December 16, 2019

Economix Blog: Uwe E. Reinhardt: What Hospitals Charge the Uninsured

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Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

Steven Brill’s exposé on hospital pricing in Time magazine predictably provoked from the American Hospital Association a statement seeking to correct the impression left by Mr. Brill that the United States hospital industry is hugely profitable.

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In this regard, the association can cite not only its own regularly published data, but also data from the independent and authoritative Medicare Payment Advisory Commission, or Medpac, established by Congress to advise it on paying the providers of health care for treating Medicare patients.

As shown by Chart 6-19 of Medpac’s report from June 2012, “Health Care Spending and the Medicare Program,” the average profit margin (defined as net profit divided by total revenue) for the hospital industry over all is not extraordinarily high, although for a largely nonprofit sector I would rate it more than adequate.

Medicare Payment Advisory Commission

But in each year there is a large variance about that year’s average shown in Chart 6-19, with about 25 to 30 percent of hospitals reportedly operating in the red and many others earning margins below the averages.

The hospital association also correctly points out that under the pervasive price discrimination that is the hallmark of American health care, the profit margin a hospital earns is the product of a complicated financial juggling act among its mix of payers.

Payers with market muscle — for example, the federal Medicare and state Medicaid programs — can get away with paying prices below what it costs to treat patients (see, for example, Figure 3-5 and Table 3-4 in Chapter 3 of Medpac’s March 2012 report).

With few exceptions, private insurers tend to be relatively weak when bargaining with hospitals, so that hospitals can extract from them prices substantially in excess of the full cost of treating privately insured patients, with profit margins sometimes in excess of 20 percent.

Finally, uninsured patients — also called “self-pay” patients — have effectively no market power at all vis-à-vis hospitals, especially when they are seriously ill and in acute need of care. Therefore, in principle, they can be charged the highly inflated list prices in the hospitals’ chargemasters, an industry term for the large list of all charges for services and materials. These prices tend to be more than twice as high as those paid by private insurers.

To be sure, if uninsured patients are poor in income and assets, they usually are granted steep discounts off the list prices in the chargemaster. On the other hand, if uninsured patients are suspected of having good incomes and assets, then some hospitals bill them the full list prices in the chargemaster and hound them for these prices, often through bill collectors and even the courts.

It is noteworthy that in its critique of Mr. Brill’s work, the association statement is completely silent on this central issue of his report. A fair question one may ask leaders of the industry is this:

Even if one grants that American hospitals must juggle their financing in the midst of a sea of price discrimination, should uninsured, sick, middle-class Americans serve as the proper tax base from which to recoup the negative margins imposed on them by some payers, notably by public payers?

My answer is “No,” and I am proud to say that when luck put in my way an opportunity to act on that view, I did.

In the fall of 2007, Gov. Jon Corzine of New Jersey appointed me as chairman of his New Jersey Commission on Rationalizing Health Care Resources. On a ride to the airport at that time I learned that the driver and his family did not have health insurance. The driver’s 3-year-old boy had had pus coming out of a swollen eye the week before, and the bill for one test and the prescription of a cream at the emergency room of the local hospital came to more than $1,000.

By circuitous routes I managed to get that bill reduced to $80; but I did not leave it at that. As chairman of the commission, I put hospital pricing for the uninsured on the commission’s agenda.

After some deliberation, the commission recommended initially that the New Jersey government limit the maximum prices that hospitals can charge an uninsured state resident to what private insurers pay for the services in question. But because the price of any given service paid hospitals or doctors by a private insurer in New Jersey can vary by a factor of three or more across the state (see Chapter 6 of the commission’s final report), the commission eventually recommended as a more practical approach to peg the maximum allowable prices charged uninsured state residents to what Medicare pays (see Chapter 11 of the report).

Five months after the commission filed its final report, Governor Corzine introduced and New Jersey’s State Assembly passed Assembly Bill No. 2609. It limits the maximum allowable price that can be charged to uninsured New Jersey residents with incomes up to 500 percent of the federal poverty level to what Medicare pays plus 15 percent, terms the governor’s office had negotiated with New Jersey’s hospital industry.

I wouldn’t be surprised if the New Jersey hospital industry was cross at me and the commission for our role in the passage of Assembly Bill 2609. The commission took the view that it helped protect the industry’s image from some of its members’ worst instincts.

