Audio Interview: The Economics of Health Care



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This interview was conducted at WNYC on September 29, 2008.

Andrea Bernstein (Interviewer): Welcome to POV's special series of web conversations surrounding the film Critical Condition. I'm Andrea Bernstein, political director for WNYC in New York and The Takeaway. Critical Condition explores the nation's healthcare crisis through the stories of four families who discover that being uninsured can cost them their jobs, health, home, savings and even their lives. Today I'm talking with Uwe Reinhardt, the James Madison professor of political economy at Princeton University and the show's director, Roger Weisberg. Hello to both of you.

Uwe Reinhardt: Hello.

Roger Weisberg: Good to be with you.

Bernstein: Uwe, let's start with you. The show looks at the healthcare system through the stories of four families. So let's look at healthcare reform as it's proposed by the presidential candidates in the same way. So let's start with Hector Cardenas. He is a warehouse manager -- is and was -- in Los Angeles. At the beginning of the film he has an infected foot, which is an outgrowth of his diabetes. He's insured when the film starts, but he makes a set of decisions based on the fact that he's worried about losing his job if he has to take time off of work and therefore losing his insurance. What would have been different for Hector Cardenas if John McCain's healthcare plan were to pass essentially intact?

Reinhardt: Well, John McCain's people would tell you that they gave him $5,000 tax credit with which he could have bought private insurance and he would have had portable insurance distinct from his job, and that should have taken care of it. Critics would say, well, for somebody with diabetes, a private individually -- purchased insurance policy might cost more than $5,000 and perhaps the addition he would have to pay out of pocket, it wasn't just him but his family, might be too much for their budget.

Bernstein: So just to be clear, instead of getting an employer based plan through his job, which is paid for before tax money, he would get the money and he could buy it himself on the open market.

Reinhardt: The idea behind the McCain plan is basically to, over time, diminish employment-based insurance. And the way that would happen is, what the employer now spends on the employee would be added to the W-2 form of the employee and the employee would have to pay taxes on that. The tax bill would go up. But the counterpart would be every single person would get $2,500 and the family would get a $5,000 tax credit that would make up for the taxes.

Bernstein: And that's basically $5,000 right off their taxes. It's not the same as a deduction; it's the money that they get to take home with them.

Reinhardt: The take home, yes, it's cash.

Bernstein: It's cash.

Reinhardt: If you -- it's refundable, in other words. If you don't have a job, you can claim the $5,000.

Bernstein: Now, one of the things that informs the McCain plan and a number of Republican plans -- Rudy Giuliani, when he was running for president was also very much behind this kind of plan -- was the idea that if you are out there as a healthcare consumer buying insurance for yourself, you're going to have a different relationship with it. You're going to be looking for bargains, you're going to be making judgments about what healthcare is worth that you wouldn't if you get this kind of an employer based plan. So in this case, in Hector Cardenas's case, what would have happened?

Reinhardt: Well, that's the idea that most of us have frivolous insurance policy with too much coverage and so on. But that is what the American people want. I don't think the American people actually want a product where they have to pay $3,000 to $4,000 deductible out of pocket. And then what can happen, you can get a cheap policy but it turns out in the middle of an illness you just find this policy doesn't cover it. What you thought it did. For example, there was a lady who had leukemia, went to MD Anderson. It was in the Wall Street Journal. And they told her, "Well, your policy doesn't actually cover what it'll cost. You have to put $45,000 cash down just for the diagnosis." And then they said, "Yes, you do have a very serious case of leukemia so now you got to put another $65,000 down." And only then did she discover that in fact, she really wasn't insured. So when you talk about these cheap policies, you get what you pay for. You can get very cheap policies but they have high deductibles or limits at the other end and you discover that just at the moment when you don't want to discover that.

Bernstein: I am sensing a sense of skepticism that this sort of marketplace plan would work. Is there nothing to the idea that if you're actually buying your own health insurance you're going to be savvier and more clever and make more careful economic decisions than if you are in a current sort of employer-based system?

Reinhardt: Well, if you wanted to do that, you might use the Swiss approach, where the benefit package is more or less the same for -- it is the same for everyone. But you can opt for a policy with lower premiums, with a higher deductible and some co-insurance, or if you want first dollar coverage, you pay a higher premium. And you can make that tradeoff. But once you're insured the package is pretty much the same. The idea that you could even imagine all the illnesses that you could get and buy a policy that's tailor-made I think is dubious. An insurance company would really know what to exclude through fine print in order to save money. But you as an ordinary person can't really imagine. I think most of us can't really imagine how easy it is to rack up a $200,000 hospital bill. That is beyond our imagination. How could it cost that much? It wouldn't even be that big a case.

