Posts Tagged ‘Ezra Klein’

Weird Science: Why Politicians and Pundits Cling to the “Cadillac Tax” Idea

January 8, 2010

The theory behind the “Cadillac tax” on health plans is little more than wishful thinking based on dubious research. Advocates believe that forcing employers to cut benefits will lead to cheaper, better care. That’s like preventing rain by outlawing umbrellas. Yet the President has reversed his campaign opposition to the tax and now supports it. John Kerry, who I respect, is defending it too.(1) Why?

Because they’re poorly served by their advisors, and by pundits who cling to the idea in the face of new evidence. Although the Washington Post got it right, too many analysts and journalists are beholden to ideas that Art Levine rightly dubbed “voodoo economics for the punditocracy.”

Why do President Obama and his advisors keep touting the tax? And why do journalists like David Leonhardt of the New York Times keep asserting that “health economists” think it’s a good idea? Uwe Reinhardt – the most respected health economist in the country – said the idea that “with high cost-sharing, patients will do the only legitimate … cost-benefit calculus … surely is nonsense.”

The best-known advocate for the tax is MIT economist Jonathan Gruber, who was hyping it as recently as a week ago, without mentioning new and contradictory data.

The Post described Gruber in 2007 as “possibly the party’s most influential health-care expert and a voice of realism in its internal debates.” How can a “voice of realism” claim that this is “a tax that’s not a tax,” one that affects “generous” plans? That statement was published only nineteen days after a paper in the influential journal Health Affairs (summarized here) disproved it. Using actual benefits data, the authors showed the tax would not target “generous” plans. Instead it would unfairly affect plans whose enrollees were older, worked in the wrong industry, or lived in an area where treatment costs are high. A leading actuary came to a similar conclusion.

Gruber also claimed that the money employers save (by slashing benefits to avoid the tax) would be returned to workers as wages or other compensation. But two leading health benefits firms (2) had already published surveys in which the vast majority of employers polled insisted they would do no such thing.

These are intelligent, ethical, dedicated people. So what’s going on? I suspect the problem is an inability to reject an attractive idea, even when confronted with contradictory facts. There is a simple truth in the world of ideas: Theories can be beautiful. Reality can be ugly.

This “beautiful” idea was born in research. The RAND Corporation published the results of its long-term Health Insurance Experiment (HIE) in the 1980s. Researchers claimed that forcing people to pay more for their medical treatment leads to reduced use of medical services, which saved money without making anyone sicker.

The HIE suggested that people who had to pay more for their care avoided treatments their doctors considered medically necessary about as much as those considered unnecessary. Yet, surprisingly, it concluded that they were no less healthy. The HIE became the theoretical foundation for 25 years of benefits-cutting, providing moral cover for a generation of analysts as they shifted medical costs back to patients. (I was one of them.) Now it underlies the thinking behind the “Cadillac tax.”

Here’s Problem #1: The HIE’s been challenged by a number of economists. As University of Minnesota economics professor John Nyman told me, “I don’t believe you can have a reduction of 25% in hospital admissions and not have it show up in any health measures.” While we don’t have space here to tackle the debate, it’s fair to say that the study’s conclusions are controversial at best. Gruber, a RAND defender, described the study as the “gold standard.” Others disagree.

Problem #2: Even if you accept RAND’s findings, you have to believe they still apply after widespread changes in society, the economy, and employer/employee relations. And then you have to believe Gruber’s assertion, based on long-term wage and benefit trends, that employers will give most of that money back to workers as compensation.

Even though surveys say they won’t …

So let’s review this fragile latticework of assumptions: First, that the RAND study is sound. Second, that the tax will only target ‘generous’ plans, despite a very thorough study disproving that. Third, that employers will give much of this money back to workers, although they say they won’t.

On that thin reed of assumptions the White House, many Senators, some economists, and the tax’s editorial supporters (Leonhardt, Ezra Klein, etc.) are prepared to support a policy that by 2016 will reduce coverage for one American in five with employer insurance. That’s more than eleven million people – and the figure would rise sharply each year.

What went wrong? I can’t know for sure, but here’s a thought: Experts can have an “aha” moment, a flash of insight, even when the pattern they perceive isn’t really there. They can build models and theories – even reputations – around that pattern. When evidence proves the pattern is false, they literally can’t see it.

Fortunately, it’s not too late. We can see it. There’s still time for the President, Senator Kerry, and other leaders to change course. Prof. Gruber and other tax advocates can still review these new findings. They and their advisors can discard an attractive but disproved theory and do the right thing for the American people.


(1) Although it was gratifying that Sen. Kerry acknowledged that the tax’s thresholds are too low.
(2)Towers Perrin Employer Survey, “Health Care Reform 2009: Leading Employers Weigh In,” (pdf), September 17, 2009; Mercer, “Majority of Employers Would Reduce Health Benefits to Avoid Proposed Excise Tax,” December 3, 2009


You Call That Health Reform?

December 13, 2009

These days when people ask about health reform, I’m reminded of Gandhi’s visit to England in 1931. Somebody asked him what he thought of “Western civilization” and his answer was, “I think it would be a good idea.”

