Tuesday, December 20, 2016

Spending Reform, Part 2: Health Care

Health care is one of the few parts of the Wyoming economy that is still growing. October of this year marked the 34th straight month with year-to-year job growth in health care and social assistance. The growth is not strong, however, at times barely statistically visible. This is not surprising, given how the rest of the Wyoming economy is doing

At the same time, health care is an industry where relatively mild government reforms could make a big difference to the Wyoming economy. 

To see the potential in health reform, we need to include both health insurance and health care production. There are interesting reform potentials in both areas.

As for health care itself, we rely to a relatively high degree on larger units, primarily hospitals. The upside of this is that we have access to a wide range of health care in a concentrated unit, but there are also two downsides: there is a relatively high fixed cost associated with establishing a hospital, discouraging competition from similar units; there is also a relatively low flexible cost (relative fixed costs) which can allow a hospital to keep smaller providers at bay.

In other words, competition between health care providers is not a given in Wyoming. Yet the best way to combine low cost with quality is to rely on the free market. The exact reform path to a better market for health care depends to a large degree on what the incoming Trump administration has in mind in terms of "repealing and replacing" the Affordable Care Act; it would be prudent to await the new administration's reform plans before developing a specific reform route to free-market health care here in Wyoming. 

What we do know, though, is that successful free-market reform of health care production would have noticeably positive effects. The Kaiser Family Foundation reports that prior to the Affordable Care Act, Wyoming had the fourth fastest-growing health care costs in the country. If the growth in our health care expenditures had followed the national trend in the pre-ACA health care landscape, we would have paid approximately $480 million less per year for our health care.  

We should handle this number with some caution. It is not the case that we can cut the annual cost of health care in Wyoming by almost half-a-billion dollars by just waving some magic wand at the industry. Comparing the nation as a whole with a rural state like ours has many caveats that skeptics rightfully could point to. 

That said, the opposite is not true either. In other words, is it not the case that experiences from other states are irrelevant to what we can do here in Wyoming. Rural states like Montana and South Dakota have historically seen their health care costs grow more slowly than ours, and North Dakota's health care costs have grown so much slower they even fall behind the national average. In fact, if we had followed the North Dakota trend in health care costs from 2000 to 2009, our health care system would have been $636 million cheaper in 2009 than it actually was.

In other words, it is fair to assume that, under the right reform conditions, we would be able to substantially cut the health care costs in our state. The key question is how those cost reductions would be returned to health care consumers; if the third party - the insurance companies - would be able to gobble up the gains, then not much would have been gained, now, would it?

The only way to obtain real cost savings from health reform is to combine reforms on the provider side and on the payment side. To see what we could accomplish in detail with in-state reforms, we need - again - to wait for what is going to happen at the federal level. That said, suppose we return to a health insurance market that approximately resembles what we had before Obamacare. Back then, in 2013, the average monthly cost of private health insurance per enrolled person here in Wyoming was $296.19. That comes out to $3,563.52 per year; for the 424,000 Wyoming residents who were enrolled in private insurance back then, the total annual premium costs amounted to $1.51 billion.

By comparison, Wyoming has historically had a high rate of enrollees in private insurance. In 2013 that rate was 74 percent, about eight percentage points above the national average. At the same time, our premium costs back then were 26 percent higher than the national average, ranking our premiums the 9th highest nationally. The combination of a high rate of private insurance coverage and expensive insurance is probably attributable to the minerals industry; nevertheless, insurance for small businesses and individuals has never been low in our state. 

With average premiums 49 percent above Idaho, we can legitimately ask how much better off we would be if we could enact competition-enhancing health insurance reforms. If we could come down to the same rates as Idahoans can pay, then for the same enrolled population of 424,000 people we would save ourselves almost exactly $500 million per year. 

Again, the exact path to realizing these potential gains runs through a territory the map of which the Trump administration is currently drawing. Nevertheless, the mere opportunity to combine almost $500 million in reduced health-care costs over time, with $500 million in reduced insurance premiums, opens the doors for major dynamic effects on the Wyoming economy. 

There is one more component of health reform that we also need to take into account here, namely Medicaid. However, reforms to that program - and its economic benefits - deserve an article of its own. Once we have that, we can start looking at the systemic economic effects of comprehensive health care and health insurance reforms in Wyoming. 

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