Saturday, July 28, 2012

Where is the risk?

That’s the question Thomas Cox, an RN with insurance experience and expertise, says should be asked about any health care financing mechanism.

The whole idea of insurance is distributing risk widely so that it can be shared over a wide group of people and thus become manageable. That’s why people need insurance at all, and that’s also why schemes that put too much of the onus on individuals are a very bad idea – as has happened in recent years to a number of people,  the “insured” individual can incur costs that are more than he or she can bear.

In general, insurance is most solid when it’s over a larger group. Each major increase in group size distributes the risk further and makes the healthcare financing system stronger. Cox has an interesting paper on this which he presented at an American Statistical Association meeting.

In general, large insurers are an order-of-magnitude more sound than small ones, and nationwide insurance systems (such as Medicare) have a distinct actuarial edge over state-based insurance (think, for example, California earthquake). For this reason, it’s a shame that the Affordable Care Act (ACA) has state exchanges as its primary mechanism rather than one single federal exchange; risk dispersal is inferior.

Looking at the risk question, there’s a real problem with affordable care organizations (ACOs), which are one of the primary ways the ACA aims to keep down future costs. Essentially, ACOs are a form of capitation, and (Cox maintains and I think he’s right) capitation is essentially a mechanism to push risks down from the insurer or from Medicare to providers. Pushing risks to smaller groups is a terrible idea and will worsen the system. With ACOs having  smaller covered populations, they are far more subject to being the victim of events they can’t control, whether that’s having a large number of huge-cost, high-needs patients in a single year or having a large number of patients affected by an epidemic or natural disaster.

Providers are not trained or qualified to manage risk well, nor do they have the financial reserves to do so.  Cox calls this “professional caregiver insurance risk.”  Burdening providers with a task they are very ill-suited for is a truly bad idea. As Cox comments:

Pushing risks elsewhere removes the only real function we are paying insurance companies for.  If insurance companies are pushing down their risks elsewhere, we are paying them money for nothing of value. Insurance companies don’t provide healthcare – if they don’t manage risk either, what good are they? Of course, if they can sit there and siphon off profits without taking risks, it may not trouble profit-making insurers . . . but it should trouble the public [if they are] issuing policies, passing the insurance risks on to health care providers, and walking off with guaranteed profits year after year.

And (particularly for the ACO that has been “unlucky” and has incurred larger-than-expected costs), the financial risk can be a force for corruption, pushing organizations toward denying care and undertreatment.

Of course, with the enormous amount of unnecessary care and overtreatment in the US medical system today, some ACOs may indeed manage to give really good care for quite a while provided they are reasonably lucky. But this is a strategy with diminishing returns (as unneeded care dwindles in amount). At root, pushing down insurance risk to smaller entities is, Cox has persuaded me, a fundamentally flawed direction.

And I’ll never look at a health care financing proposal in future without asking myself: “Where is the risk?”


Thomas Cox PhD RN said...



Steve Lucas said...

I am having a debate on another blog about the nature of Medicaid as insurance. I feel that Medicaid is a transfer payment and does not meet my criteria for insurance since it has no defined premiums, income stream, and no investment vehicle to offset cost, payments.

Medicare has an income stream tied to payroll taxes, but no investment vehicle. People traditionally receive more in benefits than they pay into the system. The difference is made up through general tax receipts.

I do believe that a fair debate could take place regarding the nature of our insurance industry as it now appears to be run for the benefit of shareholders and not policy holders.

My feeling is that as a transfer payment Medicaid cannot be supported by the general public. We cannot raise tax revenues high enough to offset an already costly system with no end in sight of cost increases.

We already spend twice per patient on care compared to other countries.

Medicaid has no cost constraints.

My wife dealt with people on welfare and they all wanted the “Magic Card”, Medicaid. Why go to the doctor for a cold when a 911 call brings an ambulance and a trip to the ER.

We need to have the national debate about how we will fund and what limits we will place on medical care. Simply put, taxing the rich will not work since those making over $74,000 already pay over 70% of taxes.

There is a small group that needs the help that only we can provide working as a whole. The problem becomes in expanding this group with no limits on cost and no defined income stream.

The “risk” is that with half of the population not paying taxes the cost to the remaining population will be unsustainable.

Steve Lucas

Keith said...

We will not be able to constrain health care costs without providers having some incentive to restrict utilization. The inherent problems with fee for service is that it drives providers to sell more and more of their services and in many cases utilize more expensive treatment options as their first choice where less expensive options are available.

There are ways to develop shared risk models where organizations have potential insulation from downside risk, but insurance companies and providers can be rewarded for constraining costs. this is what will be necessary to develop a new structure under which ACOs operate that can potentially offer better and more efficient health care to its members.

