Regional inequities in health care reform
15 October
In the pending health care bills, low-income individuals and families who buy health insurance outside employment will get large government subsidies. Those subsidies vary by locale. This represents a significant implicit policy decision with enormous distributional and political consequences. I don’t think most Members or their constituents have focused on this. I think they should.
Let’s start with the Knights, a family of four with adults age 40. The family has $44,000 of income, putting them at twice the poverty line for a family of that size. The Knights do not get health insurance through their employer. The Knight family lives in Las Vegas.
Their friends the Ford family are identical in every way, except they live in Portland, Maine. They, too, make $44,000 of income, but it doesn’t go quite as far as the Knights’ $44K, because it costs almost 6% more to live in Portland than in Las Vegas, according to CNN.com’s cost-of-living calculator. Utility costs are much higher in Portland, and food prices are 2% higher in Portland.
Suppose we are designing a new national program to subsidize food for modest-income families. We have a range of choices.
- At one extreme, both families get the same subsidy amount.
- At the other extreme, both families pay the same net amount for groceries, meaning the Ford family gets a bigger subsidy, since groceries cost more in Portland.
Which is fair? In a system of locally-elected representatives, your answer probably depends on where you live. I can construct legitimate arguments for either extreme, or for a midpoint policy such as the Ford family getting a 2% bigger subsidy than the Knights.
Now what if people in Portland eat 5% more than people in Las Vegas? If we go with approach (2), should the Ford family get a subsidy that accounts for the higher prices in Maine and their greater food consumption? Should the two families pay the same amount for groceries if they’re eating different amounts? Again, there’s no objectively right answer. My personal preference is to favor approach (1).
Different federal spending programs take each extreme approach and many variants in between. Some adjust for regional variations; others do not.
Now let’s look at what the Baucus bill does for the new low-income subsidies to purchase health insurance outside of employment. Here is the key sentence from the conceptual description of the Senate Finance Committee-reported bill (labeled as page 27, it’s page 30 of the PDF).
The premium credit amount would be tied to the second lowest-cost silver plan in the area where the individual resides.
This is approach (2) (and it becomes clear it’s the extreme when you study the details). If you live in an area with relatively inexpensive health plans, low- and moderate-income people in your area will receive smaller government subsidies than their similarly-situated identical twins who live in relatively high-cost areas.
A “health plan” is not a commodity like “a gallon of milk.” A health plan in Las Vegas is quite different from one in Portland. While the overall cost-of-living in Portland is higher, health care spending is much higher in Las Vegas. This higher health spending is a function of different prices and different usage of medical care.
Atul Gawande wrote a much-discussed article on this topic in The New Yorker, “The Cost Conundrum: What a Texas town can teach us about health care.” There are wide geographic dispersions in medical care spending, and it cannot all be explained by different prices. While I disagree with Gawande’s policy conclusions, I recommend the article.
Since insurance premiums ultimately reflect the cost of medical care used, insurance premiums too will vary widely from one area to the next. This brings us to the effects of the policy decision in the new health care bills.
We are fortunate have a calculator created by the (liberal) Kaiser Family Foundation to do most of the hard work for us.
The Kaiser calculator makes a simplifying assumption that premiums in high-cost areas will be 20% higher than in average areas, and premiums in low-cost area will be 20% lower than in average areas. That seems like a reasonable assumption to illustrate the conceptual point.
I have chosen Las Vegas and Portland because they represent high-cost and low-cost areas respectively. Using Kaiser’s assumption, I will assume that a typical health insurance premium costs one-third less in low-cost Portland than in high-cost Las Vegas (1 – (80%/120%)) = 1/3. Note that while the overall cost-of-living in Portland is higher than in Las Vegas, per-person health spending is much lower in Portland in part because of differences in medical care usage.
Under the Baucus/Senate Finance Committee bill, both the Ford family and the Knight family will pay only $3,070 for family health insurance after netting out their new government subsidy. That’s an incredible deal for either family.
It also represents approach (2) described above. Both families pay the same amount, post-subsidy, for health insurance. Since (using Kaiser’s assumption) health insurance costs 1/3 less in Portland than in Las Vegas, under the Baucus bill the Knights in Vegas will get a $6,365 subsidy, while the Fords in Portland will get a $3,220 subsidy, 49% less than the Knights. (The Kaiser calculator gives me these subsidy amounts.)
Is this fair? One family, living in a higher-cost area, gets a subsidy twice as large as the other because of differences in medical care usage in their local markets?