Bernstein: One of the things, Roger, that you've found in your film was that people just have these bills that were completely dissociated from reality. People that were making $14,000 a year that had hundreds of thousands of dollars in medical bills. And one woman in the film just stops answering the phone for that reason, because they can't pay that at all. What happens, Uwe Reinhardt, to the healthcare system when it is billing people who simply cannot pay and have no intention of ever paying because the money just isn't there?

Reinhardt: Well, of course part of the problem is that the health system traditionally has charged uninsured people far higher prices than they would charge a private insurance company. Like, I had a case where the Princeton Hospital charged a father with a child that had pus in his eyes $1,200 for an emergency room visit. And you wonder, why do they even do this cruelty? Well for some of them, they collect this money over time. But mostly they don't on average -- they collect maybe 15 cents on the bill dollar. So it's kind of phony to do this to begin with. I think it would be so easy and it wouldn't be that expensive, to give everyone a basic, decent health insurance package. And then say, if you want really fancy care, always brand name drugs, always single rooms, you have to pay extra. But the basic package I think should be adequate and the same. And we have not managed that.

Bernstein: So let's talk about Hector Cardenas a little bit more and what it would be like under the Obama plan. But Roger, perhaps you can just describe him. He does make an economic decision at the beginning of the documentary about what he's going to do with his foot.

Weisberg: It's a staggering decision. Here's a guy who was told by his doctor that he could save his foot, but it might probably take five or six months. Or he could have that foot amputated now. And because Hector faced the prospect of losing his health insurance in a month, he opted to have his foot amputated. He lost his job anyway, sadly, and then was in this catch-22 where he couldn't afford the permanent prosthesis he needed in order to get back to work, but he needed desperately to get back to work to regain insurance so he could afford that prosthesis. So his is a perfect example of the cruel position that we put the uninsured in in this country.

Bernstein: Now what about Hector Cardenas under the Barack Obama plan? What would be different for him if the Barack Obama plan went through essentially as it is now?

Reinhardt: Well, the Barack Obama plan basically would say, we will help you with subsidies to buy the kind of health insurance that federal employees, our congressmen and women have through the federal employee benefit program. So in other words, his is a very generous package. You would get -- he puts more money down. It's not clear; McCain hasn't come out with what he would do on the delivery side. But Obama basically takes the existing system and just fills the gaps.

Bernstein: He says if you don't have insurance you could get insurance under the same plan that insures federal employees, including members of congress and senators, but that wasn't his -- I mean, he had health insurance. His problem was he was worried about losing it. Is there something in the Barack Obama plan that would catch that kind of an individual in that situation?

Reinhardt: Yes it would because he would get a subsidy if he doesn't have a job and doesn't have the money and he could show, I'm basically destitute, he would essentially get a subsidy large enough so that he gets it for free.

Bernstein: So the subsidy -- I mean, in his case, he has to move out of his house because he can't afford to pay the rent. So in his case, once he lost his job -- I mean, would the subsidy be enough for him to buy an insurance package that would cover a prosthesis?

Reinhardt: That certainly is the intent. Senator Clinton had in her plan the idea, you shouldn't have to spend more than 10% of your family income on insurance. Obama hasn't put that number down, but that would be the intent, to give fairly heavy subsidies. He has in mind -- actually something like $100 billion dollars in subsidies which he would offset with savings, some of us believe might not come about. But there is an intent to give fairly generous subsidies. It is simply a more generous approach.

Bernstein: Now, one of the big discussions in the primary, one of the big debates between Hillary Clinton and Barack Obama was over the issue of mandates. Would everybody be required to opt into the system? Obama said no, because there are certain poor people who don't want to make this decision, but that seems to sort of contradict something that you just said, which is that it would make it possible for people, even in the situation that Hector Cardenas was in, to buy health insurance.

Reinhardt: Well, I think that is a bit of a contradiction. I think the reason Obama and his advisors approached it that way -- they were up against a republican wooden mandate and they didn't want that to be the dividing issue. So they went -- I think Senator Clinton actually had it right in the way that any school of public health would design the kind of plan Senator Clinton had. Obama didn't want to go on a mandate except for children, where he has a mandate.

Bernstein: You feel like that was a political decision?

Reinhardt: Oh, it's a purely political decision. I know the advisors; I talked to them. Because I said, "Hey guys, we are all of us for the mandate, right? So what happened to you guys?" And they said it's a political decision that you just have to make, nor would we budget quite the amount of money that Senator Clinton had had, simply because too much -- the congress won't swallow this. An article by Henry Aaron in today's New Republic, who says if you do it all at once it may all fail. You may have to face it. So the Obama plan was far more driven by politics, while the Clinton plan was far more driven by policy wonkism, you know, what would come out of the Harvard School of Public Health.

