Saturday, November 20, 2010

ObamaCare: the demise of consumer directed health plans

Media outlet reports, insurers communicating to policyholders, and human resource departments communicating to employees are full of reminders to participants enrolled in consumer directed health plans: no longer will participants find over-the-counter drugs reimbursable beginning 01/01/2011. (1) Consumer directed health plans are specifically know as Health Savings Accounts (HSA), Health Reimbursement Accounts (HRA), and Flexible Spending Accounts (FSA).

Why the removal of over-the-counter reimbursement?

Many commentators argue that ObamaCare removed the reimbursement merely as a government revenue measure. That removing the reimbursement then removed the tax qualification of the reimbursement and causes the participant to show more taxable income. Other commentators say that the removal of over-the-counter reimbursement is merely signaling the beginning of the end of consumer directed health plans.

Removal of over-the-counter reimbursement is not the entire story?

ObamaCare's removal of the reimbursement for over-the-counter drugs is really not the story. The story largely unreported is the purposely designed long term demise of consumer directed health plans under ObamaCare. More generally missing from the story is the long term demise of consumer directed health care decisions over the past forty years. Also under reported is that ObamaCare's removal of reimbursement for over-the-counter drugs works directly opposite of other government initiatives to bring drug costs down for consumer by accelerating the speed at which name brand drugs become generic drugs which in many cases also become over-the-counter drugs.

Consumer Directed Health Plans

What is a consumer directed health plan? Consumer directed health plans are a group of insurance plans based on the concept of utilization of health-care dollars at the point of service. That incentives are created for the consumer to make judgements regarding price and quality of health-care related items at the point of service. Currently its estimated that 46 million workers are covered under consumer directed health plans (2)

Consumers of health-care need incentives?

Why do consumers need incentives to judge price and quality in the realm of health-care? Don't consumers always judge price and quality? Why is health-care different than other consumer price and quality decisions?

Health-care price and quality decisions were the same as any other consumer decision until third party payer effects distorted the decision making process. What does third party payer effects mean?

An example likely best illustrates third party payer effects and the consequential distorted decision making process. If you have purchased "bread insurance" for those occasion in which you buy bread, is your decision to buy bread more based on price and quality or is your decision more based on the bread store accepting your "bread insurance"? If the store you have entered has stone ground whole wheat bread on sale for 50 cents a loaf, but the store will not accept your bread insurance, exactly how do you react? Do you buy the bread or do you seek another store that has a regular white bread priced a $2.00 a loaf however will indeed accept your "bread insurance"?

Remember, you have already paid your monthly premium for your bread insurance. Do you absorb an extra 50 cents and buy the best price/quality or do you purchase the $2.00 loaf and allow the pre-paid third party insurance to handle the transaction? The question is then: does a price distortion occur when third party effects enter the consumer's decision at the point of sale? Yes. "One of the biggest reasons for higher medical costs is that somebody else is paying those costs, whether an insurance company or the government" -Thomas Sowell. (3)

How pervasive is the third party effect?

Circa 1960 health-care costs were paid at a rate of forty five (45) percent on the dollar by health-care consumers at the point of sale. Circa 2008 the forty five percent has become fifteen (15) percent. Addressed alternatively, we have increased from 55% transfer payment level to 85% transfer payment level between 1960 and 2008. (4)

Consumer directed health plans are cost containment programs

Consumer directed health plans are an attempt to reverse the third party payer effect. That is, the plans encourage consumers to make decisions at the point of sale regarding cost/benefit rather than a third party effect causing the consumer to reject cost/benefit as someone else is paying hence cost/benefit takes a back seat.

Why are consumer directed health plans going to end under ObamaCare?

The removal of over-the-counter reimbursement for consumer directed health plans is merely the first signal of the demise of such plans. The health insurance scheme designated as ObamaCare does not specifically forbid consumer directed health plans however the internal workings of the scheme make consumer directed health plan non-viable. Why would such plans be non-viable? Three components of the ObamaCare scheme work to remove consumer directed health plans:

(1) high deductible plans, which are the hallmark of consumer directed health plans, are only allowable under ObamaCare based on a sliding scale of deductible and co-insurance based on income. That is, there is a maximum deductible and co-insurance allowable then those figures are reduced for lower income thresholds at 300 to 400% of the poverty level income then again at 200 to 300% of the poverty level income,

(2) the 80% minimum "medical loss ratio" (amount insurer is required to pay out in benefits for each dollar of premium). High deductible plans would likely never meet this requirement,

(3) first dollar coverage requirements of ObamaCare for "preventative services" does not correlate with a high deductible plan. That is, first dollar benefits, through the third party payer effect, defeats the high deductible plan's incentive of the health-care consumer making cost/benefit decisions at the point of sale. Further, a high deductible plan's cost structure is based on consumers paying first dollar benefits in exchange for a lower premium.

