The Myth of the Public Option

While supporters of Obamacare constantly accuse their opponents (often wrongly) of spreading misinformation they have themselves very frequently been guilty of that very offense. Many arguments in favor of a public option have been characterized by much misinformation.

Contrary to the assertions of its supporters, the existence of a public option will neither reduce the costs of health care nor slow the increases. Evidence suggests, in fact, that a public option will likely raise health care costs, especially if introduced in conjunction with a slew of mandates on private providers, which is virtually certain to be the case.

The public option has little to do with reducing costs and much to do with driving private insurance companies out. Recently, Washington Senator Maria Cantwell attempted to tie health insurance company profits to the rise in health care costs, a charge that was parroted by one of our local papers, as I commented on earlier.

“While individual wages may have gone up 24 percent, health care costs, as I have said, have gone up 120 percent over a 10-year period of time.

"But insurance profits have gone up 428 percent over that ten year period of time. So, obviously, there's something going on here, where they're making a lot of money and not driving down costs.

"And competition from a public option would help do that. I think, as we get to the heart of the debate, we can make this point . . ."

The claim that “insurance profits have gone up 428 percent” is meaningless, misleading and simply wrong. It derives from this “study” from Health Care for America Now, a coalition of left-wing activist groups created to advance the left’s version of health care reform.

First, these profits don’t represent the entire insurance industry, just the 10 largest publicly-traded companies (let’s call them the Terrible 10). Second, the calculation used to arrive at the 428% figure is dubious. HCAN merely compared the profits each company reported in its SEC filings in 2007 with those it reported in 2000. This produces very deceptive results.

For example, say Behemoth Health Care reported $1 billion in profits in one year and Mega Health Care $500 million the same year. The two companies combined for $1.5 billion in profits. The following year Behemoth purchased Mega and the combined company reported $1.25 billion in profits in that year. In reality, there was a $250 million reduction in profits (from $1.5 to $1.25 billion). But using the HCAN method, profits increased $250 million since Behemoth reported $1 billion one year and $1.25 billion the next. As the Terrible 10 engaged in a flurry of merger and acquisition activity during this time period, that effect had a substantial impact on the increase in total profits reported by HCAN.

As the chart* below shows, while total profits for the Terrible 10 have tended to increase, profit margins (the percentage of revenues that constitute net profits) have remained relatively stable and low. They have generally been between 2% and about 6% and were even negative during one year. This is hardly in the price gouging range.



Something else interesting about the information in the chart above: Notice that both the total profit and profit margin plummeted in 2008. The HCAN study was released in May 2009. All of the companies had filed their annual SEC reports for 2008 by March of this year, which should have allowed plenty of time for HCAN to update its report. Yet the 2008 figures, which would have significantly impacted the percentage increase in a manner not supportive of HCAN’s thesis, were not included.

A further look at the numbers reveals that the claims that health care costs are rising because insurance companies are pocketing large rate increases while refusing to pay claims is specious as well. The portion of premiums that The Terrible 10 expend on health care has fluctuated between about 81%-87% of the premiums they take in (increasing over the last few years) while health care costs have continued to climb.*



Despite the shrieking of those on the left there is no evidence that health insurance costs cause health care costs to rise (at least not in the way Obamacare proponents would like you to believe, as we will show). In fact, exactly the opposite is true – insurance costs are driven by health care costs. The reason health care is expensive is because health care is expensive. Health insurance costs rise because health insurance providers are forced to spend increasing amounts of money to pay for the health care of their insured.

Before he became President Obama’s Budget Director, Peter Orszag was the director of the Congressional Budget Office (CBO). In this capacity, he testified before the Senate Budget Committee in January 2009 about the growth of health care costs. He identified several factors that served to increase the cost of health care.

Most analysts agree that the most important factor driving the long-term growth of health care costs has been the emergence, adoption, and widespread diffusion of new medical technologies and services by the U.S. health care system.

[…]

Advances in medical science have made available to patients and physicians a wealth of new medical therapies, many unheard of in even the relatively recent past. Some medical advances permit the treatment of previously untreatable conditions, introducing new categories of spending. Others, relative to older modes of treatment, improve medical outcomes at added cost, expanding existing spending. Available empirical estimates suggest that approximately half of all long-term growth in health care spending has been associated with the expanded capabilities of medicine brought about by technological advances.