In that spirit, I invite the American Hospital Association to join me in urging federal lawmakers to pass a similar law for the nation. Evidently the mere guidelines on hospital pricing that the association published in 2004 have not been enough.

Indeed, in 2009 I had urged the designers of the Affordable Care Act to include such a provision in their bill — alas, to no avail. Courage to impose it on the industry had long been depleted.

Article source: http://economix.blogs.nytimes.com/2013/03/15/what-hospitals-charge-the-uninsured/?partner=rss&emc=rss

Today’s Economist: Uwe E. Reinhard: The Complexities of Comparing Medicare Choices

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Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

The roughly 50 million Americans covered by the federal Medicare program have a choice of receiving their benefits under the traditional, free-choice, fee-for-service Medicare program or from a private, managed-care Medicare Advantage plan. The private plans have a steadily increasing number of enrollees — currently 13 million, or 27 percent of beneficiaries.

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A fundamental question that has engaged health-policy researchers and commentators for some time is whether coverage of Medicare’s standard benefit package under Medicare Advantage plans is cheaper or more expensive than it is under traditional fee-for-service Medicare.

The answer is yes.

At the risk of going over ground already covered in Economix and in the scholarly literature on the subject, this answer may warrant some explanation.

The latest round in the debate over the question was begun in August 2012 by Zirui Song, David M. Cutler and Michael E. Chernew in their paper “Potential Consequences of Reforming Medicare Into a Competitive Bidding System.” In that paper, the authors explored how much more above their regular Part B premiums the elderly would have had to pay in 2009 to either a Medicare Advantage plan or to traditional Medicare if the much-debated Ryan-Wyden plan for Medicare had been in place that year.

That plan would have established a Medicare Exchange — a federal version of the insurance exchanges envisaged under the Affordable Care Act — on which Medicare beneficiaries could have chosen among private health plans that would compete with traditional Medicare on the same terms, that is, on the same competitive platform.

Each private plan would have had to offer a benefit package that covered at least the actuarial equivalent of the benefit package provided by the traditional fee-for-service Medicare. Medicare’s contribution (or “premium support”) to the full premium for any of these choices, including traditional Medicare, would have been equal to the “second-least-expensive approved plan or fee-for-service Medicare” in the beneficiary’s county, whichever was least expensive. That premium support payment would have been adjusted upward for the poor and the sick and downward for the wealthy.

Drs. Song, Cutler and Chernew estimated that on the basis of a national average the second-lowest bids actually submitted by private health plans in the various counties and regions in 2009 were 9 percent below the comparable average per-beneficiary cost of traditional Medicare.

Close to 70 percent of the beneficiaries in 2009 would have had to pay more than their traditional Part B premiums to stay in traditional Medicare. About 90 percent of beneficiaries in private Medicare Advantage plans in 2009 would have paid more than they actually did in that year.

These figures suggest substantial savings for United States taxpayers, although not for beneficiaries. Mindful of the beneficiaries, the authors ended their paper with reservations about the Ryan-Wyden plan, rather than an enthusiastic endorsement.

In an acerbic comment on that paper, published in The Weekly Standard, James C. Capretta and Yuval Levin saw in the authors’ numbers strong support for Ryan-Wyden or similar market-driven plans and sharply took the authors to task for their interpretation of the data.

But so far the Ryan-Wyden plan is only theory. In fact, as is by now widely known, enrollment of Medicare beneficiaries in private Medicare Advantage plans actually has cost taxpayers considerably more than it would have cost had the same beneficiaries stayed in traditional fee-for-service Medicare. As the Medicare Payment Advisory Commission, or Medpac, observes in its March 2009 report to Congress (see Page 252):

In 2009, payments to MA plans continue to exceed what Medicare would spend for similar beneficiaries in FFS. MA payments per enrollee are projected to be 114 percent of comparable FFS spending in 2009, compared with 113 percent in 2008. This added cost contributes to the worsening long-range financial sustainability of the Medicare program.

These extra payments to Medicare Advantage plans in 2009 have been estimated at $11.4 billion.

How, then, is one to reconcile these contradictory claims over the likely benefits from competitive bidding for Medicare’s business by private health plans?

The answer can be found in the bureaucratic arrangement enacted as part of the Medicare Prescription Drug, Improvement and Modernization Act of 2003.