Theoretically you could design a consumer direct health plan given the above parameters however the end result would be a plan with a low deductible, with many first dollar benefits, as well as a plan based on third party payer effects. That is, you would have designed a policy that looks just like the prescribed ObamaCare health plan. (5)

Counter to over-the-counter

ObamaCare is counter to other government initiatives designed to lower drug costs. One one hand you have the government striking deals with drug companies allowing drug companies to more freely advertise their name brand drugs with the drug companies shorting the patent period allowing drugs to go generic quicker. Meanwhile many generic drugs become over the counter drugs or even name brand drugs going direct to over-the-counter such as Zertec. On the other hand the ObamaCare scheme disallows over-the-counter drugs to be reimbursable under consumer directed health plans. Hence two centralized government schemes work directly counter to one another.


The removal of the over-the-counter reimbursement by the ObamaCare centralized planned scheme is merely the first stage of the demise of consumer directed health plans currently covering 46 million workers. The incentives produced by consumer directed health plans causing consumers to make cost/benefit decisions at the point of sale to overcome the third party payer effect will be purposely eliminated over time through the conscious designed central planning scheme known as ObamaCare. The ObamaCare required removal of reimbursement for over-the-counter drugs works directly counter to other measures of government to reduce drug costs.

Update 02/28/2011: The big problem with healthcare? It's not a market.


(1) Health-Care Reform Changes Flex-Spending Reimbursement Rules

(2) Employer Benefit Research Institute, December 2009.

(3) Alice in Health Care, Thomas Sowell,

(4) Back in the Old Days When the "Single Payer" Was the Patient, There Was "Self-Rationing".

(5)Bad Medicine, Michael Tanner, Cato Institute, 2010.

Wednesday, November 10, 2010

ObamaCare: purposely designed to end as a single payer plan?

Many commentators make a general argument that ObamaCare was purposely designed to end as a single payer plan. However the same commentators hop scotch over the concept of private insurance vs. social insurance reserves which needs examined as a component of the assertion that ObamaCare was purposely designed to end as a single payer plan .

That is to say, beyond the myriad of arguments against ObamaCare including the demise of consumer directed health plans, price fixing resulting in quantitative and qualitative reductions in service, a centrally planned market for health care through massive and expensive bureaucracy replacing price coordination in a decentralized economy, one point that gets little press time is the difference between private insurance and social insurance reserves.

What are insurance company reserves?

A simple definition is: "consumers make insurance claims in the future and depend on insurers to honor their earlier commitments. Reserves—the financial assets in which insurers invest their premium income—are often the most tangible sign of an insurance firm's staying power". (1)

A more complex definition is: "amount designated as a future liability for life or health insurance to meet the difference between future benefits and future premiums. net level premium is determined so that this basic relationship holds: the present value of a future premium equals the present value of a future benefit. This relationship, incidentally, exists in fact only at the point of issuance of a life insurance policy. After that, the value of future premiums is less than the value of future benefits because fewer premiums are left to be paid. Thus, a reserve must be maintained at all times to make up this difference". (2)

An alternate definition is: "[means amounts—] which are set aside to mature or liquidate, either by payment or reinsurance, future unaccrued claims arising from life insurance, annuity, and noncancellable accident and health insurance contracts (including life insurance or annuity contracts combined with noncancellable accident and health insurance) involving, at the time with respect to which the reserve is computed, life, accident, or health contingencies". (3)

Underwriting, Preexisting Conditions, and Reserves

The concept of "preexisting conditions" has become a hot political topic that is used in debate with much verbal virtuosity. However, preexisting conditions is actually a term that describes a condition of a risk uncovered through "underwriting". In private insurance, which is reserved to pay for future claims, underwriting directly effects reserves and ultimately pricing. The key in private insurance is "a reserved plan to pay future claims" which is achieved in part through underwriting.

