Interview with Mark Pauly: Part 2

Interview with Mark Pauly: Part 2


President Trump and Obamacare



Healthcare reformers, like the wives of King Henry the 8th, have a thankless job. In a curious inversion of the Tudors, President Trump, who has promised to make healthcare great again, finds himself in the same predicament as the King’s sixth wife who knew what she had to do, just didn’t know how she could do it any differently. Dr. Mark V. Pauly (MVP), Professor of Economics at the University of Pennsylvania, believes President Trump’s options are neither exhaustive, nor exhausted.

The Interview

SJ: I’m quoting from your book Healthcare Reform without side effects “with community rating…doors are open for political and special interests to lobby…Imagination will be stifled…political rent seeking will be rampant.” When I read this paragraph I checked the publication date of your book. It was not 2016. It was 2008 – before the passage of the ACA.

MVP: Unfortunately, the book wasn’t published soon enough before the ACA.

SJ: What, in a nutshell, is the problem with the ACA?

MVP: The nucleus of the problem, from which all other problems arises, is community rating. This is why the premiums have risen so much. This is what is hurting the middle class. We’re hurting many more people financially to help a few. Insurance has been politicized. Furthermore, to control the premiums insurers have limited the network. This means that the healthy are paying higher premiums, with more restrictions, than they might have if there was no interference in the market.

SJ: So, what happened is that the government which robbed (low-risk) Peter to help (high-risk) Paul lost the support of Peter.

MVP: The problem is beyond that. While the ACA has a provision where insurers enrolling higher risk get money from insurers enrolling the lower risk, the formula is not exact. This, and the fact that insurers are constrained by the amount they can charge, the thing that I feared the most happened.

SJ: Insurers abandoning the exchange?

MVP: That’s right. And this destabilizes the individual market more than anything.

SJ: What are the attributes you like about the ACA?

MVP: I like many things about the ACA. I support the subsidies.

Subsidizing the premiums of the low-income is important because subsidies increase the chances that people buy insurance, lower the administrative costs of the insurer and reduce their motivation to risk rate. Subsidies, by lowering the premiums, increase the expected value of insurance for a given level of risk aversion, increasing the quantity of insurance purchased. When the insurer sells more insurance, the selling costs of insurance decrease. Lowering the premium lowers the cost of persuading people to buy insurance. The best way to persuade people to buy insurance is to make the premiums cheaper.

Now, given that the insurer is selling more insurance, the insurer is less motivated to risk rate – part of the motivation for risk rating is that the insurer does not have enough people buying insurance. When the quantity of insurance sold increases, the added value of risk rating diminishes.

Also, and this seems counterintuitive at first, subsidies can, after a while, negate the need for subsidies by reducing the administrative costs which reduce the premiums further, which reduces the very need for subsidies. I once calculated that a 5 % subsidy, which increases the percentage buying insurance from 20 % to 80 % can reduce the administrative loading (as a percentage of premiums) from 30 % to 10 %.

SJ: That’s a beautiful example how a government intervention can drive the market and the intervention need only be temporary. In a sense, this is the opposite of a death spiral – subsidies are an immortality spiral for insurance.

Do you favor the individual mandate?

MVP: I do favor a mandate, which SCOTUS calls a “tax”, on the moderate-income low-risk. While lower premiums will entice more people to buy insurance, there will always be people, the young invincibles, or free riders, who will be disinclined to buy insurance at any price. Sufficiently large penalties targeted at the right income group can be valuable.

In summary, subsidies for the low-income average risk; penalties for the high-income average-risk; and subsidies for the high-risk, and guaranteed renewability to prevent reclassification risk, would be my prescription.

SJ: People like low premium insurance, such as high deductible insurance with catastrophic coverage, until they have to pay the deductible. What role does a high deductible have in reducing premiums?

MVP: People will never be happy with insurance all the time. As Kenneth Arrow explained, high deductibles reduce the administrative loading of insurance. It is easy to see why. High deductibles reduce the administrative time and cost processing small claims, reducing the administrative loading and reducing the premiums.