That’s how I feel about health reform: It would be a good idea.

The truth is that what we’ve been calling health reform doesn’t really “reform” the system at all. It mostly shifts responsibility from one part of the economy to the other. While the Senate’s misguided excise tax places undue and unfair pressure on working people’s health plans, both bills squeeze the middle-class enormously. How? By mandating the purchase of costly and inefficient private insurance, in order to create conditions where the lower-income uninsured can receive coverage. Maybe we should call it “health inefficiency redistribution” instead, since the few cost-containment provisions are in all likelihood being oversold.

That said, the current House and Senate bills would both accomplish some very important things. But these bills do little to lower costs, and it didn’t have to be this way. This seems like a good time to get out of the weeds and look at the situation from a slightly broader perspective.

Here are some thoughts that might help sketch the outline of real reform:

People don’t understand how the money really flows in InsuranceLand.

Ezra Klein will point out that insurance company profit margins are low. They are, but as I pointed out here, the really big insurers have better-than-average margins – and most people are covered by really big insurers.

Even more importantly, margins are artificially low for health insurers. Think of it this way: Let’s say you hire me to pay your bills for $5 each. The first bill is for $1,000, so I charge you $1,005. My profit margin is very low (0.5%), but I just made five bucks and all it took was a second to write the check (and 42 cents for the stamp). Sweet. If I do that 10,000 times I day I’m rolling in cash … and I when I bitch about my profit margins, it’ll sound reasonable to lots of Democrats and liberals.

With the cost inflation we’re seeing, health insurers aren’t “managing” anything. Like my example above, they’re just writing checks. They should be treated that way – as overpaid performers of a clerical function – until they demonstrate that they can do their jobs better. We could make some accounting changes, too.

The idea that insurers have to pay 90% of whatever they charge for medical expenses sounds good, but …

if that happens, what’s the one sure way to make sure they have more profit in the years to come? Charge more! If you only get to keep ten cents on the dollar, the only sure way to get more money is to collect more dollars. Don’t think they’d do that? I hope you’re right. But at a minimum, it certainly doesn’t give them much incentive to lower costs, does it?

There are more creative ways to accomplish the same goal – and give them the right incentives.

We already have single-payer in most of the country – but it’s private single-payer.

One study has shown that 94% of health insurance market areas in this country have a near-monopoly situation, while another showed that in 16% of markets they studied one carrier had 90% or more of the market. We have near-single-payer or absolute singer-payer in wide swaths of the country – but it’s single-payer in the hands of a profit-making elite answerable to no one.

Real health reform would do something about that.

Meanwhile, here in the real world …

So, what about the health reform we do have? I had already said that the watered-down public option probably wasn’t worth keeping, and that advocates should hang tough in favor of something more robust. Medicare expansion seemed like a good alternative to that weak public option in certain ways, although that’s a tough choice to be forced to make. There are also many unanswered questions – and it could become a dumping ground for bad risk. The number of people eligible for the plan is likely to be extremely small. And I never underestimate the political process and its ability to mess up even a marginally good thing. (See reports that Kent Conrad was trying to ensure that the expanded Medicare program can’t use Medicare rates – an idea that would rob it of any real value.)

So the Medicare expansion, even if it’s not diluted any further, is a backdown from a compromise proposal that was a itself compromise from the Democrats’ 2008 campaign pledges – pledges which were themselves less than what most experts felt needed to be done. A compromise of a compromise of a compromise of a compromise: I’ll let others decide if that’s the best we can expect from (and for) our nation.

Any good news? Sure. Both the Senate and House bills provide insurance to the lower-income uninsured (although the subsidies are too weak), create portability for people with pre-existing conditions, and limit out-of-pocket costs. (Note that I said limit and not reduce. From what I’ve seen, neither bill would lower those costs much, but they’d cap them.) But would the bill be “a pretty remarkable accomplishment,” as Mike Lux put it? Only if you grade on an extremely steep curve – one in which an “A” is not the health reform we should have, or even the one that was promised by Democrats in the 2008 election, but is the result of a process that seemed to lack the best our leaders can offer in the way of imagination and decisive leadership.

Maybe, once the bill is passed, we could use the enormous reservoir of talent our leaders possess to begin work on real reform. The work won’t end then – it’ll just be beginning.

Tier 4 Drugs: An Industry Response

April 14, 2008

Ezra Klein spoke with Robert Zirkelbach of America’s Health Insurance Plans regarding Tier 4 medications. Mr. Zirkelbach’s response hits a few points:

National Conversation

That we need a “national conversation” about “whether drugs that cost ten or a hundred times as much as current treatment options are producing better outcomes.” (Whatever your opinion of Hillary Clinton, I’m not particularly grateful for the insertion of the phrase “national conversation” into the political lexicon. A little less talk, a little more action, as Elvis would say.)

