Good afternoon, everybody. I want to welcome you all here today. Im peter russo, ademocratdirec personal affairs at thecato institute. This is a capitol Hill Briefing entitled economics of Health Insurance reform. The repeal and replacement of the Affordable Care act dominated discussions on the hill in recent weeks and lawmakers are huddling in philadelphia to recourse for the damage done to the Health Market in recent years. When they state they dont have a plan and i suppose im being cheritiable here but democrats say they dont have a political viable one. There is some truth to that as any comprehensive replacement will require support from democrats. If there is a take no prisoners approach continues they will in an act of self fulfillment prevent the plan. But to add to the mix the president promised an outline of his own further complicated the endeavor, bun that might bind and unify existing offerings. Time will tell and we will see. The true libertarian position requires he no federal interpeerance and the slightest regulation at state level, prices are clear innovation and quality is high, if prices are low and entrepreneurship and kme t competition will be minimal. The economics can prove insightful and steer law makers to policies less distortion to policy answers he help with the problems of unmet medical need in insurance markets. All this aside and understand the best available course in our present circumstances, we need have a better understanding of how Health Insurance markets work and how they relate it Health Care Spending and real world effects on patients health. I have asked Peter Van Doren to give his opinions today. He is editor of the wonderful fos fascinating quarterly journal. If youre not getting that already, come to me after and i will make sure youre on the list. He is on the housing land Energy Environment transportation and much else. He has taught at princeton. School of organization and management at yale and university of North Carolina at chapel hill. He was been published in washington journal and new york post. Been on cnn, cnbc, fox news and voice of america. A graduate of mit, earning masters degree and doctorate from yale university. We will leave time for question eats the end but for now welcome Peter Van Doren. Im an podium kind of speaker. I like to wander. But the microphone confines me to be here. So i will move around all day and cspan will be irritated. So if i look edgy, its because i like to make believe im teaching my class, which i cant do with this setup. Anyway, i thault i would start with some humor. Notice the first word in the outline. Its an adjective and its modifying facts. This couple, last couple weeks, weve had some adjectives modifying facts. So im using a term economists use and a colleague last week asked me, why do economists always use the term stylized fact and i had no idea. So i actually looked up the origin. It comes from an article by nicholas caldore, nobel prize winner, 1957 within used he the term to use with analytic studies and regresses that economists have come to accept as true. So they are are facts not in the 2 plus 2 equals 4 sort. They are fact from analytic studies and estimates and things like that. That the economics he profession comes to accept as true. What i thought i would do today is start out by everyone, all of you from congressional offices, anyone who claims to want to do something about health care, we first have to start with the facts. The facts about expenditures. Cspan, where history so you can read what ive written in the outline, which is expenditures rise predictably with age. Per capita expenditures from 2012 are about 3500 for underaged 19. For 4400 between 1944 and 9500 and so on and so on. So finally, if youre over age 84, the average Health Expenditure on you in 2012 are 3 32,400. Thats a lot of money. First of all, average divided across the whole population is 10 grand. So guess what . What we do is basically have endless, endless, endless fights over whether everybody pays 10 grand or some people pay less and some people pay more. Right . Thats pretty much it. And he if some people pay less than 10 grand a year, some people have to pay more. And the parties fight over this and people fight over this but in the end weve got to pay 10 grand a year per capita. Because thats what we spend. See, im drifting way from the mike. Second important stylized fact about Health Care Expenditures, is that theyre extremely, and i mean extremely, concentrated. Most people arent sick. In fact, so im going to, if i had a a accumulative frequency distribution is what i want it draw. If i rank order allamericans, there is 330 million of us almost, 325 million americans, make believe we put them all in a row from the Lowest Health care expenditures in a given year to the highest. All right . There is a sickest american every year. We spend, i dont millions of dollars on that person he. And then theres someone that spends zero. Not only someone, if you look at the outline data i give you, the first 50 of that accumulative frequency distribution, in other word, something on the order of 160 million americans, they dont spend anything on that health care at all, hardly. They spend 264 a year. Okay . Thats only 2. 