Remarkably, the Republican authors of that bill in the White House and in the Congress — usually self-proclaimed champions of market-driven competition – eschewed that approach in favor of a statutory, administrative algorithm so complex as to defy description within the space of this post (for details see this Commonwealth Fund document).

Most likely, the bureaucratic route was chosen at the behest of private insurers that would have insisted that a truly competitive approach required traditional Medicare to be treated as just another health plan competing with private plans on identical terms. In the process, however, the industry managed to extract from Congress remarkably generous terms.

Under those terms, Medicare’s benchmark for a county or region is not based on competitive bids at all but is administratively set with appeal to the average spending per beneficiary in traditional fee-for-service Medicare in the county or region in which a beneficiary resides, albeit with a variety of adjustments that push the resulting county or regional benchmarks considerably above per-beneficiary spending under traditional Medicare. Austin Frakt neatly illustrates the resulting benchmarks graphically.

In this system, the private plans do submit premium bids for a statistically average (“standard”) beneficiary in the relevant county or region, and for Medicare’s standard benefit package. These so-called standard bids are the actual bids used in the Song, Cutler and Chernew analysis.

If a Medicare Advantage plan submits for a county or region a standard bid above Medicare’s relevant benchmark, the plan is paid by Medicare a “base rate” (for the statistically average beneficiary) equal to that benchmark. It means, of course, that the plan is paid more than the relevant per beneficiary spending under traditional Medicare. The Medicare Advantage plan must then collect the difference between its bid and the benchmark from the enrollee (on top of the Part B premium the enrollee must pay in any event).

Medicare’s payment to the plan for a particular enrollee, however, is not just the “base rate.” The actual payment quite properly reflects the individual beneficiary’s actuarial risk. That multiplicative adjustment is clearly illustrated in Figure 1 of this Medpac publication, where it is called “CMS-HHS Weight.”

On the other hand, if a Medicare Advantage plan’s bid is below Medicare’s relevant benchmark, then that plan is paid its bid plus a fixed percentage of the difference between its bid and the benchmark, a so-called rebate. Most of that rebate must be spent by the plan on added benefits not in Medicare’s standard benefit package, although some undoubtedly flows into profits.

For 2012, the fixed percentage for the rebates ranges from 67 to 73 percent, depending on a quality rating score. After 2014, the fixed percentages will be 50, 65 and 70 percent, depending on the plan’s quality rating.

The table below, a reproduction of Table 12-3 of the March 2012 Medpac Report to Congress, exhibits the nationwide averages of the Medicare benchmarks, the standard bids by plans and the projected payments to plans under this complex “bidding” system. The different types of plans (health maintenance organizations, preferred provider organizations and private fee-for-service plans) were described in an earlier post. Special-needs plans concentrate on patients requiring home care or other special care. Employer plans are offered by particular employers.

Medpac, Medicare Payment Policy, Report to Congress, March 2012

It is seen that all Medicare Advantage plans together and especially H.M.O.’s do appear to bid less on average than per-beneficiary spending under traditional Medicare. That would seem to justify the argument that, on average, under genuine competition Medicare Advantage plans as a group would be cheaper than traditional Medicare.

These differentials — here two percentage points for all Medicare Advantage plans and five percentage points for H.M.O.’s — are a bit misleading, however, because the traditional Medicare spending figures include add-ons that are not part of providing health care to Medicare beneficiaries. Traditional Medicare makes payments for graduate medical education and so-called disproportionate share payments to hospitals that treat a disproportionate share of Medicaid patients or uninsured patients. Private Medicare Advantage plans do not have to make such payments.

There is the additional suspicion that even after risk adjustment, the private Medicare Advantage plans still benefit to some extent from favorable actuarial risk selection.

So the question remains: Is coverage of Medicare’s standard benefit package under private Medicare Advantage plans cheaper or more expensive than it is under traditional fee-for-service Medicare?

Readers now know why the correct answer is yes.

Whether Congress will ever have the temerity to foist upon vendors to the Medicare program truly raw price competition remains an open question. Traditionally vendors to government have preferred administered prices, for reasons evident in the table above.

Article source: http://economix.blogs.nytimes.com/2013/01/04/the-complexities-of-comparing-medicare-choices/?partner=rss&emc=rss

Economix Blog: Uwe E. Reinhardt: How Medicare Is Misrepresented

DESCRIPTION

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

A common phrase in the current debate over the so-called fiscal cliff is “Medicare needs to be restructured.” The term serves as code for policies unlikely to be appealing to voters, a term that can mean everything and, thus, nothing.

