Health Care Reform: My Prescription

What a difference a day makes!

On Monday, January 18, 2010 House and Senate Democrats buzzed around a White House conference table hammering out a health care “reform” compromise package.  Never mind that it wasn’t truly reform – it didn’t change any major facet of how health care is delivered or consumed in our country.  And never mind that it really wasn’t compromise – there were no Republicans at the table, and the meetings were held in secret without the public being allowed to watch via C-Span.  But since both the House and Senate had passed similar health care reform bills, and Obama had pledged to sign whatever bill passed, it was all but certain that our nation was about to embark on a new budget-busting health care road. 

Then on Tuesday January 19 the people of Massachusetts voted.  In a stunning rebuke to the Democrats’ agenda, Republican Scott Brown won the Senate seat formerly held by Ted Kennedy.  As a result, Republicans now hold 41 seats in the Senate, enough to filibuster major legislation.  Consequently, the Obama-Pelosi-Reid health care bill is comatose.  Thank you, people of Massachusetts.

I wrote in the January edition of Line of Sight why ObamaCare was toxic medicine for our country.  Now, because of Scott Brown’s election, we have the chance to start with a clean slate.  Here’s what I believe true health care reform should look like.  I’ll break the discussion into the five key areas which I believe are the biggest problem with our current system:

Doctor Incentives

Patient Incentives

Free Rider Syndrome

Tort Reform

Employer Based Insurance Purchase

Incentives – The Crux of the Issue

We all react to incentives.  In almost every action we take – be it with a spouse, an employer, or in economic transactions, we are influenced by incentives.  The biggest problem with our health care system is that the incentives are all wrong.  Let me explain.

I.   DOCTOR INCENTIVES

1. Our Fee For Service System

The vast majority of doctors are paid on a “fee-for-service” basis.  Simply put, every time a doctor performs a service, he gets a fee.  So what is the doctor’s incentive?  If he wants to maximize his income, it’s to perform as many services as possible.  The more services he provides, the more he gets paid.

This is not to say that doctors are evil, greedy people who perform unnecessary tests simply to make more money.  Quite the contrary.  All the services provided must be within the realm of what is medically necessary.  But that realm can be quite wide, and subject to interpretation. And the result is, in the aggregate, we have more and higher cost services because of the incentive structure.

Let’s say a patient comes in to a surgeon’s office with chronic shoulder pain.  And let’s say it’s unclear whether surgery will help the patient.  It might, or it might not.  If the surgeon recommends the patient “grin and bear it”, the surgeon makes no money.  If the surgeon recommends surgery and the procedure is performed, the surgeon makes a lot of money.  So what will the surgeon do?  It’s hard to say, but clearly some surgeons are pushed by the incentives to recommend surgery.

2. Legal Liability

Our legal liability system also creates incentives for doctors to provide more tests and services than they otherwise would.  Doctors are always afraid of being sued by patients.  The more tests that are performed on a patient, the less likely it is that a doctor can be successfully sued.  So doctors are incentivized to order many tests, even ones with minimal value.  

Together, the fee for service model of payment, and our legal liability system, incentivizes doctors to perform more tests and provide more services than is optimal.  And that drives up costs for us all.

II. PATIENT INCENTIVES

It’s just not doctors who are pushed in costly directions by incentives.  After all, doctors can’t perform all these services or order all those tests unless the patient agrees!  The problem is that the patient has every reason to agree.  In fact, patients are incentivized to consume an almost infinite amount of health care services.

The vast majority of Americans have health insurance, either through their employer or the government.  Some of us pay a monthly premium for the insurance, while others pay little or nothing if the cost is paid for by our employer or government.  In either case, when most Americans go to a health care provider, the immediate cost is paid for by someone other than the patient.

For example, I have health insurance provided by my employer.  When I go to the doctor, I pay only a small co-pay, usually $20.  I never see the bill for the services I consume.  In fact, I don’t even know how much the services I consume cost.  Why should I?  I’m not paying the bill!  Even if I buy my own health insurance and pay my own monthly premiums, it costs me the same whether I visit the doctor once a year or fifty times a year, whether I grin and bear my shoulder pain or get shoulder surgery.

So what’s my incentive?  It’s to consume as many health care services as I want, regardless of cost.  After all, someone else is footing the bill.  My expenses are fixed.