Bernstein: Talk about the mandate, because in the Romney healthcare plan in Massachusetts, the one that he instituted when he was governor versus the one that he proposed when he was running for president, does have a mandate. Everybody has to participate in some way. How is that played out?

Reinhardt: It's played out reasonably well, although the state of Massachusetts discovers that they have to exempt more and more people from the mandate who cannot afford to buy insurance with their income, and yet they don't have enough money to subsidize them. So in principle it's still working, in practice they have made a fairly sizable number of exemptions. Hillary Clinton would have experienced that too and Obama says, "Well, let's not even have to debate this at this stage." But we would, nevertheless -- the estimate is they would cover some 18 million uninsured with what they put on the table.

Bernstein: And let's just step back a bit. The theory behind a mandate is that if everybody doesn't opt in, then you don't really have a real insurance system because you have the healthier people, the people less likely to use the system not in the system, and if those ones aren't participating then the sort of theory, the economic theory of insurance doesn't work. Do I have that right?

Reinhardt: Yeah, you get into a death spiral. If you were to say, "You don't have to buy insurance, on the other hand, if you're critically ill, we as a society have a right to let you die." If you had the guts to do this, then this would work. But what we say is, you don't have to have insurance and wink at you, but if you get sick, we'll take care of you. That is the worst of both worlds. So then a young person will not buy insurance because when they get sick, they have the right to buy insurance, guaranteed issue, at a community rate, in other words, at a premium that does not take your health status into account. And Obama has that in his plan. Well, you just invite a death spiral. New Jersey has that system. Community rating, guaranteed issue, but insurance is voluntary and insurance is sky high and healthy people just are not in it.

Bernstein: So is there a lesson there for the presidential candidates?

Reinhardt: Well, I mean the real lesson is ultimately, if you want universal coverage, you have to have a mandate. There's no ifs and buts. What the Obama people saying, well, that'll come later and maybe if we have the money we can do this. Right now, the good politics is not to have a mandate and don't get universal coverage done within, say, the next four years.

Bernstein: There's a discussion going on among some people in the republican party that healthcare is a much more serious issue for the republican party than it has been previously thought. Most recently this was articulated by David Frum in the New York Times Magazine where he was talking about how people's incomes have gone down because their health insurance premiums have gone up. And that the republican party needs to grapple with this much more seriously than it has in the past. Is there a republican way to approach the healthcare crisis? Is there something that sort of incorporates republican principles of lots of individual choice, low taxation, minimum of regulation?

Reinhardt: Yes. The McCain plan, if you gave it to a bunch of policy wonks, they might say, we alter it in two ways. Number one, give rich people a $5,000 tax credit. Why do they need it? Yes, you can even tax them on their employer provided insurance. But rich people don't need help. Number one, concentrate the public subsidies on the poor and instead of $5,000, give $10,000 if a family needs it. That's one. Secondly, you have to organize the insurance market for individually purchased policies so that you have large risk pools so that you can give people policies without taking their own health status into account, so that a perfectly healthy person and someone with diabetes would pay the same premiums. And that's the weakness of the McCain plan, he says on his website, "I will work with the governors to make such risk pools available," but that's not much of a policy, I will work with the governors to do it. He'd really have to say, "This is how I'd do it." And he doesn't do that. And that's why some of us, even those of us who don't want to be political about it, technically say the McCain plan will not cover that many additional people, because the private insurance market for individual policies is not organized. It basically now medically underwrites, which is technical jargon to mean if you're not healthy, if you have diabetes or you've had cancer, your premiums will be much higher than if you didn't. And as long as that is typical of that market, the McCain plan is not going to work.

Bernstein: Let's talk about another one of the characters in the documentary, one of the people, Joe Stornaiuolo. And Roger, maybe you can sort of fill us in on his story. He was someone who had worked as a doorman but was not currently insured.

Weisberg: Yes, he worked all of his life. He lost a finger. When he was in the hospital, he lost his job, and upon losing his job, lost his health insurance. So here was a guy with a chronic liver condition, who could manage his condition as long as he was on medication and had routine primary care. But without insurance, he had none of those things. He ended up getting acutely ill, going into the hospital where they would treat him for these acute illnesses, costing tens of thousands of dollars each time, but they'd send him out, back to his home, without the ability to fill prescriptions, without the ability to go to his doctor to have his condition monitored and he slowly progressively got worse and he died during the year that we were chronicling his struggle.

