31 January 2018

An Obamacare Critic's Concerns Considered

A friend of mine reports this exchange on the Facebook page of her Congressman (emphasis mine):
So today, as I often do, I posted a pointed but respectful critical comment on my Rep. (Dave Brat)'s Facebook page, in response to him voting yes on the "healthcare" bill today. Below is one of the responses to my comment. 
"Fine with me. I am sick of paying premiums 5 times higher to cover deadbeats with issues from obesity, smoking, drugs, maternity, PMs, meds and sports injuries. Stick it to them ...they stuck it to us."
My friend was somewhat shocked by the response, basically because it was so heartless.

I think it is fair to assume that this particular response is a sincere, heartfelt statement about why this particular constituent doesn't like the current Obamacare system, and that lots of other people hold the same view.

Essentially, this constituent frames this as a moral issue and believes that a lot of her health insurance premiums (it could be a he or a she, I don't actually know), are due to bad choices deliberately made by others that she shouldn't have economic responsibility for subsidizing.

Also, ultimately, her grievance is that her health insurance premiums are too high, and she really just wants to solve the problem that these premiums impose on her household budget and doesn't really much care what the consequences of a solution to that problem might be.

The premiums she pays for the conditions she claims run up premiums five fold, actually account for closer to 45% of her premiums, with smoking and obesity being the primary sources of those costs which account for 32% of her premiums (v. 13% for the other complained of charges). But, this is still significant and the premium surcharges allowed by Obamacare for smokers, in practice, account for only about 2% of increased health care expenses associated with smoking. But, about 24% of American adults are obese, about 17% smoke, and about 6% are both obese and smoke, so the surcharges she proposes would affect about 41% of people with health insurance.

It would take a $315 per month smoking surcharge to prevent smokers from being subsidized by non-smokers (the current average is $70), and given that Obamacare allows up to a 50% premium increase for smokers and that the average monthly premium for a family of four is $833, a significant share of that subsidy could be reduced by increasing the surcharge for smokers. Thus, a non-smoking family of four with pay about $661 per month for health insurance, while a family of four with one smoker would pay $976 per month for health insurance, and if there were two smokers they would pay $1,291 per month.

To prevent subsidies for obese people, there would have to be a $214 per month premium increase for them per year relative to the status quo, while non-obese people would see a $92 per month premium decrease. Thus, a family of four with no obese people would pay $741 a month for health insurance, while a family of four with one obese person would pay $955 a month, and a family of four with four obese people would pay $1,597 a month.

If both of these factors were combined a family of four with no smokers and no one who was obese would pay about $570 a month for health insurance, while a family of four with four obese people and two smokers would pay $2,055 a month for health insurance.

On one hand, smoking and obesity combined with mandatory health insurance does impose a substantial ($266 a month) take on families with no smokers who have no one who is obese.

On the other hand, these are very common conditions which are very difficult to change even in the face of large monetary incentives, and forcing individuals to bear their individualized share of a global expenditure defeats the purpose of health insurance to a great extent, and the practical effect of increased premiums for smokers and the obese which are sufficient to fully ameliorate the subsidy would prevent many smokers and obese people from obtaining any coverage.

But, speaking with an economist's "third hand", it is also possible to reduce the amount of the subsidy cause by the health insurance premium setting process, without eliminating it entirely, splitting the difference between the approaches. One can have some surcharges that don't fully capture the additional costs of including someone with certain

For example, one could reduce the monthly premium for health insurance from $833 per month to $758 per month, if the smoking surcharge was $158 per month per smoker, and the obesity surcharge was $107 per month per obese person. This would push the premium for a family of four with two smokers and four obese people to $1,502 per month. It would push the premium for a family of four with no smokers put four obese people to $1,186 per month, and for a family of four with no smokers and two obese people to $972 per month. So, premium surcharges for some high cost conditions that a significant economic incentive might reduce the incidence of might be justified in a health care policy.

