The Only Gun Control That Would Have Helped in Vegas

In the wake of major mass shootings like that in Las Vegas, gun control supporters have brought attention back to a wide range of gun control measures. Universal background checks, assault weapons bans, and numerous other measures are floated, and end up going nowhere given the heated opposition of gun rights supporters.

But while many of these measures would help with day-to-day gun violence (which, along with suicide, is responsible for 99% of all gun deaths) – none of them would have helped in Las Vegas. What might have helped?

A high capacity magazine ban, banning magazines with a capacity over 10 rounds, would have reduced casualties in Las Vegas by over half, and perhaps by as much as 90%.

After the Sandy Hook shooting, I analyzed every mass shooting in the US between 1980 and 2012 – and in each case I reviewed what forms of gun control, if any, might help. One finding stood out – the majority of mass shooters commit suicide, and they tend to commit suicide after running out of bullets and being forced to reload.

The Las Vegas shooter committed suicide as well. If mass shooters commit suicide as a result of the brief thoughts or impulses that occur during the reload cycle, then how many lives would have been saved by forcing the shooter to reload 10 times more often? In studying previous mass shootings, it turned out that a high capacity magazine ban could have saved over 50% of all lives lost.

Many Americans have absolutely no interest in gun control – Bill O’Reilly recently posted that “This is the price of freedom.” But for those with an interest in improving upon the status quo, there’s a lesson here: rather than wasting energy on a wide range of proposals, those interested in curtailing mass shootings should focus on EFFECTIVE measures, not feel-good measures. A high capacity magazine ban is unlikely to pass anytime soon – but placing the focus on a single effective policy instead of broad, sweeping measures helps set the stage for eventual success.

 

Cue the rebuttals:

There are millions of high capacity magazines in the US already! A ban would stop further sales, and since magazines are cheap a buyback could reduce the volume available while driving up the price of those remaining (making them harder to obtain)

Bad guys don’t follow the law! – Ending the public sale of new magazines will rapidly diminish their availability to the black market. Magazines are simple, but need to be machined precisely or they will tend to cause jams.

Shooters will just reload more often! – Analysis of over 60 mass shootings shows that the vast majority of shooters commit suicide after reloading a handful of times. Limiting the amount of damage possible per reload cycle thus reduces the overall damage.

You’re depriving individuals of their 2nd Amendment rights – No less a figure than Antonin Scalia held that the 2nd Amendment is subject to limits and regulations. Bump stocks aside, fully automatic weapons have been banned for individual ownership since 1934 (as a result of misuse of Tommy guns by Al Capone and other mobsters). The question has never been about unfettered access to arms – in this case suitcase nukes would be an arm that one could bear. The question has always been one of striking the appropriate balance between gun rights and the dangers they introduce in society.

AHCA Update: Let Red States Secede from Universal Healthcare

The House is likely to vote today on an updated version of the AHCA (the GOP’s Obamacare replacement) today. I’ve written previously about the bill, and noted that for a GOP-introduced bill, it was originally quite moderate – it embraced the notion of universal healthcare.

The latest AHCA update is considerably more conservative, as it effectively allows states to eliminate most of the ACA’s universality. By bringing back medical underwriting, states will be able to roll the clock back to 2013 (pre-ACA exchanges), when individuals with pre-existing conditions generally could not obtain health insurance.

But several forces combine to make it highly unlikely that pre-existing conditions coverage will disappear from any American state:

  • Once the bill makes it to the Senate, it will likely have to be made considerably more moderate, as the GOP can only lose two GOP Senate votes, and a number of Senators have expressed reservations about the latest changes.
  • The bill will still have to pass through reconciliation between House and Senate, and might die in that process, or might emerge more moderate in that process. It appears unlikely that it will pass through Congress as currently written, or in more conservative form.
  • Even if the bill does become law as written, the 31 states that expanded Medicaid are unlikely to seek to remove pre-existing conditions coverage. Within the 19 remaining states, it’s unclear that state officials are willing to take the blame for rescinding that coverage.

At this point, assuming the bill does make it through the House, it’s the Senate modifications and reconciliation process that will determine whether the final product is worthwhile. If the Senate is able to preserve universality, while strengthening tax credits for older age groups, a credible final product may emerge.

