Wednesday, April 7, 2010

Reporting the Controversy: Why Health Insurance Is More Important Than Nothingness

by MR. AWESOME

After I went after Robert Samuelson for his smug unwillingness to report on health care reform, I figured I'd further explore his academic failure by doing what he wouldn't.

There's a lot going on in this legislation. There is a world of content that anyone with the least interest and training could dig into — there's economic, legal, policy, moral and ethical stuff. This is just signature, life-altering legislation. This doesn't happen often. Graduate students will learn this reform for decades, just as the academics who teach them will make and break careers upon it. Professionals and policy wonks will be able to dine out on knowing this bill. It's extraordinarily important.

This is why "experts" like Robert Samuelson amaze me. The legislature hands him a massive, rich piece of subject matter upon which a real academic could base signature work, and he responds with total disregard. This bill is neither wonderful nor terrible, but it is great, as a matter of magnitude. It deserves more — and the audience deserves more — than D-game bloviating that ought to be reserved for dead news days and "whether Bush pere and Bush fils 'had a catch' at a Kennebunkport getaway." Washington inside-baseball nonsense is thoroughly inadequate.

Many people aren't interested in this stuff, but it's not unreasonable to expect a self-described economics and policy expert like Samuelson to care. It's not like he lacks for naked self-interest: this reform directly affects even rich pundit dorks. They have health insurance, presumably. This legislation will change that health insurance. This bill will benefit people with health insurance, even people with "good" health insurance, by current standards.

I wrote more than I anticipated, and I've barely scratched the surface of this legislation. I realize my lack of comprehensiveness might open me to the same cop-out charge I level at Samuelson, but the situations are unequal. He's not even the sole guilty party. Literally hundreds or thousands of people get paid to tell you the facts of HCR for a living, and chances are you're learning a lot of these facts for the first time on a blog run by a dead African tyrant. I don't think I'm remiss for not doubling down with another thousand words.

Primarily, I want to describe a specific legal situation, and point out how this legislation changes the health insurance landscape. This reform creates security where none existed before. But this reform exists in a context we haven't really changed or improved as much as we could. These are things someone should have told you about already, and they probably haven't. So here they are.


You Don't Have Health Insurance
Insurance in general is a contract, providing indemnity against loss. By this definition, virtually no one in America has health insurance. That's our status quo. You may think you have health insurance, but you're probably wrong. They are bound, the one to pay the other in the event of occurrences XYZ. Insurance depends on the enforceability of this arrangement, and on the contractual nature of this arrangement. To be secure and meaningful, contracts cannot be revised on the fly. They cannot be open to unilateral revision. The mutual benefit provided by a contract is destroyed by fundamentally unequal terms, or by one party receiving an insubstantial benefit.

Health insurance does not follow these rules. Our status quo health insurance doesn't "work" as a contract. To wit:
medical underwriting allows the insurer to price and re-price the risk posed by the insured party on the fly;
discretionary rate-setting allows the insurer to raise premiums at will, pricing the insured out of coverage (thus ridding the insurer of the insured who might actually seek a return on their rate payments);
lifetime payment caps allow the insurer to abrogate the insurer's basic contractual responsibility through a contractual term (thus the same as the parenthetical above);
and so on, and so on.
These are just a few examples of why health insurance generally is not really "insurance" under our status quo. This is to say nothing of the incredible powers afforded to insurers through the Employee Retirement Income Security Act (ERISA).

A patchwork of state regulations operate in a general vacuum of federal action, creating a system whereby individual health insurance is rarely portable across state lines, and where the health benefits packages of interstate employers are essentially unregulated. For decades, we have maintained and tolerated a system wherein the insured has no security, and the insurer has few real obligations. At best, you have a promise which can easily be broken, made by a party with powerful, perverse financial incentives toward bad faith. You have an insurance product which often fails to protect against catastrophic risk and expense, which itself can generate its own catastrophic expenses by requiring uncertain, expensive litigation to achieve enforcement. You have a security blanket with smallpox. This is not insurance.

As health insurance reform takes effect over the next four years, we will come progressively closer to actually having insurance. This point gets lost in the noise of our "health care debate." As a country right now, we don't really have health insurance. We have the insured; we have the uninsured, and neither party has decent coverage. This bill doesn't just shell out insurance to the uninsured; it reforms existing insurance policy to provide real coverage to all the deluded insured, people who think they have health insurance when they very often don't.

I'm going to go over how the health insurance reform legislation will change things, to a very limited extent, and with very broad strokes. And I'll describe some ways it won't change things. I'll start with the status quo.