On the other hand, there are other conditions like maternity coverage, sports injuries, prescription medicine coverage, and mental health care, where the premium reduction benefits of excluding coverage would be modest, but the impact in individuals with these needs would be high. And, in the case of prescription medicine coverage and mental health care, there is very little that a prudent person could do to avoid having these conditions.

A fair decision to consider certain risks in setting premiums involves a mix of the amount of subsidy involved, on average, with allowing people with those above average risks to have an unsurcharged premium, and the extent to which the condition is avoidable.

The analysis that leads to these conclusion are below.

1. Are her factual assumptions correct?

She thinks that about 80% of her current health insurance premiums are due to coverage of conditions that she thinks are voluntary that she shouldn't have to pay for and wouldn't have to pay for under a non-Obamacare plan.

For sake of argument, we'll assume that she is part of a family of four and has the average health insurance plan for a family with an $833 a month premium and an $8,000 deductible.

Is she really paying $666.40 a month extra in health insurance premiums because of Obamacare?

How much of her health care premium goes to maternity coverage?

One of the big differences between pre-Obamacare individual market plans and post-Obamacare individual market plans is that they historically did not cover maternity care, and now they do.

The reason for the exclusion pre-Obamacare was "moral hazard". Someone could refrain from buying maternity care except when they actually planned on getting pregnant, and then spread the cost of maternity care when they did plan on getting pregnant to other people who also have maternity coverage. This kind of behavior wouldn't be fair. In those days, maternity coverage was very expensive, giving the impression that this kind of coverage is very expensive to provide, because mostly only people planning on getting pregnant in the near future buy it. As a result, buying maternity coverage on an individual health care market plan used to easily double the premium (or more) of the coverage, costing many hundreds or even thousands of dollars per year.

Post-Obamacare, the theory is that everyone who isn't in poverty or nearly in poverty, and on Medicaid, is required to have health insurance which includes maternity coverage in place all the time for everyone in their family, even when many members of their family can't get pregnant or are unlikely to get pregnant in the next policy period.

Mandatory maternity coverage in health insurance policies certainly increases health insurance premiums. But, it does so by a far smaller amount than you would think based upon the price of maternity care in the individual market prior to Obamacare. According to a July 1, 2013 article in the New York Times:
The average total price charged for pregnancy and newborn care was about $30,000 for a vaginal delivery and $50,000 for a C-section, with commercial insurers paying out an average of $18,329 and $27,866, the report found.
Some of the difference between the "stick price" and what is charged comes from co-pays and deductibles paid by the pregnant woman and her family. Lots of the difference comes from negotiated lower fees that are charged to insured patients (who present less of a bad debt risk than uninsured patients, and have benefit from the insurance company's negotiating power of buying in bulk).

In that same year, 32.7% of U.S. births were C-sections.  So, the average commercial insurance cost per pregnancy and delivery for maternity care was $21,448. The U.S. birthrate is 12.4 per 1000 people per year. So, maternity care at the rates paid by commercial insurers costs about $26.60 per person in the United States per year. In theory, in a world where everyone has health insurance, the cost of maternity care for a family of four is about $106.40 per year ($8.87 per month).

The average family health insurance plan costs about $833 per month with an $8,000 deductible.

So, post-Obamacare, does mandating maternity care increase premiums for people who don't need it?

Absolutely yes.

How much does it increase premiums?

A little more than 1%.

Why is the percentage so much lower?

The average lifetime cost of maternity care for a woman who has two children is about $42,496. Spread over a lifetime, that isn't so much. But, if people can get insurance only when it is extremely likely that they will need that care the insurance isn't spread very far and it is very expensive, while if it is spread evenly over everyone, the cost is very modest.

* How much of her health care premium goes to sports injuries?

Health care for sports injuries for children aged 6 to 19 in the United States cost about $935 million per year. Adults play sports as well, although not as often, on average. Let's assume that sports injuries for adults and children combined cost $3.3 billion a year to treat in the U.S. This probably isn't exactly right, but it is a good, fact based, order of magnitude estimate.

