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In Search of a Better Health Care System

Posted by kostub on September 15, 2009

The assumption that spending more of the taxpayer’s money will make things better
has survived all kinds of evidence that it has made things worse.
- Thomas Sowell

Rapid increases in the costs of health care in the US has placed an undue burden on small businesses, the self-employed and the uninsured, and the system is need of an extensive overhaul. The White House health care page has an excellent description on the goals of such a comprehensive reform. While the goals themselves are noble, and no person should be denied health care or have to go broke just because they became sick or had an accident, the lawmakers seem to have forgotten the true goal of the reform viz. make health care affordable for all.

The administration’s proposal for cost reduction involves setting up a massive public insurance plan which will be able to negotiate lower payments to doctors and hospitals. But, past experience has shown us that government involvement and socialization does not result in lower costs. Medicare, one of the government’s largest social programs is already running into budgetary difficulties despite the fact that it negotiates far lower rates with medical providers than private insurance. Moreover, similar reform has already been enacted in Massachusetts, and yet we still see rising medical costs there.

Why are these costs rising? In a previous post, I had argued that the reason costs in India were under control was due the presence of free market competition amongst medical providers. By contrast, in the US, neither the provider nor the patient has any incentive to decrease the cost, as all of it is borne by someone else i.e. health insurance. In fact, both have an incentive to increase the cost by ordering unnecessary or more expensive tests – the provider gets paid more while the patient believes that they are getting better treatment. Obama’s plan does little to change this fact. All it does is transfer the cost from employers who pay the premiums (which is indirectly transferred to the employees in terms of lower salaries) to the tax payers.

The dilemma that health care reform needs to contend with is how to provide universal health care without creating a sense of entitlement in the society. These are two opposing forces and need to be balanced. Any health care reform intending to reduce cost must incentivize the system to do so. There is no better way to do that other than giving customers choice of providers based on cost and quality. Free market competition has many benefits – it reduces costs, improves efficiency and spurs innovation. In an excellent article about what’s wrong with the US healthcare system, David Goldhill cites an example of how the free market has reduced the cost of Lasik surgery. In the past decade, this cost has reduced by over 80%, primarily because Lasik is not covered by insurance. Consumers pay for this surgery out of pocket and are deeply sensitive to price changes. On the other hand, the cost of older technology like MRI scans has not significantly reduced as the cost is never directly exposed to consumers.

The following is a list of proposals to re-introduce competition amongst medical providers while still providing universal care. Many of these are based on sources such as David Goldhill’s article, John Mackey’s op-ed in the Wall Street Journal, and the Singapore health care system.

  • Provide catastrophic insurance to all individuals. This insurance should cover any basic medical expenses incurred by the individual above $20,000 per annum. Have strict guidelines on what procedures this insurance will cover. Only procedures with a high cost-benefit ratio to lengthen life or improve quality of life should be included. Any experimental, cosmetic or unproven procedures should be performed at the individuals own cost.
  • Reimburse the $20,000 deductible to underprivileged sections of the society who cannot afford it. The people below the poverty line should have the deductible fully reimbursed and the reimbursements should be phased out after 400% of the poverty line.
  • Make all medical expenses tax deductible.
  • Eliminate mandates on employers to provide health care coverage. Eliminate tax exemption for employer provided health coverage, and tax it as regular compensation to the employees.
  • Radical transparency – force medical providers and private insurance companies to publish their prices so that the consumer can shop around for the best rates. The government sponsored catastrophic insurance provide detailed statements of expenditures to the tax-payer for accountability.
  • Enable any individual to open an HSA account just like an IRA account which would grow tax free as long as the money is used for medical expenses.
  • Allow individuals to buy private insurance to supplement/replace the basic catastrophic insurance at their own cost. This insurance could be used to cover some of the initial $20,000 deductible or provide coverage for additional procedures.
  • Remove restrictions on private insurance on who or what they should cover, like mandatory coverage for preventative care and forced inclusion of pre-existing conditions.
  • Actively encourage and educate people to save in their HSA accounts and seek out primary care on their own.
  • Phase out Medicare over time and move seniors to the same plans as everyone else.
  • Reform the tort system. Only gross or criminal negligence should result in medical malpractice lawsuits. Medicine is not an exact science, and reasonable advice from the doctor should be trusted.

