[ Saturday, April 24, 2021 ]
Chapter 4: Nancy and Ted and
the Nature of Legislation.
If you’ve paid much attention
to Congress in recent years, you’ll have gotten the impression that they don’t
tend to get a lot of legislative action done, and whenever they do, it’s a
whole bunch of related – and often entirely unrelated – stuff jammed into one
big piece of legislation. The number of
“omnibus” or even “comprehensive omnibus” bills, particularly when slapped
together as a “continuing resolution” or a “reconciliation act” of some sort,
sure seems to outnumber anything else Congress does.
Occasionally, you’ll get a
rifle-shot bill that addresses a single issue that is either (i) incredibly
pressing and must have some resolution, (ii) something pushed through on a
purely partisan basis while one party holds both houses of Congress and the
Presidency, or (iii) universally accepted.
Usually, though, it’s a hodge-podge of items, mainly poorly drafted,
that are the final result of an endless series of horse-trades. A law relating to home mortgages is included
in a bill requiring certain classroom requirements in all elementary schools;
neither had a chance of passing on its own, but the people wanting the education
deal dropped their objections to the mortgage deal and vice versa. Some of the worst examples in recent years
have been the USA Patriot Act on the right (at least it had the excuse of
coming on the heels of a terrorist attack), and the American Reinvestment and
Recovery Act on the left (the source of the HITECH Act).
The other type of grand multi-faceted
law is what I like to call a Christmas Tree: it’s a generally-well-regarded
legislative idea, usually one that’s bipartisan and not objectionable to anybody,
but a hobby horse for some, that gets amended and adorned with additional
provisions addressing related but different legislative initiatives, so that it
turns out to be adorned with so many new ideas that it’s like a Christmas tree
laden with ornaments. HIPAA started out
like that.
If you’re young and not from
the midwest, you may not remember that Nancy Kassebaum was a mainline
conservative Republican Senator from Kansas in the 1990s; unless you’re really
new here, you probably know that Ted Kennedy was a liberal Democrat Senator
from Massachusetts at the same time (he’ll appear in this series again, don’t
worry). In 1996, Kennedy and Kassebaum
co-sponsored a bill intended to address the issue of “job-lock.” This would turn out to be of great
provenance.
The American health care
industry is unique; it’s not just that the US is the world leader in research
and level of care (seriously, despite all the jeremiads about how American
health care is the “worst,” if money were no object, to what country with
“better outcomes” would you flee for health care services?), we are also the
only country in the world with a principal reliance on employer-provided
healthcare. That’s mainly an accident of
history.
At the end of World War II, most
of the world’s industrial capacity lay in ruins: besides the US, the great
industrial powers before the war (Europe and Japan) had seen their
manufacturing sectors bombed into near oblivion. By happy accident of geography, the US was
spared. Not that the US was not
impacted: millions of soldiers returning from war were trading their rifles for
wrenches, which could have been a huge burden on US industry to re-incorporate
them. But US industry was now the world’s
industry, and American industrial capacity, already dramatically expanded to
conduct the war effort, was switching from building tanks and warplanes for the
American war effort to building cars and commercial planes (not to mention
refrigerators, washing machines, and all manner of industrial equipment) for
the rest of the world. The supply of
workers was expanding dramatically, but the demand for American industrial
output, to supply the entire world, was expanding even more.
However, from a policy
standpoint, US industry was still operating under government “war rules,” such
as wage restrictions (here’s a long-time truth: once the government starts
regulating something, it doesn’t easily give up its regulatory powers, even if
the reason for their initial implementation is gone). Employers in many cases were limited by law
in how much they could pay employees, so it was difficult for Ford, say, to
attract workers away from GM. While they
couldn’t offer a higher per-hour wage, an employer could throw some fringe
benefits out to attract more new workers.
The concept of employer-sponsored healthcare coverage was not invented
then (actually, HMOs themselves had been invented [Kaiser-Permanente, if I
remember correctly] as a way for employers to keep their employees healthy and
on the job), but if did become the most common way for Americans to receive
healthcare payment coverage. And now,
the US pretty much stands alone in terms of the breadth and size of its
employer-provided private insurance markets.
However, there’s a downside to
tying a major personal-life benefit to your employer. We don’t get our auto or home insurance from
our employers (although we may get some life insurance), so why should be get
our health insurance there, instead of from Allstate or State Farm? Given a particular truth about the insurance
industry, this connection between your employer and your insurance raises a
couple of interesting issues, one of which I’ll address here (for the other, see
chapter 7).