There are 330 million people in the United States. So, the cost per person of sports injuries in the United States each year is about $10 per person per year, or $40 for a family of four per year ($3.33 per month).

Assuming that everyone has health insurance as they should under Obamacare, the cost of covering these injuries is part of your healthcare premium and you pay about 0.4% of your premium for sports injuries.

How much of her health care premium goes to cover health issues related to smoking net of the additional health insurance premium that smokers are required to pay?

About one in six U.S. adults smokes (about 45 million people).

Smoking related direct medical care for adults costs about $170 billion per year in the United States. This is about $515 per person in the United States per year, which is $2,060 for a family of four per year ($171.67 per month).  This is about 20.6% of the monthly premium.

Obamacare allows a 50% health insurance premium for smokers and 43 states allow them, but the median surcharge is $70 per year per smoker and lots of older smokers don't get health insurance at all as a result of the surcharge. But, it is only allowed for current smokers, not everyone is truthful about their smoking habits on their insurance applications, and not every insurance policy (especially in group health insurance through an employer) applies surcharges, let along surcharges this high.

Thus, if every smoker had health insurance and paid the premium about $3.15 billion per year in health insurance premiums would be paid by smokers. This covers about 2% of the cost of health care for smokers. So, even net of smoker premiums for health insurance, she is still probably paying 20% of her monthly premium to cover health care costs for smokers.

Also, notable is the fact that a significant share of the health care costs related to smoking are paid after age 65 by Medicare (something that is not true of maternity care or sports injury care which may cause those costs to health insurers to be underestimated by perhaps 25%).

Quitting smoking is very hard. "Over 80% of smokers wish to quit smoking but only 33% attempt to do so [ ]. Of those who attempt to quit, 75%-80% relapse within six months. Addiction is the main reason for smokers failing to quit."

So, she is not mistaken that non-smokers are significantly subsidizing smokers under Obamacare. It is not as great as she thinks, but is is meaningful.

How much of her health care premium goes to "drugs"?

Drug and alcohol abuse combined result in about $216 billion annually in health care costs (for illicit drugs alone the cost is about $94 billion a year). This is a slippery figure, however, and a lot of it comes from care this critic would not question or comes from sources other than health insurance payments.

For example, about a third of all accidents have alcohol as a contributing factor and the cost of treating people injured in those accidents is treated as a health care costs associated with alcohol abuse. But, the person injured, for example, in a drunk driving incident, may personally have been entirely sober.

State and local Medicaid expenditures to combat substance abuse are about $1.8 billion a year nationwide, and people with substance abuse disorders are disproportionately receiving Medicaid coverage rather than buying health insurance under Obamacare, an amount matched roughly dollar for dollar by the federal government for a total of $3.6 billion a year.

No doubt significant substance abuse treatment costs are also paid from the budgets of prisons and jails, by Medicare, by the Veteran's Administration's health care programs, and by local public hospitals and clinics (whose expenditures on trauma care are the bulk of the $93.8 spent on "substance abuse and addiction" generally.

U.S. healthcare costs attributable to the abuse of prescription painkillers totaled an estimated $25 billion, about 15% of the cost of smoking related health care. This is the leading illicit drug issue treated by health care, so the total for all drug related treatment might be more like $38 billion a year (about 23% of the cost of smoking related health care).

But, the percentage of drug treatment that is covered by private health insurance as opposed to other government programs is much lower than the share for smoking. Probably a bit less than half is paid for by health insurance and that is a high estimate. So, perhaps $18 billion a year (about 11% of smoking related health care costs and about 3% of health care premiums) contributes to health care premiums (about $18.88 a month).

How much of her health care premium goes to cover health issues related to obesity?

Certainly, lots of expensive health care conditions are related to obesity, and a large share of all people with health insurance are obese. The annual costs of such care for all Americans is $147 billion to $210 billion a year, resulting in a 42% increase in direct health care costs relative to people who are not obese (81% for the severely obese). About 30% of the population is obese.