On the other hand, social insurance programs are notorious for reserving for future claim paying ability through the taxation authority of a central government. That is, future claim paying ability shows up as future unfunded entitlements that are "reserved" through the ability of the central government to raise taxes to fund the unfunded future claims paying ability.

Reserves vs. Taxes

Social insurance can remove/reduce underwriting allowing for preexisting conditions as social insurance does not reserve their ability to pay future claims. If social insurance was required to reserve future claim paying ability, then suddenly underwriting and preexisting conditions would immediately be placed back on the table and permanently placed back on the table. Therefore, underwriting which uncovers conditions of a risk known as preexisting conditions can/are removed in social insurance as "tax" is the reserve.

The end game is by removing underwriting in social insurance, in effect, guarantees future tax increases as the reserve must increase to accommodate anti-selection due to the removal of underwriting. Anti-selection leads to adverse claim experience hence causing additional reserve needs to expand exponentially.

Private Insurers Reserves and Price Increases

Once you go through the above reserve comparison exercise regarding private insurance vs. social insurance, then you can proceed to the argument regarding ObamaCare being purposely designed to end as single payer plan. A major reason ObamaCare ends as a single payer plan through design is because private insurance can not possibly reserve to pay for future claims when underwriting is eliminated. Private insurance can raise prices in the short run but as they eventually see insolvency on the horizon due to reserve problems they merely exit and end operations.

Note: private insurers, even in the short run, will have difficulty raising premiums at a rate needed to increase reserves as ObamaCare is a price fixing scheme in regards to insurance premiums as well as health-care services. Any price increase by insurers are immediately met with angry inquiries such as those by Kathleen Sebelius of the H.H.S. . (4)

Meanwhile, while private insurers reserves become inadequate and private insurers exit, the exiting private insurance administration is dismantled. However, existing private insurance administration could be utilized as an administration source for ObamaCare. The organization and expertise already exists. But ObamaCare authorizes its own massive bureaucracy built from the ground up with little expertise hence the existing private insurance administration ends. Note that in the short run you have duel administration of exiting private insurers and ObamaCare bureaucracy which is an additional cost driver.


The single payer end game, a government administered plan, is in essence a non-reserved entitlement where "tax" is the reserve. Hence "tax" must increase as you have elected not to reserve to pay for future claims paying ability in a social insurance plan. Taxes will increase as anti-selection increases claims, due in part to the removal of underwriting, which means future claims paying ability must be further reserved. You either reserve or you tax. In social insurance you tax.


(1) Federal Reserve Bank of Minneapolis


(3)Cornell University Law School

(4) Sebelius Has a List, Wall Street Journal

Tuesday, November 2, 2010

ObamaCare: the general public is misinformed?

ObamaCare has become increasingly out of favor with the general public. As more and more information surfaces regarding what is actually inside the ObamaCare bill, the general public has become increasing called for repeal of ObamaCare.

The following infamous statement by Nancy Pelosi, although a sadly uninformed statement, may have paved the future path of discontent with ObamaCare: "We have to pass the bill so yo can find out what is in it". (1) As the general public "finds" what is within the ObamaCare bill the more they dislike the content.

The general electorate is misinformed?

The counter argument of the framers and supporters of ObamaCare to the rising voices in support of repeal is that those opposing ObamaCare are merely misinformed. The argument has overtones of "they don't know what is good for them". Some framers and supporters of ObamaCare have gone so far to argue that ObamaCare was not "presented" correctly to the general public. In other words, ObamaCare needed "sold" to the general public.

Special Knowledge and Experts

Below is a link to EconTalk with Russ Roberts from 10/25/2010. The interview is with Thomas W. Hazlett a Professor of Law & Economics at George Mason University School of Law. (2)

The entire segment is very interesting however take a moment and listen to the five minute segment of 36:43 - 41:30.

The segment mentioned above is about buying consumer products that "signal". That is, the proposition you are what you buy, eat, listen too, etc.. Its related to the concept of conspicuous consumption. Roberts and Hazlett get into a discussion regarding Thomas Sowell's observations that self appointed experts within a field (cameras in this example) despise mass marketers and despise those that buy from mass marketers (Kodak cameras). That self appointed experts view buying from a mass marketer as saying something about "you" with moral tones attached. That buying from the mass marketer, although in the self interest of the novice camera user, is somehow making the purchaser a lesser person.