What You Actually Have
Health insurance comes in two basic flavors — individual and employer-provided. The second category can vary based on who's financing the risk. Simple employer-provided insurance is a health plan the employer has negotiated on behalf of the employees, like an insurance agent. The employer can also self-insure, where the employer binds itself to cover the insured loss, as opposed to finding someone else (Blue Cross/Blue Shield, etc) to do it. This distinction is important, but it's abstruse and outside scope of what I'm trying to get at here.

The distinction between the individual market and employer-provided insurance determines applicability of many laws and regulations.


The Individual Market
Under the status quo, the individual market insurance operates entirely through state regulations. These regulations vary enormously. Each state has different and incompatible regulations on what health insurance must/need not cover, what insurance can/cannot do, and what insurance policies can/cannot say. This is why you can't generally buy insurance across state lines; when people suggest reforms allowing such purchases, they refer to this regulatory clash. States also vary widely in their legal traditions. A case of action against Insurer X for doing things ABC may be valid in California, but totally unfounded in Maine. A statutory right or protection enforced in Wisconsin may be unheard of in Florida.

If you have individual health insurance, right now, the extent to which you are actually protected against loss varies tremendously on where you live. You may have all sorts of protection. Often, state courts will provide additional protection above and beyond what the insurance contract and state statutes require, because health insurance cases tend to have compelling equitable interests at heart. Of course, the sympathy of a judge is a pretty cold comfort after you've been in court for a couple months or years paying legal fees to attain enforcement of a contract you already paid for. And, of course, depending on state law, you may also get a big pile of nothing.

You could write a series of books on the variations in state insurance regulation, whether generally or specifically as they apply to health insurance. I'm not writing a book here, though. I'm more interested in talking about employer-provided health insurance, both because it's more common, and because it's pretty crazy shit.


Employer-Provided Health Insurance
This is how the majority of Americans get access to medical care, and the options offered are often bewildering. The first thing to bear in mind is that an employee benefits package is not a contract. Contract law principles do not apply. If an employee benefits package reserves to the employer the power and discretion to amend the benefits package, then the employer has that power, with extremely weak limitations. (Be warned, there's a bunch of law stuff below.)

Employer benefits packages and health plans are governed primarily by ERISA. I'm not going to try to explain ERISA; probably only a couple dozen people in the world really understand it, with everyone else working off a provisional or functional knowledge. Just note that all the stuff below about how employer-provided health insurance works is due primarily to the regulatory framework of ERISA. Note also that although only a select few hoary-bearded legal mystics actually understand ERISA, everyone else understands it well enough to know it's a thoroughly outdated, convoluted pile of shit.

For example, see McGann v H&H Music Company. Here, a man was diagnosed with AIDS, and covered by his employer with a lifetime coverage cap of 1 million dollars. After he informed his employer he had AIDS, his employer revised the employee benefits plan to specifically apply a $5,000 coverage cap on AIDS claims. The employee sued and lost. The case includes a discussion of how employee benefits packages operate as non-contractual agreements, along with a wonderfully unapologetic apology for this legal standard, based on pure free-market econobabble. You see, once people get word that H&H Music Company will leave its employees twisting in the wind, they'll all quit and find work with I&I Music Company — or not, depending on the non-competition agreements they likely signed with H&H. Of course, I&I will subsequently do the same thing, as will every other music company, because none of them will have any bottom-line incentive not to. This relationship leaves employees with little organized bargaining power, and none of the push required to create actual free market push and pull.

This case law is totally alien to any state law, which is fine, because employer-provided health plans are generally unaffected by state law. That is to say, state laws cannot affect employer-provided health plans directly, except under very limited circumstances. The laws governing employer-provided health insurance are federal in nature. This is the Supremacy Clause at work. ERISA creates the entire legislative, regulatory scheme for employer-provided insurance, and state law does not work against or alongside its provisions. ERISA is enormously hostile to insured plaintiffs.


You're Totally Hosed
See Aetna Health Inc. v Davilla. Here, the Supreme Court bundled up several claims under state law, against the managers of employer-provided insurance plans. They found that these state law claims were precluded by ERISA's federal regulatory scheme. A claim against the insurer of an employee-provided health plan will be confined by the scope of ERISA whenever the plaintiff's case could be brought under ERISA, which is essentially always. Once the plaintiff is locked into the ERISA remedial scheme, courts must review the insurer's decisions using an "arbitrary and capricious" standard of review, which means that the court will find for the insurer unless the plaintiff can demonstrate the insurer's decision was arbitrary and capricious. This standard of review comes from administrative law, where it's applied to the decisions of regulatory agencies, under the assumption that public servants are:
1. Not out to screw the public, and
2. Better situated to understand and apply the regulatory schemes they're charged with administering.
In practice (and this is an extreme oversimplification), this means that an administrative agency will win a suit challenging its regulatory opinions and actions, unless it fails to demonstrate it followed the proper regulatory procedures, and/or its regulatory decision is totally out of line with the statute it administers.

