work as planned is perennial (that Mind triumphs over Markets), and so should be relentlessly questioned.

It's much more prudent to assume that unintended effects will largely swamp intended effects, and that people and institutions will continue to do what they were doing before the NRBT came along - maximizing their profits (or, if they're not for profit, like the vast majority of hospitals, maximizing their revenues).

A less hubristic approach is to just assume we can only marginally control incentives. And that means tweaking the health care reimbursement system so that it rewards efficiency and innovation and then get out of the way and let the market do what it does best - hatch many small scale experiments and kill all but a handful.

EHRs may yet succeed, and deliver their promised benefits, especially in a more competititve health care system where providers have to answer to consumers, rather than regulators or insurers.

Until then, expect lots more stories like this one. And expect people to keep wondering why the NRBT never seems to become the NRBT.

As policymakers in Washington deliberate over the next fiscal cliff, it would be irresponsible to ignore the need to rein in federal healthcare spending, which as of 2011 has hit $744 billion, or $2,392 per-capita; roughly 28 percent of total national healthcare spending. The remainder of the $2.7 trillion in health spending is made up of state and local spending (which itself depends to a large degree on federal spending) -- $470 billion (17.4 percent of the total) - and private spending -- $1.4 trillion (about 55 percent of the total). Altogether, government spending is just under half of total national health spending.

While the U.S. certainly gets good value for our spending by some measures, much of the growth in spending can be tied to the lack of a true market for healthcare, meaning few or weak price signals to the consumers of medical goods and services (a 2001 essay by Milton Friedman elaborates at some length on this topic).

The discussion on U.S. healthcare spending, unfortunately, often starts and ends with two charts:

In the first chart, we see that the United States leads the OECD in per-capita health spending; in and of itself this doesn't tell you much. The U.S. is undoubtedly an outlier in many categories that measure domestic consumption. However, the second chart takes into account GDP per-capita (per person) as well, clearly showing the United States as an outlier.

This is a bit more concerning. Why does the U.S. spend so much more, and what does it get (if anything) for its spending.

According to the New York Times editorial board, we don't get anything of value for our added spending.

The contention then turns to the idea that a single-payer, or universal healthcare system is the route that the U.S. needs to take to control health care costs without much consideration for some of the actual reasons for the U.S.'s high levels of spending.

Scratch just a millimeter or two beneath the surface, and there are two factors that can account for more than half of the variation in OECD countries' per-capita health spending over the past decade: differences in per-capita GDP as well as out-of-pocket spending as a share of total national health spending.

Per-Capita GDP

That GDP is strongly correlated with health spending is a given - the chart presented earlier illustrates the highly correlated relationship between levels of GDP per-capita and health spending per-capita. In brief, richer countries spend more on health care. No surprise there. No one would seriously say that a poor country (like Rwanda) has a better health care system than France, just because it spends less on health care.

 While the U.S. may be an outlier in terms of OECD health care spending, it isn't completely removed from a possible trend, particularly if we drop the assumption that it would be a perfectly linear relationship (after all, differences in demographics often do not follow a linear trend).

However, even if we keep the rather rigid assumption of linearity, growth in per-capita GDP explains a significant amount of the growth in U.S. per-capita health spending.

Source: OECD StatExtracts Database

The chart above shows the tightly correlated relationship between GDP per-capita and health spending per-capita within the United States over the past 10 years, with the only real exception due to the recession. In fact, the above correlation explains over 90 percent of the change in per-capita health spending over the past decade. Of course, the above shouldn't be taken to imply causation (for a number of reasons, but largely because incomes can rise in response to inflation, as can medical costs, which in turn impact healthcare spending - put simply, there may be an endogenous relationship between the two variables), but does indicate (as the latest national health expenditure numbers do) that the rate of growth of healthcare spending may not be as out of control as it seems.

Out of Pocket Payments

While per-capita GDP may be strongly correlated with per-capita health spending, the explanation isn't entirely satisfactory. The fact is that in cross-national comparisons the United States is still an outlier - and while per-capita GDP may explain some 90 percent of the change within the United States, it explains a little less than half of the variation between OECD countries, over time.

The rather rich data available from the OECD, however, offers another interesting variable to investigate - Out of Pocket Payments (OOP) as a percent of total health spending. It should be noted that OOP refers to spending on actual healthcare goods and services (including deductibles and copayments), and does not include premiums to insurance companies (since those premiums are later used to pay claims). Theory tells us that consumer behavior tracks price sensitivity. If you have to pay more out of pocket for something, all other things being equal you'll buy less of it than if a third party pays a part of the cost.  In other words, people who have to cover more of their own bills, become more cost-conscious. Think of it as the open bar theory: If someone else is paying for your drinks, you don't buy Budweiser you buy Johnnie Walker Black.