Sure, the person who pays the deductible will be unhappy. But this is balanced by several others whose premiums are lowered and who have more money in their pockets. As with much of healthcare, deductibles are a tradeoff. We hear about the unhappy Paul who is paying the deductible. We don’t hear about the happy Peters who have more money in their pockets to spend on a vacation, or whatever else takes their fancy.

SJ: What does “competing between insurers” even mean? What can they compete about?

MVP: That’s a good question. There is certainly some, though not much, fat to trim. The profit margins aren’t as much as people think. For-profit health insurers earned a pretax return on equity in 2008 of 8 % – 11 % – not a lot by the standards of other industries. Cutting profits in half, though politically popular, would barely touch premiums.

Healthcare can be made a little cheaper if people are willing to sacrifice some care, but the costs in the long run can’t be reduced much. Solutions such as squeezing the wages of doctors and nurses only redistribute welfare, and do not lower real resource cost, and are frustratingly temporary.

SJ: Will competition across state lines reduce premiums?

MVP: I doubt it. But I don’t think it’ll be a race to the bottom as some of my colleagues on the left fear. There is no harm in trying. It may make a difference in a heavily regulated state such as California. I doubt it’ll make much difference in Pennsylvania.

SJ: So, intrastate competition ought to be sufficient and interstate competition will add little. Do you think health savings accounts (HSAs) will make a difference and should be encouraged?

MVP: My view of HSAs is the same as my view of tattoos. Some people like them. Those who like them should get them.

SJ: As insurance works by the law of large numbers is it not inevitable that only large insurers will survive in either the individual market or ESI, and that healthcare will be an oligopoly of either large insurers or self-insuring healthcare systems such as Kaiser?

MVP: No, it’s not inevitable at all. The law of large numbers does apply but the optimal large number to pool risk is around 50, 000.

SJ: So, we will not necessarily be Kaisered?

MVP: No, there’s no reason we will be Kaisered, Blued or Aetnaed. A local mutual is good enough to provide insurance. A related point is the barrier for new entrants in the insurance market. It is not the market power and concentration of a dominant insurer, such as the Blues, per se. Rather, it comes from a dominant insurer’s provider network and/ or management tools, which new entrants find hard to duplicate.

SJ: Do you favor a single payer?

MVP: The U.S. is not Sweden. Americans are different. Americans have choices and preferences about their health insurance and healthcare and these preferences are not the same. If everyone had the same preference even an incompetent government would solve our problems. The reason markets exist is because preferences are heterogeneous.

SJ: Who has influenced you the most?

MVP: My PhD thesis adviser, and Nobel prize winner, James Buchannan. Also, Victor Fuchs, who was the first real health economist.

SJ: Do you believe medical care is a right?

MVP: People talk about the right to medical care, but they do not say how much is rightful or how it should be produced and paid for. Let me answer the question differently. Watching your neighbor suffer is a negative externality, and we want to avoid negative externalities and encourage positive externalities. Access to medical care in a country as affluent as the U.S. is neither a right nor a privilege but a moral obligation. Even President Trump recognizes that. The question is what is the optimum combination of government and market which gives most access to medical care to most people most equitably.

SJ: In the raging debate between Keynes and Hayek, who do you side with?

MVP: Neither. That (macroeconomics) is all black magic.

SJ: William Baumol in the Cost Disease believes that medical care can occupy even larger chunk of the GDP without any real problems. Do you agree?

MVP: It’s an interesting question. Some economists say that medical care can consume 30-40 % of the GDP. The point here is not how much of the GDP medical care can or should consume. The point, from welfare economics, is how it reaches that level of spending. If it is by the voluntary preferences of the people, who consume more medical care because of affluence or risk-aversion, and prefer spending on medical care than other goods and services, I support it. If that level of spending is imposed by fiat, rather than preferences, then it’s not fine. The market is amoral but crucially the market must decide.

SJ: What would you advise President Trump?

