Corruption of Senate Healthcare Bill Revealed, Using Middle-School Math

The shocking corruption of the Senate health care bill revealed, using just two facts (helpfully supplied by the Senate itself) and a little middle-school math

On Christmas Eve, the Senate passed its long-awaited health care reform bill. This post proves the colossal stupidity and corruption of the so-called “Patient Protection and Affordable Care Act”—using only two facts (helpfully supplied by the Senate itself) and a little middle-school math.

Part I: The Core of the Stupidity: Two Little Facts

Let’s get right to it. Section 2718 of the Senate bill provides that

Health insurance companies will be required to report publicly the percentage of total premium revenue that is expended on clinical services, and quality rather than administrative costs. Health insurance companies will be required to refund each enrollee by the amount by which premium revenue expended by the health insurer for non-claims costs exceeds 20 percent in the group market and 25 percent in the individual market. The requirement to provide a refund expires on December 31, 2013, but the requirement to report percentages continues.[1]

The Senate document in which this summary appears presents Section 2718 as a good idea for ordinary Americans—the summary is included under the heading “Bringing Down the Cost of Healthcare Coverage.” But what does this provision really mean?

“Refunds” to patients sound good at first, but what the Senate is really saying here is that the Senate bill requires private insurers to spend only 75 to 80 percent of every premium dollar on actual health care. OK, so what does that mean?

Let’s put it another way: the Senate bill authorizes private insurers to consume 20 to 25 percent of every premium dollar on administrative costs.

But according to the Senate’s own data, ordinary Medicare's administrative costs are only 2%.[2] In other words, if we simply opened ordinary Medicare to uninsured Americans, 98 cents of every Medicare dollar would buy actual health care.

Believe it or not, the two little facts given above—that 20 to 25% figure, and that 2%— are enough to prove, without any other information, the colossal stupidity and shocking corruption of the so-called “Patient Protection and Affordable Care Act.”

Part II: A Few Simple Definitions.

Before we get started, let’s make sure we know what we are talking about. Let’s define some basic terms, so that everyone can understand the argument.

Obviously, the Real Product of the health care sector is health care. Just as obviously, Real Product is good. Rational “buyers” (individuals, taxpayers, or businesses[3]) want to buy as much Real Product (actual health care) as possible at the lowest possible total cost.

Let’s define the Production Cost of a given amount of health care as the price that the producer (the doctor or hospital) charges an “insurer” or “payer” in order to provide that amount of Real Product (i.e., health care) to the “buyer” (i.e., the patient).

And let’s define the Administrative Cost of a given amount of health care as the price that the “insurer” or “payer” charges for providing the service that it provides—i.e., “payer” service—that is, collecting funds from the “buyer” and writing a check to pay the provider to provide that amount of Real Product to the “buyer.”

Note that the “insurer” or “payer” adds no value to the real health care product and doesn’t contribute to its production or quality in any way.[4] All the “insurer” or “payer” does that is of any use to the “buyer” or “patient” is to collect buyers’ money and write checks to buy Real Product from providers. Thus, every dollar that the “insurer” consumes in Administrative Cost represents one less dollar of Real Product that the “buyer” can afford to buy.[5] In other words, Administrative cost is bad. Very bad.

Just a few more definitions. First, the Total Cost of a given amount of health care is the sum of the Production Cost and the Administrative Cost (that is, the actual amount that the “buyer” or “patient” must spend to acquire the Real Product, health care, via the “payer” or “insurer”). And just as obviously, the goal of a rational buyer is to make Total Cost as low as possible, by minimizing Administrative Cost, so as to be able to buy as much Real Product as possible, at the lowest possible cost.

Let’s define the Medicare Cost of a given amount of health care as the Total Cost to buy that amount of health care through ordinary Medicare.

And let’s define the Private Insurer Cost of a given amount of health care as the Total Cost to buy that amount of health care through private insurers under the Senate plan.

So far, so good. Already you are probably beginning to draw some conclusions of your own (especially if you have reviewed the facts in Part I). But don’t jump to conclusions—if your middle-school math is a little rusty, you may be in for a bit of a shock.

Let’s add one last definition. Let’s say that the Administrative Cost Wedge of an “insurer” or “payer” is its Administrative Cost expressed as a percentage of Production Cost. This is a very important concept which the next section explains in detail.