The same holds for health care consumption. In fact, 10 years of data tells us that countries that have been more successful in controlling their health spending are indeed those with higher levels of OOP.

Although the trend may not be quite as clean (owing partly to the fact that these observations are over 10 years) OOP has an undeniably strong correlation with per-capita health spending.  

And in this metric the U.S. stands out rather ingloriously with one of the lowest levels of OOP in the OECD, coming in at 11 percent for 2011 and projected to fall even further as the ACA is implemented.

Now there may be (and probably are) diminishing returns from high levels of OOP, as an overly heavy financial burden incentivizes people to forgo cost-effective care. However, a well implemented system that creates a cost-conscious consumer (such as the health care system of Switzerland, which has an OOP of about 25 percent), can hold down costs without the need for onerous price controls that stifle innovation.

Back to the Fiscal Cliff

Proponents of single-payer health care ignore the fact that there is really no such thing as "free" health care. There's no magic pixie dust that makes health care more efficient when the government pays for it versus private employers. If the price to consumers is zero they will still drive up health care spending compared to other goods and services. And if the underlying costs of medical goods and services is increasing, so too will the price paid by consumers.  What governments can do is set uniform public health care budgets (including through the use of price controls) and - wait for it - increase OOP for consumers.

So what does this mean for fiscal cliff discussions?

The President has seemingly declared government health care spending off-limits. Instead, he wants to balance the budget through revenue increases. But if you're concerned about health care spending (and back in 2009, when he was fighting to pass Obamacare, the president said it was his highest priority) shifting more revenue to health care spending is the exact opposite of what you want to do.

If you really want to slow health care spending, you have to find ways to drive efficiency across the system, and this has to start with consumers. Medicare Part D, for instance, contains means-tested premiums that have helped drive consumers to generics and control costs. HSAs have been among the few insurance plan designs to hold costs down, without hurting quality (at least that we can see).

Other reforms could pare down subsidies in the ACA to 300 percent of FPL to make them a more realistic means test; better tax incentives could be implemented to encourage greater adoption of high-deductible health plans; private health insurance exchanges could be allowed to compete with the ACA exchanges (by allowing ACA subsidy dollars to be spent on those exchanges). Many options exist for putting more control of spending in the hands of consumers - and a system of appropriate means-testing can ensure that vulnerable populations like the low-income and the disabled are protected.

This isn't going anywhere with the White House, which continues to insist that 30% of all U.S. health care spending is wasted, but that health care entitlements can't be cut. And that we need more revenue to pay for them. 

The New Year's Day agreement to avoid the fiscal cliff included a repeal of the Community Living Assistance Services and Support (CLASS) Act. This action will likely not have a material impact on anyone, as this component of the 2010 health reform law was abandoned by the Obama Administration when it was determined to be unsustainable. It was simply a matter of when - not if - it would be eliminated.

Its repeal, however, is welcome as it makes it more difficult for Congress to amend the act and thus impose another financially burdensome entitlement program upon us. As I pointed out previously, if the program makes sense and there is both a demand for it and a means to provide it, the market will ensure it exists without the need for an inefficient and bureaucratic mandate.

While the fiscal cliff deal ended up being smaller than originally expected, the New Year's agreement did make some notable changes in the healthcare space. Repealing CLASS was one; cutting $1.7 billion from the funding for Consumer Oriented and Operated Plans (CO-OPs) is another. What else would you have trimmed and what do see as the implications of these changes?

The 2011 numbers are in - for the third year in a row, U.S. healthcare spending continued to grow at a relatively slow rate; just 3.9 percent. Though the initial slowdown was, in some part, due to the recession, national health spending came in about four-tenths of a percentage point lower than GDP growth for that same period - clearly, more than just the economy was in play.

A 2012 study by the RAND Corporation offers some insight into one potential cause - the growing use of High Deductible Health Plans (HDHP). An HDHP places more control over healthcare spending in the hands of consumers by offering lower monthly premiums but requiring a higher deductible for medical services. The study found that these plans (often paired with a Health Savings Account (HSA), which allows consumers to use pre-tax dollars to pay for routine medical expenditures), make consumers more cost-conscious about their care; spending for families who switched to HDHPs was 21 percent lower  than for similar families who remained in traditional plans.

