Saturday, August 01, 2009

OT: Solution to Health Care Reform

The following message sent to the Clinton Transition Team on December 15, 1992 is still valid, and politicians are still misdiagnosing the problem leading them to advocate changes that will make matters much worse and more expensive. Economics Professor and Nobel Laureate Milton Friedman wrote in 1992 regarding the following proposal for a Medical Savings Account with linked variable deductible major medical insurance that “Your health insurance reform, except for details, is identical with one that I have long favored. ... I agree with you completely in what you regard as the fatal flaw.” This solution to health care reform provides universal coverage for 100% of medical expenses (unlimited), with cost consciousness because patients (not government or insurance companies) are put in charge!

Re: Health Insurance Reform / Medical Savings Plan

Dear President Elect Clinton:

Health Care costs are out of control for one reason only: Health Insurance was erroneously formulated from its inception, containing a fatal flaw:

Flaw: “Health Insurance” makes medical cost appear to be free to patients, physicians, and hospitals because it is not insurance. Workable insurance must provide a pre-specified payoff that is triggered by events not under the control of the insured, not the ability to spend without limit at no personal cost.

Patients need to be cost conscious. My 8 year old daughter, Becky, is ready to buy toys without limit if her parents are buying, but is unbelievably frugal and prudent with her own savings—yet this elementary lesson was lost on the health insurance industry and the error was perpetuated in the design of Medicare and Medicaid.

During a decade and a half of directing Computed Tomography facilities at a University Medical Center, not a single one of the hundreds of physicians I trained contradicted my claim that if each patient were to be offered a free color television in place of the insurance paid CT scan they were about to undergo (economically equivalent), we would do far fewer CT scans—a true measure of the huge resource misallocation caused by flawed health insurance. Value is always subjective, so only a patient spending his or her own money can decide whether a health care expenditure is “necessary”. Current reform proposals such as “managed competition” won’t work because they perpetuate the “health insurance” flaw that causes cost to rise uncontrollably, and because they eliminate the crucial information and direction that detailed price fluctuation conveys to producers and providers. The disastrous ineffectiveness of central planning, overall funding caps, and price controls is the key lesson that should be taken from the eastern bloc having lost the “cold war.”

To minimize these perverse effects of health insurance, while creating a huge pool of capital for investment in the economy, I suggest the following evolutionary approach to limiting health insurance to catastrophic major medical coverage, utilizing the best features of self-insurance, IRA’s, cash value life insurance, variable annuities, credit/debit cards, electronic funds transfer, and asset management accounts:

Solution: Every American should have a tax-deferred freely investable MEDICAL SAVINGS ACCOUNT into which is directly deposited the monthly equivalent of at least the amount of health insurance premiums, or more if an individual chooses. The fundamental idea is that the amount of the deductible of a linked health insurance policy varies and is equal to the current medical savings account balance, with changing monthly insurance premiums automatically paid from the account. This self-insurance approach with linked major medical backup maximizes cost consciousness while providing 100% coverage.

Medical costs are paid electronically by using a medical savings account debit card. Account overdrafts for medical costs are automatically paid by the linked private health insurance policy but since most payments are not account overdrafts, most insurance administrative costs are avoided. Buildup in the value of the medical savings account thus results in an accelerating decline in health insurance premiums. As account balances become larger, self-insurance increases, cost consciousness increases, health insurance premiums dramatically decrease, investment earnings cover the costs of medical care, and monthly contributions can decrease [as Einstein commented, compound interest is mankind’s greatest invention].

Account balances must be perceived as being personal money. Amounts accumulated in excess of the expected total cost of future health care during the individual’s remaining lifetime may be withdrawn, and any balance remaining at death goes to the designated beneficiary. Family members would be free to combine or transfer funds between accounts, and dependents could be freely added to accounts. Insurance policies should have no exclusions for prior conditions, and be universally available with community ratings except for temporary premium increases only to offset individual insurance reimbursements exceeding DRG norms while providing actuarial discounts for preventive care and safety measures such as air bags and smoke detectors, and surcharges for voluntary risk taking such as smoking, motorcycling, and skydiving. Various arrangements by insurance companies, fee for service health care providers, HMO’s, care quality auditing firms, information services, mutual funds, and banks, etc. in various combinations would be innovated to serve this new market.

Result: Millions of Americans spending their own money for health care will impose market discipline, currently absent, and will receive better care with dramatically reduced health care expenditures due to elimination of care judged by patients to be unnecessary, avoidance of cost shifting, and elimination of most current administrative costs. Health insurance also becomes portable, eliminating “job lock”, and account balances help fund medical care when not working while account overdrafts due to unpaid premiums by the unemployed could become tax loans as in the Clinton student loan proposal. A huge investment pool accumulates for investment in the economy and funding of retirement, and a savings model is established that can be developed to provide a funding mechanism for other social insurance needs.