AHCA: Insured to Rise by 7M by 2026 – CBO Misses Power of Free Plans

The CBO generally performs careful, in depth analyses – but their approach is susceptible to inaccuracy when policy proposals differ sharply from existing norms. The CBO projects that over 24m individuals will lose insurance coverage as a result of the AHCA, as older individuals and Medicaid recipients lose insurance faster than younger individuals gain it. This projection misses the power of free plans, however. The table below shows how much different age groups might pay for coverage under the AHCA, with prices based on 2017 ACA exchange prices for states with low (Oregon), medium (Ohio), and high (Nebraska) insurance costs [1]. As the table shows, the AHCA tax credits can provide catastrophic coverage to the majority of Americans below age 45.

Monthly Cost after AHCA Tax Credit
(Plan cost as found on healthcare.gov, cheapest available plan)
State Age 20 Age 30 Age 40 Age 50 Age 60 Family Ages 40,10,8 Family Ages 30,30,5,3
Oregon (Low Cost State, Zip 97035 Used) Free ($112) Free ($208) Free ($234) $35 ($327) $160 ($493) Free
($466)
Free
($648)
Ohio (Medium Cost State, Zip 43004 Used) Free ($121) $12 ($216) Free ($244) $49 ($341) $186 ($519) Free
($487)
Free
($677)
Nebraska (High Cost State, Zip 68010 Used) Free ($131) $66 ($274) $59 ($309) $139 ($431) $323 ($656) $33 ($616) $105 ($855)

Using the information compiled above, we can estimate the change in uninsured rates for each of the groups in the chart below. For age groups below 40, the uninsured rate is projected to drop close to the same level as that of children below 19, since these groups will have access to free plans paid for by tax credits (and insurance companies will market these subsidized free plans mercilessly). For age groups above 45, the uninsured rate will rise, though not quite to pre-ACA levels, when no support was provided.

Projected Uninsured Rate Under AHCAThe CBO estimates that 14 million Americans will lose Medicaid coverage, and that 9 million more will lose either individual or employer-based coverage.

Using population estimates for 2026, I calculate that the number of insured Americans aged 19-34 rises by 7 million, aged 35-44 rises by roughly 2 million, and aged 45-64 drops by roughly 2 million [2]. While it’s important to note that these plans will be much less generous than ACA-subsidized plans, the total number of insured actually rises by around 7 million under these estimates. The GOP will have installed universal, nearly-free catastrophic plans as the future of American health care – if the AHCA passes, as Mssrs. Trump and Ryan continue their struggle to get it through Congress.

P.S. If you are interested to find out more about how the AHCA might impact you or your clients’ investments, my company HiddenLevers has modeled that in our TrumpCare scenarios. Have a look through one of our free demo accounts.

 

[1] The 2017 ACA prices are a reasonable guide as the Trump administration plans to relax the essential benefits associated with plans, and to widen the max price differential between plans for young and old. The risk pool under the AHCA will also likely be healthier, as young, healthy Americans will be drawn into free AHCA plans – because they are free.

[2] Roughly 23% of the population is aged 19-34, and a 9% point drop in uninsured rate for this group in 2026, translates to a rise of 7m more insured Americans. A similar calculation for the 35-44 group yields another 2m insured Americans, while the 2.5% rise in uninsured among older Americans yields a loss of insurance for 2 million. The CBO appears not to contemplate that many of those losing Medicaid will receive tax credits sufficient to provide them with free catastrophic plans, as shown in the table above. This mitigates the Medicaid cuts to some extent.

[3] The original chart above can be found here at the CommonWealth Fund.

TrumpCare (AHCA) – Welcome to Universal Catastrophic Health Insurance

The AHCA would move the USA toward universal catastrophic healthcare coverage, by enabling insurance companies to sign up individuals to $0 monthly premium plans with high deductibles and limited coverage.

While healthcare analysts have been in overdrive commenting on the new GOP health plan, it appears that some key points have been lost in the noise. Whether on Medicaid, total enrollment, or tax credits, it seems that many analysts fail to understand the large-scale implications of the bill. As written, the AHCA has the potential to be transformative – it would retain the goal of universal coverage, while shifting tax credits toward universal high deductible insurance. If fully implemented, the AHCA could actually lead to gains in coverage – but the US healthcare market would be transformed by a move toward high deductible catastrophic coverage.

AHCA Key Changes:

  • Covered Benefits: The AHCA does not change the essential benefits list, but Secretary Price is interested in reducing essential benefits to lower costs.
  • Tax Credits: Tax credits will be less generous, but will cover more of the population, potentially leading to a shift toward catastrophic plans.
  • Medicaid: The Medicaid expansion ends after 2019, but tax credits will be available to all lower and middle-income Americans.
  • Employer Coverage: AHCA creates a strong incentive for employers to drop coverage, since most American workers will receive tax credits.
  • Universality: AHCA provides tax credits to virtually all Americans without other coverage, cementing the goal of universal health care in the USA.
Detailed Findings:

Covered Benefits:
With the exception of abortion coverage, the AHCA does not change the essential benefits under the ACA. HHS Secretary Tom Price has indicated that he will reduce regulations that increase costs – he can do this by limiting the definition of essential benefits.