And there is reason to believe that these consumer-directed plans did play some role in slowing the growth of health spending as adoption of these plans grew significantly over the three years of relatively modest spending growth.

From 2009 to 2011, the use of HDHPs has grown by nearly 43 percent across all markets; even in the individual market, which is usually the most expensive (and the market that Obamacare expands in its exchanges), enrollment grew by about 27 percent.

The results of the RAND study, along with the realities of growing use of HDHPs offer a good case for at least partly explaining the slowdown in cost-growth. Giving this view even more weight, a survey conducted by consultancy Mercer last year, found that the growing use of HDHPs by employers has helped drive their cost growth down to the lowest in 15 years.

The broader takeaway is that getting more skin in the game, financially, from consumers may help keep overall healthcare spending down. Ultimately, however, those covered by HDHPs only represent about six percent of those covered by private insurance - so the effect on overall healthcare spending will likely be minimal. Still, the impacts of higher-cost sharing are becoming visible, as out-of-pocket spending grew by 2.8 percent in 2011, compared to 2.1 percent in 2010, reflecting higher cost-sharing requirements across all plan types.  (However, the RAND study found that if the proportion of people with employer-sponsored coverage with HDHPs rose to 50 percent, annual health expenditures would fall by about $57 billion - accounting for more than half of the 2011 increase in health care spending.)

While the cost-reducing effects of HDHPs are clear, some critics, like Aaron Carroll at the Incidental Economist, have argued that HDHPs may lead people to avoid care that they might need. Indeed, The RAND study found that the savings were driven, in no small part, by reductions in the use of services. (An unexplained phenomenon in the RAND study, however, is that much of the reduction in services was in preventive care which has been covered by most HDHPs even before Obamacare's requirements). These concerns are certainly valid, and health outcomes for individuals with HDHPs will have to be monitored over the years.

As we learn more about states' health insurance exchanges and the types of plans that insurers will be offering, we should hope to see continued growth in HDHP use. Despite critics' concerns, HDHPs offer a market-based tactic for bringing younger, healthier patients into health insurers' pools - and more healthy people in the pools means lower costs for those with chronic ailments as insurers are better able to spread their risk. And while consumer-directed plans shouldn't be seen as a panacea for our healthcare spending (now standing at 18 percent of GDP), for those concerned about the cost of our system, they offer a great starting point.

Despite all the uncertainties of Obamacare, one fact has remained - insurance will become more expensive.

The NY Times reports that insurers are seeking double-digit rate increases in a number of markets - in California for instance, some 68,000 people will see an average increase of 18.8% in the individual market. In Connecticut, a state that will have one of the highest bars for participation in their insurance exchange, a slew of individual market products have already seen increases of about 14%, affecting over 20,000 people.

Under Obamacare, HHS requires states to conduct reviews of proposed health insurance premium increases. For states without an "effective review process" HHS will conduct the reviews themselves. The basic idea is that exposing insurers to public, and government scrutiny will help keep down insurance costs for consumers - there is reason to doubt that this will pan out as well as hoped.  

For starters, the rate increases are often justified by increases in costs - in Connecticut, 20% of the 14% jump was due to administrative expenses; almost 70 percent was due to increases in actual medical costs (the largest of which was "professional services" that includes payments to doctors). Some will doubtlessly argue (and the NYT article addresses this) that this still means that states should simply have the power to deny or modify rate increases - as New York has just done (some 36 other states have the power to do so as well). The problem with this line of logic is that it doesn't address the underlying growth in costs - health care continues to become more expensive, and Obamacare doesn't help much by requiring more generous benefits and banning the ability to base premiums on health status.

Additionally, insurers also have other options for addressing cost growth - rather than raise premiums they can simply increase cost-sharing (such as co-insurance or deductibles) to make consumers foot more of the cost of their health care. This means that rather blunt policy tools like denying rate increases are unlikely to work and would instead make the cost hikes less transparent.

Instead (though it's too early to tell now), states that tend to have more restrictive policies and tendencies (such as denying rate increases or requiring more generous benefits packages) may very well see insurers exiting their markets as they decide that it isn't worthwhile. As states establish their health insurance exchanges this year, it will be wise to keep an eye out for insurers refusing to offer policies in states with higher bars for participation.

So while the ultimate reason for rising insurance costs may be uncertain - more generous coverage, more administrative costs, or higher health care costs - the end result is still the same: under Obamacare consumers will be paying more for their insurance.