This plan shifts the cost of the treatment from the insurance provider to the patient, while the safety net of catastrophic insurance protects people from bankruptcies due to illness. Giving the patient more choice would increase competition amongst medical providers and urge them to reduce costs and provide better care. Businesses would not be required to pay for employee health insurance, though they may provide it as a perk, and employees have the choice of just relying on the catastrophic insurance or buying a private supplementary health plan. The one deficiency in this plan is that hospitalization costs which typically run over $20,000 would not be subject to the same competition as lower-end services. There would definitely be some trickle down effect as costs of cheaper services decrease, but costs of expensive procedures would need to be controlled by the insurers pushing back on the providers. This is unfortunate, but as I stated before, providing universal coverage and eliminating entitlement are opposing forces and they need to be balanced.

Unfortunately this proposal is way outside the political mainstream viewpoint. Most lawmakers are in favor of increasing the presence of the health insurance industry, while what I am advocating is to drastically reduce the role that health insurance plays in health care. Until they realize that health insurance is the problem and not the solution, we will not see any dramatic reductions in health-care costs.

Update: This article is featured in the Health wonk review for Sep 2009.

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7 Responses to “In Search of a Better Health Care System”

  1. Jeff said

    This really nails the point I’ve been making, too, that there is no reform for health _care_, only reform for health _insurance_, and the latter does nothing to bring overall costs down. I’m seeing this sentiment more and more, yet there seems to be no political action on it, which is really disappointing.

  2. Yana said

    Yup. Some sort of cost-sharing has to happen. Otherwise individuals have no incentive whatsoever to stay healthy. On the other hand, it shouldn’t be too much, otherwise you’ll end up with people postponing treatment and possibly even causing public health risk.

    The system in MA is a complete disaster, IMO. We moved here last fall and seeing a doctor is much harder than it was in Seattle (more demand), facilities are old…the system is a mess. Not sure if the reasons are demographic (older populace, lots of smokers) or political, but G_d help us if that’s what’s coming…Here is an article On MA costs in today’s paper (summary: costs expected to rise 10% in MA next year, big business will absorb some costs, tough luck for individuals and small biz)…I personally love reading the comments section. Your IQ may drop in the process but it’s a good way to see what “the average person” is experiencing.

  3. I agree that the health reform we so desperately need is about much more than health insurance. Reducing costs must be at the heart of what we do, along with improving quality of care. But I think that the solution lies in more than just enabling competition. We need to work together to drive real innovation, we need to implement new technology-enhanced models of care, and we need to give clinicians the flexibility they need to give patients the care they need, whether that means in-person visits or in-home virtual monitoring. http://blogs.intel.com/healthcare

    • kostub said

      Thanks for your comment Eric. I totally agree that real innovation is the key to reducing costs and many of the ideas you outline would help a lot in the future. Free market competition would automatically drive innovation from within as medical providers compete to attract the best clientele by providing better services as other industries have done. I don’t believe that innovation should be mandated by the government, rather it should encourage it by dismantling regulation that stifles innovation and provide incentives like tax breaks for companies with better measurable outcomes like lower costs or better patient care.

  4. Polprav said

    Hello from Russia!
    Can I quote a post in your blog with the link to you?

  5. Thank you for nice article and If you want to know information about LASIK procedure, laser eye surgery complications, cost, alternatives, online directory of Laser Eye Surgeons that connects prospective patients with a surgeon in their local area. Go to lasikeyesurgeryfaq.com

  6. [...] In Search of a Better Health Care System [...]

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