First, a word or two about
insurance (you’d know all this if you ever really thought about it, but you
probably haven’t). No insurance company ever made money by paying claims. That is a fact – they make money by
collecting premiums, and if they avoid paying claims, the keep more money for
their owners, investors, employees, and executives. Insurers are, therefore, incentivized to limit paying claims wherever
reasonably possible; they can’t refuse to pay ANY claims, or nobody will buy
the product, but the less they pay, the better (for the insurance company). Part of this is necessary: the pool of money
should only be paid out for legitimate covered expense, and the insurance
payment system needs to be structured to prevent “free riders” who obtain
outsized benefits from the insurer without taking part in the risk (of paying
and not needing/getting). In fact, you
need your insurer to be stingy (at least toward bad claims) to assure that
there will be money there if you really need it. If the insurer doesn’t collect enough in
premiums to cover whatever claims it does pay, it must raise premiums or it
goes bankrupt, leaving the latecomers with no coverage at all.
And the basic premise behind
buying insurance is to cover risk. For
example, you buy homeowners insurance because you can’t afford to replace your
entire house it were to burn down or be destroyed by a tornado, but you can
afford to pay a monthly premium for insurance.
Most years, you won’t make a claim: like buying a losing lottery ticket,
you spent a dollar and got nothing (actually, even though you didn’t collect
the Powerball winnings, you did get something: the thrill of playing the
game). Insurance is similar: in most
years you pay your premium and get no cash payout in return: however, you did
get the risk of loss during that year covered, and maybe the peace of mind that
goes with that as well. Most years
insurance is a losing bet, but in a year when you need it, it’s can be life
saver (literally, with health insurance).
But like I said, there must be
enough money in the insurance plan to pay the expected claims, so the insurance
company must make sure that the risk is evenly spread among the participants
paying in, based on what they are paying in.
Let’s take home fire insurance example.
Say you have a neighborhood of 1000 houses, each costing $100,000. Statistically speaking, in our example, one
house burns to the ground every year. In
order to cover for that annual community risk, the community needs to raise
$100,000 each year to cover that loss. Rationally,
if every homeowner paid $100 in insurance premiums, the homeowner whose house
burned to the ground each year would be covered. In any given year, 999 families don’t need
insurance, but one does; for 999 families, their $100 is “wasted,” but for one,
their $100 is a lifesaver, because it generated $100,000 to rebuild their
house. However, they all pay in $100 to
an insurance pot each year (1000 x $100 = $100,000), and the money goes to the
one guy who lost the lottery that year.
Of course, the homeowners have to pay for someone to run the program, so
actually you have to pay a little more than $100, but let’s keep this simple.
Now, what if not everyone
participates? Let’s say that 10 people
don’t play – they have $100,000 in a trust fund they can use if their house
burns down, or just don’t have the $100 (“hey, I got gambling money”). Now,
instead of a pool of $100,000 each year, we have a pool of $99,000. Two things the remaining 990 participants can
do: everyone pays an extra dollar (and a penny) to get back to $100,000, or
have the one fire victim each year only receive $99,000 to rebuild their
$100,000 house. Either way, the
insurance plan is in balance.
So, imagine you’re one of the
10 non-participants, and you smell smoke.
Quickly, you call the insurance administrator, run over with $100 (or
$101.01), and now you’re insured. Of
course, the smoke is your house burning down. But it’s OK, you’re insured! And best of all worlds, you’ve managed to
save that extra $100 you paid each preceding year, unlike the rest of those
suckers. This homeowner is the
free-rider: taking advantage of the benefits but not sharing in the risks.
You can see the problem there,
can’t you? Word gets around, and next
year, instead of 990 participants, there’s only 900; an additional 90 people
join the original 10 and say, I’ll just get the insurance once my house is on
fire. The 900 now have to pay $111.11
each to fill up the $100,000 bank account needed for the year. Suckers.
The next year, instead of 900, only 500 participate; the cost is now $200
per household. Eventually, nobody
participates.
So, back to employer-sponsored
plans. A life insurer or auto insurer
can turn down a customer who looks like a bad risk (or at least charge them a
much higher premium), but an employer-sponsored plan can’t practically do
that. You don’t normally have to give a
blood sample when you apply for a job.