So, obesity does add to her health insurance premium, accounting for about 11% of her monthly premium (about $91.63 per month).

Obamacare does not allow premiums to be increased due to obesity.

Also, notable is the fact that a significant share of the health care costs related to obsesity are paid after age 65 by Medicare (something that is not true of maternity care or sports injury care which may cause those costs to health insurers to be underestimated by perhaps 25%).

Losing weight in amount sufficient for an obese person to become non-obese is very difficult.

So, she is not mistaken that the 70% of Americans who are not obese are significantly subsidizing people who obese under Obamacare. The amount of the subsidy is not as great as she thinks, but is is meaningful.

On the other hand, obesity rates are among the greatest among the populations most politically incensed by Obamacare (e.g. 37.7% in West Virginia), and those are also populations that would have a very hard time affording a premium surcharge for obesity. In general, the obese are less affluent, on general, than those who are not obese.

* What does she mean by "issues from . . . PMs"? 

This could mean pre-menstrual syndrome (PMS with a capitalization error), or could refer to the plural of a PM which stands for something else that I'm having trouble guessing from context. Whatever it is, how much of her care goes to this?

If the concern is PMS, the answer is surely almost nothing. This is addressed with infrequent primary care doctor visits and over the counter drugs for the most part.

It could stand for prescription medicines, which cost about $56.30 a month of her premium (excluding "meds" discussed below).

* What does she means when she says "issues from . . . meds"? 

Does she really mean any prescription drug costs for anything?  Or, does she mean, for example, psychiatric drugs often called "meds" in day to day conversation with this more narrow meaning?

In the context of her overall rant, the second interpretation seems more likely.

About 18% of adults in the U.S. have a mental health issue (other than substance abuse) at some point. Anxiety and panic disorders (including phobias), depression (including dysthymia, also known as persistent depressive disorder), ADHD, PTSD, eating disorders, psychosis (i.e. schizophrenia and bipolar disorder) and OCD are most common. In any given year, about 3.9% of the insured and about 4.7% of the uninsured experience these conditions, and those in poverty (at 6.8%) who are likely to be covered by Medicaid if they have health insurance at all, are almost twice as likely as those not in poverty (3.5%) to experience these conditions. U.S. death rates from mental illness and substance abuse conditions are double those of our international peers.

Mental health care is expensive, although a lot of this cost as often estimated overlaps with healthcare costs for smoking and drugs, as people who are mentally ill are also much more likely to smoke and almost all drug and alcohol abuse also involves mental health issues.

Total health care spending for mental illness treatment in the U.S. is about $89 billion a year (about twice that of pregnancy and childbirth), although this overlaps with substance abuse treatment and includes not just meds but inpatient treatment, and is not limited to health insurance expenditures. About $6 billion a year is spent by health insurance companies for mental health treatment for children, and about two-thirds of the children treated have ADHD.

The more common conditions are usually treated with "meds", while treatment for eating disorders and psychosis (as well as substance abuse) can often involve costly inpatient treatment (about 90% of inpatient treatment is for psychosis and substance abuse and another 5% are for dementia or something similar). There are about 2 million mental health inpatient cases per year.

It is also worth noting that the share of people who psychosis who also smoke is extremely high (probably in excess of 90%) because nicotine is therapeutic for that condition, and that a significant share of adult smokers are either diagnosed with psychosis or suffer from it at a sub-clinical level. A low end estimate would be that 10% of American smokers are in this category, and a high end estimate would be perhaps 25%-30% of American smokers. So, a surcharge for smokers is also a surcharge for many people who have mental health conditions.