As the New York Times noted in its December 15 editorial, When the Physician is Not Needed, health-care reform will propel millions of newly insured Americans into a system with far too few primary-care physicians.

That shortfall will have to be filled by other qualified providers, including nurse practitioners (NPs) operating in retail-based clinics. As I noted in a 2011 New York State Health Foundation-sponsored report, Easy Access, Quality Care: The Role for Retail Clinics in New York, retail clinics offer high-quality care for routine ailments at a fraction of the cost of physician's offices or emergency rooms. Today, about 1,400 retail clinics operate nationwide.

Unfortunately, in New York, retail clinics are often hindered by outdated regulations. Fewer than 20 retail clinics operate in New York today, compared with 106 in Florida (which licenses corporate owned retail clinics, although it does not license provider-owned clinics). Albany policymakers should rescind laws that prohibit companies from directly employing NPs and allow NPs to practice independently - making routine care more affordable and accessible.

This not to say that all traditional hospital or physician-based services are outmoded, just that every provider should be allowed to practice at the top of their license and utilize emerging technologies and new business strategies to reduce costs and increase efficiency. Providers that deliver enhanced quality, improved convenience, and lower costs to consumers - whatever license they happen to have - will win in the emerging cost- and data-driven health care market place.

Take another evolving consumer-oriented health care innovation, telemedicine. Telemedicine (via companies like Teledoc) offers a way for consumers to access physician services using phone or web-based platforms like Skype or Facetime.

Telemedicine allows consumer to conveniently consult with expert physicians or specialists when they can't get an appointment with their regular physician, in rural areas where specialists aren't available, or for business travelers who can't access their regular physicians - avoiding an expensive and onerous trip to the emergency room. In New York, Beth Israel Medical Center offers telemedicine services for just $38 - including prescriptions, if necessary - compared to $75 or $100 for a traditional "bricks and mortar" office visit.

An even more promising evolution is the expansion of app-based health care services through on your smart phone. My colleague Mark Mills has penned a terrific Forbes blog series on the app- and supercomputer-driven future of medicine, enabled by massive increases in computing power and ubiquitous Web access. The real life Star Trek tricorder may not be far off, and it will eventually revolutionize medicine - with sophisticated analytics that can match or better the diagnosing skills of all but the best physicians.

Back to the New York Times editorial. Bravo to them for thinking about health care from the consumer's perspective, where cost, quality, and convenience are key. The irony is that the Affordable Care Act is building out mid-century American medicine - subsidizing high cost traditional insurance and physician access - when technology is poised to make the old paradigms obsolete.

Health care's labor problem won't be solved without massive increases in technology driven productivity, espeically given the double whammy of the Affordable Care Act and a rapidly aging population that is going to require much more care and care management. The resulting logjam of patients demanding doctors to "see them" will have to spur a revolution in how care is delivered, and by whom (or what).

In other words, paging Dr. Watson.

An editorial in the LA Times has received some backlash from physicians for expressing support for reforming Medicare's payment system from fee-for-service to a bundled payment.

One Physician from Santa Clarita perfectly sums up the concerns:

Putting financial burdens on doctors for better results ignores social factors, including personal compliance.

Some skin in the game, however, is exactly what we need to demand of physicians.

Under its current structure, Medicare - as with private insurance - reimburses providers based on the complexity (determined somewhat arbitrarily through the Resource Based Relative Value Scale) and volume of their procedures. Predictably, as with any volume-based payment system, this encourages overuse of the system and contributes to fraud. While private insurance, not reliant on taxpayer money, has significant incentive to reduce waste and fraud resulting in higher overhead, Medicare instead has an incentive to keep such "overhead" costs low, resulting in unrealistically low administrative expenses (if Medicare were to combat fraud at the same level as private insurance, their administrative expenses would likely be similar). These dynamics mean that fee-for-service reimbursements may work with private insurance (which tries to reduce waste and fraud) but may not be appropriate for a government program with less incentive to do so.

Under a bundled payment structure, care providers would receive a sum of money to provide for the healthcare needs of their patients while still ensuring quality. By tying providers' income to the health of their patients rather than the volume of care provided, two problems are addressed: first, the perverse incentive to needlessly increase the volume of high paid specialist services is minimized; but secondly, it eliminates the need to constantly return to bickering over Medicare's Sustainable Growth Rate, since growth would be more manageable under pre-determined budgets.   