Part III: Mind-Blowing Secrets of the Senate Revealed, Using Middle-School Math

Obviously, a smart buyer who wants to buy as much Real Product (actual health care) as possible [6] should figure out the Administrative Cost Wedge of each potential “insurer,” so as to be able to predict how much that insurer’s “money collection and check-writing service” will increase the Total Cost of Real Product. But how do we figure out this Cost Wedge under the Senate bill? For that we need our middle-school math.

Get ready for some sticker shock. A hasty person might leap to the conclusion that because ordinary Medicare consumes in Administrative Cost 2% of every dollar it receives from “buyers,” Medicare’s Administrative Cost Wedge must be 2%.

Similarly, a non-math-major might assume that because private insurers under the Senate bill would consume in Administrative Cost 20 to 25% of every premium dollar, that the Administrative Cost Wedge of private insurers must be 20 to 25%—and that therefore, if we want to figure out the Private Insurer Cost (i.e., the Total Cost to buy a given amount of health care using a Private Insurer under the Senate plan), we simply need to add 20 to 25% to the Production Cost.

These assumptions are completely and utterly wrong. Surprised? Here’s why.

Suppose (for simplicity’s sake) that the Production Cost of the amount of Real Product that we want to buy is $100. In order to figure out the Medicare Cost for that amount of Real Product, we need to solve the following middle-school equation:

0.98 x M = 100.

Thus we find that M, Medicare Cost, is not $102.00, but $102.0408. OK—; so far so good. To figure out the range for Private Insurer Cost, we need to solve two equations:

0.80 x P1 = 100 and 0.75 x P2 = 100.

Solving them, we find that the Private Insurer Cost to buy $100 of Real Product is not $120.00 to $125.00, as a non-math major might guess, but $125.00 to $133.3333. [7]

Thus, Medicare’s Administrative Cost to buy $100 of healthcare is $2.04, and Private Insurers’ Cost to buy $100 of healthcare ranges between $25.00 and $33.33. [8] Put differently, ordinary Medicare adds 2.04% to the Total Cost of Real Product, whereas Private Insurers under the Senate plan increase the Total Cost of Real Product by 25 to 33.33%.

As it happens, we have just solved for the Administrative Cost Wedge of the available “payers” or “insurers.” Ordinary Medicare’s Administrative Cost Wedge is 2.04%; and Private Insurers’ Administrative Cost Wedge under the Senate bill is 25 to 33.33%.

Quite a contrast in “Administrative Cost Wedge,” isn’t it? But hold your horses! There’s more to this than you might think, as the next section will show.

Part IV. Read This Section and Make Naked Senators Weep!

Okay, we’ve done some Einstein-level math here and need a break. Let’s work with words again for a few paragraphs. Obviously, a smart buyer who wants to buy as much Real Product as possible at the lowest possible Total Cost should pick the “insurer” with the smallest possible Administrative Cost Wedge. But how do we compare “insurers”?

A few more definitions might come in handy. So let’s define the Real Cost of a given amount of healthcare as the lowest possible Total Cost at which a smart “buyer” can buy that amount of Real Product. (In other words, Real Cost is the sum of (1) the Production Cost of the provider and (2) the Administrative Cost of the least expensive “insurer.”)

And (just for the heck of it, since logic apparently isn’t in fashion in the Senate) let’s define any portion of Total Cost for a particular insurer that exceeds Real Cost as Waste.

Given the “insurers” or “payers” under consideration here, we can conclude that
1. the Real Cost of healthcare = the Medicare Cost of healthcare, [9] and
2. the Private Insurer Cost of healthcare = the Medicare Cost of healthcare + Waste.

But how much Waste? Let’s try one more definition: the Administrative Cost Wedge Differential[10] is the difference between (1) the Administrative Cost Wedge of a particular “insurer” and (2) the lowest available Administrative Cost Wedge (i.e., the Administrative Cost Wedge of the least expensive “payer” or “insurer”).