The adult figure is trickier. On one hand, some of the most expensive mental health care costs, for schizophrenia and bipolar disorder, predominantly involve adults, but the mentally ill are much less likely to have private health insurance coverage (45% and 26% less likely respectively). Out of pocket costs relative to insured costs are also lower for mental health, while Medicare and Medicaid expenditures for these conditions are proportionately greater than for private health insurance.

significant share of people (about 3% of the overall population) have mental conditions but do not treat them due to cost or lack of insurance coverage, which can pose active threats to the general public and result in burdens not in health care premiums but in costs like lost job productivity that others must bear as a result. Only two-thirds of U.S. adults with major depression, for example, receive any treatment, with the percentage much higher in demographics with high levels of health insurance coverage (up to about 81% of those age 50 or older) while it is lowest in demographics with low levels of health insurance coverage (47% of those age 18-25)

Prescription drugs as a whole account for about 10% of health insurance spending, although much of that is for physical ailment treatments. About $60 per insured person per year is spent on mental health drugs (mostly ADHD and anti-depressant class drugs), which means about $20 a month from the health insurance premiums of a family of four (oral contraceptives would add about $7 a month to this and might be within the ambit of what is considered "meds").

What is the combined impact on health insurance premiums of the questioned expenses?

All told the costs complained about account for $377.68 of a monthly health insurance premium of $833.00 a month accounting for 45% of the total, and in round numbers, almost doubling her premium (as opposed to quintupling it as she claimed), although there is some overlap between the categories.

So, her concerns are not entirely off base, even though they are exaggerated and in some cases (like sports injuries) petty.

In particular, about 32% go towards smoking and obesity, while 13% of the complained of costs go to other kinds of health care.

About 20% of people who are obese are also smokers. So, about 41% of Americans are either smokers or obese. So, forcing them to bear their condition specific risks would affect a great many people, many of whom would not be able to afford health care as a result, and would end up driving up non-insurance health care costs that result in higher government spending out of taxes and cost shifting by providers from the uninsured to the insured as was common prior to Obamacare.

More problematic issue statistically in allocating health care costs, is that active smokers are less likely to be obese than the general public. So, while smokers have higher health care costs related to smoking, many smokers would be obese and have higher health care costs for that reason if they weren't smokers:
Former smokers were more likely to be obese than both current smokers (adjusted OR 1.33 95% CI 1.30-1.37) and never smokers (adjusted OR 1.14 95% CI 1.12-1.15). Among smokers, the risk of obesity increased with the amount smoked and former heavy smokers were more likely to be obese than former light smokers (adjusted OR 1.60, 95% 1.56-1.64, p<0.001). Risk of obesity fell with time from quitting. After 30 years, former smokers still had higher risk of obesity than current smokers but the same risk as never smokers.
2.  Is Mandatory Health Care Coverage A Regressive Tax?

Health insurance premiums do not depend in a very direct way on your income. If you have more income and wealth, you could pay more in health insurance premiums in exchange for lowering co-pays and deductibles, or you could pay less in health insurance premiums in exchange for higher co-pays and deductibles which you can afford. Either way, the cost-benefit analysis of premium level v. co-pay and deductible level is such that the total combined health care cost is on average pretty similar, but just allocates risk differently.

This means that every time premiums go up because health insurance is required to cover something, the premium increase will be a bigger share of the income of a lower income person than a higher income person.

The expanded Medicaid coverage of Obamacare eliminates this regressive tax effect for the poor and near poor, and Medicare eliminates this regressive tax effect for the elderly. The health insurance premium subsidies of Obamacare mute the regressive tax effect for the middle class, but don't eliminate it. The rich, of course, have no reason to complain about regressive taxation although they do per some of the burden with Obamacare taxes on unearned income and high incomes.

So, while various features of Obamacare mute the extent to which broader coverage that increases premiums operates as a regressive tax, these features don't wholly eliminate the disproportionate burden this places on middle class people who are either in the individual market or have payroll deductions for their employer paid group health insurance.

Relative to a single payer system, when mandatory coverages are increased under Obamacare, there is a regressive effect, although it isn't all that much different than the regressive effect associated with raising government funds through sales taxes and excise taxes as opposed to income taxes and estate taxes.

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