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Health Care

The Current Health Care System Needs Changing


The current system for providing health care in the U.S. clearly needs fixing. Unfortunately, the system is large and complex and there are a wide variety of opinions about what is wrong with the system and what to do to fix it.


What is Wrong with the Current Health Care System?


There are a number of interrelated factors behind the interest in health care as a public policy issue. The most obvious is that the costs of Medicare and Medicaid are rising so rapidly that it is inconceivable that these programs can be maintained in their current form. However, there are a number of other issues that explain the current focus on Health Care as a public policy issue, among them the desire for universal, or nearly universal, "affordable" health care insurance coverage.


Health Care and Insurance


Medical care expenses can be very large in the face of a serious accident or illness. As medical science continues to make progress, the expense of treating patients rises because there is more that can be done. However, the cost of medical care also rises, in part, because society subsidizes medical care expenditures, causing the demand for them to be very unresponsive to price.


As with other potentially catastrophic events, a system of insurance has grown up to handle medical care expenditures. This system includes private individual policies, employer provided policies, Medicare and Medicaid. Most of these forms of health care insurance have relatively low deductibles and co-pays. Low deductibles and co-pays shield patients from the true costs of their care and make them indifferent to its cost. The prevalence of this form of insurance is partly due to the fact that, unlike other employee benefits, health care benefits are not a taxable benefit for the employee. This encourages employers to compensate employees, as much as possible, through generous health care benefits, with low co-pays and deductibles, in lieu of higher, taxable, wages.


Because most insured individuals receive their health insurance through their employers, there is, also, a concern about the lack of portability of health insurance.  Those with employer provided coverage fear losing their coverage, when changing jobs, and fear being unable to re-establish it because of pre-existing conditions.


Health Care Cost and End-of-Life Care


A very large portion of health care expenditures occur at the end of life. To a certain degree, this is inevitable. But much end-of-life care offers little hope for meaningfully extending the quantity or quality of life. Nevertheless, the medical care system is set up to provide any care that might be helpful, if the patient wants it, and medical insurance, usually Medicare and Medicaid, shields patients and their families from most of the costs of that care so that no one is in a position to judge whether the costs are justified.


Health Care and the Uninsured


Twenty percent of non-elderly Americans aren't covered by any kind of health care insurance. As a society we are unwilling to let people go without urgently needed medical care, so we provide emergency room care to all who come and, if the patient cannot pay, the costs of that care are absorbed by the hospital and passed on to other patients and their insurers. This turns out to be an expensive and inefficient way to provide medical care to the uninsured. It also encourages the uninsured to ignore medical problems until they reach crisis levels and are more expensive to treat. In a kind of vicious cycle, the high cost of insurance provides an incentive for individuals to accept the risk of going without insurance, thereby shifting additional costs for catastrophic care, for these individuals, back onto the insured, further driving up the cost of insurance.


Other Factors Driving Up the Cost of Medical Care


There are other factors, besides how we insure medical care expenditures, that drive up these costs.


Malpractice Litigation


The response of doctors to the risk of malpractice litigation also adds to the cost of medical care. Whether one believes that these awards are justified or not, the response to the risk created by them is inefficient because the judgment about whether to conduct the tests, and bear their costs, is not being weighed against the costs of the litigation by anyone. Insurance typically shields the patient from the costs of these tests. This encourages the doctors to act as though tests and procedures are free, or nearly so.


The cost of these jury awards, which are often unjustifiably large because juries sympathize with patients who have suffered, even if it was not the doctor's fault, are passed on to the system through higher malpractice insurance costs and higher compensation to doctors to offset that cost.


Conflicts of Interest in Prescribing Care


If doctors have an economic interest in the procedure that they are prescribing for patients, they are likely to over prescribe these treatments. This is obviously a problem if the doctor owns an interest in the company providing the medical device or treatment.


There is also a more general conflict of interest problem with providing health care using a fee for service system. If doctors could be paid on the basis of a flat fee for treatment of a particular illness or injury, one would expect that much of the incentive to over  prescribe treatments would be eliminated. However, this is not always practical and might result in a tendency to under prescribe treatments in some cases.


Fraud, Abuse, and Over Billing


Any third party system for paying for medical care also carries with it the potential of fraud. This is true for private insurers as well as government insurers. The advantage of relying on a private system is that the insurance firms have a much stronger incentive than the government to police the system for fraud and abuse. The private insurance system would, also, be more effective in ferreting out fraud, if patients had a bigger stake in the costs of their treatments and would therefore pay closer attention to their bills to ensure accuracy.