Now obviously, if our Senate really wants to “reduce the cost of coverage,” it should cut out Waste entirely. If for some reason [11] our senators have drafted a bill that does not buy “money-collection-and-check-writing” (i.e., “payer”) service from the least expensive “insurer,” but instead buys it from insurers who create staggering Waste, something’s seriously wrong in Washington. So let’s define any amount of Total Cost exceeding Real Cost as Graft, and rename the Cost Wedge Differential the Graft Wedge.

Obviously, applying the equation for the Differential given above, the Graft Wedge for ordinary Medicare is zero [12]; therefore, insuring the uninsured under Medicare would create zero Waste and zero Graft. But the Graft Wedge for Private Insurers ranges between 22.96% (solving for 25% - 2.04%) and 31.29% (solving for 33.33% - 2.04%).[13]

In other words, using private insurers to insure the uninsured (instead of opening Medicare to all Americans) wastes between 22.96 and 31.29% of every health care dollar in completely unjustifiable graft.[14]

In still other words, 23 to 31 cents of every health dollar (given the amount of real work that goes into producing the Real Product) is a heck of a lot to ask buyers, not for the service of writing checks (“payer” service), but for nothing—yes, nothing!—at all.[15] For let’s be very clear: there is no value added in the Graft Wedge. The Graft Wedge just represents colossally stupid waste—and shocking corruption. [16]

Part V: Let’s Draw Those Conclusions: Shocking Stupidity and Corruption of the Senate Health Care Reform Bill Stunningly Revealed.

So our Corporate Democratic Senators called their health care “reform” bill the “the Patient Protection and Affordable Health Care Act”—but it is really quite the opposite.

This is actually the “Screw the Patients and Increase the Cost of Healthcare by 23 to 31%, For Absolutely No Good Reason At All Act.”

It should be obvious by now that this bill does not protect patients. The only “protection” here is for private insurers. Compelling ordinary Americans to pay private insurers between 22.96% and 31.29% of every dollar in sheer graft, for no service or product, but merely to let patients have access to health care they could buy a heck of a lot more cheaply through Medicare, counts for “protection money” in my book.

But the problem is not just that Private Insurer Graft represents a huge amount of patients’ money lost. It also represents huge amounts of health care lost.

Suppose that the amount of health care we need to buy is actually $100 billion.
Medicare Cost would be $102.04 billion. Private Insurer Cost would range between $125 billion and $133.33 billion. In other words, Private Insurers would consume between $22.96 billion and $31.29 billion in Graft. But that Graft money, if instead plowed into Medicare, would buy between $22.5 billion (i.e., 0.98 x $22.96 billion) and $30.66 billion (i.e., 0.98 x $31.29 billion) of additional Real Product (i.e., health care).

In other words, if we use ordinary Medicare instead of private insurers to insure the uninsured, we can save $22.96 billion to $31.29 billion dollars for every $100 billion of healthcare we buy; or again: when we use Medicare instead of private insurers to buy health care, we can buy 22.5% to 30.66% more health care for the same price.[17]

So why do our Senators want us to pay wasteful private insurers a 22.96%-to-31.29% Graft Wedge, for no value, product, good, or service in exchange—unjustifiably and perversely increasing the cost of health care by 22.96 to 31.29%?

Seriously—what are we supposed to think when in the worst recession in over 70 years, with 10% unemployment [18] and deficits of over a trillion dollars a year, Corporate Democrats like Max Baucus and Ben Nelson in the Senate, given a voter mandate to find a way to “protect patients” and make health care “affordable” for Americans, come up with an outrageous scheme like that?

And what are we supposed to think of a President who does not educate us in this math?

Well, there you have it.

The Stupidity and Corruption of the Senate bill has been proven as promised—using only two facts, helpfully provided by the Senate itself—and a little middle-school math.

Obviously, the real Corruption here is in the Congress. And just as obviously, the real Stupidity is in the American people, if we let Congress force us to buy private insurance for the uninsured under its corrupt “Protection Money” Act, instead of opening ordinary Medicare to all Americans.

We need Improved Medicare for All. [19]

If Corporate Democrats don’t wake up to the basic math in “healthcare reform,” they sure as hell aren’t going to like the math of the next elections!

__________
END NOTES

[1] “The Patient Protection and Affordable Care Act as Passed: Section‐by‐Section Analysis,” U.S. Senate, January 26, 2009 at http://dpc.senate.gov/healthreformbill/healthbill49.pdf.