MVP: The president should not make promises he can’t keep. He has promised cheap insurance and complete access – you can have one, not both. I’d advise him to stick to the Ryan plan. I’d advise that he minimizes rent-seeking and keeps the hand of regulation light and graceful.

I’d advise that he improves the ACA by making the individual market more robust. He should allow risk rating and think very carefully how to help the high-risk. I’d favor a value-added tax, but general taxation will do. He should maintain guaranteed renewability in the individual market and extend the renewability to the people with employer-sponsored insurance, so that they can be covered if they lose their jobs, or move to new jobs. This will deal with job-lock.

There is no getting around the subsidizing of the high-risk. There is a more efficient way of subsidizing their premiums without discouraging the participation of insurers in the individual market. Strengthening the individual market and undoing the problems created by employer sponsored insurance, will take a long time, but I believe this is the most optimal strategy for health insurance in this country.

SJ: Will the sky fall if Obamacare is replaced?

MVP: The sky can fall if the ACA is repealed without an alternative and replaced without a grace period to a new system. I’d allow at least two years where the provisions of the ACA are kept intact. The sky need not fall.

Post script

Speaking to Pauly is not like speaking to an astrologer or a healthcare leader. He does not inspire people to cross the Red Sea. I don’t think Pauly would be good at Tweeting, so thoroughly devoid is he of rhetoric. All one gets with Pauly is reality and more reality, and if he’s pushed, even more reality. It’s hard to pin Pauly to a specific ideology. But healthcare makes graveyards out of ideologies. It is just as well that the economist who thoroughly understands the healthcare system is ideologically-neutral. President Trump would do well to have coffee with Mark Pauly.

About the Author

Saurabh Jha is a radiologist and contributing editor to THCB. He knows far less about economics than he thinks he knows, and he thinks he knows far too little. He can be reached on Twitter @RogueRad
















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9 Comments on "Interview with Mark Pauly: Part 2"

Steven Findlay
Jan 22, 2017

Timely. Agree with Saurabh that Price/Ryan (not Trump, he would not understand) should sit down with Mark P, long a deeply knowledgable health economist. Some specific comments:

– “allow risk rating?” No! We took further stride to social insurance with ACA and we should absolutely not go back. The American people don’t want that–as is quite clear from recent polls.

– Across state lines, agree – big mistake and pointless really. As Mark implies would create more trouble than its worth.

– High risk pools? No. Agree there with Steve2 and Barry. Failed experiment over 15 years in 80s to early 2000s.

– Health spending at 30-40% of GDP? Sorry Mark, not a full analysis or good answer at all. Should never go that high even if driven partly by more discretionary demand and spending. Ignores 20 to 30% waste in system now and highest prices in the world–that’s what is driving it to 20% now from 17% just a few years ago. Mark’s answer also seems to imply affluent people buying more care if they want, whether they need it or not. That undermines the priority of public health broadly and the aim of an overall healthier population. Spend less on wasteful and inappropriate care…and take that savings and spend it on population/public health/prevention. That should be the overall priority and direction. At same time, reduce rate of price rise. If commitment to all that, and major push over 20 years, we’d never top 20% or so of GDP on health care–or need to.

Barry Carol
Jan 22, 2017

I read an article recently where several venture capital investors were discussing the healthcare space. One veteran investor thought that if health spending reaches 20% of GDP, it would be a tipping point that would create a much greater sense of urgency to rein it in.

Separately, I was asking my primary care doctor last week about prostate cancer screening. While the PSTF now recommends against routine PSA testing in normal risk men, physicians continue to do it because not screening is still not generally recognized as the standard of care, especially by malpractice lawyers. Until not screening becomes the standard of care, the docs will continue to do it to protect themselves from potential lawsuits mainly. That’s yet another unfortunate example of defensive medicine in our system and society.

Jan 22, 2017

There is tremendous controversy regarding prostate screening. It will probably be more effective in the future. One question that arises is that deaths from cancer of the prostate have fallen. Why? Early diagnosis? An alternative? We don’t know, but one shouldn’t be too confident in any conclusion they draw since prostate cancer is the #2 cancer killer of men or about 26,000 lives.