Tom Price has indicated on multiple occasions that HHS will seek to reduce regulations on health insurance markets, and recently both he and President Trump indicated that these changes would be part of “phase 2 & 3” of their healthcare overhaul. In the past Secretary Price has indicated that he will seek to specifically limit the essential benefits requirement while at HHS.

The AHCA is particularly punitive towards abortion, barring the use of tax credits for any plan that covers abortion services (page 72 of bill pdf).

Tax Credits:
The AHCA offers up to $14k in tax credits per family, at 2k-4k per person depending on age (pages 90-92 of pdf). It also enables insurance companies to claim tax credits on behalf of enrollees, enabling them to offer cheap or free plans to the public.

Much has been written on winners and losers with the proposed tax credit changes. Analysts both left and right fear many will lose insurance. But look at page 106 of the bill: “Not later than January 1, 2020, the Secretary … shall establish a program … for making payments to providers of eligible health insurance on behalf of tax payers eligible for the credit under section 36C.”

Consider what this means – insurance companies will be paid between $2000 and $14,000 per year for each enrollment. In a similar situation in the for-profit university industry, tuition essentially matched federal loan programs, creating a no-money-down product for students. With the AHCA, insurers will be strongly incentivized by the market to offer $0 premium plans in order to maximize their signups of younger individuals in particular.

With the change of young-old ratio to 5:1 (page 66), and Tom Price’s expected reduction of essential benefits, new catastrophic plans will likely flood the market, providing a no cost option for many. See Appendix I for specific examples using 2017 exchange pricing.

Medicaid:
The AHCA ends the Medicaid expansion in 2019, but states may have some incentivize to jump in now, because the future funding they receive is based on the number of enrollees at the end of 2019. Beginning in 2020 the Medicaid expansion will be repealed, and only those enrolled under pre-ACA rules (with stricter income and asset tests) can be newly enrolled into Medicaid.

The AHCA does close a gap caused in non-Medicaid expansion states, where many workers make too much to qualify for traditional Medicaid, but too little to qualify for ACA subsidies. These individuals will qualify for the new AHCA tax credits.

Employer Coverage:
The AHCA removes penalties for not providing insurance (page 84 of bill pdf), and could encourage employers to drop coverage as it provides tax credits to a much larger range of working age Americans.

Per the Kaiser Foundation, the average employer contribution to individual employee healthcare is around $4800, with the employee contributing around $1200. At a 25% federal tax rate, this leads to a tax deduction value of $1500, versus a tax credit of $3000 for the median-age American worker. For family coverage, a tax deduction value (25% tax bracket) of roughly $4500 compares to a tax credit of $9000 for a family of four with adults in their 30s. In both cases, both the employer and employee would benefit if the employer dropped coverage, raised wages, and let the employee take advantage of the tax credit.

Appendix II presents a fully worked example for a family of four making $100k per year, and shows that the family would likely benefit under AHCA changes.

Universality:

The AHCA offers tax credits to all Americans without employer-based healthcare (except those with higher incomes), and as a result the AHCA accepts the ACA’s premise of universal health insurance.

The only Americans excluded from the new AHCA tax credits are those already receiving healthcare from a government program (Medicare, Medicaid, VA, etc) or from employer-based coverage (page 97 of bill pdf).

The GOP has produced a plan that implicitly accepts that universal healthcare is here to stay. The end game (relative to the ACA) will look very different, however, with large swaths of the population covered by high-deductible catastrophic plans.

Appendix I: Are $0 premiums for catastrophic plans really possible?

Is $2000 ($166/month) sufficient to offer a “free” plan to a young adult, or $10,000 ($833/month) sufficient to offer a “free” plan to a family of 4?

Using Healthcare.gov, in the Atlanta area the current cheapest plan for age 21 is exactly 1/3 of the $597 charged to a 64 year old, as a result of the ACA 3:1 limit on costs for older Americans. A bronze plan for age 20 is only $126/month in Atlanta, since the 3:1 limit doesn’t apply below age 21 (even in New York City, individual catastrophic plans are available from around $165/month). Since the AHCA raises the ratio limit to 5:1, this shows how $0 plans will fit within the $2000 tax credit.