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The question is what problem restructuring is to solve in traditional Medicare, which remains one of the most popular health insurance programs in this country. People who use this vague term should always be challenged to explain exactly why and how Medicare should be changed.

Critics of traditional Medicare – even those who should know better – often accuse it of being “fee for service.” It is a strange accusation. After all, fee-for-service remains the dominant method of paying the providers of health care under private insurance, including Medicare Advantage, the option of private coverage open to all Medicare beneficiaries.

Describing Medicare as fee-for-service insurance is about as thoughtful as describing a horse as “an animal that has four legs,” a characteristic shared by many other animals. The practice is particularly odd, given that traditional Medicare as early as the 1970s was the first program to develop so-called “bundled payments” for hospital inpatient care – the diagnostically related groupings, known as D.R.G. – in place of fee-for-service payment of hospitals, an innovation that has since been copied around the globe.

A more descriptive term for traditional Medicare would be “free choice of providers” or “unmanaged care” insurance. These features, of course, would hardly be viewed as shortcomings among people covered by traditional Medicare or their families. Neither term would be a good marketing tool among voters for proposals to abandon traditional Medicare.

In this regard, it may be helpful to list the various contractual relationships that can exist between the insured and insurers, on the one hand, and the various methods of paying the providers of care, on the other:

Indemnity Insurance: This is the oldest form of health insurance. It offers the insured free choice of health care provider and of treatment, which is why such policies tend to be expensive.

Under indemnity insurance, providers of care are typically paid on a fee-for-service basis. Insurers usually pay a stipulated fraction (say 80 percent) of the providers’ bills for covered services. Patients absorb the rest in the form of deductibles and coinsurance (e.g., 20 percent of the providers’ bill). Under some policies, insurers ask patients to pay providers first and then seek reimbursement from the insurer.

Managed-Care Contracts: The other three insurance contracts shown in the display – H.M.O., P.P.O. and P.O.S. contracts – are generally lumped together under the generic term “managed care.” It is another ill-defined term that can mean a host of specific limitations on the insured’s freedom of choice.

Doctors may assert that it is they who manage the medical treatments. But in health-policy circles, the term managed care means that the doctor’s medical treatments are subject to external constraints imposed by a private regulator — the patient’s health insurer — although, in principle, public insurers could “manage” care as well, if legislators permitted it.

These externally imposed constraints may take the form of formularies for prescription drugs or prior authorization by the insurer for specific procedures – e.g., expensive imaging or elective surgery – before the insurer agrees to pay for the procedures. They may mean exclusion from coverage of procedures deemed by the insurer to have a low expected benefit-cost ratio. While Congress forbids Medicare to let cost-benefit analysis guide its coverage decisions, private insurers are not subject to that constraint.

Finally, managed care techniques might include the external coordination of medical treatments that involved multiple providers of health care, especially the treatment of chronic disease, often by subcontracted companies specializing in care coordination.

These are the major forms of managed care insurance contracts.

Health Maintenance Organizations (H.M.O.): These contracts represent the most restrictive form of managed care. The insurer provides covered health care benefits through a network of health care providers under contract to the insurer, with zero or very modest cost-sharing at point of service on the part of the insured.

In a staff model H.M.O., the insurer actually owns the health care facilities and health professionals are the insurer’s salaried employees. More commonly, the H.M.O. merely contracts with a set of otherwise independent providers that are paid negotiated fees or, for primary care, sometimes annual capitation payments per patient on the doctor’s list.

Usually, in an H.M.O., the insured is asked to select one from a roster of primary-care doctors who regulates referrals to specialists. In principle, under an H.M.O. contract the insured is confined to the H.M.O.’s network of providers for covered services and pays in full out-of-pocket for health care procured outside that network.

Preferred Provider Organizations (P.P.O.): A popular alternative to the strictly limited choice under H.M.O.’s is a Preferred Provider Organization. Under that contract, the insurer negotiates prices with a network of “preferred” providers of care and the insured can contact specialists without a required referral by a primary-care doctor.

For the most part these providers in the network are paid on a fee-for-service basis as well, often X times the Medicare fee schedule, where X could be smaller than 1 but usually exceeds 1, where X is negotiated between the insurer and providers. The insured usually faces an annual deductible and relatively modest copays (dollar amounts, not fractions of the fees) if they obtain care from a provider in the network.

