Solving the Problem of Health Insurance
for All
Jim Dawson, of
Merced, California, returned home last July after surviving a staph
infection that nearly killed him. Then the phone rang and the hospital
informed him that he had maxed out his insurance plan’s lifetime cap of
$1.5 million, and that he owed a total of $1.2 million for his care.[1]
When Mrs. Dawson
looked over the itemized billing statement, she noted that the hospital
had charged Mr. Dawson $791.00 for stockings designed to improve blood
circulation. The same stockings can be purchased on the Internet for
$12.00.
The hospital’s
Chief Medical Officer acknowledged that charges were high because
hospitals collect only a fraction of their billings. He said that this
was an industry-wide problem. Hospitals typically recover only
one-third of their total billings, and must mark up their billings where
they can. The implication of this is that uninsured people, and people
who max out their own plans, are billed three times as much as people
with insurance. Usually, they are the people who can least afford to
pay.
To get help
from California’s Medicaid program (Medi-Cal), Mr. Dawson would have to
forfeit his home and his retirement funds, and pay any income above $900
per month towards his medical bills.
It is important to
note that Mr. Dawson had what is considered a generous health insurance
plan. However, had the plan’s lifetime cost ceiling been indexed for
inflation, it would have been $6M in 2007, and Mr. Dawson’s bill would
have been covered by his insurance policy.
A 2005 health
insurance survey of 19- to 64-year-olds noted that 26% were unable to
pay for basic necessities because of medical bills. Thirty-nine percent
had used up their savings, 11% took out a loan or a mortgage against
their homes, and 26% took on more credit card debt. Even among those
who were insured, 26% had a medical bill problem during the year.
Right now, heath
care in the United States is the Number One issue for most Americans.
Let us examine how we might address and solve this problem.
There are two
kinds of insurance:
1.
Community rating (everyone pays the same); and
2.
Risk rating (everyone is assessed a premium reflecting the risk
that he or she represents to the insurer).
There are different
variants and combinations of these two basic types of insurance, and the
use of deductions and co-payments makes the larger picture more
complicated. But this will not affect the logic and conclusions of this
essay.
One thing is
certain: If one company introduces risk rating for a certain sector of
insurance, all companies in that sector must also introduce risk rating
as well. Why? Because all good risks will enjoy lower rates under risk
rating, and people judged to be good risks will migrate to the risk
rated plans. Community rating companies will then be left with only poor
risks. To survive they must change from community rating to risk rating
if even only one of their competitors does so. The only way to make
sure that community rating will continue to exist is by legal mandate.
What we will learn
from decoding the human genome eventually will allow actuaries to
predict health risks with far greater accuracy than that which current
actuarial methods allow. If a health insurance company knows your DNA
profile, you will have little bargaining power on premiums unless your
employer, or the government, provides group coverage as a choice for
you. And employers are reducing insurance coverage for employees every
year. It is possible, even likely, that eventually Americans may have to
pay for their own health insurance. On the one hand, this will
automatically improve the choices of individuals for plans that fit them
better than what was previously offered through an employer. On the
other hand their medical history may preclude them from finding a plan
that they can afford. Already, fifty-five percent of personal
bankruptcies in the US are caused by health care bills that exceed what
people can afford to pay.
No matter what
insurance offerings will be available, there will always be somebody who
is too sick — or too poor — to afford insurance. If we believe that
health care is a right, we must subsidize those who will need health
insurance, but cannot afford it.
Should such
subsidized insurance be offered by private insurance companies or by
government? Some will largely favor government insurance (Medicare,
Medicaid), primarily because government insurance programs are community
rated and carry only a two-percent overhead cost. Others will favor
private insurance, because the higher overhead costs of insurance
companies would be held in check by competition, and competition among
them will spur more innovation and better packages that more closely
will fit individual buyers.
Health is
different, people argue. Companies should not make money from disease
and injury. Well, then, are we against our for-profit neighborhood drug
store? Mini-clinic? Surgical center? All of these make money from
people who are sick. Should hospitals all be non-profit? Or owned by
the government? Why? We don’t argue for government or non-profits only
to offer car insurance or home insurance.