Lets take this notion and transpose it onto the field of political-economy and in particular the anointed/intelligentsia. That the self appointed anointed/intelligentsia think of themselves as experts of special knowledge. (3) That they alone come up with unique ideas. That they are the center of the manufacturing of unique, knowledgeable, and insightful ideas. In other words, they are the experts in Sowell's camera example.

The self anointed/intelligentsia only have one product to sell and that is “ideas”. As pointed out by many, the ideas are not empirically tested ideas but rather ideas based on “the way things ought to be”. That is to say, ideas based on “the way things ought to be” that basically paints the world in their author's own self image. Do the anointed/intelligentsia, who’s only product is ideas, attempt to shape their ideas as the "signal" mentioned above? The extension of which, is that if you espouse and repeat the ideas of these self appointed experts then you "signal" that you are a purveyor of unique, knowledgeable, and insightful ideas as well.

Conversely, propositions that challenge the ideas of the self anointed/intelligentsia are, as discussed above, labeled "mass marketed ideas". That buying into these labeled "mass marketed idea" says something about "you" with moral tones attached, as perceived by the self appointed experts within the field of ideas. That somehow you are a lesser person as you reject or counter the "signal".

In practice the anointed/intelligentsia want to frame counter arguments to their signal as being "the status quo". More specifically, the "cling to their bibles and guns" vilification exercise is merely an argument-with-no-arguments to create a baseless debate counter point to the long standing empirically tested ideas of the anointed's opposition aka the emperically based camp. In essence, what the anointed/intelligentsia label "the status quo", is really the widely held common sense and empirical arguments of their opposition.

For example, ObamaCare is based upon a price-fixing scheme. It widely known that price-fixing schemes result in quantitative and qualitative reductions in supply aka rationing. Therefore one might say that this particular emperical point and/or axiom is in fact a very important "status quo". Rather than the anointed/intelligentsia countering the price-fixing scheme argument they merely label the counter argument as "the status quo" which results in an argument with no arguments.

In the final analysis, emperically tested ideas and common sense ideas put forth by those countering the "signal" are bundled into the phrase "status quo" (with the conotation that the "status quo" is some sort of mass marketed idea). Next "status quo" is arbitrarily and purposely given negative overtones by the anointed/intelligentcia. However, and in fact, "status quo" is a totally baseless tag line used to put forth an argument with no agruments rather than an argument of facts.

Are Some Politicians the Self Anointed/Intelligentsia?

Many politicos fancy themselves as self anointed/intelligentsia and/or align themselves with those producing the "signal". A problem emerges that if your ideas are not empirically based and merely based "on the way thing ought to be" and consequently painting the world in your own self image, then what if the ideas are presented as a politico?

Robert Nozick in his book Anarchy, State, and Utopia discusses moral side constraints at length. He poses the question of do we know of a being with no moral side constraints? Yes we do: animals. That humans attach no moral side constraints to animals i.e. the law of the jungle. Hence the lion eating the zebra, the hawk eating the field mouse, the scavengers eating the remains of carcass…humans accept this behavior and add no moral side constraints.

Yet we have humans wanting to add moral side constraints regarding humans killing animals e.g. we should not eat meat with the argument based not killing the animal should be a moral side constraint. Hence we have the paradoxical argument of having a set of beings with no requirement of moral side constraints yet a separate set of beings are required to have moral side constraints regarding the set of beings with no moral side constraints.

Keeping the above mentioned paradoxical moral side constraint argument in mind, have humans allowed the same paradoxical argument to exist between politicians and the general electorate? In other words, falsifying, misrepresenting, and espousing half truth are not moral side constraint of politicians yet are moral side constraints of the general electorate.

If politicians have a separate set of moral side constraints, and have often been reported to falsify, misrepresent, and espouse half truth, then what if this same group tries to "sell" non- empirical ideas based on "the ways things ought to be" which consequently paint the world in their own self image? That is to say, would politicos falsify, misrepresent, and espouse half truths in order to paint the world in their own self image through the idea of "the ways things ought to be"?


The general public is misinformed in regards to ObamaCare? -Or- conversely, has the general public been purposely misinformed about ObamaCare?




(3)Thomas Sowell, Intellectuals and Society

(4)Robert Nozick, Anarchy, State, and Utopia