8 of aggregate Health Care Expenditures a year. The sickest 1 , somewhere around 3 Million People a year, we spend 107,000 a year on them. That accounts for almost a quarter of aggregate u. S. Health expenditures. The top 5 , okay, 1 , so 15 million out of 330 Million People, 15 Million People, the expenditures on them, that half of Health Care Spending right there. So figuring out what to do about how to pay for, how to struggle with, Health Care Spending basically dehe pends on figuring out what it do with those sickest people. Right . E pends on figuring out what it do with those sickest people. Right . Pends on figuring out what it do with those sickest people. Right . Pends on figuring out what it do with those sickest people. Right . And everyone says, oh, i dont know what to do about that. There are claims on both side about what we have to do and im going through those and then i will try to argue that there are two papers that you never heard of and never read, and you should read them. Ive been giving a version of this talk for 20 years. For 20 years. The first paper im getting ahead of the game here but the first paper im going to talk about was published in 1995. And yet, i bet you, i bet you, i bet you a lot of money, none of you in this room, or congressional staffers, have ever read that paper, even though its your job to figure this out. So how do they manage these stylized fact . The conventional wisdom certainly posts Affordable Care act is that the only solution, that all of you here, who are healthy and young, you wont buy anything called Health Care Insurance unless your employer provide it at a very subsidized rate. Because youre healthy. You dont need it. Okay . And then thus the and that leaves sick people and sick people, the mean expenditure for them somewhere between 50 and 100,000 a year. That means the premiums would have to be that average. No one would want to, and many couldnt afford to pay that. So the solution in the conventional wisdom is coercion. Right . That you have to pool, all of you here, have to be forced to join a pool with all of the sick people so that in the end somehow, all of us end up paying 10 grand a year. Right . Somehow we have to pay 10 grand a year. The only question is how. The conventional wisdom is that we need to use force. Of course, libertarians, we kind of worry. We may need forced coercion now and then but be careful. Dont think of it as your first solution. So the gentle word for force is Community Rating. Just language is everything in politics. So Community Rating sounds pretty benign, libertarians say, no, its forced. Both are true, they are describing the same situation. Now, heres the thing thats puzzled me. Which is, there is an alternative world. It did exist and he it did work and somehow everyone denies that that occurred. I was in Health Care Conference once, a little meeting atcato, with ezekiel emmanuel. I said, have you read the pauly paper . And he said, no. And i said, then stop talking. You cant talk about the possibility of individual guaranteed renewable Health Insurance markets unless youve read the pauly paper. And he said, i dont have to read it. And i walked out. Well, what can i do . Right . All im trying to do today is not win you over, not to make you do anything. Just to say, i think you owe yourselves to read the two papers im going to describe because they say that the world thatca that cato describes he, that cant exist, in fact did exist. I want to walk you through, how is that possible . The key is that the costs are very concentrated. Okay . Most people arent sick. Some people are. So therefore, Health Insurance contracts need to have pro two prices. Two component. Ro two prices. Two component. O two prices. Two component. Two prices. Two component. The first is the average Health Care Costs of someone of your age, if youre normal and not sick. And the way this is defined is, all this comes from the medical expenditures panel data. And diseases are defined. Cato regrets this of course, but the government does keep good data. So the data for the studies im describing all come from the great data kept by medicare and medicaid. And big insurers. We have data set on the history of illness on allamericans for 25 years. So we know the probability of any, for any given age group of reverting to a very sick condition for the next year and we know how long that lasts and we know how much we are going to spend on it. We know all that. So the key is, and an individual compatible guaranteed renewable Health Insurance world, what would induce everybody to sign up . Even those of you who are only spending 264 a year . Those of you who werent interacting with the Health Care System at all . And the answer is, if youre young, you would have that base rate for, heres what i spend and its like 200 a year. Then we know diabetes, cancer, ms, cerebral palsy, weird autoimmune we know all that. We know the probabilities of that occurring in every age group. And we know the cost of treating those disease and we know how long they last. They dont last forever. The median time is four years. People either get better or they die. The good perspective is that there is an end to this highcost Condition One way or the other. And we know the probabilities and thus we can just multiply how much we spend, time the probabilities and had that to the normal very lowcost premium that you would have if you add term only nonrenewable kind of Health Insurance. That is the renewable individual Health Insurance premium for you for that year. We can do this for 20yearoldes. We can do this for 63yearolds. It would be more expensive. But we know the transition prob bills in any given year. And for all low risk at age 18 will become high risk by age 55. And 40 will be high risk by age 64. But we know this in a very finegrained way. So we can price all this. Here is what pauly did. Pauly priced everything out. And he said, in his hypothetical world, and he