Summary of the Efficiency Problems and the Issue of Equity


Because of all of these factors, the cost of health care is rising so fast that it threatens the ability of government to provide benefits, like Medicare and Medicaid, at anything like current levels. The rapid rate of increase in medical care costs also raises concerns among individuals and employers who provide health care coverage about their ability to pay for medical care insurance in the long run.


Some of this increase in cost is just the consequence of better care being technologically possible and this is not a public policy problem. But some of this increase in cost is due to inefficiencies in the way we have decided to pay for medical care. Much of this inefficiency is driven by earlier, well intended, public policy decisions and we can change public policy to reduce or eliminate these inefficiencies.


These inefficiencies, while they are serious, do not constitute the whole of the motivation behind those who want to change how health care is provided in the U.S.  For many people, they are not even the major concern. Some people believe that health care is a right and ought not to be allocated or rationed through any kind of market system.


For a variety of reasons we feel that it is unhelpful to characterize any good or service as a "right," even if it makes good public policy sense to subsidize or provide that service publicly. Doing so only inflames the anger of those who are expected to pay for the "right" and creates expectations, among those who feel entitled to it, that may be economically impossible to fulfill.


That being said, we feel that there are valid public policy reasons to subsidize some level of health care for all U.S. citizens and legal residents, not just the elderly, the indigent, and the disabled. Among these are public health concerns about communicable diseases like tuberculosis, the relationship between health, learning, productivity and employablity, and the fact that we will provide health care to desperately ill individuals anyway and it is better to provide this care when it is less expensive and more effective. In addition, providing a base level of health care for everyone strikes us as a better way to promote long-term social mobility and income equality than outright transfer payments.


What is Wrong with the Affordable Health Care Act, "ObamaCare"?


The Affordable Health Care Act of 2010 was ill advised for a number of reasons, not the least of which is that it would be difficult to imagine a worse time to be taking on a new, open ended entitlement program regardless of its merits.  In addition, the method of accomplishing the objective, requiring individuals or their employers to purchase health care insurance, even if it is ultimately deemed constitutional, is a major intrusion of government into people’s lives that creates a troubling precedent. In addition, there is very little in the act that attempts to make health care more affordable, except for those who are subsidized.  Expanding employer provided health care only exacerbates the problems associated with providing health care through employment. In addition, because the Act provides very low penalties for failure to get insurance and requires insurers to accept all applicants regardless of pre-existing conditions, it creates perverse incentives for individuals to game the system. This was supposed to be the point of the individual mandate. However, in order to make the mandate politically palatable, Congress stripped the mandate of its teeth and set the system up for failure.

 

Another problem with the Act that is symptomatic of its problems is the rule that no more than 20% of the premiums charged can be used to cover administrative expenses and profits. It is enforced by requiring insurers to refund any excess margin to their customers. Low overhead is a good thing but government fiat is the wrong way to get there. This method discourages new, typically smaller entrants to the industry that will have lower economies of scale, at least initially. It also reduces the incentive for new entrants by limiting potential profits. It essentially turns the health care insurance industry into a quasi-regulated public utility. The history of public utilities suggests that this is not going to be an effective way to get efficiency in the industry. A far better approach to achieving the same outcome is to remove barriers to new entrants and competition, such as restrictions on the ability of insurers to compete across state lines. In the  airlines, telecommunication, and transportation industries we have ample evidence that it is competition and not government regulation that drives down prices to consumers.

 

Why not just hand the Heath Care issue back to the states to deal with?

 

With a number of issues, we propose letting the states take action first rather than jumping in with a federal solution. Generally, this is a good approach. It is in harmony with the Constitutional principle of delegating powers to the states. In addition it has the advantage of allowing state level experiments to determine which public policy prescription works best, without committing the whole nation to one direction. Unfortunately, in this case, federal tax and entitlement policies are at the root of the problems with the current health care system. In addition, separate regulatory structures on this issue will mean a fragmented, less efficient, and less competitive health insurance industry.


Why not Universal Health Care?

Many developed countries provide universal health care to all legal residents. Opponents derisively refer to this as "socialized medicine." Proponents confusingly refer to it as the "single payer option."  The analogy to Medicare is misplaced because Medicare only works, as far as it does, because it can take the pricing for services in the private market and use them for Medicare patients. If there is no private market the government must set prices for all medical services. Since such a market is free from price rationing the government must also provide the rationing, deciding which services will be offered and which will not. If there is excess demand for these services, at the prices set by the government, various kinds of rationing  will emerge such as lines, waiting periods, or bureaucratic screening.

In some systems, a private market is allowed to exist in parallel to the public one. As with public education, many middle income users of the system who would prefer to use a private market, will stick with the public one because they are being taxed to support the public one. 