It is not health insurance profits but the technological advances (the advances that increase the length and quality of life) that are the largest driver of health care cost increases. This is not really something that we want to skimp on. Absent greater government control of the health care system it may also be extremely difficult for policymakers, both politically and morally, to address as a Kaiser Family Foundation report notes.

Over the long run, bringing health spending growth closer to the rate of overall economic growth would likely require finding ways to slow the development and diffusion of new health care technologies and practices. Developing ways to explicitly assess and weigh the benefits and costs of new technologies is one promising approach, although such evaluations present serious challenges. The sheer volume and pace of medical advances would make it difficult to assess important changes before they are incorporated into medical practice; focusing on the most expensive new treatment options might be more practical and could have a meaningful impact on cost growth.

Health technology assessment may also involve difficult decisions about whether a medical benefit is worth the cost and whether it should be covered by a public or private insurance program. For example, the National Institute for Health and Clinical Excellence (NICE), the U.K. authority charged with approving medical treatments, received widespread criticism when it excluded beta interferon to treat multiple sclerosis from the list of publicly-covered treatments. Other ways of potentially reducing the development and diffusion of new health care technologies, such as much higher cost sharing that could reduce the ability of many to afford expensive treatments (which in turn would dissuade their development), are no less controversial. Recent legislation provided federal funding for the development and dissemination of comparative effectiveness research, specifying that the funding be used to evaluate and compare the clinical outcomes, effectiveness, risk, and benefits (but not the costs) of various technologies and treatments, and not be used to mandate coverage, reimbursement, or other policies for public or private payers.

Considering some of the other factors (aside from lifestyle-related) driving health care costs upward, it would seem counterproductive to adopt a system that further insulates the health care consumer from the costs of care. Essentially, we spend more on health care because we can. Orszag:

Other examples of factors contributing to spending growth include the growth in personal income and the rising share of health care costs paid by third-party insurers over recent decades; both of those trends contributed to spending growth by increasing demand for medical care. Because medical care is a desired service, people naturally purchase more of it as their income increases. And health insurance, as economists are fond of pointing out, effectively drives down the cost of care from the consumer’s perspective, resulting in a higher quantity of services demanded than would otherwise be the case. [Emphasis mine]

The Kaiser document echoes the point that third-party payer systems increase demand for health care, which serves to push up costs.

Insurance coverage has increased. Government subsidies for health coverage also affect cost levels and potentially cost growth. Tax subsidies for health insurance and public coverage for certain groups (poor, disabled, and elderly) reduce the cost of health care to individuals, encouraging them to use more of it. Some argue that the high prevalence of health insurance encourages health technology development because those developing new technologies know that insurance will bear a substantial share of any new costs

Americans pay a lower share of health expenses than they used to. Another factor that may help explain rising health spending is the falling share of health care expenditures that Americans pay out-of-pocket.16 Between 1970 and 2007, the share of personal health expenditures paid directly out-of-pocket by consumers fell from 40 percent to 14 percent. Although consumers faced rising health insurance premiums over the period which affected their budgets, lower cost sharing at the point of service likely encouraged consumers to use more health care, leading to expenditure growth.

With these facts in mind, it would be foolish to adopt a system that further removes the consumer from the direct costs of care. Yet this is exactly what the public option and the increased mandates on insurance companies associated with Obamacare would do. Orzsag’s testimony hints that increasing cost-sharing by consumers may be a successful means of reducing costs, although with a caveat.

On the consumer side, a landmark health insurance experiment by RAND showed that higher cost sharing reduces spending—particularly when compared with a plan offering free care—with few or no adverse effects on health.15 However, compared with more typical health insurance plans (which do not offer free care), high-deductible designs have more modest effects on health care spending; such approaches also raise concerns about the financial burden on individuals with significant health problems (again reflecting trade-offs between providing insurance protection and maintaining incentives to control costs).

Proponents of Obamacare often point to the high cost of health care in the US compared to other countries as evidence of the need for drastic change. The implication is that we can better control rising costs by adopting systems more like those of other countries in which the government is much more involved. Orzsag’s testimony seems to refute this.

Although the level of spending per capita in the United States contrasts sharply with that of other wealthy countries, the growth rate of spending in the United States is less unusual. Most industrialized countries—even those with a financing system quite different from that in the United States—have experienced a substantial long-term rise in real spending on health care.[Italics in original, bold mine]

Many proponents of the left’s version of health care reform claim that the inclusion of a public option to compete with private insurers is essential to controlling health care costs. This assertion is based upon the flawed premise that health care costs can be controlled by further involving the government and further removing the consumer from the costs of care. The reality is that insulating the consumer from the actual cost of health care serves to increase demand which drives costs upward. Despite their false claims and misinformation the public option would move us in precisely the wrong direction.