[2] Paul Krugman, “Administrative Costs,” July 6, 2009, New York Times, http://krugman.blogs.nytimes.com/2009/07/06/administrative-costs/.), citing a study by Jacob Hacker at http://institute.ourfuture.org/files/Jacob_Hacker_Public_Plan_Choice.pdf, itself citing a Congressional Budget Office report at http://www.cbo.gov/ftpdocs/76xx/doc7697/12-08-Medicare.pdf.

[3] In reality, of course, “businesses” are not truly “buyers” of healthcare. The real “buyers” of “employer” insurance are workers and taxpayers. (The workers have contracted for the health insurance in lieu of other compensation, and the taxpayers subsidize purchase of healthcare for workers, by not charging employers income tax on money spent to buy employee healthcare, and not charging workers income tax on income accepted in the form of health insurance.)

[4] That is why alarmist talk about a “government takeover” of healthcare is nonsense. The reality is that Medicare is simply a mechanism for collecting money and writing checks to pay private-sector doctors and hospitals for providing the real product—healthcare—to patients. In this regard, Medicare is precisely the same as private insurers, with the notable difference that it is the purpose of Medicare to charge as little as possible for providing that check-writing service—while it is the purpose of private insurers to charge as much as possible for providing the same service.

[5] Thus, any increase in administrative cost over the minimal possible value is 100% dead loss for the “buyer,” adding no value, and in fact depriving the buyer of a corresponding amount of actual product.

[6] i.e., a buyer who wants to “protect” patients and make health care “affordable”

[7] Yes, this is really how the universe works. If you don’t get it, go visit your 7th-grade math teacher.

[8] I think we can all safely agree that $33.33 is a pretty stiff charge to write a $100 check.

[9] Because Medicare is the least expensive insurer with the lowest Administrative Cost Wedge, providing the lowest possible Total Cost (i.e., the “Real Cost”).

[10] We can also define the Administrative Cost Wedge Differential as Dead Loss to the “buyer,” because it is the amount of the insurer’s Administrative Cost Wedge that represents pure Waste (i.e., it does not even provide the service of collecting money and writing checks; it in fact provides nothing at all).

[11] (such as fat campaign donations and the promise of revolving-door payoffs)

[12] Because Medicare is by far the least expensive insurer, with by far the lowest Administrative Cost Wedge—so that the lowest possible Total Cost for the product (i.e., the “Real Cost”) is Medicare Cost.

[13] Again, if you are having trouble with this, check in with your middle-school math teacher. It really is true.

[14] The reality, of course, is that all individuals who currently pay for private insurance directly, and all workers and taxpayers who buy “employee” health insurance through employers, are already paying a similar Graft Wedge to these inefficient private insurers. Image the vast cost savings if we opened Medicare to employers—i.e., if we gave “employers” (i.e., workers and taxpayers) the right to buy ordinary Medicare for employees—paying only the Real Cost of healthcare—instead of forcing them to pay private insurers a massive cost wedge for no reason at all!

[15] The Graft Wedge, for example, does not even buy the service of collecting money and writing checks, because it represents Private Insurer Cost in excess of the Real Cost of healthcare (i.e., the Total Cost of using Medicare to pay for health care—including its total Administrative Cost for the service of collecting money and writing checks.)

[16] In actuality, Medicare is (in theory at least) able to negotiate better prices with providers than Private Insurers, in part because (if permitted to use it) it has greater bargaining leverage because of monopsony buying power—and in part because working with ordinary Medicare instead of thousands of private insurer plans reduces providers’ own billing costs. The reality is that a “single payer” is by far the most efficient way of collecting money and writing checks to pay providers for their product. (If individual “buyers” were the “payers” for health care, for example, doctors and hospitals would have to vastly expand their billing departments as they struggled to collect bills from 300 million individual payers—adding substantially to production cost.)

[17] See, e.g., “State Jobless Rates on the Rise,” January 22, 2010. http://money.cnn.com/2010/01/22/news/economy/state_unemployment.

[18] Improved Medicare for all would save Americans $400 billion a year in graft—more than four times the amount needed to insure all of the uninsured using ordinary Medicare. For more information about Improved Medicare for All, go to the Physicians for a National Health Program, at http://www.pnhp.org.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future