On Health-care Pt. 2.6: Risk Pools and Fraud

Health-care reform has been a BigDeal(tm) lately, and I wanted to express some thoughts about it, the way it works and my general gripes about what is decidedly not real progress in my mind. In this series I will explore the benefits and failures of the current path of health-care reform in the United States. I will talk about insurance companies and risk pools; the difference between moral, political and economic decisions; and (in)efficiencies of scale in different levels of the industry.

So, I was taking a look at the Coalition Against Insurance Fraud website, and found a page full of stats (2) for reporters. Two things became instantly apparent: they don't know how to cite their so-called "stats" in any kind of usable manner and they are obviously run by the insurance companies themselves. Despite this, some of their claims are sort of interesting:

The U.S. spends more than $2 trillion on healthcare annually. At least 3 percent of that spending — or $68 billion — is lost to fraud each year. (National Health Care Anti-Fraud Association, 2008)

Medicare and private health insurers pay up to $16 billion a year for needless imaging tests ordered by doctors. (American College of Radiology, 2004)

Fraud accounts for 19 percent of the $600 billion to $800 billion in waste in the U.S. healthcare system annually. Fraud amounts to between $125 billion and $175 billion annually, including everything from bogus Medicare claims to kickbacks for worthless treatments and other services. (Thomson Reuters, 2009)

Medicare and Medicaid lose an estimated $60 billion or more annually to fraud, including $2.5 billion in South Florida. (Miami Herald, August 11, 2008)

First of all, let me say that I have little faith in these so-called statistics. I have little faith in anything that uses as its source The Miami Herald. Not because the Herald isn't a fine newspaper (it isn't) but because it's written by journalists not academic researchers. I'd like to see real research, not some little quotable that's mostly unfounded opinion. In the great words of Wikipedia, "[citation needed.]"

Second, the actual figures don't really matter to me. I'm here to talk about ideas. Let's look at four types of fraud:

• Person without coverage receives care which is billed as if the covered person had received it
• Person with coverage conspires with provider to participate in excess billing in exchange for cash or otherwise
• Doctor orders unnecessary procedures to increase billings when lacking clients
• Person receives medicine paid for by insurance which is improperly used or re-sold. (Where do you think dealers get pills?)

The first one stands out to me, because I see a solution for it. The fraud consists of someone not participating in the insured pool, but then using the coverage of the pool to receive treatment. It is the equivalent of sneaking in a concert. His / her costs are being paid for by the rest of the participants, raising their premiums. The higher the premiums go, the more incentive there is to cheat or forgo insurance in this system. You could detect and stop the fraudsters by investing in additional fraud and abuse detection units and then attempting to prosecute the fraudsters, which costs money. Another possible solution is to make participation in the pool compulsory, and severely limit the possibility of fraud. You still would be open to abuse from people not eligible for the mandated pool (e.g. illegal immigrants), but it would be much more difficult and there would be much less incentive for legal residents to attempt to cheat this system.

Final result? Compulsory participation reduces the amount of care the uninsured fraudulently receive that is paid for by the presently-insured. Depending on the levels of fraud in the system and the cost of compulsory participation, the costs of the presently-insured might even drop.

On Healthcare Pt. 2.5: Demographics of the Uninsured (UPDATE-1)

Health-care reform has been a BigDeal(tm) lately, and I wanted to express some thoughts about it, the way it works and my general gripes about what is decidedly not real progress in my mind. In this series I will explore the benefits and failures of the current path of health-care reform in the United States. I will talk about insurance companies and risk pools; the difference between moral, political and economic decisions; and (in)efficiencies of scale in different levels of the industry.

Last week, I ranted about risk pools. This week I continue, since the rest of my work on the next post is not ready. See, I have this work thing that I have to do if I want to get paid. I was perusing through a report on the uninsured from the CDC and stumbled upon this interesting chart (click for full version). The chart focuses only on people under 65 because anyone older than 65 is covered by Medicare.