Bernstein: That was just a year?

Weisberg: Yeah.

Bernstein: It's very dramatic because he just looks so much worse each time you see him and visit with him. But let's take this example of somebody. Is there a way -- you've criticized some elements of the McCain plan -- but is there a way in a sort of Republican-oriented plan that somebody like Joe Stornaiuolo could get, could be able to buy insurance and get his medications in a way that doesn't involve a sort of big, government subsidized plan or is it just impossible?

Reinhardt: No, no, it's not impossible. If you were to go to the Heritage Foundation, people like Stuart Butler, who are well-known economists who wrestle with that issue, with enough subsidies for poor people to buy insurance, you could craft a system where that would work, this market approach. There are some, you know, how well? Whether this is cheap? Is there another approach? But it could be made to work. But you can't make it work -- somebody like him probably couldn't get insurance now in the individual market and you'd have to guarantee that. Plus, if he's out of a job, you'd have to think of more than $5,000 in subsidies. So, yes, it could be made to work, but I don't think at the moment the money that Senator McCain puts on the table plus the total absence of an organized individual insurance market makes this plan very practical.

Bernstein: Now, the big news, clearly, is the economic bailout in Washington right now. Is there a lesson for healthcare reform in what has just happened with the meltdown on Wall Street?

Reinhardt: There's not much of a lesson. I mean, what happened on Wall Street is that there was a faith in the free market where you did not regulate enough and everyone was allowed to make bad decisions, encouraged by some government policies, indeed. There was a policy that made more subprime loans available, the banks did it and they got into trouble. But greed and stupidity really got most of the big banks in trouble, it wasn't government.

Bernstein: It seems to me like those two things could obtain in a healthcare system as well, greed and stupidity.

Reinhardt: Unless you regulate healthcare very, very tightly, yes, you would get all kinds of bad decisions by individuals, by insurance companies. They could, for example, insure people and run out of money. So a health system has to be very tightly regulated to function. And that even thoughtful Republicans understand that only too well. They are now learning what they didn't want to learn, that finance has to be regulated too. And not that finance is complicated. Healthcare is complicated, finance is not. Finance is actually quite simple. What was bad about the finance was the irresponsibility and recklessness of the CEOs. No one, including myself, had anticipated that CEOs of major banks could so manage them as to destroy the banks. No one who's market-oriented -- and I am in many ways -- we're shocked that this happened, really shocked. In healthcare we would have anticipated it because it's a far more complicated arrangement. Insurance is complicated, healthcare is complicated.

Bernstein: So you would be looking for regulation in any system?

Reinhardt: Very tight regulation, oh yes.

Bernstein: And what about the question of money? You've talked about for the McCain plan to work, there'd have to be sufficient subsidies; for the Obama plan to work, there has to be sufficient subsidies. Is the money there now?

Reinhardt: Yes, we have the money. I mean, the best estimate came out a month ago, Jack Hadley, John Holahan and another co-author, they estimate to get universal coverage, to give the uninsured what insured people have, would add about $120 billion to national health spending on top of the $2.3 trillion, so that's a 5% increase. Do we have the money? Well, we spend $10 billion a month in Iraq.

Bernstein: Right but having the $700 billion bailout that is on the table, is there--

Reinhardt: Oh, no, no, but that's a mistake. The $700 billion is just buying a used car [laughs] that you can resell. The assets you are buying for the $700 billion may be worth less, maybe $100 billion less, or they may be worth more. You might even say when everything is said and done, the tax payer will make $50 billion profits on the deal, but that money isn't an expenditure, that money is really just an investment. But you own the assets and they're worth something. So the idea to liken the bailout's $700 billion to defense spending, which is money down the tube, or Medicare, which is spent, down the tube, you're not going to get it back, this you get mainly back. So it shouldn't even be considered.

Bernstein: But is that clear, that it will come back? Since no one is quite sure--

Reinhardt: Not all of it, but certainly the stuff is not worthless. And my former colleague Ben Bernanke thinks, and I think he's right, that if you didn't have to sell them on a fire sale, these assets, but if you could sell them in an orderly market over five years, they are probably, not each, but together, worth more than the $700 billion.

Bernstein: So you think it's basically immaterial to healthcare reform?

Reinhardt: I think it's completely irrelevant to that.

Bernstein: All right, well, we are going to have to leave it there, but I do want to thank you, Uwe Reinhardt, the James Madison professor of political economy at Princeton University and Roger Weisberg, the director of Critical Condition. Thanks.

Reinhardt: Thank you.

This podcast has been supported by The Fledgling Fund. Special thanks to WNYC for their production support.