This can happen, especially when you have an administration in power hostile to the purpose of the agency. In fact, this is the life story of the Environmental Protection Agency. It's always an uphill battle for the plaintiff. But it makes some sense in that these cases have a plaintiff alleging that all the government-accredited experts on Regulatory Act X are wrong about Regulatory Act X, and also because these experts don't actually control the statutory text of Regulatory Act X.

Applying this standard to the decisions of a private party with
1. enormous financial incentive to screw the public, and
2. full discretionary control over the policy they administer
may seem grotesquely stupid. But, as Justice Thomas notes in his opinion, in one of the great all-time moments of dismissive bureaucratic contempt, the plaintiff still has a proper remedy under ERISA. They can always pay for medical procedures out of pocket, then hire a lawyer, then sue for compensation, without directly challenging the health plan. So, you're covered. If you have a few million dollars to burn, you can always pay for the medical care when the medical insurance that you already paid for (and apparently don't need) doesn't provide you with medical insurance. Then you can hire lawyers to press a case you'll lose. Just stop pretending you have medical insurance and batter your head against an insurmountable standard of review which asks purely procedural questions about the nature of a policy universe controlled by the opposing party.

This may or may not be a problem or risk for you, depending on the trustworthiness of your employer, and the extent to which the free market operates to your benefit. If you're a successful professional working for a respected institution or business, there's likely not much risk the employer will screw you and your peers. But if you're not, or if you're working for a small business with a more fluid, unpredictable bottom line, then you may have more problems. Of course, this assumes that you even work for a business that offers a health plan and isn't deliberately employing you under the minumum number of hours per week required to qualify for full-time employment and benefits coverage.


What You Will Have (Due to the HCR Bills)
I've been talking about what you currently have, because the HCR bills haven't taken effect yet. I say "bills" because there are actually two major HCR bills. There's the Patient Protection and Affordable Care Act (PPACA, pronounced Pee-Packah), and there's the Health Care and Education Reconciliation Act of 2010. The first one is smaller, and it contains the changes I'm really getting at here. The bill takes effect in steps, over the next four years. Note, though, that we have not changed the ERISA legal process described above, not directly.

Obviously, there's a lot more going on with the status quo, but the status quo will change in large part once this bill goes into effect. Here are just a few major ways it will change. These changes are all federal in nature. So they apply to every health insurance plan, employer-provided or otherwise.

The majority of all the changes most people likely care about are in the PPACA. It's surprisingly and depressingly hard to find a good executive-type summary of the PPACA. I honestly couldn't find anything better than the Wikipedia page, which reflects badly on some combination of society and my research skills. I'd like to think Robert Samuelson and his peers have some really cool, detailed, bullet-pointed summary about PPACA they keep in a locked drawer in their desk. Maybe they keep it in a big manila folder with a full assessment of income and payroll tax regressivity, and birthday cards signed by "Anonymous Source." I find the idea of professionals hoarding the information they're supposed to provide the public more comforting than the idea of professionals being totally incurious and ignorant.


1. No Exceptions for Pre-Existing Conditions
Insurers can no longer deny or base a coverage decision on any pre-existing medical condition. This is obviously huge. Right now, if you're fired and lose your employer-provided health insurance, and you have a significant pre-existing medical condition, you are up shit creek. Unless you can find another job, quickly, you must go uninsured and/or hope you can fall back on hugely inadequate stopgaps like COBRA, especially if you have dependents, and if those dependents have pre-existing conditions, and so on. This gives employers a huge amount of leverage over their workers, limits the employee's personal and occupational mobility, and produces horrible and frightening situations. When this portion of PPACA goes into effect, this will no longer happen.


2. No Medical Underwriting
Underwriting is the process insurers use to analyze and price risk. When you get homeowner's insurance, they look at crime statistics for your neighborhood and run a background check on you in order to determine how much risk they're taking, and how much they should charge. This practice will become illegal in the health insurance market. This will primarily help people who use the individual insurance market, because employers already pool the individual worker's risk for them when they secure or provide health insurance. Right now, you can easily price undesirables out of the health insurance market. Lose your job, and insurers don't need to find a pre-existing condition, not when they can simply appraise your risk high enough to leave you out in the cold.