For every other product I consume, where I pay the cost, I am always making judgments about whether the product provides value to me above the cost.  And sometimes products have enhancements for which the manufacturer charges more.  I decide whether that enhancement is worth the additional price.  In our society, the consumer plays a critical role in determining what goods and services are provided, and what enhancements provide value above their cost.  But not in health care.  When someone else is footing the bill, we always want the best and most advanced treatment or test, whether or not it provides value above its cost.  No one wants an X-ray anymore when a CAT scan is available.

III. FREE RIDER SYNDROME

As detailed in my last Line of Sight article, there are many people who can afford health care insurance, but voluntarily choose not to purchase it.  This is not an irrational decision.  We have decided as a society that all citizens are entitled to health care.  Hospital emergency rooms must serve anyone who presents himself, and at least stabilize the patient, regardless of the person’s ability to pay.  So some people voluntarily forego health insurance, knowing that if they become very ill, they will be able to receive treatment.  Taxpayers (or those with insurance who are charged higher premiums to compensate hospitals for patients who don’t pay) pick up the tab.  So people who don’t purchase insurance get a “free ride”.

IV. TORT REFORM

We’ve all heard the stories of patients suing their medical providers and being awarded astronomical amounts of money.  Many lawyers specialize in this practice.  And injured patients have every incentive to sue, especially since these lawyers are paid only if the patient wins.  Thus, it costs the patient nothing to sue.

Our legal liability system drives up costs in two ways:

   1. Doctors order more tests than they otherwise would to protect themselves from being sued.
   2. All doctors carry medical liability insurance to protect themselves against these awards.  The cost of this insurance has skyrocketed in recent years due to astronomical jury awards for “pain and suffering”.

Thus, through ordering more tests and the necessity of purchasing expensive legal liability insurance, costs are higher than they should be – and this gets passed on to us.  Reforming our legal system to limit astronomical “pain and suffering” awards would undoubtedly help.

V. WHO DECIDES WHICH POLICY IS PURCHASED

We have a bizarre system in the United States for purchasing health insurance.  For the vast majority of Americans, your employer picks one health insurance plan.  Employees then enroll in the plan.  We have become so used to this method that we don’t stop to think how bizarre this is.

Why is my employer involved in the health insurance purchase at all?  Every other good and service that I consume for my benefit I purchase myself.   Why should health insurance be any different?

Employer purchased health insurance began in the 1950s as a way to circumvent wage controls.  It was a way for employers to compensate employees by purchasing health insurance for them without violating wage laws.  Wage control laws have been gone for decades, yet employer-paid health insurance remains.

And why should I not get to choose from among all insurance plans offered by any insurance company, headquartered anywhere?  When I go to my local Wal-Mart, the goods offered for sale are made by companies from all over the world.  That competition for my money helps keep prices low.  Under our current system, I can only buy a health insurance plan that has been filed with and blessed by my state insurance commissioner.   This regulatory burden limits choice and helps keep prices artificially high.

So what would true health care reform really look like?

As a start, any reform plan must tackle the biggest problem of our current system – cost.  And it also must put the consumer – you and I – at the heart of the health care purchase decision.  To do that, we must answer the issues raised above.  

 Here’s what I propose:

1. All individuals purchase their own insurance.  We end employer-based insurance purchase.  

For employers, ending their participation in the health insurance purchase process would be a welcome relief.  It’s one less regulatory burden on employers.

The money currently spent by employers on premiums would get passed on to workers in the form of higher salaries.  It’s reasonable to expect that if my employer is spending $500 per month on health insurance for each employee, and my employer no longer buys health insurance, then each employee’s salary should increase $500 per month. Thus, there is no net cost or benefit to the employer.  

Employees would also have no net cost or benefit.  The additional salary would be used to purchase catastrophic health insurance, as detailed below, or a traditional health insurance policy.

Employees would have one large direct benefit.  The employee would now get to choose which insurance policy best suits his family and not be locked in to whatever policy is offered by his employer.  

And people should get to deduct the cost of premiums from their gross incomes in calculating their taxes, just like employers do today.

2. We eliminate the need for insurance companies to register each insurance plan with every state insurance commissioner.  

Instead, there should be one federal regulator, instead of 50 state regulators.  Individuals can purchase any plan offered by any insurer – just like with every other good and service.