I think the comment that today prostate screening is done to prevent malpractice is a bit of an unfounded guess. Guesses can be right, but too frequently the guessers draw conclusions that have no basis.

Jan 22, 2017

” (not Trump, he would not understand) ”

A gratuitous swipe at one that has created more in a month then you are likely to have created in a lifetime.

Jan 22, 2017

Aetna, UnitedHealthcare, and Blue Cross already market insurance in multiple states. Its a cumbersome arrangement since they must qualify for their actuarial stability, state by state. On the other hand, it is stable as the ACA has not been. Other than a nationally defined need to recognize the special role of Primary Healthcare to coordinate a comprehensive care plan for each citizen, decentralized governance should apply. The neglected responsibility of Primary Healthcare to offer responsive ‘medical triage’ should be a priority for improving our nation’s healthcare for each citizen. Our nation’s worsening maternal morality ratio will not improve without this standard of care for everyone.

Barry Carol
Jan 22, 2017

I’m glad that MVP recognizes the need for both subsidies and a way to provide coverage for people with known high health risk. The history of high risk pools, as noted by Dr. Palmer below, is terrible. Insurers should be allowed to quote astronomical premiums with taxpayers covering the entire cost above some reasonable percentage of income like 10% maximum. Alternatively, we could keep the ACA exchanges in place. Let insurers price them as though they were normal risk policies. Then cap the individual contribution at 10% of income with no income ceiling. Taxpayers can cover the losses so insurers can break even. Insurers would be treated as the equivalent of electric or gas utilities providing an essential public service at no profit and no loss but would be free to charge market rates in the rest of their business including Medicare Advantage and Medicaid.

The bottom line is that a mechanism to provide insurance to people with known high health risks and subsidies for those who can’t afford a market rate premium on their own are both critical to getting the percentage of the population without health insurance to well below the 15% level that prevailed before the ACA and to ensure that nobody who has health insurance as a result of the ACA loses it and even more people can acquire it.

Barry Carol
Jan 22, 2017

I would suggest that drug prices, especially specialty drug prices, could be mitigated by a greater willingness to exclude them from the covered formulary if the price is deemed too high based on some rational criteria like QALY metrics or the availability of adequate alternatives within the therapeutic class.

Long term care is a tough one given the huge amount of care currently being provided for free to payers but at high personal cost, both financial and emotional, to family members. At the least, it would have to be priced on a sliding scale using both income and wealth as criteria to determine how much any given individual or family can pay. That would essentially be the college financial aid model. Medicaid could continue to cover the poor as it does now.

For alcohol and drug abuse, perhaps it should be viewed partly as a sub-set of the criminal justice system where it would be paid for outside of health insurance when criminal activity is involved. That at least would be partly offset by lower prison costs. For non-criminal mental health issues, I don’t think there should be parity with physical health issues because of the difficulty in measuring and determining progress on the mental health side. Insurance benefits outside of drug therapy should be limited. Anything more could be priced on a sliding scale basis with taxpayers covering any shortfall.

William Palmer MD
Jan 22, 2017

We shouldn’t forget three other difficult problems: 1. Pharma prices and the technology “imperative”–how to bring the proper new technology into health care and how to price it; 2. long term care–is there enough money in the system to put those who need good nursing care into good long term facilities?; 3. mental health and drug rehab–how do we offer the most efficient mental health and drug rehab services and yet prevent patient moral hazard?( people using it too much).

Jan 21, 2017

Thank you much for this. Pauly is on the list of people I read regularly and for whom I have a lot of respect, especially because he is not ideologically driven. I agree with most of what says here. However, on high risk pools while I think he probably has the economics correct, I think he has the politics wrong on this. We have tried high risk pools. They have failed. When budgets get tight, and sometimes even in good times, states just don’t fund high risk pools. I think you can make the case that the ACA has not taken the best approach to solve this problem, but high risk pools don’t solve it either unless we are just going to accept having people who are actually sick not have insurance.