Universal health care deals with the over expenditure on end-of-life care by limiting the care provided under the system. Concerns about this issue led to exaggerated claims of "death panels" during the debate over ObamaCare. However distasteful this may seem, limiting end-of-life care is one of the principle reasons universal health care systems are able to produce comparable health care outcomes, at lower cost per patient, than the U.S. system.

Opponents of universal health care also point out that it would replace a system with inadequate price signals with a system with none. As a consequence, one would expect that the medical care provided under these systems would be provided less efficiently than in one with some degree of price rationing.

In general, those with serious medical conditions and unlimited funds tend to prefer the care offered in U.S. medical care facilities to that offered at facilities under universal health care. In addition, people in the U.S. tend to prefer the freedom to select their own care providers offered by the U.S. system.

One thing that it is important to remember in considering the universal care option is that, without some kind of rationing this method of providing care would be extremely expensive. Unfortunately, that is the direction that Medicare has evolved, which is why its costs have been rising so dramatically.

The Alternative


We propose the following alternative.


Subsidy for Minimum Health Care Coverage including Coverage for those with Pre-Existing Conditions through a Refundable Tax Credit (Voucher)


We propose repealing ObamaCare and eliminating the tax subsidy for employer provided plans and replacing both with a refundable tax credit (voucher) for privately provided individual plans. We believe this system should gradually replace both Medicare and Medicaid.


The credit may only be used to purchase insurance from providers who agree: 


1) not to deny coverage based on preexisting conditions (premiums could be based only on the age and location of the insured), 


2) to provide low co-pays and deductibles for treatment of communicable and easily preventable diseases,


3) to provide substantial co-pays and deductibles for most other treatments in order to discourage frivolous use of the system and restrict the rate of growth of costs (those who accept the credit may not buy insurance to cover the deductibles and co-pays),


4) to at least cover a minimum set of treatments and conditions, that constitute a base level of cost-effective medical care that we want to be available to all Americans. "Cost effective" means a level of care that the average, rational, fully informed American would choose to purchase if they had received a lump-sum amount from an insurer equal to the cost of the care, but they were not required to use the money to purchase the care. (The determination of this minimum set of treatments and conditions is the core bureaucratic aspect of this plan.)


5) Individuals would be free to buy additional insurance to cover additional conditions or treatments, if they wished, but not to insure for the deductibles or co-pays under the plan,


6) Insurers will be free to sell plans across state lines, 


7) Individuals who choose not to purchase health insurance lose the ability to discharge debts due to medical care in bankruptcy,


8) The size of the credit would be fixed in real terms (indexed to general inflation) and would vary with the age of the recipient. If the cost of insurance rises beyond that of general inflation, the subsidies will not rise to accommodate it. If, as a society, we decide that we wish to subsidize health care for the elderly disproportionately relative to other demographic groups, that desire can be accommodated by the relationship between the size of the subsidy and age. The constraint on this age bias is that the size of the credit to younger recipients must be large enough to induce the vast majority of them to use it.


9) The credit may not be used to compensate employers for providing health insurance coverage to their employees.


This Plan deals with the issue of insuring those with pre-existing conditions without creating a new open-ended entitlement program and it does not require that people take the credit and buy insurance.


Individuals would still be free to buy insurance without the credit from insurers who discriminate on the basis of preexisting conditions and therefore charge lower premiums to healthy individuals. However, if they do so, they would have to forgo the credit. If the credit is large enough, it should be economically unattractive to buy insurance without it and the vast majority of people will end up insured through plans that meet the requirements for receiving the credit.


Individuals would have a one-time opportunity to sign up with an insurer meeting the requirements of the program. Once they sign up and for as long as they continue to pay their premiums, they would be entitled to receive the tax credit. They would also be entitled to switch to another insurer meeting the requirements without concerns about pre-existing conditions. If, however, they stopped paying the premiums, and subsequently attempted to become insured under the program, any pre-existing conditions would not be covered. This same onetime opportunity would also be available to individuals on, or before, reaching the age of 26. Children may continue to be insured under their parents plans until they are 26 years old.


Backstop


If individuals still choose not to be insured they may recover the costs of the medical care, that would have been insured under the minimum version of the plan above, and which exceeds their current income and assets, with a federally guaranteed market rate loan. Like federally guaranteed student loans, this loan would not be dischargeable in bankruptcy. The loan would be paid back at the lower of: the loan's repayment schedule or 10% of their future income from all sources including unemployment compensation, Social Security income, or other transfer payments (less the costs of covered medical care). At the time of their death the holder of the loan would have first claim against any of the borrower's assets. For a period 3 years prior to taking the loan, the borrower would be prohibited from selling any assets, without acquiring a like value asset, or making any material gifts. (This is similar to the eligibility requirements for Medicaid.)