In this case, I would say we don’t need a “conversation” about better outcomes. We need data. It’s a research question, not a political one. If these therapies are better than the alternative, then we need a conversation – but it has to be about our level of willingness to provide insurance that pays for the best available treatment. That’s a debate worth having, and it’s also where we need some of that transparency Jonathan Cohn calls for.

Generic Alternatives

Mr. Zirkelbach says we should encourage “generic versions” of Tier 4 drugs. But, as Ezra points out, they’re not likely to be available.

Comparing New and Current Treatment Options

Lastly, Zirkelbach suggests “we need a national system in this country that compares new drugs with the treatment options currently available in the marketplace.” That’s a good point. Even under single-payer coverage, we would still need to do cost/benefit analyses on very expensive therapies – and not just for pharmaceuticals. The more information that’s made publicly available, and the more education and debate that ensues, the better.

I still say there is a point at which insurance” becomes a misnomer. What that point may be is somewhat subjective, but in theory it’s this: When the coverage being provided no longer protects individuals from severe financial harm as a result of loss.

And I’d add this thought to the “national conversation”: When plan designs are no longer made to change behavior, but simply to transfer high-cost items back to the insured party, that’s risk transfer and not benefit design. As a result, the insurance concept is being subtly modified – and arguably undermined.

Tier 4 Meds: When Is Health Insurance Not Insurance?

April 14, 2008


Is health insurance even insurance anymore? The high cost of intensive drug therapies is being shifted back onto patients – and not because the procedures are considered “experimental.”

The New York Times’ Gina Kolata wrote a piece today about a new kind of financial catastrophe striking Americans who have – or think they have – health insurance. The problem is with so-called “Tier 4” drugs, which are typically prescribed for severe medical conditions. These medications are extremely expensive, and insurance companies have been exempting them from the usual rules (like fixed copays and out-of-pocket limits) that protect their members from financial shock. As a result, people who think their they’re protected financially are being hit by huge drug bills.

Patients aren’t bearing more of the cost for these medications because they’re experimental – a reason that’s often used for denying certain treatments. They’re bearing more of the cost because they’re expensive, at least as far as some quick research today could determine. And, as Jonathan Cohn of The New Republic observes, the political debate isn’t even addressing this part of the problem.

How bad is it? Take one breast cancer patient in the Kolata piece, for example, who lives on Social Security disability and has Medicare coverage:

(Her insurer) declined to say what Tykerb might cost, but its list price according to a standard source, Red Book, is $3,480 for 150 tablets, which may last a patient 21 days. Wellcare requires patients to pay a third of the cost of its Tier 4 drugs.

That’s nearly $400 every three weeks. Or, how about the MS victim whose Kaiser coverage changed unexpectedly, so she didn’t find out until she picked up her usual prescription?

Now Kaiser was charging 25 percent of the cost of the drug up to a maximum of $325 per prescription. Her annual cost would be $3,900 and unless her insurance changed or the drug dropped in price, it would go on for the rest of her life. “I charged it, then got into my car and burst into tears,” Ms. Steinwand said.

Ezra Klein’s not sure how Tier 4 drugs are designated. (But he got curious about it, too. See his post and my reaction.) Ezra writes:

(Kolata’s) article vaguely implies that Tier Four is simply composed of costly drugs that insurers are dumping on patients. My understanding of the situation is that Tier Four is actually composed of largely experimental and unproven treatments that don’t seem to offer benefits in line with their cost. If it’s the former, then this really is, as the article seems to suggest, a cruel and crazed practice. If it’s the latter, then it’s exactly what we need to be doing.

I wish Ezra was right, but he’s not. Here are a couple of examples of the logic used to transfer these costs to customers. Blue Cross and Blue Shield of North Carolina says Tier 4 drugs are “medications classified by BCBSNC as those which require special dosing or administering, are typically prescribed by a specialist and are more expensive than most medications.” That’s it: nothing about “experimental.” And the UPMC health plan, affiliated with the University of Pittsburgh health system, says this:

The fourth tier is for specialty drugs, which are high-cost medications and biologicals, regardless of how they are administered (injectable, oral, transdermal, or inhalant). These drugs also have the highest level of copayment. These medications are often used to treat complex clinical conditions and usually require close management by a physician because of their potential side effects and the need for frequent dosage adjustments.

These two descriptions are typical of the way insurers describe Tier 4 drugs. Defenders of the Tier 4 system will say that health premiums will become unaffordable if these costly treatments, which can exceed $100,000/year, are paid by insurance. There’s some truth to that. But here’s the problem with that argument: The function of insurance is to protect individuals from expenses they can’t afford. Once you start withdrawing that protection, it’s a misuse of language to describe the product you sell as “health insurance.” It needs to be called “health cost offset,” or “selective health cost mitigation,” or something else that doesn’t promise more than it can deliver.

If costs have become so high that the private health insurance system can’t provide affordable coverage that protects people from financial harm, then the entire system needs to be re-envisioned. Remember: In all the debate about “universal healthcare,” most politicians are really talking about “universal health insurance.” But if it isn’t really “insurance” anymore, what are they offering voters?

(Kevin Drum has also written about this issue)