Indeed, the original LA Times article cites a study showing a 10 percent reduction in costs under a bundled payment approach, with the same level of quality of care.

But it's important to also realize the difficulties that physicians would face if Medicare adopted bundled payments. The same physician concerned about taking on financial burdens also worries about tort reform:

There is also a chance that should I neglect to order a test, I'll get sued by an avaricious malpractice lawyer.

For real Medicare reform to take place, physicians have to be held accountable not only for a patient's health, but also for unnecessary costs incurred by the publicly-funded system. At the same time, other healthcare reforms will be necessary to align the rest of the system with the new reimbursement schemes, and this will no doubt include tort reform. Bundled payments offer a good start to help cut the overuse of Medicare, while ensuring that beneficiaries still receive the same quality of care. 

Paul Howard and Yevgeniy Feyman

The recent bill passed by both the House and the Senate effectively kicked the fiscal cliff can two months down the road and was just approved with the President's signature. Among the provisions in the bill is one that also postpones, for the next year, a 26.5 percent cut to physician reimbursements from Medicare. Commonly known as the 'doc-fix', this measure has been used for many years to avert reimbursement cuts required by Medicare's Sustainable Growth Rate. While physicians can rest easy for the next year, part of the cost of averting the payment cut is being funded by cuts to hospital reimbursements.

So what are we left with? The underlying problem with how Medicare's SGR is calculated remains unattended - come 2014, Medicare providers will once again be at the mercy of congressional maneuvering. Moreover, the hospitals facing the cuts are those that primarily treat poor populations. (Disproportionate Share Hospitals).

The broader problem, which isn't addressed, is how Medicare's payments are calculated - the Resource Based Relative Value Scale. Developed decades ago, the RBRVS guides how Medicare reimbursements are structured based on four categories: mental effort, physical effort, skill, and time. Seemingly uncontroversial, the RBRVS has steadily grown to favor specialists over primary care doctors - reimbursements for specialist services have grown tremendously (even as many procedures - like a cataract extraction - have become more routine and automated) while primary care physicians have seen their reimbursements remain static. Certainly, specialists perform often complicated procedures that require years of training to perform properly - and they deserve to be compensated fairly for their work. But primary care is similarly demanding, and patients rely on their physicians to help diagnose one out of possible dozens of ailments and refer them to the appropriate specialist - no small feat with an ever growing number and variety of chronic diseases.  We're also asking primary care physicians to shoulder more of the burdens of chronic care management, in effect asking them to become health care's version of air traffic controllers.

Of course, it's possible to avoid dealing with the RBRVS entirely by simply changing how the SGR fee update is calculated with a method to always insure a positive increase.  But is this the right way to approach the question?

Congress should be agnostic about who performs a service, as long as the service is delivered effectively and efficiently.  Congress should also set up a system that encourages innovators to replace expensive labor (services) with much less expensive diagnostics.  By basing the RBRVS on the "mental skill" required to perform services, the system implicitly biases the increased utilization of labor rather than diagnostics. 

Or, to put it another way, IBM's Watson could eventually deliver routine and complex analysis of a patient's health through a low-cost tablet app offering supercomputing services to a physicians' assistant, nurse, or primary care physician. This reality isn't that far away - The Tricorder X-Prize, offered by manufacturer Qualcomm, seeks to reward the first company to "put healthcare in the palm of your hand" by essentially creating the ubiquitous Star Trek gadget. Mark Mills, senior fellow at the Manhattan Institute, writes:

The ultimate Tricorder idea is to access the wealth of (voluntary) data about what you've been doing, eating, how your own biological machinery has been operating, and marry it with a rich stream of highly precise and real-time physiologically-specific information about what's going in your body right now - wherever you are - and link this wirelessly to the analytic computing power that resides in the Cloud.

The new world of "Big Data" makes this possible - and with the exabytes of health data out there, it will help put healthcare decisions into the hands of patients.

The RBRVS and the SGR lock American health care into labor arrangements that are swiftly being overtaken by technologies that have the potential to radically change the cost and quality of American health care.  But their use will be constrained as long as pricing signals are based on assumptions about the value of labor that are woefully outdated.

A better solution would be to get out of the business of pricing services entirely, through a premium support mechanism that encouraged robust competition among many different networks of competing health care providers. Pricing competition will encourage insurers and providers to seek out the most cost effective and innovative mix of pricing and services.    

Then we won't have to worry about the SGR or the RBRVS ever again.  And that would be a priceless gain for American health care.   

