Michael Cannon comments on my post about his paper yesterday, noting in passing that I have an HSA. C’mon Michael you can understand that people will take advantage of incentives, even though the policy behind those incentives is bone-headed, can’t you? After all like most of your colleagues at Cato I think that getting tax relief on my mortgage is bad policy, I think that paying taxes to support the war on drugs is terrible policy. But no one exactly gave me the choice…

But onto the real discussion. In his blog Cannon says I didn’t read his piece carefully enough. Actually frankly I’m not very interested in the attempt to figure out how HSAs fit into our current broken system which occupies most of the piece, and I despair of any of their supporters taking them very seriously. They all say that they’re “partial solutions”, or “incremental”. Frankly our care system is so screwed up that whether we force more problems on the sick in their decisions about accessing care (which Cannon agrees that HSAs/HDHPs might do) is pretty irrelevant when we have 15% of the population who’d love to have that problem.

What I like about Cannon (and Tanner and Kling) is that they’re among the very, very few on their end of the spectrum who’ll have a theoretical argument about the insurance “market”. So let’s get to our core “mis”understanding

Also, Holt accuses me of ignoring the fact that risk segmentation results in reduced subsidies to the sickest insureds. Yet that is a central theme of the “students & professors” hypothetical (pp. 6-8).

I don’t accuse him of ignoring the reduction in subsidies! I accuse him of both understanding that it happens and believing that it’s a good thing! And the conclusion to that hypothetical piece is

Though the professors would lose the cross-subsidies they received under Plan A,those losses would essentially be temporary transition costs. The higher health insurance premiums for today’s professors would convey to today’s students the importance of saving for their future medical needs. Thus tomorrow’s professors would face greater incentives to save for their future medical needs. Because their current premiums would be lower, they would be better equipped to do so.

In other words, the market would send a signal to the “students” that the if they didn’t avoid having any health care costs in the future, and hadn’t saved all their lives to finance them, they’d be lying bankrupt in the gutter with “professors” who also haven’t saved enough to afford the costs they’re paying for the care they need now. This is a “transition” cost, and Cannon and several of his colleagues believe that a) we really can get to a place where individuals accounts saved for over the years can cover all health expenses, and therefore insurance (with its implied social cross subsidy) is unnecessary, and b) the transition costs are small. Given the current savings habits of Americans  the first assumption is laughable, but it’s the next point that’s the real problem.

If you go to the logical extreme and do away with insurance, a) those transition costs are huge and b) the “students” who get sick will not be able to save enough over their lifetimes to deal with their future costs. The problem remains the 80/20 rule. If you allow the 80% to put all their money in an individual account and not in the social pool there will not be enough money to pay for the care of the few who need it—even the ones who’ve scrimped and saved all their lives.

But don’t fear Cannon has a solution for that. After we’ve eliminated the cross-subsidy of social insurance, we somehow or other bring it back

And on page eight I write:

Though HSAs may reduce hidden subsidies to sicker workers, they do not preclude subsidizing those workers in other ways.

Strangely he didn’t include the very next sentence

Other options include government subsidies or private charity, including assistance from family and friends, churches, civic associations, and uncompensated care from hospitals and doctors.

Which if I’m not very much mistaken is what we’ve got already and what the providers and employers are bleating about at the moment. Cannon just thinks that we should be pushing policies that will make the current zoo worse, and return more money to the healthy people who don’t need it.

His justification for all of this (which he continually says is “socially desirable”) is that putting people into HDHPs will reduce their spending overall and drive out that darned unnecessary care they’re all demanding. But as apparently although he will admit it he doesn’t want to consider that most health care spending is not under the control of a patient spending their own money, even if they have an HSA/HDHP. The stuff that costs the most money is the flat-of-the-curve medicine being visited on the nearly dead. And Cannon apparently has no interest in figuring out how to reduce that because it requires a supply-constraint. To be fair to him, not many other people want to do that either, as it means beating up on a bunch of doctors and hospitals. But other countries manage it!

So for the nth time, if you want to have a rational, fair and cost-efficient health care market you need compulsory social insurance, hopefully progressively based, so that those people who end up with large healthcare costs don’t end up being bankrupted. Then you need incentives for providers that induce them to provide cost-efficient care over a population, rather than to do as much as possible to those who can pay, and ignore the rest—which is the recipe for driving up costs. Cannon’s analysis suggest that he knows this, but his solutions drive us towards the opposite state, which is why I’m wondering about the color of his planet’s sky.

Kaiser Family foundation has an excellent slideshow introduction about the CDHP—how it works, what it’s supposed to do, who pays, etc, etc. Of course all you need to know is in the line below titled “Total Firm Contribution” as to why employers might think they like the HDHP.