The President has made a big deal about regional differences in health spending as an opportunity for making American health care more efficient while retaining high health outcomes. That’s one of the points of the Gawande article, that greater usage of medical care does not result in similar improvements in health. Minnesota is the usual example, where per person medical spending is low, while health outcomes are quite high.
Academics have done a lot of research on this. If the New Yorker article excites you, go learn about the famous RAND Health Insurance Experiment and the Dartmouth Atlas of Health Care.
The President’s push to address this source of inefficiency would lead one to design a new subsidy program favoring approach (1), equal subsidy amounts that are independent of regional differences in health spending. Approach (2) has the downside of directing greater subsidies toward areas of greater usage. When you subsidize something you get more of it, so if you subsidize areas with greater usage, you should expect even more usage. Whatever your view on the equity question, the Baucus/SFC choice of approach (2) will likely increase disparities in health spending and exacerbate the problem the President has correctly identified. This is inefficient and counterproductive.
Efficiency is not, of course, the only goal of subsidy design. If my experience is any guide, most Members of Congress (and many citizens, and all local press) will care first about whether their modest-income families are being treated fairly relative to other similarly-situated families in other areas. Again this is a matter of perspective, but I think the approach chosen in both the Baucus bill and the House Energy & Commerce bill looks terribly unfair by creating such enormous disparities in subsidy amounts. To me it looks like if you’re a modest-income family in a low-health-spending area, you’re getting shafted relative to those in higher-spending areas.
Let’s look at a few more examples, using the same example family (4 people with adults age 40, $44K income, no health insurance through their job). The Baucus bill gives this family the same after-subsidy cost for health insurance. This means:
- If the family lives in the high-cost Bronx, Chicago, Baton Rouge, Detroit, or Las Vegas, they will get a government subsidy of $6,365 to buy health insurance.
- A family with the same income living in average-cost St. Louis, Reno, or Delaware will get a government subsidy of $4,792. That’s 25% less than the Bronx or Chicago family.
- A family with the same income living in low-cost Little Rock, Indianapolis, Portland, or Nebraska, will get a government subsidy of $3,220. That’s 49% less than the Baton Rouge or Detroit family.
I ran similar numbers for the House Energy & Commerce Committee bill, the one most-discussed before the August summer recess, and got similar results. I wanted to see both the relative subsidy levels in both bills, and which parts of the country might qualify for different subsidy amounts.
I needed a way to divide the country up into low, average, and high-cost areas. The nice people at Dartmouth have done the Dartmouth Atlas of Health Care, which extensively examines regional differences in medical care usage and prices. The Dartmouth folks break down per-capita Medicare spending by geographic area. It’s certainly not a perfect proxy for private health plan premiums, but we’re only trying to divide places up into high-average-low, so I think it works fairly well for a back-of-the-envelope exercise like this one. Fee-for-service Medicare spending tends to be highly correlated with non-Medicare spending in the same area. I end up with 134 “low cost” areas, 114 “average cost” areas, and 58 “high cost” areas.
I’m sure a team of researchers could do a slightly better job, but I would bet their final list would look a lot like mine. To be careful, though, I think of this as an illustrative list of regional differences for this thought experiment. I do not claim these are the actual subsidy amounts for each region, because I have had to make and use some simplifying assumptions. The actual different amounts and regions could be determined only after a drawn-out and incomprehensible regulatory process months after enacting a new law. So while the following tables are necessarily educated guesses, I hope they illustrate the rough impacts that will result from this critical policy choice that no one is discussing.