Anyone following the manufacturing sector will tell you that one of the most exciting trends is the advent of 3D printing. Using complex software, it is now possible to "print" 3-dimensional objects essentially creating a "desktop factory". It really couldn't be easier - you input the proper calibrations into your computer, feed in the raw materials, and let the high-powered lasers in the printer do the rest. For manufacturing, this is an exciting turn of events - last year, my colleague Mark Mills, senior fellow at the Manhattan Institute, discussed the enormous potential that 3D printing has for disrupting the manufacturing status quo. 

More recently, it's spilled over into the biotech sphere. Autodesk, a CAD-software developer, just entered into a partnership with Organovo, a 3D bioprinting company, to develop software that can create architecturally accurate, living human tissue. Think about that for a second - software that enables the creation of human tissue. This represents a tremendous step forward in medical research. Though the technology is still far away, the logical endpoint is the ability to create replacement human organs or body parts.

There will be many challenges before this kind of technology becomes widely used - many barriers not the least of which are the safety and technological challenges stand in the way. With luck, FDA reform will ensure that regulatory barriers are minimized by then. 

Now that HHS has released all of their guidance concerning essential health benefits, the minimum benefits that insurance plans must offer to be sold in the state, nine states have received approval for their benefits package (out of 19 that have said they will build their own exchanges). Looking only at the nine approved so far, it becomes apparent that insurance will be no more affordable in most states than it was pre-Obamacare (one of the main goals of setting up health insurance exchanges is to offer consumers more choice among insurers). In fact, it is likely to be more expensive, and no more accessible than before.

State-Level Insurance Mandates

Source: "Previous Mandates" from the Council on Affordable Health Insurance's 2011 report; "New Mandates" from National Conference of State Legislatures.

Under the law's essential health benefit requirements, HHS defines the categories of benefits, while states determine the specifics by selecting a benchmark plan for minimum coverage. For the most part, states have taken to choosing plans with more generous coverage than their previous requirements mandated, with D.C. making the biggest jump. Some, like Connecticut however, have actually reduced the number of total mandates, but at the same time have imposed requirements on insurers to commit to at least two years of participating in the exchange (note: D.C. has done the opposite, and has said that they will allow any insurer  that covers the minimum federal EHB to participate).  Thus far, as my colleague Avik Roy has noted, one large insurer has only committed to participating in a little more than a dozen exchanges; another only in ten. Fewer insurers means less competition, which means higher prices for consumers.

The market-influenced approach of health insurance exchanges is surely one of Obamacare's bright spots - if nothing else, a properly implemented exchange allows the individual to know exactly what kind of insurance policy they're purchasing , how much it costs, and what it covers. It encourages consumers to shop around for value, and encourages insurers to compete for people's business.

This isn't the approach that the ACA encourages, however.  Richer plans require higher premiums, which will in turn discourage young and healthy people from buying coverage, especially when they can pay a small penalty and buy the same coverage later if they become sick.

Given what we know about the approved exchanges to date (which, to be fair, isn't much), there isn't much reason to think that they will encourage robust competition. Increased state-level mandates and other requirements are likely to cancel out any potential for increased competition amongst insurers.

So what are we left with? For insurers, this is a new minefield of regulations to navigate. Insurers will likely avoid those exchanges with more mandates, and onerous rules and regulations. For consumers and taxpayers, this leads to fewer options to choose from and higher premiums.  A more flexible exchange format, encouraging more competition among insurers (Utah's clearinghouse model for instance has contracted to sell 140 plans already) and more choice for consumers, would be a far superior approach.

Paul Howard and Stephen Parente

We've received several comments about our 12/6/2012 piece in USA Today regarding the National Health Insurance Exchange Hub as prescribed by the Patient Protection and Affordable Care Act (ACA) and we'd like to clarify several issues. Our piece states 'when the constantly updated information is combined in a central data hub, the potential for abuse is staggering.'

Every op-ed goes through editing, and this one certainly did as well, and so we would like to clear up one potential misunderstanding: that there will be a giant database available with 300 million US citizens information available for all who wish to abuse it. This is not what we meant.

In fact, our original version goes into more detail: 'They (data inquiries to the Hub) occur, in discrete steps and with your permission, (similar to when) you apply for a mortgage.' Furthermore, 'to make matters even more complex, the exchange has to access this data in real time (if the government simply kept a file coordinating all of this data on you, it would be an even bigger invasion of privacy).'