3. All individuals must purchase “catastrophic” health-insurance coverage.  This covers individuals from big-ticket expenses, or for the cost of chronic disease treatment.  

Catastrophic plans differ greatly from current plans.  Today’s insurance plans are “first dollar” policies.  They cover the first dollar of cost, after a small co-pay or deductible is met.  Almost all financial risk is transferred to the insurer.  With catastrophic plans, costs of routine health care services remain with the insured.  Only large expenses are covered by catastrophic plans.  It is insurance in the true sense of the word.  Since this insurance is catastrophic only, it will be substantially cheaper than current plans.

         1. Because of this, many more Americans will be able to afford it.
         2. For those who cannot afford it, the government may subsidize it (which we do today in practice anyway, but for a much larger group of people).
         3. In this way, the public is spared from picking up the cost of treatment for very expensive services to people without insurance.

 

Of course, people who want to purchase “first dollar” insurance policies like they have today are welcome to.  It’s a private transaction just like any other that is between two willing parties, and the government should have no role in it.

4. Individuals pay “out of pocket” for routine health care costs, like checkups and mammograms.  

Doctors will compete for our business based on the price they charge and the quality of service they provide.  Does anyone today know what a check-up costs?  Probably not, but under my plan you will.  Individuals could use tax-advantaged Health Savings Accounts to accumulate funds on a regular basis to pay for routine health care costs.

Health care insurance would become similar to car insurance.  Most of us carry car insurance to protect against large expenses (major accidents), but routine expenses like oil changes are paid for out of pocket.  Why should health care insurance be any different?

By making people pay out of pocket for routine expenses, people will consume health care services more wisely.  Must we get an MRI every time we have a headache?  If someone else is paying the bill, yes.  If I am paying the bill, no.

One concern is that poor people will not get routine checkups, since that would not be covered by catastrophic coverage and they would have to pay out of pocket.  Then small medical issues could become big medical issues, with a resulting much higher cost.  To prevent this, I would consider the need for the government to pay the cost for routine health care checkups for qualifying individuals.

5. For costs that are between “routine” and “catastrophic”, individuals would pay their own cost out of their Health Savings Accounts.  

But if they can’t afford it, they could borrow the money from the government.  However, that money would have to be repaid.  If it was not, the government would have the right to garnish future wages.

6. Medical providers would no longer be paid on a “fee for service” basis but on a “fee per diagnosis” basis.

This obviously needs to be flushed out further.  We have to end incentives for medical providers to simply perform more services, without a mechanism to ensure that the benefit of those services outweighs the costs.  HMOs had a good start on this with “capitated” rates.  Doctors in HMO plans are generally paid a flat fee per patient they serve (“capita” is a Latin term meaning “per head”).  HMOs, however, despite their lower costs, have not been very popular due to their limited doctor networks.  A “fee per diagnosis” system would fall somewhere between today’s fee for service and HMO’s capitated system.

7. There would be meaningful tort reform limiting “pain and suffering” awards.

We have to end the ability of patients to “win the lottery” by suing their medical providers.  Damages awarded to patients have to bear some relationship to the actual losses suffered by people wrongly injured.  A vast majority of Americans support tort reform, but Congress has not yet acted.

Through these 7 planks:

   1. Individuals are back in charge of making rational health care choices.  Individuals, in consultation with their doctors, decide which treatments offer the best value and cost combination.  The incentives for individuals are to spend their money wisely, just like for every other product.
   2. Doctor’s incentives are changed.  Due to “fee per diagnosis” instead of “fee for service”, coupled with meaningful tort reform, doctors are now incented to provide more rational levels of service.  And now that individuals are spending their own money, they will ask more questions and be better consumers of health care.  Health care providers will actually have to compete for our business based on price and quality, just like accountants and lawyers.  This will help drive down costs.
   3. Insurance companies will have to compete for our business.  Rather than a few companies dominating each market, competition will flourish as arbitrary state limitations fall.  This too will help drive down costs.
 

Health care is complex.  I do not claim to have “the” solution, or that my proposals won’t create a whole new set of issues.  But I do believe that what I propose is vastly superior to the system we have today, and will bring about reduced health care costs without compromising quality – something that is sorely needed.


The people of Massachusetts have given us another chance to get health care reform right.  Hopefully, Washington will listen this time.