* - Data for charts obtained from companies' SEC filings (10-K and Annual Reports)

Note: The two paragraphs directly above the first chart have been altered slightly since the post was originally published.

Michael Moore is a Big Tub of...

Hypocrisy. Some things

MICHAEL MOORE made a name for himself pointing cameras at cruel corporate executives and other enemies of the people. He stalked the chairman of General Motors, sent people in Puritan costumes to Ken Starr's home and set up a Web site with a camera trained on a window of Lucianne Goldberg's apartment.

But Mr. Moore does not appreciate being bothered himself, as Alan Edelstein discovered. After he was fired by Mr. Moore, Mr. Edelstein tried borrowing the technique Mr. Moore had applied to G.M.'s Roger Smith in the film ''Roger & Me'': showing up uninvited with a camera and trying to get an answer from a boss who has decided to downsize.

Mr. Moore responded by filing a complaint with the New York police accusing Mr. Edelstein of aggravated harassment, menacing and criminal trespassing. As a result, Mr. Edelstein was arrested in March and spent nine hours in a cell at the Midtown North police station.

never change.

The funniest moments of all in the movie, though, may just be in the opening and closing credits. We see that the movie is presented by "Paramount Vantage" in association with the Weinstein Company. Bob and Harvey Weinstein are listed as executive producers. If Mr. Moore appreciates any of the irony here he sure doesn't share it with viewers, but for those members of the audience who are in on the secret it's all kind of amusing. Paramount Vantage, after all, is controlled by Viacom, on whose board sit none other than Sumner Redstone and former Bear Stearns executive Ace Greenberg, who aren't exactly socialists. The Weinstein Company announced it was funded with a $490 million private placement in which Goldman Sachs advised. The press release announcing the deal quoted a Goldman spokesman saying, "We are very pleased to be a part of this exciting new venture and look forward to an ongoing relationship with The Weinstein Company."

Personally, I'm looking for more from America's most-talented documentary filmmaker.

Solar Blemishes VIII

Or Lies, Damned Lies and Statistics.

This morning the Sun presented yet another editorial advocating for a public option in health care reform (or is it health insurance reform? I can't keep up with all of the semantic games). They included some statistics to help make their case.

As Sen. Maria Cantwell, D-Wash., explained so well to her committee colleagues, the reason to approve a public option is this: Over a 10-year period, she said, insurance company profits soared by 428 percent and premiums rose 120 percent while the average wage of an American worker nudged upward only 29 percent.

428%? When you've actually done some research, as I have, and know that the largest health insurers profit margins are in the low- to mid-single digits a number that large just seems too good (or bad) to be true. Turns out that it is.

The figure originates from this report from Health Care for America Now (HCAN). The claim that "insurance company profits soared by 428 percent" is very misleading. The information is contained on p. 8 of the report. HCAN merely took the 10 largest publicly-traded health insurance providers in 2007 and compared each company's net profit in 2007 to their net in 2000.

This is not an accurate representation of the growth of profits of the industry as a whole, or even how the profits of the 10 largest insurance companies in 2000 compared to the 10 largest in 2007. It is merely a reflection of how these individual companies grew during this time (many of them from relatively small firms). This "study" is rougly equivalent to saying that, since the New England Patriots won 5 games in 2000 and 16 games in 2007, that wins in the NFL increased by 220% during that time. It is an absolutely meaningless statistic.

When you look into who HCAN is or, rather, who comprises HCAN, it's easy to see why they would present such a misleading study. HCAN is a coalition of left-wing organizations, including ACORN, AFSCME, MoveOn.org, National Council of La Raza, SEIU, Center for American Progress Action Fund and many more. This is a conglomeration of leftist activist groups that was created for the very purpose of pushing the left's version of health care reform. The left dismisses their opponents as shills for Big Insurance and Big Pharma but an organization whose very reason for being, its raison d'être, is to advocate for a particular policy is considered beyond reproach.

Once again, the Sun editorial board simply parrots the assertions of liberal/leftist politicians, media and activist groups without even a cursory check of the facts. It's one thing for a politician to do this but quite another for journalists.