How about for a family of four ages 31, 31, 4, and 2? This priced out at $713/month in Atlanta, below the $10k AHCA annual tax credit. Since the AHCA allows excess tax credits to be placed into an HSA, the family could bank around $1500 per year toward future medical expenses while paying $0 in premiums. In New York City, the family premium would be around $1050/month, leaving the family bearing around $200/month in premiums – but this is before accounting for the impact of the new 5:1 ratio and curtailment of essential benefits, which would likely bring net costs to $0 even in NYC.

What about older Americans? A $4000 ($333/month) tax credit will not cover a single 64 year-old’s $600/month premium in Atlanta. If HHS substantially reduces essential benefits, that may close the gap, but with a corresponding loss of benefits. Pre-Medicare age older Americans are clearly the biggest losers under the AHCA reform. But if the AHCA is able to substantially increase enrollment by the young and healthy due to $0 premiums, this may enable more affordable plans further up the age spectrum.

Appendix II: Why Employers May Drop Coverage – A Specific Example

Let’s consider again a family of four, ages 31, 31, 4, and 2. Using Kaiser numbers, on average the family and their employer spent a total around $18,000 on health insurance premiums, with the employer contributing roughly $13,000 of that amount. In the 25% tax bracket, the family is receiving $4500 in value from the existing tax deduction. In total, the family is spending about $500 out of pocket on health insurance when employer assistance and tax deductions are considered.

What if the employer were to drop coverage, enabling the family to receive a $9k AHCA tax credit, and to raise the employee’s salary by $13,000 instead? The employee would receive $9750 in new after-tax income (considering only a 25% federal rate) plus $9000 in tax credits, or $18,750 total. Assuming similar premiums, the family would then spend $18,000 on health insurance, leaving $750 unspent. In total the family might come out $1250 ahead versus the existing system, and the employer would be able to offload the risk and expense of managing benefits.

The GOP Civil War on Taxes

Republicans love tax cuts, and both President Trump and Speaker Ryan have set their sights on lowering both personal and corporate income tax rates. But some Republicans also like controlling the budget deficit, while others favor defense spending or immigration control. How can the GOP cut tax rates, raise defense spending and immigration enforcement, and control the budget deficit? Here’s the heart of the problem: the federal government gets roughly $1.4T from income taxes, $440B from corporate income taxes and capital gains, $1.1T from payroll taxes, and smaller amounts from other sources [1]. The tax plan under consideration will substantially cut the first two sources, without raising the other categories. How can such a tax plan be implemented without blowing up the budget deficit?

The evolving Trump-Ryan plan bridges this gap by introducing a new category: a border adjustment tax on imports. If all 2.7T in US imports were taxed at 20%, this could raise over $500B per year, providing a source for big tax cuts (though still not enough to pay for the tax cuts proposed). But there’s a problem with this idea – will 50 Republican senators vote for it?

The National Retail Federation has come out strongly against the plan, as have the Koch brothers, whose companies participate heavily in international trade. The Kochs are focusing their battle charge in 15 states where they may be able to sway Senate votes. Meanwhile, with retail giant WalMart strongly opposed, will the senators from Wal-Mart… err Arkansas be on board?

Hence we have a GOP civil war, pitting major exporters like Boeing, Oracle, and GE against retailers and other importers, and pitting nationalist Republicans versus traditional free-trade Republicans.

Trump and Ryan can only spare two votes in the Senate – will they be able to keep everyone on board? While the plan could stimulate US growth through tax cuts and favoring US production, it may also trigger a trade war that nullifies much of its benefit. There’s also the essential nature of the import tax – it is effectively introducing a new US consumption tax for the first time. Consumption taxes have been on the GOP radar for some time, as they tend to shift tax burdens down the income scale, and to reduce taxes on the wealthy. But is Trump’s base ready to pay an extra 40 cents at the pump every day, when many of them won’t see a huge tax cut [2]? Let the Republican tax civil war begin.

[1] The CBO provides a detailed breakdown of revenues here. I have combined corporate taxes and capital gains into one category, as both are taxes on capital.

[2] Roughly 50% of oil is still imported into the US, so a border adjustment tax could disproportionately increase oil prices.

What Can Be Done About Skyrocketing Drug Prices?

The American government and even major insurers actually have a lot of levers they can pull to lower drug costs – but do politicians, insurers, and employers have the courage to try?

