naked capitalism

By Marshall Auerback, a fund manager and investment strategist who writes for New Deal 2.0.

Many people are lamenting the apparent death of the health care bill in the aftermath of Scott Brown’s unexpected election to the Senate last week. They shouldn’t be. Congress and the President should use the opportunity afforded by the loss of Ted Kennedy’s seat to reconstruct a more sensible piece of legislation which genuinely addresses the real problems posed by our current health care system.

Senate Democrats in particular should not obsess about the number, 60. The absence of a so-called super majority of Senators does not preclude the possibility of passing significant health care reform, even the approach is ultimately more piecemeal and incremental. There is still ample opportunity to implement legislation in the Senate via reconciliation (a parliamentary maneuver which allows legislation to pass with a simple majority vote). And it’s fundamentally more democratic: 2 or 3 Senators should not be able to hold an entire piece of legislation hostage to their own narrow political interests, as Senators Lieberman and Nelson, amongst others, were cynically able to do under the previous legislation.

In response to the “incrementalists” Paul Krugman has argued that it is difficult to achieve significant health care reform via reconciliation, as this Senate procedure is basically limited to matters of taxing and spending, and therefore cannot be used to enact many important aspects of health care reform (such as the ban on pre-existing conditions) What Krugman fails to recognize is that the current incarnation of the health care bill would have done nothing to stop the abusive denial of coverage on the basis of pre-existing conditions, as Yves Smith and I have previously highlighted.

Krugman also embraces the principle flaw inherent in the whole health care reform effort. Both the House AND Senate versions of the bill entrench the centrality of private health insurance companies. But health care is not a service that should be provided by private health insurance companies, as L. Randall Wray has pointed out:

Most health “reform” proposals would somehow insure many or most of these people—mostly by forcing them to buy insurance. All of them have pre-existing conditions, many of which are precisely the type that if known would make them uninsurable if insurance companies could exclude them. While it is likely that only a fraction of the currently uninsured have been explicitly excluded from insurance because of existing conditions (many more are excluded because they cannot afford premiums)—but every one of them has numerous existing conditions and one of the main goals of “reform” is to make it more difficult for insurers to exclude people with existing conditions. In other words, “reform” will require people who do not want to buy insurance to buy it, and will require insurers who do not want to extend insurance to them to provide it. That is not a happy situation even in the best of circumstances.

Contrary to what the President suggested last week, bad salesmanship was not the main problem with this bill. There were lots of unattractive substantive elements, such as reductions in spending on Medicare to “pay” for the bill’s “reforms”, misconceived taxes on “Cadillac plans” to “reduce” health care costs and “fund” reform, a focus on costly end of life care (requiring “guidance” from an “independent group” outside of “normal political channels”), and a loophole big enough to drive a truck through in regard to the prevention of denying health insurance coverage on the basis of pre-existing conditions (which is why the 150,000 strong nurses union ultimately opposed the bill). All of this occurred against the backdrop of vague, incomprehensible talk by the President and his budget director, Peter Orszag, about “game changers” and curve-benders”, and arguments that “we’re going to have to change how doctors think about health care and how patients think about health care”. These are the sorts of things that can be happily debated in a health care symposium, but will hardly ease the fears of the average voter, whose main concerns are: “Will I get coverage?” and “How much will it cost me personally?”

Remember the Alternative Minimum Tax (AMT) which was introduced almost as a footnote to Reagan’s tax reform bill of 1986? At the time, it seemed like a relatively small item as the threshold for the AMT was set at a reasonably high level and it didn’t catch a lot of people initially. But of course, as time went on and incomes rose, more and more of the middle class got trapped by it.

The same thing would have almost certainly occurred in regard to the so-called “Cadillac tax” proposal, a tax on high cost health care premiums ran in excess of $23,000 per annum. Given that neither the House, nor the Senate, versions of the bill contained any serious proposals for cost containment, health insurance premiums likely would have continued to skyrocket, which would have likely guaranteed that an increasing number of health insurance customers would be hit by the tax as time went on. It is hard to see how pricing disclosure via national exchanges would significantly change that element, especially given the fact that the health insurance industry is an oligopoly dominated by a limited number of private companies, with no competition from a now-killed public option alternative. True, in the absence of any kind of health care reform, rising health insurance costs are still likely to remain an everyday reality, but minus the punitive taxation provisions contained in the current bill, which would simply add to the problems of a highly stressed, debt-laden American consumer.