But it is a fact
that the specter of “socialized medicine” appears every time any attempt
is made to ensure that everyone is covered financially when they become
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But
eventually virtually every American voluntarily enrolls in a
plan that could well be characterized as “socialized
medicine” — when they reach the age of sixty-five, and
become eligible for Medicare. And Medicare is a very popular program.This
is the way it could happen:
1.
Like we do with Medicare, we will need to agree on
the specific nature and contents of care that everyone
should have a right to receive. That decides the offering
that every private insurance company must offer, and at the
same fixed price, perhaps adjusted for location, age and
gender. There must be no exemptions for pre-existing
conditions, every applicant must be accepted for enrollment,
and there will be no lifetime ceiling on costs. It is also
important that we include preventive care in the basic
package. And we must accord the same tax benefit to
individuals who pay their own premiums that we currently
offer to employers.
2.
Insurance companies that end up with a
disproportionate percentage of poor risks will receive
subsidies that will allow them to profit from insuring those
risks.
3.
Insurers are free to add offerings of their own to
the basic package that may encourage people to quit smoking,
adopt healthy lifestyles, and seek preventive medical or
integrative care. Obviously this is a possible strategy that
insurers may use to differentiate themselves from the
competition and add to their revenues. Competition among
insurers will thus focus on who can best provide insurance
products that will make people healthy, and thereby reap the
bonus of the resulting lower payments for expensive medical
care. It should also be possible to combine private
insurance of this kind with health savings accounts, further
rewarding both clients and insurance companies for seeking
out better options for care.
4.
This kind of financing will cause a large part of the
health sector to shift from being disease-focused to being
health-focused. We may actually end up with a true health
sector!
5.
If the health sector in turn competes for patients by
focusing on who best can improve the health of their
patients, and when the financing mechanisms reward them for
achieving these noble goals, productivity will work its
magic on costs, and we will end up with a far better, far
more productive, and, yes, far less expensive health sector.
But the
most important outcome will be a healthier population.
Yet,
wages and fees for health care professionals could continue
to increase even as the costs lessen. (See:
http://www.tordahl.com/NewsLetters/Volume4Issue2.Html
for What if the U.S. Health Sector Were as Productive as
the Average American Worker?) (See also:
http://www.tordahl.com/newsletters.html for Health
Care in the U.S.: Be Careful What You Pay For, and How You
Pay For It). We already benefit from that phenomenon in
another sector of the economy. In Silicon Valley,
productivity improves by about sixteen percent per year, and
workers, owners and consumers all benefit: Workers receive
higher wages due to their continuously higher value added,
owners benefit from higher dividends and stock prices, and
the public enjoy lower prices and better products every
year. As a share of GDP, this sector of the economy has
stayed largely constant (5%). So could the health sector;
allowing it to reward all its practitioners as before but
not until all of this happens. Not only will
the increased productivity that would follow allow the
health sector to cover all Americans at the same or lower
cost, the increased level of health will itself raise
productivity, lower the cost of care, and improve America’s
competitiveness in the global economy.
I am
not saying that this will be easy to do. But I can’t
imagine that doctors will not be pleased to be handsomely
rewarded for making people healthier, and keeping them
healthy. That is a reward that is at odds with how most
physicians are paid today. Today, most physicians are
financially better off the sicker their patients are.
This
plan draws upon the magic of right incentives. This kind of
thinking is what Leonid Hurwicz of the University of
Minnesota received the Nobel Prize for Economics for this
year.
He
advocated the simple common sense rule that people should do
the right thing in the right way all the time and be
properly and correctly rewarded for it.
And so
do I.
And no
matter what your situation is, these principles will work
for you, too.
As for
Mr. Dawson — he was lucky. He was a veteran, and qualified
for care from the Department of Veterans’ Affairs. That
solved his need for ongoing care, but not the $1.2 million
debt he carried for his earlier care. The hospital decided
that Mr. Dawson qualified for financial assistance under the
hospital’s charity-care policy, and wrote off the entire
bill.
We
should not have to depend on such luck during the most
vulnerable times in our lives.
[1] The Wall Street Journal.
November 29, 2007. CCL (127). 1.
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