If the insured obtains care from a provider outside the P.P.O.’s network, the insurer will reimburse the insured only at what the insurer considers a reasonable fee, leaving the insured to pay any billed fee above that reimbursement. According to a report by the American Health Insurance Plans, these out-of-network fees can be exorbitantly high, which serves as a natural constraint on the free choice of provider under P.P.O.’s.

Point of Service (P.O.S.) Contracts: These contracts are combinations of H.M.O. and P.P.O. contracts. The insured still must select a primary-care doctor who coordinates the insured’s overall medical care, but patients can procure covered care from providers outside the H.M.O.’s network, albeit at high rates of cost-sharing. In that regard the arrangement resembles a P.P.O.

High-Deductible Health Plans (H.D.H.P.): These contracts couple indemnity- or preferred-provider (P.P.O.) insurance with very high annual deductibles, sometimes exceeding $10,000 for a family. The theory is that by putting the insured’s skin in the game, these plans will give patients an incentive to shop around for cost-effective health care. Some call them “Consumer-Directed Health Plans” (C.D.H.P.’s), because in theory they elevate “consumers” (formerly “patients”) to act as the chief managers of their own health care. However, the requisite information for shopping around has not generally been available to patients, forcing them to function in health care as would blindfolded shoppers in a department store.

What the critics of traditional, government-run Medicare actually find wanting in traditional Medicare is that it basically is classic indemnity insurance. It offers its enrollees free choice of doctor, hospital and other providers, and doctors relatively free choice of treatments, while most private insurers typically no longer do.

In other words, the complaint is that health care rendered under traditional Medicare is unmanaged care. These features, of course, are precisely the reason why in the eyes of the public traditional Medicare is still one of the most popular insurance products.

A case can be made, on theoretical and sometimes empirical grounds, that properly managed or coordinated care can on average yield superior medical treatments, at lower cost, than completely unmanaged care under classical indemnity insurance.

The problem has been and continues to be that this is not the folklore among patients or doctors. The latter, as noted, generally believe they can manage their patients’ care properly without outside interference into their clinical decisions. Among patients and doctors, the term managed care is still not quite respectable.

This can explain why critics of traditional Medicare delicately but nonsensically prefer to decry it as being fee for service rather than as free-choice-of-providers insurance or unmanaged-care insurance.

Article source: http://economix.blogs.nytimes.com/2012/12/07/how-medicare-is-misrepresented/?partner=rss&emc=rss

Economix Blog: Uwe E. Reinhardt: The Role of Prices in Health-Care Spending

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Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

The term “health care” evokes different images in people’s minds. To patients who find a miraculous cure, health care may be almost sacred. For physicians, nurses and other health care professionals it is a compassionate human activity. To hard-nosed economists, health care represents just another exchange of favors embedded in a wider market economy that consists of exchanging favors.

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The chart below illustrates this exchange. Some members of society surrender real resources — their time, amplified by their skill or the health care products they produce — to the process of patient care, which is meant to improve the patients’ quality of life. In return, society issues these providers of real health care resources generalized claims (money) on all the things included in gross domestic product.

Thus, the health care sector of any country always has the dual goals of enhancing the quality of life of patients as well as enhancing the quality of life of the providers of health care, and, charity care aside, patients are at once objects of compassion and biological structures yielding cash.

We express the generalized claims given to the providers of real health care resources either in dollar terms per-capita or as a percentage of G.D.P. The chart below illustrates the fraction of G.D.P. ceded to the providers of health care in a number of different countries over the last three decades.

Although not all countries can be featured in such a chart, the fact is that no other country cedes quite the slice of its G.D.P. to the providers of health care as does the United States. Current projections are that health care will claim every fifth dollar (19.8 percent to be precise) of G.D.P. in the United States by 2020.

Organization for Economic Cooperation and Development, 2011

It follows from the first chart that the claim on G.D.P. that a nation cedes to its providers of real health care resources does not tell us what real resources patients receive in return, let alone what value these resources have to patients (see, for example, this report).

That is because the size of the claim on G.D.P. depends not only on the quantity of real resources surrendered to the process of health care, but also the price paid the providers per unit of real resource. In theory, it would be quite possible that in two otherwise identical countries exactly the same real resources are surrendered to health care and yet the slice of G.D.P. ceded to the providers of these resources in return could differ.

