Middle-class families need health insurance to protect themselves from the financial devastation of a catastrophic illness. But many (arguably, almost all) of the most serious defects of the health care system are created by third-party payment of medical bills.
So a natural question is: Can we get the benefits of insurance without the harmful effects of third-party payment? The other day at this blog, reader complaints about third-party payment prompted Uwe Reinhardt to proffer a full-throated defense of health insurance to which I replied, why must the two be linked?
There is a huge difference between insurance and third party payment of medical expenses. I have life insurance. But when I die, the insurer is not going to pay for my autopsy, my cremation, the urn that will hold my ashes, or the cost of the plane need to sprinkle my ashes over the Princeton University football field (or some other suitable place). Instead, my wife will get a check.
Interestingly, before the current era, the most common form of health insurance — other than Blue Cross plans — was indemnity insurance with a fee schedule. A typical benefit consisted of so many dollars a day for each day in the hospital. Since the benefit was independent of what hospitals actually charged, this type of health insurance did not interfere with the ordinary workings of the hospital marketplace.
Can we replicate that idea in a way that meets the financial and health needs in the modern era? I think we can.
In thinking about how to design a radically different type of insurance we have to come to grips with two principles that seem to invariably clash:
Principle One: Efficient, high quality health care requires that providers compete for patients on the basis of price and quality and that will not happen unless patients can unilaterally decide how their health dollars are spent.
Principle Two: Since all third-party insurance involves a pooling of resources, the more discretion individuals have to unilaterally draw from the pool, the more wasteful and costly the insurance will be.
Let’s briefly review why these principles are so important.
Evidence for Principle One. As we have consistently pointed out at this blog, wherever third-party payers are not, medical markets work reasonably well. For example:
In the market for cosmetic surgery providers compete for patients based on price; the result: transparent, package prices that have actually come down by 44% over the past decade.
In the market for LASIK surgery, price and quality competition are the norm, package prices and transparency are routine and real prices have barely changed over the past decade, despite considerable innovation in corrective eye surgery techniques.
Walk-in clinics, originally designed for patients paying out of pocket, post their prices, deliver high quality care, maintain records electronically and can prescribe electronically.
Concierge doctors typically communicate with their patients by telephone and e-mail, maintain electronic medical records; prescribe electronically and help their patients negotiate for specialist care and expensive tests.
In the international medical tourism market, which was initially all based on out-of-pocket payment, there is price and quality competition with package prices and quality data often made available online.
The evidence is so overwhelming that competitive markets in health care in the absence of third-party payment work and work well that one wonders why it is that virtually the entire health policy community is so oblivious to that fact.
Evidence for Principle Two. The evidence for the second proposition is the current state of the health care system. To keep costs from exploding, insurers impose a list of services they will pay for (CPT codes) and negotiate with providers over the fee for each of them. Yet, any system that pays by task (1) will always leave important items off the list (e.g., telephone, e-mail, patient education, etc.) and prevent doctors from repackaging and repricing their services to meet patient needs; (2) will give incentives to providers to maximize against reimbursement formulas rather than maximize the wellbeing of patients and (3) because medicine is so complex, will still leave doctors and patients with enormous discretion over resources leading to wide variations in spending as is revealed, for example, in the Dartmouth Atlas studies.
So how do we get around these seemingly irreconcilable principles?
Solution One: Use Self Insurance Wherever Possible. Self insurance, say, through a health savings account (HSA) is always preferable to third-party insurance wherever (1) the medical event is non-risky or (2) the price of third-party insurance is high and (3) the exercise of individual choice creates no serious externalities for the others in the insurance pool. As I argued in “Designing Ideal Health Insurance,” people should self insure for almost all primary care, almost all diagnostic tests and even most emergency room care.
Solution Two: Adopt the Casualty Model for Most Expensive Medical Care. For bypass surgery, a hip or knee replacement and many other routine, but expensive, procedures, health insurance could emulate the kind of insurance most people have for their homes and automobiles. As I explained in “Designing Ideal Health Insurance,” the insurance plan might commit a sum of money (say the expected cost at an efficient center-of-excellence facility) and let the patient have the choice of providers and facilities — paying additional sums from an HSA.
Solution Three: Combine Self-Insurance, Casualty Insurance and Supplemental Insurance for End-of-Life Care. Many of the headline-grabbing examples of denial of care in Britain concern expensive drugs that promise only months of additional life. Yet even in the United States, two people with the same cancer conditions might end up spending vastly different sums.
Why not have a basic insurance plan which pays for a very conservative approach to end-of-life care? People who want more aggressive care could buy supplemental insurance. Self insurance could also play a role — providing extra funding, for example, for the very different approach offered by Cancer Treatment Centers of America.
Notice that in this brief outline, we have had no need to introduce deductibles or copayments or CPT codes or many other dubious features of the current health insurance system.
About the Author
John C. Goodman is president and CEO and Kellye Wright Fellow at the National Center for Policy Analysis. He is widely known as the “Father of Health Savings Accounts.”