Those of you who are bored this week can entertain yourselves pondering the planetary origins of this ditty called Health Savings Accounts: Do the Critics Have a Point? The answer according the to author, Michael Cannon of Cato is, of course, no. But he does at least burrow deep into the issues. You have to hand it to Cannon and Cato which is the sensible libertarian’s think-tank (I used to call it the thinking man’s right wing shop, until Trapper told me that it’s not right wing!) for at least trying.

Unlike Grace Marie Turner, Greg Scandlen, Ron Grenier, Sally Pipes and all the other loons on the HSA bandwagon, Cannon confronts what HSAs do to the risk pool head on! If you have the intestinal fortitude to dive into the guts of his 23 page report (Full PDF here) you’ll find that on page 6-8 Cannon describes accurately how the introduction of a high deductible low-premium plan for in a single unified insurance pool (which he divides up between two groups–the healthy “students” and the sicker “professors”) destroys that risk pool.

He suggests that basically the healthy members of the group are better off moving into higher and higher deductible plans. Eventually no one will be left able to afford the "sicker" plan, so the effect will have been the movement of everyone to a high-deductible from a low deductible plan.

This ignores two HUGE issues. The first is the loss of the money from the pool to pay for the care of the sick people in it. Unless miraculously in Year 1 overall health care costs collapse, the movement of all the healthy people into a lower premium insurance product will mean that there won’t be enough money in the pool to pay all the health care expenses of its members. Why not? Because it’s the premiums from those healthy "students" that’s paying for the care for the sick "professors". If you stop collecting premiums from the 80% of healthy people and allow them to keep them in cash, there is not enough money left in the pool to cover the care of those who get sick. The math just doesn’t work, as I showed here (and I’m by no means the only one who’s pointed this out). Someone has to make up the difference in year one. (This is BTW why social security privitization is a political non-starter because it demands more money in the first years).

The second issue is that he’s not even satisfied with moving everyone to a HDHP, and he wants an ever bigger selection of variation of insurance plans to offer up. In that case presumably a bunch of the "students" in Cannon’s ideal world won’t purchase any insurance at all (after all that’s what happens in the real world and is something he raises in his example), or perhaps they’ll buy a policy with a $100,000 deductible that costs them $10 a year. Now when the small percentage of the "students" who do need it require care, they’ll have to pay out of pocket.

Except that in reality, no one who needs catastrophic care can afford it out of pocket, and the people who are the least able to afford it should they need it are exactly the ones most likely not to buy insurance–because they’re relatively poor and relatively healthy (remember they’re "students"!). But don’t worry! According to Cannon they’ll have saved up for this eventuality! Which is where the HSA comes in. Of course in reality they’ll get treated and the providers will have to eat the costs. Which is why we have the recent fuss about who gets cost-shifted to whom.

Now there are plenty on the right on the Grover Norquist vein who want this whole thing to collapse and believe that all those "lucky duckies" should be, as Mr Potter is accused of demanding by George Bailey, saving and scrimping and paying cash for everything. But the reason that health nsurance exists in the first place is that people who get very sick can’t afford the costs of medical care because they’re very large compared to their incomes and other predictable expenditures.

Meanwhile those costs are usually incurred largely well beyond the amount of the deductible of a typical HDHP. So the whole cost conscious consumer/patient is largely a myth. Cannon knows this is true. In his book he devoted all of two sentences to solving the issue of the 80/20 rule (in fact in reality it’s 90/10). He claims in this paper (devoting a whole two paragraphs to the topic, so we’re getting some progress!) that people with HDHPs are cost conscious beyond the deductible (even though there’s no reason for them to be) and that if we just allow higher deductibles that’ll help here too. Of course that ignores 100 years of history in which doctors and the system largely decide what happens to very sick people, and all the evidence is that medical culture and the number of physicians per capita is the major determinant of costs. (Go hunt out the Dartmouth stuff for more). Maybe this will change by magic in some consumer nirvana, but count me as a skeptic.

I’m glad that he’s one of the few on his end of the political spectrum
to actually bother with some underlying theory about how this works.
The rest of them just say that HSAs/HDHPs are a minor incremental change– they
just don’t seem to realize that it’s a minor change that’s making an
already broken system worse.

So as far as I can tell Cannon has worked through all the logic of HDHPs/HSAs on a theoretical basis. He comes to the same basic conclusion that I do on how it will play out, but decides that a destroyed risk pool in which participation is voluntary, and a lack of control over provider behavior towards the very sick are not the problems that current critics of the system like me think they are. Even though those are the twin problems responsible for both driving up costs and the incredible injustices of the current insurance system which penalize people unlucky enough to be sick. And therefore he advocates policies that will logically make both of those problems worse!

I just wonder what color the sky is on his planet.