Rapidly rising private health insurance costs are amongst the major reasons why American living standards have continued to decline over the past quarter-century. And an insurance dominated health care program is a horrible way to construct an effective health care system: the benefits of extending health insurance coverage are almost certainly overstated and are not likely to make a major dent in our two comparative gaps: we spend far more than any other nation but do not obtain better outcomes and in important areas actually get worse results. Private health insurance, in fact, represents yet another facet of the ongoing financialization of our economy – credit default swaps, instruments to facilitate speculation in vital commodities such as energy and food, exotic home mortgage products – all of which enable Wall Street gamblers to speculate and profit on outcomes with non-existent social benefit to the rest of us.

In addition to the huge rents extracted from the economy, private health insurance creates other problems, as L. Randall Wray has noted: your friendly health insurance company sells you a policy, and then denies your claim due to the existence of pre-existing conditions (of which you might have been totally unaware), or simply because denial is more profitable and you as the aggrieved victim, are likely have insufficient funding to fight your way through the courts. Bankruptcy is often the end result (according to Steffie Woolhandler, two-thirds of US bankruptcies are due to healthcare bills).

My proposal: use Senate reconciliation and expand Medicare via the Senate’s buy-in provisions. The CBO has already signed off on this as a means of saving money (“budget savings” is nonsensical concept, I know, but let’s go with it, as it provides the necessary political cover for what is essentially a budgetary procedure). More importantly, if more Americans can do a buy-in with Medicare, it creates more cost control (because there’s a genuine “public option” competitor out there against the private insurance companies). It also helps to solve the problems of pre-existing conditions, because Medicare does not deny coverage on this basis, as James Galbraith has noted in “The Predator State”:

Public health insurance entities such as Medicare do not evaluate risk because they are universal. Therefore, they save the major cost associated with private health insurance. They pay their personnel at civil servant salary scales and are under no obligation to provide a return to shareholders via dividends or meet a target rate of return. Insurance in general, therefore, strikes me as something which is intrinsically a service that the public sector can competently provide at lower cost than the private sector, and from the standpoint of the entire population, selective provision of private health insurance is invariably inferior to universal public provision. US private insurance is extraordinarily inefficient and many of the criticisms you level against your post office are replicated in spades at our insurance companies.

Allowing a Medicare buy-in to Americans under 65 would give people a genuine alternative to private health insurance and thereby render the whole issue of denying coverage on the basis of pre-existing conditions moot. It would also lower Medicare costs, by expanding the risk pool of patients (the great bulk of medical expenses are accounted for by a small number of people, mostly the elderly, requiring very expensive treatment). And it would substantially enhance the global competitiveness of American corporations. After all, in what other country in the world is health care a marginal cost of production for business?

A Medicare buy-in would also have the added benefit of getting us closer to single payer, which is a far more rational way to control health care costs, largely due to the administrative complexity associated with our current patchwork system, and the corresponding inability to bargain with suppliers, especially drug companies, for lower prices. Residents of the United States notoriously pay much higher prices for prescription drugs than residents of other advanced countries, including Canada. This proposal would also give American health care consumers far more bang for their buck than the current legislation, which looks set to go down in flames. (What is less appreciated is that both Medicaid and, to an even greater extent, the Veterans’ Administration, get discounts similar to or greater than those received by the Canadian health system – another little known secret of the Obama health care proposals is that they place considerable restrictions on the importation of generic drugs from other countries as part of the deal to get Big Pharma on board ).

Yes, what I’m proposing is politically difficult and the financial reform bill efforts have already illustrated how potently the likes of Wall Street can lobby against effective reform when their perceived vital interests are at stake. Health insurance companies are almost certain to do the same. But, as the festering populist reaction in Massachusetts demonstrates, the foes of reform can overreach and trigger a significant backlash. Hopefully, President Obama and his party will recognize this and mobilize current voter discontent if they want to deliver on real beneficial change in health care. Scott Brown’s surprising election win has bloodied the Democrats. One hopes that the President and his party recognize that, like Shakespeare’s Macbeth, they are “in blood
Stepp’d in so far that, should I wade no more,
Returning were as tedious as go o’er.”

Time to cross the Rubicon, Mr. President.