Trump Addresses Congress: The Healthcare Economist’s Take

Tonight, President Donald Trump delivered his first address to a joint session of Congress.  Although the speech touched on a number of topics, I give my line-by-line commentary on the portions of the speech related to health care.

“Tonight, I am also calling on this Congress to repeal and replace Obamacare with reforms that expand choice, increase access, lower costs and at the same time provide better health care.“

• If only it were so easy.  More choice, more access, lower cost.  It all sounds good, but the devil is in the details.

“Mandating every American to buy government-approved health insurance was never the right solution for our country. The way to make health insurance available to everyone is to lower the cost of health insurance, and that is what we are going to do.“

• This comment targets the individual mandate.  The advantage of the individual mandate was that it helped avoid the problem of adverse selection.  Some insurance markets will unravel if healthy patients leave the market.  When healthy patients leave the market, premiums rise.  This price increase can lead to a viscous cycle where moderately healthy individuals no longer buy health insurance and premiums rise even further.  At the same time, Americans place a high value on choice and generally do not like the government to mandate anything if it can be helped.  President Trump is correct that coverage in and of itself is not enough; health insurance must also deliver high value to the individuals who purchase it.

Obamacare premiums nationwide have increased by double and triple digits.  As an example, Arizona went up 116 percent last year alone. Gov. Matt Bevin of Kentucky just said Obamacare is failing in his state, the state of Kentucky, and it’s unsustainable and collapsing.

One third of the counties have only one insurer, and they’re losing them fast, they are losing them so fast. They’re leaving. And many Americans have no choice at all. There’s no choice left.

Remember when you were told that you could keep your doctor and keep your plan? We now know that all of those promises have been totally broken. Obamacare is collapsing and we must act decisively to protect all Americans.

• It is certainly true that in 2017, a number of Obamacare markets have seen large premium increases. As I state in my interview in NPR, some of these premium increases are one-time increases due to decreased federal support of insurer’s high cost patients.  However, some large insurers did exit certain markets–like Arizona–and a lack of competition did drive up premiums in these areas.  Stating that “Obamacare is collapsing,” however, is certainly an exaggeration.  For instance, the Covered California Obamacare marketplace has been remarkably functional and could serve as a model for the nation).  Nevertheless, policymakers should recognize that in 2017 the exchanges in some states become less stable.

“Action is not a choice; it is a necessity. So I am calling on all Democrats and Republicans in Congress to work with us to save Americans from this imploding Obamacare disaster.”

• Disaster is certainly an overstatement.  I do agree that collaboration between Democrats and Republicans would be nice for a change.

“Here are the principles that should guide Congress as we move to create a better health care system for all Americans.

First, we should ensure that Americans with pre-existing conditions have access to coverage and that we have a stable transition for Americans currently enrolled in the health care exchanges.“

• Insuring high-cost individuals with pre-existing conditions is a serious issue.  Creating publicly funded high-risk pools reduces insurer uncertainty and helps to lower premiums for the general market.  However, these high-risk pools have generally been underfunded and run large deficits. Including high-risk patients with pre-existing conditions in the general insurance pool, however, can risk destabilizing the market due to an averse selection death spiral (see more details below).
• One solution proposed by John Cochrane is premium insurance.  Under this scenario, health insurance is priced in an actuarially fair manner. If you are sick you would owe more for health insurance than someone who is healthy. To address the issue of equity, one could buy premium insurance.   For individuals who become seriously ill, premium insurance would cover this increase in premiums by providing a lump sum payment (or an annuity) that could be used towards the purchase of the now higher-priced health insurance.  Thus, patients who fall ill would be no worse financially than before.  Further, insurers would actually compete to attract sick patients since they would be paying higher premiums.    There are a number of logistical issues to this approach that would need to be worked out, but it may be worth considering supporting a market for premium insurance.

“Secondly, we should help Americans purchase their own coverage, through the use of tax credits and expanded health savings accounts, but it must be the plan they want, not the plan forced on them by our government.”

• At first glance, health savings accounts sound like an idea any economist would like.  High deductible plans with health savings accounts put patients at more financial risk for the care they purchase and thus the may spend healthcare resources more frugally and eliminate unnecessary care.  In practice, however, patients with high-deductible plans generally reduce all healthcare spending rather than just low-value care.  Further, the ability of many sick individuals to price compare is limited not only by a lack of price transparency but also by the fact that sick people are less likely to have the time or energy to price compare.   Finally, the largest share of health care cost is incurred by the sickest people.  These individuals inevitably will blow past their out-of-pocket maximum quickly and thus the high-deductible plans are likely to have a modest effect on overall cost.

“Thirdly, we should give our state governors the resources and flexibility they need with Medicaid to make sure no one is left out.”

• This statement likely is tied to a proposal to give block grants to states to provide Medicaid coverage.  In essence, this proposal would transfes all risk of Medicaid cost increases to the states.  There is a worry of a ‘race to the bottom’.  States could decrease Medicaid benefits in order to lower taxes and attract wealthier residents.  Other states that wish to increase Medicaid benefits, may–due to competition across state lines–be forced to lower these benefits.  On the other hand, states may appreciate the increased flexibility to managed Medicaid as they please.  Pushing government closer to the local level is often sound policy.

“Fourth, we should implement legal reforms that protect patients and doctors from unnecessary costs that drive up the price of insurance and work to bring down the artificially high price of drugs and bring them down immediately.”

• The comment about legal reforms is likely related to tort reform.  Capping malpractice awards may decrease physicians malpractice premiums, but will hurt the patients harmed by poor care.  Capping malpractice awards also dulls the incentive for physicians to practice more safely.  There is evidence that defensive medicine works to reduce risk to patients.
• Drug prices are a hotly contentious issue. In the short-run, it would appear that decreasing drug prices is a good thing.  Drugs are generally cheap to produce and getting more people access to life saving medicines is certainly a good thing.  If all drugs were very low cost, however, few pharmaceutical firms would have an incentive to invest in the research and development needed to create then next generations of medicines.  This tension between short-term benefits to current patients from low prices, and the medium to long-term benefits that high prices can bring through increased innovation is a constant tension.
• How drug prices would be reduced is also key issue.  If drug prices are reduced through decreased regulation, prices could fall with no adverse effect on innovation.  Decreased regulation, however, may also decreased patient safety so that any initiatives that accelerate drug development likely would need to be coupled with additional post-market surveillance.  On the other hand, centralized drug pricing is generally a poor option.  The federal government generally is not good at setting prices.  On the one hand, the federal government would be incentivized to price drugs too low since short-run costs (i.e., the drug itself) are clearly seen by constituents, but the long-term benefits of higher drug prices (i.e., increased innovation of novel treatments) are not.  On the other hand, government prices may be too high in the long run.  As competitor products enter the market, drug manufacturers are less likely to compete on price when prices are set through a central authority compared to when prices are set within a market.  Further, currently, a number of governments programs (e.g., Medicaid) rely on private market prices as a benchmark for their own prices; controlling prices through top-down planning would be problematic.

“And finally, the time has come to give Americans the freedom to purchase health insurance across state lines which will create a truly competitive national marketplace that will bring costs way down and provide far better care. So important.“

• This proposal is likely to have a small impact on overall health care cost.  For health insurers to sell into a market, they not only need regulatory approval from the state, but they also have to contract with a network of hospitals and physicians. Thus, it is unlikely that an insurer in New Jersey can sell insurance to patients in California without having established a local market presence.  My guess is that this initiative would result in a small decrease in premiums due to increased competition but only in selected markets where there was entry by health insurers.

“Everything that is broken in our country can be fixed. Every problem can be solved.”

• Easier said than done.