The drumbeat of overpriced-drug stories has been continuous in America of late, from Martin Shkreli’s 5400% price hike last year, to the recent price hike and subsequent backpedaling of Mylan with respect to the EpiPen. With growing outrage over skyrocketing drug prices, it’s worth asking – what can be done about it? Drug pricing is not subject to typical market forces since a new drug often has exactly 0 direct competitors – enabling a drug company to set virtually any price. New cancer drugs often start list pricing at $300,000 per year, while groundbreaking new Hepatitis-C treatments like Gilead’s Sovaldi started out at $84,000 for a short term (curative) course of treatment. Insurance companies (and major employers) have been unwilling to say no, swallowing each hike and passing it on in higher premiums. Medicare, Medicaid, the VA, and other public entities have been banned from negotiating prices, leaving them powerless to get a better deal for those receiving care through their programs. Here are a few ideas on how to break the logjam, in order of increasing potential savings:

1. The Anti-Monopoly Approach

Making drugs, and in particular so-called small molecule drugs, is actually both inexpensive and easy. The primary protection that drug makers use to enforce their monopoly position on new drugs is the patent system. While this arguably makes sense for new drugs, what about long-generic drugs? In recent years certain drug companies (e.g. Valeant) began specializing in buying up the manufacturers of old drugs and immediately hiking prices. After gaining a monopoly position it became easy to hike prices by 50-100% per year and extract huge profits, while new entrants were stymied by
the FDA approval process required to certify the efficacy of their drug version. Why not streamline the FDA approval rules for generic drug manufacture? If a drug is tested and shown to be chemically identical, how much further testing is really necessary?

Alternately, the Department of Justice or FTC could bring suit to halt acquisitions which would leave zero competitors in the market for a generic drug. Special pharmacies called compounding pharmacies are also capable of making many drug compounds. Why not
allow compounding pharmacies to compete across all generic drugs, or specifically contract with them to make generic equivalents for the VA system or Medicaid system?

2. The “Title IX” Approach

Private American colleges and universities are not actually required by law to provide equity in women’s sports, or to follow any of a wide range of Department of Education edicts. The catch? In order to receive federal funding, institutions of higher education must comply with these rules. Since virtually all colleges make use of varying forms of federal assistance, they fall into line.

The American pharmaceutical industry does very little original research – most innovations originate in the university system, and most of the research funding (over $21B per year) comes from the National Institutes of Health [1]. The American government could utilize this lever to strongly influence drug pricing. Pharmaceutical companies might be required to adhere to certain pricing guidelines if they wished to license research originating from NIH funding.

Those guidelines might require drug makers to release drugs into the generic market on an accelerated timeline, for instance. Or the rules might require that drug makers adhere to a value-based pricing approach, as described further below. Drug makers could be required to pay a tiered tax on drug sales to fund NIH research – a tax of 25% on prices above $1000/patient/month and 50% above $4000/patient/month could simultaneously fund future research and encourage drug makers to keep pricing down. The advantage of the “Title IX” approach is that it preserves the liberty of drug companies – if they don’t want to conform with the rules, they can simply do their own basic research. Fiscal conservatives might find this approach palatable as it directly charges users (drug companies) for the government programs they use, and lowers the deficit in the process.

3. The Value-Based Approach

If insurers and government buyers (Medicare/Medicaid/VA) all insisted on paying for value, pharmaceutical companies might be compelled to go along. How do you define value? The UK’s NICE measures the efficacy of medical treatments by attempting to measure the number of “quality-adjusted life years” provided by that treatment. If a cancer drug postpones death by 2 years on average, and has mild side effects, then it can be said to provide 2 years of QALY. The NIH takes this a step further by quantifying how much it will pay per QALY (currently around 25,000 pounds per year), and it sets prices
on drugs using this approach.

American buyers could emulate this approach by offering to pay for measured improvements in outcomes. If a new cancer drug extends life by 2 years, but existing cancer drugs extend life by 1.5 years, then the value of the new drug is an additional half-year of life. Drug buyers could offer to pay a premium for the new drug based on this degree of improvement, and no more. Buyers could also use this as a way to foster competition between older and newer generations of drugs. The older drug is 75% as effective, so it can be placed into competition with the new drug, but at a discount. Express Scripts took this approach in the Hepatitis-C market and was among the first buyers to find a way to push back against Gilead’s $1000 per-pill asking price for Sovaldi.

Conclusion

As long insurers are happy to pass rising costs along in the form of higher premiums, and American politicians remain beholden to the pharmaceutical lobby, nothing will change. But the ideas outlined above show that America doesn’t need European style price controls to break the drug price spiral – a combination of relatively small policy changes and insurers’ willingness to negotiate are all that is required.

 

[1] This article investigates the breakdown of basic pharmaceutical research in detail, and concludes that big pharma companies contribute less than 25% of research dollars in the US, with most of the balance coming from the NIH.