It's not clear exactly how the data hub will operate, and that is our expressed concern. Ideally, the hub should function as a switch that routes information but does not retain the person-identifying information it is routing. Major credit card purchases today operate this way: where a retail vendor, at the point of purchase, uses your credit card to link a variety of data about you to make sure you are not a credit risk and then clears you for purchase of your 70" LCD TV for the holidays. This approach minimizes privacy risks and provides good data security.

The federal data hub should operate this way, coupled to either a State or Federal insurance exchange as well as to the Social Security Administration, Treasury Department, Homeland Security and Department of Justice, et al. Operating this would create a fire-and-forget data system that would instantaneously link to an abstract piece of information and then delete it to prevent it from becoming a privacy concern. Major credit bureaus have been providing these services for nearly two decades, and if there ever has been a privacy breech, it is not from a pure data switch.

Having said how you could provide reliable data privacy protection, no one has said how the data hub will actually operate. Greater transparency is needed, and a frank acknowledgement that the ACA's posted deadlines should take second place to reasonable data concerns. This isn't a political point, and isn't meant to impinge anyone's motives inside HHS.

HHS' job is to implement the law. And, much as we may dislike an assortment of the law's underlying provisions (and we have repeatedly expressed longstanding concerns about its impact on insurance markets, the federal budget, etc) HHS staff are doing exactly what they are supposed to do and facing constraints they can't always control. They are doing so in a politically charged environment - and crashing headlong into the constraints of scarce human capital, complex regulatory requirements, and a massive IT project with literally no technical precedent.

We believe that Congress has a legitimate oversight responsibility to ensure that - whatever your feelings about the ACA - the final product is trusted, functional, and secure for all Americans. They should take that responsibility seriously - and the Administration should help them execute that responsibility.

Friday's new rules included a 373-page HHS regulation that covers risk adjustment in the exchanges, cost-sharing limits and user fees for the federal exchanges; a 122-page Office of Personnel Management rule that spells out the guidelines for the Multi-State Plan Program; and the Internal Revenue Service put out a 42-page rule on the Medicare payroll tax that will be charged to high-income earners to help pay for the law.

But the sudden deluge of regulations doesn't change the fact that insurance commissioners have been kept waiting for months, and they say the delays have made their jobs significantly harder.

Until now, most of the loudest complaints about the lack of guidance on the Affordable Care Act came from Republican governors. But at the insurance commissioners' conference this week, the officials in the trenches implementing the law -- even in states that have been its strongest supporters -- quietly expressed the same concerns. ...

"We're still very much depending on getting further guidance from HHS. There are still some major gaps," said Washington State Insurance Commissioner Mike Kreidler, whose state has long pursued its own exchange. "The timetable that we have is going to be a real challenge. ... We're still plowing ahead but without some of this critical guidance from the federal government, it's going to be very difficult."

Paul Howard & Yevgeniy Feyman

Democrats sold -and continue to sell the ACA - as a way to cover the "millions of people" with pre-existing conditions who can't get affordable insurance. For instance, in defending their recently released guaranteed issue regulations, HHS claimed that 129 million Americans have pre-existing conditions.

This is a huge bait and switch. The vast majority of Americans with "pre-existing conditions" already have insurance. Why? Age is strongly correlated with developing a chronic illness - and seniors are covered by Medicare. If you're disabled and poor, and can't work, you're eligible for Medicare and Medicaid. The low-income poor (healthy or not) are already eligible for Medicaid. In between, the majority of Americans have employer-provided insurance, and are also already protected from pre-existing insurance exclusions or rate hikes due to illness, through HIPAA.
Who's left then? Not that many people.

In fact, preliminary results from the Center for Disease Control and Prevention's (CDC) National Health Interview Survey indicate that even among the uninsured, only 1.7 percent considered themselves to be in poor health, compared to 6.8 percent of those in Medicaid, and just .6 percent of those with private insurance.

A Medical Expenditure Panel Survey report from 2007-08 also estimated that only 16 percent of the uninsured had two or more chronic conditions - compared to one-third of those with private insurance and 50 percent for public (Medicare and Medicaid).

In a 2010 National Affairs article, James Capretta and Tom Miller estimate that only 2-4 million uninsured Americans with pre-existing conditions need additional financial help accessing insurance, preferably through high risk pools.