This is really interesting! The younger groups are less likely to be covered.  If we make the (admittedly big)  assumption that older people need more treatment, what we are seeing is a rational economic choice by the younger population to stay uninsured. I have no hard statistics on this, but from anecdotal evidence--I am in my mid 20s--younger people often will go without health insurance if they are short on money or in order to free-lance or work part-time; the price elasticity of demand for health insurance in this group is larger. I know many, many young people who go without health insurance, some because they can't afford it, and some because they are taking their chances because of the cost of coverage. Of the group that "can't afford" it, all of them could, they just refuse to reduce their standard of living for it. It makes sense if the healthy younger population gets sick less; they may not need enough coverage to justify the premiums. This means that the younger population is not subsidizing the older population, making the rising costs of insurance a self-fulfilling prophecy (remember the cost of coverage has to be less than or equal to the premiums paid plus the return on float for the system to be sustainable). If you knew the cost of your insurance was priced to subsidize someone else's, you might elect not to buy, and therefore drive the cost up for the remaining participants. By forcing everyone to participate in the risk pool, we are introducing a large set of young people, bringing down the median age of the risk pool, reducing the cost-per-particpant, and hopefully reducing the cost of participation too.

Before anyone thinks I am saying that young people going increasingly uninsured is responsible for a rise in premiums, let me clear it up: I am not. The uninsured as a percentage of the population has largely remained steady over the last couple of 20+ years, as you can see below. What I am saying is that making participation compulsory will create an implicit transfer payment system that will allow us to smooth out the changes in cost of care over the life of the participant. We are paying a little more now so we have to pay less in the future. The young can bitch about this now, but they'll probably have to pay this no matter what. If the old people can't afford health-care, the government will chip in and guess who will end up paying the government? Yup, that's right, the young. If the old can pay, but end up severely draining their wealth reserves, guess who's going to either inherit less or have to help them more? Yup, the young.

Now look at the other half of the graph (full version linked)

What is most obvious here is that blacks and hispanics are disproportionally less insured. Supporting a system where there is such huge disparities by race is definitely not progress. One could argue that this is because black and hispanics are more likely to be poor, but the really poor have Medicaid. It's the  marginally less-poor that are more likely to be uninsured:

Lack of access to health insurance could be holding back this not-so-poor segment of the population. Say it with me: This is not progress.

UPDATE-1: Got another nifty little piece of data, thanks to my sister. According to this report from the census, uninsured individuals by households income level break down like this (click image for full-size):

• < $25,000: 24.5%
• $25,000 - $49,999: 21.4%
• $50,000 - $74,999: 14%
• > $75,000: 8.2%

I am looking for more data as far as value of coverage utilized by age group and premium levels by age group so I can see if my theory checks out. Please shoot me an email if you have access to any of this data or know where I can find it.

On Health-care Pt. 2: Risk Pools

Health-care reform has been a BigDeal(tm) lately, and I wanted to express some thoughts about it, the way it works and my general gripes about what is decidedly not real progress in my mind. In this series I will explore the benefits and failures of the current path of health-care reform in the United States. I will talk about insurance companies and risk pools; the difference between moral, political and economic decisions; and (in)efficiencies of scale in different levels of the industry.

Let's start with the basics.  The reforms so far cover the following problems:

• The exclusion of individuals with "pre-existing conditions"
• Lifetime caps on coverage
• The availability of coverage for those who may not be able to afford it

As The Economist describes it:

Some 32m of the country’s 49m or so uninsured (most of those left out of the new scheme are undocumented aliens) would, starting in 2014, be required to take out insurance. The working poor and uninsured earning up to $88,000 a year get subsidies on a sliding scale so that they can afford to buy coverage; the poorest of all will be added to the rolls of Medicaid.