Individuals who lacked the income or assets to pay the premium, co-pays, or deductibles for the minimum coverage plan could also borrow to pay for these under this plan, subject to the same means tests and repayment obligations stated above.


For the permanently indigent this Plan would not be substantively different than Medicaid, other than the requirement to pay at least 10% of their income, after deducting medical expenses, toward repayment of their medical debts. For someone who would have qualified for Medicaid and who is living in nursing facility, this amount would typically be zero. For individuals who would have qualified for Medicaid and are living on their own, this sum will be very small. The big difference will be for those who are temporarily indigent. Currently, if these people qualified for Medicaid their expenses would be covered. Under this Plan these people would be obligated to gradually repay the amounts they received from the government to meet these expenses.


All of the debts incurred under the backstop portion of the plan, that were in excess of the estate of the borrower, would be forgiven upon their death.


No Open Ended Entitlement and No Individual Mandate


This alternative deals with the health care issue without creating a new open-ended entitlement program and does not require that people take the credit and buy insurance.


Medicare and Medicaid


Eventually, these plans would be phased in to replace Medicare.  People who are currently over 55 may continue to operate under the existing Medicare program. Those under 55 would operate under the new plan but they would receive rebates of some of their previous contributions to the Medicare payroll tax, proportional to the cumulative amount that they had paid in Medicare taxes.


Medicaid would also be replaced by this system. We realize that this will provide a windfall to state governments that now bear a significant portion of the costs of Medicaid. In order to prevent this shift in financial burden from adversely affecting the federal deficit, we would propose a reduction in other federal transfers to state governments equal to the current cost of Medicaid.  This should leave the state governments revenue neutral and eliminate the burden for the states of funding the current open ended Medicaid entitlement.


Controlling Health Care Costs


Because the plans outlined above puts consumers more directly in touch with their medical care expenses through higher deductibles and co-pays, it would begin to exert downward pressure on medical care costs. 


In addition, we would support tort reform that would reduce the incentive for physicians to practice defensive medicine (over ordering tests and procedures).


We would support legislation that either through disclosure or prohibition, reduced the conflicts of interest inherent in having physicians have an economic interest in procedures that they are prescribing for their patients.


We would also support efforts to encourage insurers of qualified plans to provide indemnity based coverage as an alternative to payment for services, wherever this form of coverage was feasible. This could, for example, provide the option of a lump sum payment to someone with stage IV lung or pancreatic cancer to be used as the patient saw fit. This approach could discourage fruitless end-of-life health care expenditures.


Finally, by providing all of the care through private insurers, with patients paying for significant portions of their care, this plan would provide incentives for ferreting out fraud, abuse, and accidental over billing.


How would this Plan be Paid For?


Part of the costs of this plan would be met from the increased revenues from making employer provided plans taxable. We would expect such plans would eventually disappear. We would, also, expect that market forces would result in their being replaced with higher direct, taxable, compensation to employees.


Part of the cost of the Plan would be met by eliminating Medicare and Medicaid. Any residual costs of the plan would be paid for with the Medicare payroll tax. In comparing the cost of this plan with ObamaCare it is important to remember that ObamaCare has an implicit tax on employers created by the unfunded obligation, for employers to provide health insurance, imposed by the act. It should also be remembered that the Plan would replace state, as well as federal, expenses for Medicaid.


How expensive the plan is depends completely on what kind of medical care is required to be covered by qualified plans and the size of the credit offered to help individuals pay for the premiums. At one extreme this could be the equivalent of privately provided universal health care. That outcome would, probably, be more expensive than the current approach. At the other end of the spectrum, it could be a fairly minimalist plan that would be very much less expensive than the current approach. At a minimum, the size of the credit needs to be large enough that the vast majority of people would choose to use it rather than forgo the credit and purchase privately provided coverage from non-qualified plans that discriminate on the basis of pre-existing conditions.


Whatever level of care and subsidy is chosen, this system should provide that care far more efficiently than the current approach embodied in employer provided insurance, ObamaCare, Medicaid, and Medicare. It would also end the open ended entitlement aspect of the current approach and replace it with a universal defined contribution subsidy for health care insurance. This Plan would provide an incentive for insurers to provide coverage without regard to pre-existing conditions. It would also provide market based incentives for controlling costs and reducing fraud and abuse.


Conclusion


We believe that the this Plan would capture the efficiency benefits of a market based approach and provide a minimum level of care to all Americans without saddling the economy with an unsustainable open-ended entitlement program or requiring individuals to purchase health care insurance.

 

 


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