In this regard, a study by Miriam Laugesen and Sherry Glied, published last week in the health-policy journal Health Affairs warrants careful review. The authors assert:

Higher health care prices in the United States are a crucial reason that the nation’s health spending is so much higher than that of other countries. Our study compared physicians’ fees paid by public and private payers for primary care office visits and hip replacements in Australia, Canada, France, Germany, the United Kingdom and the United States. We also compared physicians’ incomes net of practice expenses, differences in financing the cost of medical education and the relative contribution of payments per physician and of physician supply in the countries’ national spending on physician services.

Public and private payers paid somewhat higher fees to United States primary care physicians for office visits (27 percent more for public, 70 percent more for private) and much higher fees to orthopedic physicians for hip replacements (70 percent more for public, 120 percent more for private) than public and private payers paid these physicians’ counterparts in other countries. U.S. primary care and orthopedic physicians also earned higher incomes ($186,582 and $442,450, respectively) than their foreign counterparts. We conclude that the higher fees, rather than factors such as higher practice costs, volume of services or tuition expenses, were the main drivers of higher U.S. spending, particularly in orthopedics.

Other studies point in the same direction. An early one, “U.S. Health Care Costs: The Untold Story,” by the health economist Mark Pauly, was also published in Health Affairs. Professor Pauly showed that a good many nations in Europe actually transferred more real human health-care resources to patients than did Americans – suggesting that the real-resource cost of European health care is higher than it is in the United States (or was, at the time of the study). But these other nations paid physicians and other health personnel less than do Americans.

Higher physician income, of course, cannot explain all or most of the total higher health spending in the United States, as payments for “physician- and clinical services” constitute only about 20 percent to total current health spending ($538 billion out of a total of $2.7 trillion in 2011) and close to half of those payments tend to go for practice expenses, including support staff, malpractice insurance and claims processing.

But prices of other, non-physician health-care services and products in the United States also seem to be higher than elsewhere, as is suggested by the annual surveys of health care prices conducted by the International Federation of Health Plans in their comparative price reports.

None of these cross-national studies are perfect, but together they do suggest that Americans pay more for individual health care services – not only physician services – than do residents of other countries, and that this must contribute to the higher level of health spending in the United States.

What one should make of this finding is another matter. Professor Laugesen and Ms. Glied refrain from going down that route. They merely present the facts as they see them.

Critics of this study will properly point out the enormous methodological hurdles one faces in making cross-national comparisons of this sort. But it is not a compelling argument to suggest that because a study of this sort cannot be done perfectly it should be ignored. My response to the critics: Try to do better!

Article source: http://feeds.nytimes.com/click.phdo?i=4ab1e57db59d9a35f12497332be92339

Economix: The Economics of Privately Sponsored Social Insurance

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Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

On March 23, Senator Ron Johnson, Republican of Wisconsin, marked the first anniversary of President Obama’s signing into law of the Affordable Care Act of 2010 by publishing a commentary in The Wall Street Journal, “ObamaCare and Carey’s Heart.”

He began with a touching celebration of the life-saving operation that had been performed some 27 years ago by highly skilled surgeons on the senator’s young daughter, who was born with a serious heart defect. He noted that this undoubtedly expensive operation had been financed by a “run-of-the-mill plan available to every employee of an Oshkosh, Wis., plastics plant.”

His commentary suggests that he views this “free market” approach to financing health care as the foundation of our health system’s remarkable innovations and achievements.

Senator Johnson’s commentary then veered into a sharp broadside aimed at the Affordable Care Act of 2010:

I don’t even want to think what might have happened if she had been born at a time and place where government defined the limits for most insurance policies and set precedents on what would be covered. Would the life-saving procedures that saved her have been deemed cost-effective by policy makers deciding where to spend increasingly scarce tax dollars?

Not surprisingly, this comment elicited much critical commentary, some of it needlessly vehement.

I do not wish to join that a vituperative chorus, because there is much I admire in the senator. He worked hard in his youth to put himself through the University of Minnesota and studied at night for a master’s of business administration, and he eventually risked his own money and used his vision and even harder work as an entrepreneur to please customers worldwide and, in the process, create a good livelihood for his family and for his employees. I look up to such entrepreneurs. We all should.

Even so, I am puzzled about why the senator does not see in the Affordable Care Act a sincere attempt to replicate his family’s fine health care experience for millions of low-income, uninsured Americans.