Here are the subsidy amounts for our example family for the two different bills:
Comparison of government subsidies by geographic area
|
Senate Finance |
Compared to high cost |
House E&C |
Compared to high cost |
||
|
High cost |
$8,251 |
|
|
$8,911 |
|
|
Average cost |
$6,365 |
-$1,886 |
|
$7,025 |
-$1,886 |
|
Low cost |
$4,478 |
-$3,773 |
|
$5,138 |
-$3,773 |
|
|
|
|
|
|
|
|
Family pays |
$3,070 |
|
|
$2,410 |
|
The above methodology produces the following areas:
Illustrative geographic areas for varying low-income health insurance subsidies
|
Low cost |
Average cost |
High cost |
|
|
gets high cost minus $3,773 |
gets high cost minus $1,886 |
||
| Alabama | Mobile | Birmingham Dothan Huntsville Montgomery Tuscaloosa |
– |
| Alaska | – | all | – |
| Arizona | Tuscon | Mesa Phoenix Sun City |
– |
| Arkansas | Little Rock Springdale |
Fort Smith Jonesboro Texarkana |
– |
| California | Chico Redding Sacramento San Luis Obispo Santa Barbara Santa Rosa |
Bakersfield Fresno Modesto Napa Palm Springs Salinas San Diego San Francisco San Jose San Mateo Santa Cruz Stockton Ventura |
Alameda Cty Orange County Contra Costa Los Angeles San Bernadino |
| Colorado | Colorado Springs Fort Collins Grand Junction Pueblo |
Denver Greeley |
Boulder |
| Connecticut | – | Hartford | Bridgeport New Haven |
| Delaware | – | all | – |
| DC | – | all | – |
| Florida | Sarasota Tallahassee |
Bradenton Clearwater Ft. Myers Gainseville Jacksonville Lakeland Ocala Orlando Ormond Beach Pensacola |
Ft. Lauderdale Hudson Miami Panama City St. Petersburg Tampa |
| Georgia | Albany Atlanta Augusta Columbus Rome |
Macon Savannah |
– |
| Hawaii | all | – | – |
| Idaho | all | – | – |
| Illinois | Bloomington Peoria Rockford Springfield Urbana |
Aurora Evanston Melrose Park |
Blue Island Chicago Elgin Hinsdale Joliet |
| Indiana | Evansville Fort Wayne Indianapolis Lafayette Muncie South Bend |
Terre Haute | Gary Munster |
| Iowa | Cedar Rapids Davenport Des Moines Iowa City Mason City Sioux City Waterloo |
Dubuque | – |
| Kansas | Topeka | Wichita | – |
| Kentucky | Owensboro | Covington Lexington Louisville Paducah |
– |
| Louisiana | Houma Lake Charles New Orleans |
Alexandria Baton Rouge Lafayette Metairie Monroe Shreveport Slidell |
|
| Maine | Portland | Bangor | – |
| Maryland | – | Salisbury Takoma Park |
Baltimore |
| Massachusetts | Springfield | Boston Worcester |
|
| Michigan | Grand Rapids Marquette Petoskey St. Joseph Traverse City |
Kalamazoo Lansing Muskegon Saginaw |
Ann Arbor Dearborn Detroit Flint Pontiac Royal Oak |
| Minnesota | all | – | – |
| Mississippi | Hattiesburg Tupelo |
Gulfport Jackson Meridian Oxford |
|
| Missouri | Cape Girardeau Columbia Joplin Kansas City Springfield |
St. Louis | – |
| Montana | all | – | – |
| Nebraska | all | – | – |
| Nevada | – | Reno | Las Vegas |
| New Hampshire | Lebanon | Manchester | – |
| New Jersey | – | Morristown | Camden Hackensack New Brunswick Newark Paterson Ridgewood |
| New Mexico | all | – | – |
| New York | Albany Binghamton Buffalo Elmira Rochester Syracuse |
Bronx East Long Island Manhattan White Plains |
|
| North Carolina | Asheville Durham Greensboro Greenville |
Charlotte Hickory Raleigh Wilmington Winston-Salem |
|
| North Dakota | all | – | – |
| Ohio | – | Akron Canton Cincinnati Cleveland Columbus Dayton Kettering Toledo Youngstown |
Elyria |
| Oklahoma | – | all | – |
| Oregon | all | – | – |
| Pennsylvania | Altoona Danville Erie Harrisburg Lancaster Sayre |
Allentown Johnstown Pittsburgh Reading Scranton Wilkes-Barre |
Philadelphia |
| Rhode Island | – | all | – |
| South Carolina | Columbia Greenville Spartanburg |
Charleston Florence |
|
| South Dakota | all | – | – |
| Tennessee | – | all | – |
| Texas | Abilene Bryan El Paso Longview Temple Waco |
Amarillo Austin Fort Worth Odessa San Angelo San Antonio Victoria Wichita Falls |
Beaumont Corpus Christi Dallas Harlingen Houston Lubbock McAllen Tyler |
| Utah | all | – | – |
| Vermont | all | – | – |
| Virginia | all | – | – |
| Washington | all | – | – |
| West Virginia | Morgantown | Charleston Huntington |
– |
| Wisconsin | Appleton Green Bay La Crosse Madison Marshfield Milwaukee Neenah |
Wausau | – |
| Wyoming | all | – | – |
Do Members of Congress understand the massive distributional policy choice they are making by supporting these bills?