So how does an employer-sponsored insurer prevent the free-rider? Pre-existing conditions.
This much-maligned concept is
actually a good common-sense way to run an insurance plan. A pre-existing condition is the house already
afire: it’s not a conceptual or theoretical risk, it’s a known expense. Employer-sponsored plans can’t turn down
employees, like a home insurer could exclude a customer whose house is already
burning. But it is reasonable and
sensible that they would want to deny coverage for the part of your body’s
house that is on fire. Especially if
that person is a free-rider, who didn’t buy coverage previously but only wanted
to put money into the insurance system once he knew he’d be taking a lot more
money out.
But what if the person isn’t a
free-rider? He started working at Ford,
had health insurance through Ford, and was diagnosed with his condition while
working at Ford and covered by Ford’s insurance. Now, he wants to take a better-paying job at
GM; but if he goes to GM, GM’s insurer will say, “no, we aren’t covering your
chronic condition: it’s a pre-existing condition.” So our man is stuck at Ford with no way
out. If we all bought health insurance
like we bought other insurance, this would not be a pre-existing condition, and
he’d just stay with his existing insurer; to his existing insurer, he’s not a
free-rider, but to the new insurer, he is.
And thus our man is stuck. He can’t leave Ford because he won’t have
health insurance. He is, in a word,
locked into his job. He is job-locked.
Now, while it’s fair for GM’s
insurer to say not want to cover this new guy, it’s not fair to him because he’s
not a free-rider. And you know who really
wants him to go to GM? Ford. And there’s just as likely someone at GM who
wants to go to Ford and is also job-locked: Ford’s insurer doesn’t want her, and
GM’s insurer wants to get rid of her.
Like I said, pre-existing
condition exclusions make sense, and prevent free-riders from ruining the
market at the expense of those who play by the rules. But because of the peculiarities of the
American way of employer-sponsored health insurance, we have a problem here.
That’s where Nancy and Ted come in.
The goal of the
Kennedy-Kassebaum Bill was to address this unique American problem of
pre-existing condition exclusions hurting those who played by the rules and
didn’t wait until their house was on fire to buy insurance. The basic proposal was this: if you were
covered for some medical condition at your old job, and you want to change
jobs, the new employer’s insurance can’t exclude a pre-existing condition. In other words, if you weren’t a free-rider
at your old job, your new job’s insurer can’t treat you like one. You get credit with your new insurer for your
previous coverage; let’s call it “creditable coverage.”
What’s not to like? It’s good for Ford and GM; it’s good for the guy
at Ford wanting to go to GM, and the gal at GM who wants to go to Ford. It’s good (or at least not bad) for GM’s and
Ford’s insurers – they’re as likely to lose expensive beneficiaries as they are
to gain them.
Back to my original point and
the title of this chapter: the Kennedy-Kassebaum Bill was one of those
political rarities: a piece of legislation that solved an actual, everyday,
otherwise-intractable problem in a way that made everyone better off. That type of legislative idea is like a
Southern Pacific locomotive: if you’re another Congressman with a related issue
or a wish-list item and you can attach your issue to this locomotive, you can
get it passed.
And that happened: first, while
we’re dealing with health insurance and the healthcare industry, let’s fix the
industry’s adherence to paper records, by pushing standardization of electronic
data interchange in the healthcare industry.
Then, let’s fix the issue of different payors using different forms, and
get everyone on the same page. Of
course, more electronic data means greater risk to privacy and security, so let’s
fix that too. And while we’re at it, let’s
add in some rules for health savings accounts.
How about some fraud and abuse provisions, while we’re at it? Sure, and maybe a little malpractice reform
as well. A nice simple idea, and we end
up with an Act with 5 Titles, dozens of subtitles (all of what we are talking
about when we talk about HIPAA is actually the Administrative Simplification
subtitle of Title II of HIPAA), and hundreds of pages of law, not to mention
thousands of pages of regulations generated just by the Administrative
Simplification subtitle.
So what started as a bill to
end job-lock ended up as the Health Insurance Portability and Accountability
Act. That’s one P, two A’s (huge pet
peeve: “HIPPA.” Do that in my health law
class and you’ll lose a point or two).
And the P stands for Portability, which was the locomotive that pulled
all these other parts over the finish law and into the US Code.
All this privacy and security
stuff? That’s just gravy, baby.
Jeff [1:10 AM]
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