The idea is to help those with family incomes above 133 percent of the federal poverty level (currently about $30,000 for a family of four) procure — on an organized state- or federally run health-insurance exchange — community-rated, publicly subsidized, private health insurance of the sort that financed his daughter’s cure.

A government-run health insurance exchange is not such a novel idea, nor should it be controversial. The federal government’s Office of Personnel Management has for decades run such an exchange for every member of Congress and for federal employees, and very successfully, by all accounts.

To see why the Affordable Care Act is actually trying to mimic employment-based private health insurance, let me propose this definition: Employment-based group health insurance, American style, is publicly subsidized, privately sponsored, community-rated social insurance sold to American employees on formally organized health insurance exchanges.

Let me explain how I come to this definition.

First, economists are virtually unanimous that the bulk of the cost of fringe benefits –- including health insurance –- that is ostensibly covered by an employer is actually taken out of the paychecks of employees collectively, if not year by year then in the long run. Exactly what fraction of the cost is shifted back to employees in this way depends on a number of factors.

As I jokingly put it to my students, employee-benefit managers, basically kindly social workers camouflaged in business attire, are similar to pickpockets who take money out of your paychecks and then use it to buy you health insurance, for which you thank them profusely.

In other words, the employees actually pay most or the full premiums for their employment-based health insurance, even if they do not make an overt contribution toward the insurance premium.

Second, to assist employees in making this purchase, the benefit managers organize a formal health-insurance exchange that lists a side-by-side comparison of the different insurers among which employees can choose.

While there are some variations in the benefit packages offered by the various insurance companies on the list, the packages are typically dictated by the employee-benefit department, which also selects the health insurance plans permitted to list themselves on the exchange (and those that are not) and tightly regulates these companies’ behavior during and after the enrollment period.

Of course, smaller companies usually list fewer and sometimes only one or two insurers on their exchanges. Part of the intent of the Affordable Care Act is to offer these small employers access to the larger state-run exchanges, so their employees have more choices among insurers.

Third, the contributions employees make directly toward the premium for health insurance (through explicit deduction from their paychecks), plus their indirect contribution through reductions in take-home pay, are effectively community rated. This means healthier employees are forced to subsidize through their premiums the health care of sicker employees by effectively paying the same premiums.

Consider two workers performing the same work in a company, one healthy and the other chronically sick. They will make the same direct contribution to the identical insurance policy and receive the same take-home pay.

In other words, the idea that raised so many hackles last year — that younger, healthier Americans should, through community-rated health-insurance premiums, subsidize sicker Americans — has long been accepted by the bulk of Americans at their place of work.

In this sense, then, private employment-based group insurance qualifies for the label of “social insurance,” even though it is privately sponsored. It is, of course, not socialized medicine, but neither are the Medicare, Medicaid and Tricare programs, government-sponsored social insurance programs that procure health care from the private sector.

Only the program that Americans reserve for military veterans, and apparently preferred by them — the vast Veterans Administration Health System — is pure socialized medicine.

Finally, Americans who procure health insurance at their place of work receive generous public subsidies toward that purchase, and higher-income earners receive larger subsidies than lower-income earners. This is so because the contributions employers make toward the group health-insurance premiums of their employees are tax-deductible business expenses, but not taxable compensation to the employee — even though it is a form of compensation.

Estimates of the total dollar amount of that subsidy range between $200 billion and $300 billion a year, depending on what taxes are included in the analysis – only federal income taxes, or also payroll taxes, or also state income taxes, if any. Estimates consistently show that high-income earners receive the bulk of that public subsidy.

The current amount of that subsidy is estimated at around $200 billion a year, although some estimates go higher, depending on what taxes are included in the analysis –- only federal income taxes, or also payroll taxes, or also state income taxes, if any.

Estimates consistently show that high-income earners in high marginal tax brackets receive the bulk of that public subsidy.

Having said all this, I ask you to imagine a low-income family whose head or heads of household work at very low wages in small companies that do not offer their employees health insurance, which is the case at many small companies. Suppose their little daughter was born with exactly the same condition as was Senator Johnson’s daughter. What should the fate of that little girl be?

Perhaps the senator could provide some commentary on that, as well.

Article source: http://feeds.nytimes.com/click.phdo?i=7e3347057d5befb2195f159224095c3a