I’ll bet most of them don’t.
(photo credit: Official Las Vegas Tourism Web Site)
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Keith et al-
There appears to be some missing data in the context of the health care cost in public vs. private option that has me question the context of how these comparisons are drawn. All the major countries (except for Japan) outlined which have public option have per capita tax rates in the 40+%. How much of the excessive adminstrative cost is absorbed by the governments of these countries to manage health care?
Using latest WTO data let's compare two countries – Sweden vs. USA. Sweden runs ~ $4k/per capita less on health care costs, have lower infant mortality ~ 2.5 vs. 6.8 yrs and longer life expectancy 81 vs. 78.1 in USA. Taken alone these #'s look impressive.
Part 1 of 2
Part 2 or 3
However, now look at the per capita tax rate difference – 49.7% vs. 28% Sweden & USA. I would agree our health care system has inefficiencies but comparing the additional cost for these social systems at a family income of ~$100k/year, the USA has ~ $21k/year lower cost (in form of taxes). At $50k income it's still a $10k USA advantage. It would appear that although our health care system runs $4k/year more, the USA taxpayer is better off as we have more disposable income in our pockets to offset the cost. At an average family income of $100k, reasonable ROI/yr, this additional disposable income equates to Mill$ over the average working lifespan.
As Sweden is a country the size of California, with 9 M vs. 310M people and a small military where else does all this taxpayer $ go beside administrative cost and health care?
Part 3
Japan is the only country with a public health care system with a per capita tax rate <40% but we all know their debt situation (170% of GDP) is horrible and they've had a public health option since 1927. So I'm struggling with the argument that health care will reduce our deficit spend as I've seen no correlation between public options and deficit by country.
I would anticipate any country with a public option with ~100% coverage to score higher on WTO health care scores because it takes the entire populous (many of those high risk) under consideration vs. those insured today in USA private vs. those insured today in countries with public. Is there any data comparing these differences?
Isn't it inevitable the cost of this system will require a massive increase in taxes and although there are inefficiencies today, the major benefactors will be those without insurance at additional costs to those who currently have coverage?
Part 4
Data included for reference below
Country Life expectancy Infant mortality rate Physicians per 1000 people Nurses per 1000 people Per capita expenditure on health (USD) Healthcare costs as a percent of GDP % of government revenue spent on health % of health costs paid by government Tax rate per capitaNational debt as % of GDP
Australia81.44.22.89.73,1378.717.767.743.4156%
Canada80.752.293,89510.116.769.833.464%
France8143.47.73,6011114.27946.363%
Germany79.83.83.59.93,58810.417.676.940.665%
Japan82.62.62.19.42,5818.116.881.327.9170%
Norway8033.816.25,910917.983.643.683%
Sweden812.53.610.83,3239.113.681.749.737%
UK79.14.82.5102,9928.415.881.73944%
US78.16.72.410.67,2901618.545.428.261%
Final point/question – when I see the cost per capita for health care does it take into consideration the gov administration of these programs? I've read in various reports (i.e. McKinsey & Company) that the administrative cost is where much of the increase in health care in USA is driven as of late. How much is "hidden" in higher taxes in a country like Sweden?
Dorothy -
You are correct. France in trouble.
http://abcnews.go.com/Health/wireStory?id=8508673
Easier to read data – ref from OECD – I added deficit and tax rates to table
http://en.wikipedia.org/wiki/Health_care_system
LakeMan: further, if I recall correctly, I have read recently where France and Germany (against which the level U.S. care & spending is frequently compared) are both exploring how to fund their growing deficit spending w/r/t their universal health care programs. The are running in the red, theiir costs are increasing & they are looking at raising taxes (or a miracle) to cover those costs. Anyone who says that our middle class won't see huge tax increases, should any of the current proposals pass in anything like their existing form, is smoking something.
Sorry about those typos – Monday thumb-numbness, I guess.
The other elephant in the room, NOT considered in this story, is what the new federally mandated coverages will be. Once the coverage is leveled between policies in Portland and Las Vegas, the costs of those policies will also be leveled. With these coverage mandates NOT defined in ANY of the bills, it is simply not possible to project any possible cost estimates.
Congress is messing with to large a section of the economy for ANY of these plans to cause anything but an unintended consequence disaster for millions of people.