High risk pools allow people with serious pre-existing conditions get affordable coverage without increasing insurance costs for young and healthy uninsured. Yet this is where Obamacare has also failed, despite a modest effort. Under the law, federal high-risk pools were established to provide access to healthcare for patients without insurance, and with pre-existing conditions. A recent evaluation has found that only about 45,000 people signed up for these pools; a fraction of the 375,000 that CMS expected. Reasons proposed for the failure of the pools include low funding (only about $5 billion) and high costs for signing up. Regardless, for the last four years Obamacare has failed to expand healthcare to those with pre-existing conditions who really needed it.

Ironically, Obamacare also attacks consumer driven health plans - which a recent Mercer report credits with helping to hold down health insurance inflation to a 15-year low - threatening to drive up insurance costs just as we're identifying the tools to keep them in check . Various requirements such as the Minimum Loss Ratio (that insurers must spend at least 80 percent of premiums on benefits) and minimum actuarial value (that plans must cover a minimum of 60 percent of expected healthcare costs) make consumer driven health plans - which often have low premiums with high deductibles - less viable.

Ultimately, the biggest flaw with the ACA's insurance market reform is that it enforces expensive insurance regulations on the entire small group and individual insurance markets, increasing the cost of getting insurance for the vast majority of uninsured who are basically in good health. It also scales those subsidies up to 400% of the poverty level, to people who could easily afford to purchase it on their own.

Obamacare's failure at what should have been its primary goals leaves the door open for conservatives to start pushing for reform. The House could pass legislation repealing Obamacare's community rating and guaranteed issue regulations (as our colleague Avik Roy has suggested), and fixing Obamacare's flawed high risk pools. Paring back the subsidies (from 400% to 200% or 300%) would also lower Obamacare's price tag while still helping people who need it the most.

Governors of states that refuse to establish Obamacare's health exchanges (or expand Medicaid coverage) could also push for legislation to allow Medicaid funds to be used to help purchase private insurance for that vast majority of non-disabled or elderly Medicaid enrollees. This would provide high quality private coverage, and prevent people from shuffling between Medicaid and private insurance as their income changed. True state flexibility in Medicaid program design might also convince many governors to re-think their opposition to Obamacare's Medicaid expansion.

The debate on fixing or fighting Obamacare is likely to continue to for years to come. In the meantime, moderates and conservatives should point out that Obamacare's biggest shortcomings are self-inflicted - they didn't have to happen in the first place but can (and should) be remedied.

While states mull over decisions on health insurance exchanges, another decision is looming on the horizon - whether or not to expand Medicaid as the Affordable Care Act (ACA) calls for.

Many governors have held off until after the election to make their decisions, with a number of states like Texas and Florida deciding not to, but the majority still remains undecided. Though the ACA calls for the federal government to foot 90 percent of the cost, the remaining 10 percent still represents an increase in states' costs in the midst of a dire budgetary crisis plaguing much of the country.

Budgets, however, are not the only decision rule states should be using to determine whether or not to expand their Medicaid rolls. Medicaid's track record on access to care and health outcomes is generally poor when compared to private insurance, and these measures often end up being only slightly better than for those who are uninsured, and are often statistically insignificant.

A study released today in the Journal of the American Medical Association (JAMA) looked at postoperative morbidity rates for patients that received surgeries for brain tumors, controlling for the insurance status of the patient. The results? At first glance, unsurprising. After fully adjusting for patient characteristics and comorbidity, uninsured patients were 2.62 times as likely (a hazard ratio of 2.62) to die after surgery as those with private insurance.

While in the adjusted analysis, the results for Medicaid recipients were not statistically significant (the results found Medicaid patients 2.03 times as likely to die relative to those with private insurance, but were not significant at the 5 percent confidence level [analogous to a 95 percent confidence interval]), the original, unadjusted  analysis (which doesn't take into account differences in patient characteristics) shows no statistically significant difference between Medicaid patient survival rate and the uninsured (2.6 percent and 2.3 percent, respectively).

This is yet another study that sheds light on the relatively poor outcomes of patients on Medicaid, which may not be significantly better than those of the uninsured. The relatively poor outcomes should come as no surprise, as Medicaid's lower reimbursement rates for specialists tends to cause significant access to care problems. And poor access to care will likely make Medicaid patients on the whole less healthy than those with private insurance, increasing the chances that they will have other complications that may lead to higher mortality.

A critique in JAMA brings up important issues that need to be taken into account. Of relevance is one in particular - the number of uninsured patients who enrolled in Medicaid during their hospital stay; these patients would be better categorized as being uninsured rather than having Medicaid. Nonetheless, the results echo what many have been arguing for some time - that Medicaid delivers poor outcomes that are cost-inefficient for states.