You may be thinking, "Well, how can they run an insurance business if they can't assess the risk?" This is where the universal insurance mandate will come into play. Because they can no longer adversely select and insure only healthy people (which is basically printing money), insurers now have a federally-enforced guarantee that everyone has insurance, and everyone will be in the risk pool. This will hopefully save money, or at least allow money used in underwriting to be redirected towards the actual provision of services.

This is the devil's pact of the HCR bill. Health insurers can't deny coverage, and so everyone has to get health insurance. You may wonder why the legislature didn't accomplish this result through universal health care or the creation of a publicly-controlled health care plan (the allegedly infamous public option.) The answer is that this bill is extremely business-friendly. That's not a criticism, and it's not an opinion. It just is. This is a business-friendly, "centrist" bill. We have privileged and recruited the existing private market structure to achieve the end result of health care reform and universal coverage, rather than replacing or competing with that structure.

Medical underwriting also provides insurers an opportunity to collect exhaustive personal medical data, and if you make a mistake (or, well, lie) in providing that information, you can expose yourself to…


3. Rescission
If you followed the HCR bill, you should recognize this term, and it likely evokes dread and disgust. If you recognize the term from contract law generally, though, you'll have fairly neutral feelings. That's because contract law doesn't deal with health insurance very well. Rescission is a legal remedy whereby a party moves for the dissolution of a contract, such that the parties are returned to where they were before the contract was signed. Remedies like the dissolution of a contract are designed to deal with businessmen transacting with one another, not with people contracting cancer, and then suddenly losing the health insurance they'd been paying for over the past 20 years.

Insurance has value because it provides you security, in the future, protection against an unknown risk. Terminating an insurance contract after the risk occurs is a demented attempt to apply a remedy to a situation in which it is grossly inappropriate. This cuts against the entire purpose of insurance. This is possibly the biggest single reason our status quo doesn't provide real health insurance. Insurers have the tools and the incentive to undermine and undercut their contractual obligations, eliminating the security insurance is supposed to provide. They can effectively destroy their own product.

As of right now, insurers can invoke rescission even for immaterial or irrelevant innocent mistakes. You can lose your health insurance because you forgot to disclose something irrelevant in your insurance application. Thanks to the PPACA, this will no longer happen.

You will still be able to lose your insurance, though, if you commit material fraud. This will provide the different grounds to avoid the contract. That hasn't changed. However, the effective ban on medical writing, and the ban on exclusions due to pre-existing conditions work to render that situation moot.

4. Ban on Lifetime Coverage Limits
We will ban lifetime coverage limits on health insurance policies. The significance here is pretty obvious, and deeply personal to anyone who's ever had or cared for someone with a long-term illness.


The New Order and the Status Quo
I went into that case involving the AIDS-related lifetime coverage limit because it will help illustrate how these changes work when applied to the old system. There, the case dealt with an employer changing its policy on lifetime coverage limits. So that case will not arise under the new rules of health insurance because those limits will become invalid. But the employer's discretion to change employee benefits remains, and the unbalanced power dynamic remains. So, although we have changed the regulatory framework, the employer's discretion to modify (or cancel!!) employee health insurance plans will remain. These new rules will change the features of employee health insurance, but they won't change the basic relationship. They will protect you, but only to a very specific degree.

ERISA remains the primary source of law when it comes to employer-provided health insurance, and ERISA is a blizzard of craziness. These new controls on health insurance policies don't replace or supplant the ERISA scheme. They just interact with the ERISA scheme to produce something better, but still very flawed. This is crucial, not only because employer-provided health insurance is so ubiquitous, but also because the HCR legislation re-draws the tax subsidization scheme for health insurance and heavily favors the employer-provided insurance model. This bill prioritizes employer-provided health insurance over the individual market to an enormous extent.

You save a lot more money on tax breaks when you get your health insurance through your employer, and your employer saves a ton of money by providing that health insurance. The net tax incentives are extremely compelling — you will have a lot more money in your pocket for each dollar of your health insurance that comes from your employer, and your employer will have a lot more money for each dollar of your salary it pays out in the form of health insurance. This is to say nothing of the "pay or play" rules we've created, by which employers can face fines and fees for not providing employee health insurance.

If someone tells you that they "heard from a guy" that this legislation will prevent small employers from insuring their employees, or will force employers to fire people in order to pay for health insurance, they are almost certainly lying to you or relaying lies to you. The accounting is clear. Situations where both employees and employers don't save money through employer-provided health insurance will only exist below the poverty line. You'll need to have very low salaries to reach that point.