used real medical expenditure data, he said, in my hypothetical insurance world, my insurance premiums for every age group would look like this. Then he went to Health Insurance companies and said, what do you charge for your guaranteed renewable individual Health Insurance contracts . And he found that the premiums were more or less exactly what he predicted they would be given the Health Claims data. So no excess profits, no gouging, no weirdness. And he published this paper and said wow. Look at this. The most important paper youve never heard of. Most important paper youve never read. The second paper youve never heard of and not read is by a senior fellow at cato, john cochran, economist at university of chicago and a financial economist, not a health care economist. He said, here is a weird thing. Guaranteed renewbility makes consumers puts consumers in a bind. They have to trust that this life that this Health Insurance company they signed a contract with will really come true if theyre in high cost condition for the next n years, whatever n is. And they are in a monopsony, or monopoly kind of setting that they cant choose. So cochran said what they really need is a Financial Derivative that once their high cost fwoez with them, it is a sack of money tied to their neck, so that insurers would stop discriminating against people with preexisting conditions. And he called this Health Status transition insurance. And he wrote an article in the journal political economy 1995 called time consistent Health Insurance. We got him finally to do a version for cato in 2009. And that paper is available for you at the outside. So, bottom line, individual need Health Insurance contracts did exist and did work. The claim that individual Health Insurance mark set incapable of existing and working is incorrect. The problem is of course that most of us are an employer provided Health Insurance market. This is not a random sample of society. And thus the transitions between the two kind of ways of Health Insurance are difficult. So in the Pauly Cochran world, we would end coverage, end medicare, end medicaid. We would have everyone finding their own insurance, but they would have all these Little Pockets of cash attached to them that would make insurers eager to find even the most sick patient because those patient would leave the insurer indifferent covering them because they would come with the present value of all the future costs because we know all that from the data. The only trick is, now in the backwards induction game. Suppose people dont buy this really neat product. Right . Suppose lots of people dont buy individual guaranteed renewable Health Insurance with a cochran Health Transition voucher attached to it. And the truth is, i dont know what to do about that. Were back to subsidies or mandates or some combination of both. Or nothing at all. Those are the three choices. And ill leave that to political decision. So thats sort of part one i want to say. So i want to disabuse you of a notion that cato world is la la land. Not the movie. That cato world of people buying and selling and everyone being covered is somehow an imaginary world. It is not. Very reputable people with data have shown he that it did exist and can exist. You do not have to pool everyone in the same communityratings system with a few plans that are all regulated. You can have gazillions of different insurance plans and everyone going for whatever they want as long as everyone comes with a pile of cash associated with themselves thats sufficient to pay for them if they become sick. Which actually is very rare. Thats the importance to remember. Im not saying that all the details he have been worked on and all that, but if Health Insurance reform takes the premise that individual contracts are not well, i want to put individual contracts back on the table as a possible intellectual starting point and see its removal as intellectually unwarranted. Thats the message that i want to convey today. Now i want to switch and end with what i call the dartmouth based efd portion of the program. For those of you who follow health care, you know that theres a line of work that says, some of the middle class notions of what i call medical through put, which look a lot like defense through put to me, are unwarranted. Just like john mccain has never meant a defense bill he didnt want to raise spending on. Many middle class voters, many middle class advocates believe that you cant spend enough on stuff. You cant do enough prevention. You cant do enough screening. We need to have screening for everything. For everybody. Kumbaya. Well, guess what . If you believe in science and you believe in evidence, its remarkable how thin the evidence is for that position. So what i want to do is my little tirade here about the annual physical, Early Detection and mass screening may be entirely overhyped. First as man, well if you read the new york times, you know Prostate Cancer screening probably isnt a good investment. All right . Prostate cancer is very rare. Because we have detection regimes now, cat scans and things, we can find all sort theyve done this, actually. They have taken random samples of people with some exhibiting health like back pain and he others he not exhibiting back pain. Then do cat scans on both. E others he not exhibiting back pain. Then do cat scans on both. Others he not exhibiting back pain. Then do cat scans on both. E not pain. Then do cat scans on both. Not pain. Then do cat scans on both. Not e. Then do cat scans on both. They find more wrong with people without symptoms than they find with