Having been victimized by insurance companies during the HMO era where exactly the problem you pose developed, organizations are unlikely to make the same mistake. During that time, IPOs went bankrupt on a regular basis due to lack of leverage with insurers and an inability to handle downside risk. Hopefully this will not happen gain

APeticola said...

Keith, you are right about we can't have unlimited utilization, but what mechanisms do you think there are so that "hopefully this will not happen again."

Salaried providers don't have as strong incentives for either over- or under-utilization. In the long run I think it is problematic to incent underutilization; but incenting overutilization has indeed been a disaster.

So, how do we provide a BALANCED set of incentives?

APeticola said...

Steve, your comment made me tear my hair out (figuratively). First of all it's simply a lie that half the population doesn't pay taxes. Given sales taxes, property taxes (indirectly paid even by renters), and payroll taxes, virtually everyone DOES pay taxes.

Secondly you gripe about "those making over $74,000 already pay over 70% of [income] taxes" without putting that in perspective on what percent of national earned income "those making over $74,000" comprise -- so it's totally out of context, and meaningless without that information. (For full context, we also need to look at the assets of those making over $74,000. According to , the top 20% -- which would draw the line at about $80,000 in income a little above where you did -- owned in 2007 owned 85% of the assets so, by that yardstick, they should certainly be paying MORE in taxes than they do.)

By the way, the top 1% owned 50% of the assets with the next 19% owning 35% of the assets. Probably the top 1% are the MOST undertaxed group.

BS that we can't cover everyone when plenty of other countries DO.

Steve Lucas said...


Let’s start with your last statement that other countries cover all of their people and somehow I am opposed to that concept. No where in my comment did I make that statement. In fact based on our cost system we could cover everyone in the US. My concern is cost, enough of that straw man argument.

Now on to everyone pays taxes. True, but the only reliable measure we have are income taxes. Once again people receive more in social Security and Medicare benefits than they pay into that system. Regarding sales and property tax, it cost to be a part of a functioning society. Roads and schools come to mind and even the very poor use roads and schools.

Moving on to your asset comment: Any banker can explain the difference between assets and income, unless you are stating that people should give up their houses, since this is the number one asset of most Americans.

Some of your other questions can best be answered by reading the July 23, 2012 WSJ article The Latest News on Tax Fairness by Ari Fleischer. One interesting quote:

“A new Congressional Budget Office report shows that the share of taxes paid by the top 20% has gone up over the last 30 years, while the share of taxes paid by everyone else has gone down.”

During the 50’s, 60’s and 70’s England became more and more liberal and then in the 80’s a more conservative government was elected resulting on one of the world’s strongest economies today

Germany likewise saw the 70’s 80’s and 90’s lead to a great deal of internal turmoil due to social policy. A center left government was elected ushering in a time of economic reality where spending had to match income.

Canada’s national tax rate will soon match ours, and their corporate rate will be lower, while still having higher local sales taxes and a higher national tax participation rate.

The whole point of my comment was that Medicaid is not insurance. It is a government obligation to pay, what is now, the unlimited cost of medical care for any qualified individual. This is not a program we can financially sustain.

With your focus on assets I have to ask: Are you more interested in wealth redistribution, or a financially sustainable medical care system?

Steve Lucas

Anonymous said...

I watched a friend die while being denied care by an insurance company that was also the healthcare provider. At the same time I am aware of overtreatment in the same service when the insurance company is not them.

If you think that doesn't happen, think again.

Anonymous said...

Steve Lucas said...



What I see is an article full of logical fallacies and straw men arguments designed to ferment some type of class warfare.

Yes there are a few very wealthy people who use the tax code to their advantage. The problem is the Supreme Court has found that we are under no obligation to maximize our tax payments. Deferring income and using depreciation are all legal and often used tax tools. Choosing two examples really begs the point.

Yes, companies do hold profits offshore. What is the point? The IRS is very aware of this and new rules will subject private US citizens to new reporting requirements for the smallest amounts held offshore.

No mention was made of GE taking a Federal bailout and then using the associated loss in its financial unit to minimize taxes. Nor was there a mention of the nationalization of GM as shareholder equity was pushed aside in favor of government and workers, sorry, union ownership. One of the many unique parts of this debacle was GM was allowed to carry forward its losses for tax purposes.

No discussion of the Laffer Curve takes place.

No reference was made to John Maynard Keynes who is often used as the basis for much of our current economic policy. Interesting point is that Keynes was a very successful investor in a very difficult time.

What I see is a self titled “de facto chief tax enforcement officer of the United States” journalist who has staked out an extreme position in order to sell an upcoming book. The author has taken a great many bits and pieces and woven them into a call for a high tax, highly government regulated economy all in the name of “fair.”

Steve Lucas

Anonymous said...

Dividing the risk into smaller parts is a very good method, it allows people to learn and work efficiently on the issue.

Anonymous said...

Dividing the risk into smaller units/parts is a very good method. it helps the people to learn and perform the tasks effectively.