This effectively means that almost every American will have some sort of coverage, barring those who elect to forgo coverage and instead pay the fine. By my very basic calculations (34 AVG weekly hours x 22.47AVG hourly wage x 52 weeks [BLS]) there is probably a good chunk of the population that will benefit from the subsidy. I will put something more detailed together once I can get better data as to the distributions of these earners (I suspect a both a positive skew and fatter tails) and adjust for employer-provided benefits.

Insurance typically works by having covered individuals pay premiums to the insurance company, who is in charge of disbursing money to care providers for covered procedures and using their size to bargain for better deals. The care providers have an incentive to negotiate with insurers because they benefit from a single counter-party who is, in theory, more creditworthy and easier to deal with than hundreds of thousands of individuals. In addition, there may be economies of scale created by streamlining payments and the associated operational work. The cash held by insurance companies between when premiums are paid and payments for coverage are disbursed is called a "float," and insurance companies typically make money by investing the float in return-generating instruments. If aggregate premiums and the return from their investment exceed the payments made to care providers, there is an accounting profit for the insurer; therefore it is in the best interest of the insurer to make sure their policy holders are healthy, or at least healthier than the mean. This is why you often see things like gym-memberships, smoking cessation and nutritional assessment covered by health insurance. The healthier you are, the less the more profitable they are.

Unfortunately, the quest to have a healthier pool of insured participants often results in discrimination, which is what current legislation hopes to rectify. Insurance companies can be at a comparative advantage to others by improving their policy-holder pools, creating more efficient systems and negotiating harder with care providers. This too, unfortunately sometimes leads to unethical behavior. Insurers can become more profitable by finding ways to avoid disbursing monies for procedures, what is commonly known as the "pre-existing condition" problem.

Now that the risk pool is effectively the entire population, we are looking at a serious problem with this system: If the wealthy are more likely to be healthy, and the poor are more likely to be covered under the government program, private insurers are getting a comparatively better pool of participants, meaning they will inevitably be able to run a lower-cost operation than Medicaid. Not because the private sector is necessarily more efficient, although that may be the case, but because they have a healthier pool of policy-holders. What this system is effectively doing is privatizing gains and socializing losses, also known as the "heads I win, tails you lose," problem. Additionally, this will continue to reinforce the idea that the insurance companies are value creators, even if they may not be. There is no doubt in my mind that this amounts to an unequivocal give-away to the insurers. This is on top of the subsidized premiums from new policy holders that they are receiving.

Of course, this is not the only inequity in the system. Medicaid is backed by the full faith and credit of the US Government, so their cost of capital is the riskless rate. Additionally, they don't need to build a capital base since they can cover their costs from the general fund, where the additional taxes (hopefully) levied to cover these expenses will end up anyway. What this means is that private insurers must collect money ahead of expected payouts, the difference being a profit or loss. The government, on the other hand, is paying for this just-in-time, and letting the gains or losses affect the deficit/surplus. This puts them at an unfair advantage to the private operators in terms of costs of capital, which the insurers will surely whine about in an attempt to extract a tax credit.

For the following part, we will be focusing only on the federally mandated, minimum level of coverage.Of course expensive plans will cover things like private rooms while Medicaid might only covered a shared room, but let's focus on the bare-minimum care that we are all going to get. Just like schools, you always have the option of paying for a private one, but you are always allowed access to at least the same public one your neighbor's kids might go to.