This legislation entrenches the employer-provided health care model, which relies on regressive tax incentivization. The vast majority of the tax incentives benefit the top half of the income ladder. The wealthier you are, the more you're paid, the more money exists in your salary to remove from taxation. If you heard anything about "Cadillac insurance plans," it referred to this situation, where top-level white-collar workers have extraordinarily choice health insurance plans, because every dollar spent on those health insurance plans is a tax deduction for both the employer and the insured. We, the people pay for those plans in tax subsidies.

Finally, this keeps employees in the bizarre legal netherworld described in those cases, waaay back towards the beginning of this article. Your insurer will no longer be able to abuse you in a number of specific ways, and you will be much safer and more secure. But the employer-provided health insurance system still encourages and provides for abuse in general. Employers and the managers of employee benefit plans still have that discretion. They'll just need to find different ways to exercise it.

If our status quo weren't so intensely messed up, this would be a very mixed bag. But our status quo is intolerable, so this legislation is fantastic in that context. Atlanta in August is wonderful when you compare it to Hell. We need to have a big national discussion about what we're doing with this employer insurance model. We need to have a big ontological talk about ERISA.

We need to have a discussion in general. The vast majority of what we're doing here is going right over our collective head. Important policy matters are lost in the sputtering and baby-wailing of Tea Parties, lost in the circus of a dysfunctional news media, lost in the ignorance of legislators who must rely on industry lobbyists to hold their hands through the drafting process. We need to discuss this beyond the level of beltway tennis-match reporting and low-content, high-gloss political metaphysics schema. We can't meaningfully reduce this to tautologies about rights to liberty and negative liberties. This is more than polemic. This is more than political points, whatever those are. But you'd never know it if you rely on the Newsweek crew.

Samuelson and his peers see no value in familiarizing Americans with this legislation. Downtime in the next news cycle of leaks and sound bites can be more easily filled with Twitter quotes superimposed on shiny graphics, set to blaring musical themes that sound like what a teenage boy would play when commissioning a battleship. Journalists are apparently at ease in active passivity, just hanging out and being shiny. They exert effort to be ignorant and uninvolved. I've never been clear what purpose this serves, but it doesn't educate a populace, and it won't teach this legislation.

10 comments:

  1. this is greatly appreciated no joke

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  2. I've read hearsay that the language in the bill regarding 'fraud' and valid grounds for rescission is identical to what's currently in place. Do you know if this is true? If so, is there hope that the interpretation of that language will be set at the federal level rather than state (if that is where it is determined now)?

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  3. Yeah, that rescission thing could be a lot clearer. Okay, right now, pre-reform, there are state rules on rescinding health insurance contracts. These apply to the individual market. They don't apply to the federal market, and therefore don't apply to employer-provided health insurance.

    So right now there's nothing "currently in place" on the federal level. This bill changes that by putting something in place on the federal level, which will apply to ALL health insurance policies. This is federal stuff, applicable in EVERY state.

    The bill establishes that rescission is now ONLY possible in the event of material fraud. This means that if Party A signs a contract with Party B, and Party A committed fraud to convince party B to sign the contract, Party B can try to dissolve the contract.

    The status quo is different because previously, depending on state law, an insurer could often deny coverage or dissolve an insurance contract WITHOUT demonstrating material fraud.

    Material fraud requires 1) A Party must make a representation to the other party, 2) That representation must be WRONG, and the party making it must KNOW it was wrong (lying), 3) That misrepresentation must be material, which means it must be important or relevant to the contract.

    So, people who warn that rescission is still possible are right. But in order to get rescission, the insurer will have to meet a very high standard of proof. They don't just have to comb your policy and find a mistake, they have to prove that mistake was both willful and relevant. That's not easy.

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  4. I wish I heard hearsay like that. All the hearsay I hear is about death panels and white slavery.

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  5. Friends with psychic benefits

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  6. Great job man i really liked it.

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  7. As you explain it, the new reality sounds superficially similar to the Dutch model, where there is a government mandated basic health insurance that's the same for everybody regardless of medical history and offers the same level of coverage no matter which insurer you get it from, plus the option of buying additional coverage. The big difference seems to be that the new US model doesn't prescribe what should be minimally covered by your health insurance, just that you should have health insurance...

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  8. Excellent analysis in a beautifully styled rant. Health care reform is going to be a work in progress for some time now. As snags and unintended side effects come to the surface, there's likely to be round after round of new legislative fixes.

    'Gwailo

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  9. Well done, I actually learned something useful on the internet.

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  10. Good read, thanks!

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Et tu, Mr. Destructo? is a politics, sports and media blog whose purpose is to tell jokes or be really right about things. All of us have real jobs and don't need the hassle that telling jokes here might occasion, which is why some contributors find it more tasteful to pretend to be dead mass murderers.