An Outline Proposal For Health Care Reform
-
An end note: Among the people – including both ‘conservatives’ and ‘liberals’ – with whom I’ve discussed this proposal by far the biggest objections were over two provisions that seemed relatively comfortable to me, but which seem to have great psychological impact. Both provisions, which I saw as simple mechanisms for aligning incentives with goals, others perceived as unfair transfers of wealth among participants.
- To create true insurance mobility for individuals by eliminating artificial groupings (eg. employed or not, with employer A rather than employer B) that ‘trap’ people in certain plans because leaving the ‘group’ would drastically alter their costs.
- To facilitate ‘universal’ coverage by ensuring those most in need of medical services were not priced out of the market by ‘cherry-picking’ – by their exclusion from low-risk (and therefore low-price) groups.
The first provision is the prohibition on creating risk groups for purposes of setting insurance prices. In particular the “one price” rule results in shifting of costs from older people, who are more likely to be consumers and would therefore pay higher prices if grouped together, to younger people who generally consume less and currently play lower prices; it also appears to preclude lifestyle-related pricing policies like charging more for smokers or sky-divers or others who increase their risk of needing medical services by their own choice of activities. Aside from the recognition that this subsidizes some (who may or may not need it) at the expense of others (who may or may not be able to afford it), it also artificially obscures real and legitimate differences in the underlying needs and costs for different parts of the population.
The purpose of the original formulation was twofold:
It is possible to relax the “one price” rule to allow some groupings while still achieving these goals: for instance grouping either by age or by high-risk behaviors allows pricing to reflect some of the actual risk, but ensures that everyone in the same general risk category (eg. those over 65) are all treated equally and that none will be artificially priced out of the market by an arbitrary circumstance like whether or not they decide to change employers or to retire — or whether they get sick. The key to allowing such groupings is that the groupings must be consistent between insurers, which ensures mobility, and must be broad enough to spread risk widely, which ensures universal access by allowing reasonable pricing.
However insurers have a great incentive to minimize their risk by creating narrow and specialized groupings – both to minimize expenses and to allow more aggressive pricing to attract customers – and if we allow any other than whole-population risk-pooling we must be very careful in specifying what types of groupings are and are not allowed if we are to avoid the grouping traps the market currently creates. In the end it may be practically simpler just to eliminate groups altogether than to try to negotiate in a political environment what groupings are and are not legitimate and workable.
The other provision that causes dismay is the policy that money from the government health-care distribution not spent on health care is available for other uses – that people could use left-over health-care money to buy cars or stereos or junk food or whatever else they saw fit to spend it on. I admit to misgivings about that myself – it just seems wrong to build a health-care funding infrastructure only to let people abuse it in that way. However that provision is the key to driving excess costs out of the health-care system.
If people must either spend their full distribution on health-care or lose it, their incentive is to spend as much as possible on health-care – and health-care spending will rise to whatever level the government chooses to fund. If, on the other hand, people get to keep what they save on health-care to spend on other things, there is a universal personal incentive to reduce health-care spending – to evaluate each medical service they want to consume on both benefit and cost, and relative to other non-medical needs and desires.
It is true that in any given year this has no effect on spending within the health-care fund: people will spend all of the health-care dollars they receive one way or another, if not on medical services then on other things. However, since the health-care budget and distribution is recalculated annually based on the market conditions for the previous year – which reflect actual spending on medical services rather than merely health-care distributions – in the long term the overall budget and the individual distribution will go down as actual health-related spending goes down, and will ultimately reach an equilibrium at the point where the amount distributed for health care and the amount spent on medical services balance. Thus the short-term cost in unfairness of allowing people to use some amount of health-care money for other things is offset by the much larger long-term benefit in efficiency of lower health-care spending overall.
To reduce the non-health transfer cost without destroying the incentive it creates it may seem fairer to allow people to keep only some fraction of what they don’t spend on health-care rather than all of it – say you keep 25% or 50% of the difference between your health-care distribution and your actual health-care costs. But in practice any savings realized by doing so would be offset by the need for much more complex accounting. Under the original proposal individuals need not account for – or report to the government – any of their health-care spending: since they get to keep the entire distribution under any circumstances there is no way to cheat the system and therefore no need for records, filings, or auditors. A system that required returning some ‘unspent’ portion of your distribution would require all those things and the bureaucracy to support them.
© Copyright 1994, 1997, 2005, Augustus P. Lowell