You may be asking yourself, "Why is this all relevant?" The answer to that is that once the risk pool equals the population, the amount of federally-mandated coverage provided should be a constant, excluding the positive or negative effects of incentive programs from private-label insurers. This means that we are going to provide the same amount of coverage and it has to be paid for, no matter what. If the quality of care for the federally-mandated coverage is constant across the Medicaid and private-label risk-pools--which it should be since the providers are independent--the only difference is who pays for what share of the total. In the end it all must be paid for by premiums and subsidies. Following that logic, the minimum that you will pay, either through premiums or taxes, must at least equal the cost of coverage or else the insurers lose money or the government adds to the deficit, which the public taxes will eventually pay for anyway. Notice the "at least," which is important because if insurers lose money, they will simply raise rates or demand subsidies to make up for it, lest they go out of business and we all end up on the government risk pool anyways. However, if the insurers make money, they get to keep it. well, at least until we can negotiate lower premiums, but I wouldn't hold my breath. What this all amounts to is insurers taking a call option on care. If they don't make money, we make up the short-fall one way or another, if they make a profit, it's ka-ching! time for them. If you ask me, this looks less like evil socialism and more like shameless giveaways to big business.

Finally, if you were paying attention, you voiced a loud "ugh!" after reading "If the quality of care for the federally-mandated coverage is constant across the Medicaid and private-label risk-pools." Everyone knows that some coverage is better than others because some providers are better than others. The trend is toward equality, but that doesn't mean we are anywhere near it. If that is the case, it would imply multi-tiered care quality for basic care depending on your insurer. Does that sound progressive to you? Does segregating the poor and rich in the emergency room sound like that evil socialism slowly killing this great capitalist nation to you? The finer points of fairness here fall under economic, moral and ethical view points I don't feel like arguing, but I will say this:


From where I'm looking, this is definitely not progress.

On the next segment, I will cover more of the economic problems, unavoidable inefficiencies, and misalignment of interests in this system, as well elaborate on the argument for why I think is the smallest-government option for universal health-care is actually--spoiler alert!--a single risk-pool system.

On Healthcare Pt. 1: Economic, Ethical and Political Decisions

Health-care reform has been a BigDeal(tm) lately, and I wanted to express some thoughts about it, the way it works and my general gripes about what is decidedly not real progress in my mind. In this series I will explore the benefits and failures of the current path of health-care reform in the United States. I will talk about insurance companies and risk pools; the difference between moral, political and economic decisions; and (in)efficiencies of scale in different levels of the industry.

I'd like to begin this series by explaining that I am decidedly not a fan of large government. I also do not think that health-care is a right. I think that as a wealthy nation, it behooves us to share this cost to improve the life of the collective and improve our collective experience at a small cost to the privilege. If it all works well, we will collectively be more efficient, create more value and ultimately all be better off. To me, denying health-coverage to someone because of a socio-economic disadvantage that they may not be at fault for is tantamount to denying a child a polio vaccine until they can pay for it out of their wages. An investment in health-care is an investment in our labor force and our future, and I like to think it will have a positive return. That being said, that is an economic decision, not an ethical or political one.

My personal ethical inclination toward universal health-care lies in the fact that  we all get sick. Children in Nigeria, children in the United States, children in Sweden and children in China all get sick. The Queen of England gets sick, the Pope gets sick, Socrates got sick, the Dalai Lama got sick and even the seemingly invincible Dr Gregory House gets sick. Getting sick is as much a part of being a human as is being born, getting hungry and dying. Denying someone the right to live because of something they can't control seems a little backwards. We've spent so many thousands of years innovating, working towards advancement and creating this thing we call society. Fighting this just seems like spitting in the face of thousands of years of human ingenuity and progress over, as Frances McDormand once said, "just a little bit of money," which as I will explain later in the series, may not be as much as you think.

Finally, it is important to plainly state that this system implies a redistribution of wealth, which is a political decision I happen to favor, but many are opposed to *ahem*libertarians*ahem*. It is important to understand that the reasons people support, or oppose, universal health-care are varied in many different dimensions. Calling someone names over their ultimate answer is, in my opinion, unwarranted and a sign of ignorance since, ultimately, these decisions are all deeply personal. Right, wrong and truth are all subjective in this context and calling names because someone refuses to accept our truth as their own is not only intolerant, but ultimately totalitarian. This democracy thing we have going, after all, rests in the idea that we all get to have a say so we can influence, not dictate, what happens.