[ 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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