Some days I love that I have friends who can put this into words clearer than I can.

Go Down Moses

Posted on March 23rd, 2010 by Punning Pundit

H.R. 3590: An Act to amend the Internal Revenue Code of 1986 to modify the first-time homebuyers credit in the case of members of the Armed Forces and certain other Federal employees, and for other purposes.

The bill is big. Not quite so big as the entire vastness of space. Not even– when formatted like a novel– as big as Sarah Palin’s book. Nonetheless, it has an awful lot of moving parts. The biggest of which is contained in that last clause “and for other purposes”. This is the healthcare bill.

Because our media is obsessed with process (rather than policy), most people have a hazy idea of what’s in this bill. I’m not going to tell you every little detail– this post would be bigger than the internet. But let’s start with why this bill is necessary.

Private, for profit, health insurance is incentivized to take in as much money as it can, and pay for as little care as it can. This makes sense– insurance is basically a bet, with insurance companies acting as bookies.* Who wants to take a losing bet? Now the government is going to make companies take on those bad bets as the price of doing business.

The problem is that insurance companies are caught in the charmingly-named “death spiral”. Insurance rates go up (for whatever reason) and healthy individuals (IE: the ones least likely to need insurance) say to themselves “I’m healthy, I can spend that money doing other things”. Since the most healthy (and thus most profitable) have left the system, insurance rates need to go up. The cycle then starts again. Rates climb higher. Eventually no one will be able to afford insurance.

Let’s be clear: if the situation had remained undressed, the health insurance industry would either eat the entire economy, or completely unravel. Or both.

So that’s why congress had to do something. We got… this.

Interestingly, this bill doesn’t change much about the current health care system. Private insurers are still in place for all Americans ineligible for Medicare. Private individuals will be paying private insurers for private health care. Indeed, the insurance companies will now have 32 million more customers.

What it does– instead of nationalizing the system– is close off a lot of the ways insurance companies used to “pay for as little as they can”. It regulates the existing insurance market and creates a new market.

For the last 100-odd years**, and for the next 90 days (until certain provisions go into effect), it has been legal for insurance companies to deny coverage to those with pre-existing conditions. Nor, once someone has insurance, may insurance companies kick someone off their rolls. Everyone is now allowed to place a bet against their health. If an individual wins their bet, the insurance company must pay up.

To make those bets less-risky for insurance companies, they’re now required to cover preventative care. Preventing illness is a lot cheaper than paying out if someone does fall ill, so This is one of those provisions that should help keep the cost of health care from eating our economy.

Insurance companies will no longer be allowed to spend less than (I think) 80% of insurance premiums on things other than medical care. If they do spend less than this, policy holders will be rebated.

And on and on. Like I said, there are a bunch of things in this bill. There are two other important provisions that need to be mentioned.

In most bets– and insurance is no exception– the winners have the best statistics. As anyone who has passed basic stats can tell you: with bigger sample sizes, more accurate predictions can be made. Predictions like “how many people out of a million will get diabetes.” Or a broken foot. Or cancer.

Remember above where I said that insurance companies would no longer be able to say no to anyone who wanted to buy? The smart move would be to wait until after you get cancer to buy insurance. It would be in your interests to roll the dice and then place your bet. The insurance companies would survive this for about 15 minutes.

Therefore each American will be required to buy insurance. Every year, when we file taxes, we’ll be asked to show proof of insurance. If we can’t– or don’t–, the IRS will tell us how to get insurance. If we still don’t, we’ll get a fine of $695, or up to 2.5% of income (whichever is more). If someone can’t afford insurance, they’ll be provided with money to buy insurance. If they’re in the 5% who still can’t afford to buy insurance, they won’t be fined.***

As I said earlier, insurance works best with more people buying into it. This is why it’s cheaper for a company to buy insurance than for an individual to buy insurance– and why Medicare is cheaper than even the largest private insurance companies. What congress just created, and what will soon be set up, are state by state insurance “Exchanges”. Think of Amazon, but for insurance. The exchanges will be open to individuals not covered by their employers, and to employers of fewer than (I think) 50 individuals.

Companies will be competing for dollars. Plans will be placed into “bronze”, “silver” “gold” and “platinum” levels. The difference between the tiers is what percent of your dollar the insurance company expects to pay you back in the form of health care expense. It starts at 65% (bronze) and goes to 90% (platinum).

Because insurance companies will be offering very similar products, they’re going to have to start competing on price. Rather than individuals “bidding up” the cost of insurance (because we have no market power), insurance companies will have to start “bidding down” prices– because they want access to 32 million customers.

With luck, this competition among firms will cause prices to fall and quality to rise. That’s what Adam Smith said back when he wrote Wealth of Nations. It works pretty well in most industries.

And that’s… well, that’s not nearly everything in this bill. I didn’t even mention that starting next year restaurants with 20 or more locations will have to post calorie information next to prices. Nor did I mention the “comparative effectiveness reviews”– the government is going to start trying to figure out which treatments work, and which are useless. Anyone looking for a list of what this bill does should read this PDF. It was put together using your tax money– go read it!

This bill is not the end goal we lefties have been fighting for. Rather, it’s half a loaf– and a bread machine. With today’s signing, however, Obama has begun to unshackle America from the tyranny of a badly broken medical care system.

Listen here

*Just to drive this point home, I’m going to use “insurance” and “bet” interchangeably throughout this post.
**And what odd years they’ve been!
*** How much would it suck to be too rich to get subsidies, but too poor to afford insurance? We should fix that…