RTRP: CommentaramaCare Part III, The Coverage Plan

Today we finish the CommentaramaCare proposal. In this article, I will outline how the coverage system should be reformed to reduce health care costs, to save the government a fortune, and to improve coverage. In a second article, to be posted later today, I will summarize the entire CommentaramaCare proposal and outline its costs and cost savings.

The Coverage Plan

CommentaramaCare proposes making health insurance more like car insurance or home owners insurance, where individuals make routine payments out of their own pockets and then use the insurance only as a form of quasi-catastrophic protection. This quasi-catastrophic coverage would kick in after a person has spent $5,000 on health care during the year, and would cover all remaining health care costs that person experiences during that year.

Such a plan should:

• Reduce the cost of medical care by encouraging buyers of health care (patients) and sellers of health care (doctors) to deal directly with each other rather than through a middle man for most issues;

• Reduce the cost of insurance to the average person;

• Break the link between employment and insurance;

• Cover everyone regardless of pre-existing conditions;

• Dramatically cut what the government pays to provide health care to those on public programs (i.e. Medicare, etc.); and

• Allow the government to increase coverage to eliminate the uninsured problem.

Before we dig into the specifics, let us be clear. This proposal does NOT:

• Ban any form of private insurance -- you can continue to buy any type of insurance you want;

• Impose fines to force people to change their insurance plans; or

• Advocate that the government issue insurance -- not one penny is paid to the government by anyone under this plan.

Here are the details:

The Problem With The Current Scheme -- Runaway Costs

There are two broad complaints with the current system: (1) medical costs are out of control and (2) not everyone has coverage. Let's start with costs.

We have previously outlined several significant cost reduction measures, but we have not yet addressed the primary cause of out-of-control costs. There is significant evidence that the current insurance system is the main reason that health care costs are skyrocketing. Indeed, as the following graph from John Stossel shows, there is a dramatic and clear relationship between the increase in medical costs over the past fifty years and the increasing percentage of medical costs that are paid for by insurance:


Notice that as the percentage of health care costs paid directly by patients has declined, the cost of health care has increased. As Stossel states:

This interesting chart from the Goldwater Institute illustrates one of the main reasons health care costs have been skyrocketing: Americans have been paying less and less out of their own pocket. It's basic economics that the less you have to pay for something, the more of it you'll use. And yet the “reformers” keep pushing for MORE health insurance.

And this makes intuitive sense.

In a normal market, sellers want to charge as much as possible. But that instinct is held in check by the need to attract buyers, who want to pay as little as possible. When millions of willing buyers and sellers haggle over price, the resulting consensus tends to set the price most efficiently.

But under our current system, buyers (patients) don’t deal directly with sellers (doctors). Instead, buyers pay a small flat fee, and leave it up to a third party (the insurer) to handle the negotiations and the payments. Thus, the laws of supply and demand don’t work properly. Indeed, what you have is called a “moral hazard,” because the patient wants as much care as possible and doesn’t care what it costs, because they don’t pay for it.

Moreover, patients have no incentive to keep the costs of treatment down: why find a cheaper lab to run your lab work, or why run the MRI without contrast, or why engage in preventative care when it doesn't cost you anything not to bother? And that is the problem. No other field accepts such a pricing model.

The Solution -- Make Health Insurance Like Car/Home Owners Insurance

So do we ban insurance? Absolutely not. Not only does CommentaramaCare firmly believe in letting people satisfy their own consumer choices, but insurance is necessary to prevent serious medical conditions from bankrupting people.

Instead, we need to remake health insurance along the lines of car insurance or home owners insurance, so that people again begin to care what their treatment costs.

Thus, CommentaramaCare proposes encouraging Americans to abandon their current insurance in favor of obtaining a quasi-catastrophic policy that kicks in once a person has spent $5,000 on health care during the year, and which would cover all expenses thereafter through the end of the year.

Such a plan would give people an incentive to keep their costs down to reduce the amount of the $5,000 that they pay. But at the same time, it would also ensure that no one would be bankrupted by a sudden, serious illness.

What Would This Cost The Average American?

Right now, the average American spends $7,500 per year on health care. As just mentioned, we are proposing a deductible level of $5,000. Ergo, if the cost of the insurance works out to less than $2,500 a year, there will be no net cost increase to the average person.

My sampling of catastrophic plans has found that most plans currently run between around $100 per month to $200 per month, i.e. $1,200 a year to $2,400. Therefore, even if we take the high end estimate, the average American would save $100 a year under this plan.

And keep in mind, this assumes that you have more than $5,000 in medical bills during the year. Anything less than that will result in direct savings to the individual. Thus, a person who has no medical bills at all during the year, would save $5,100 over the current average. Likewise, a person who was on a flat rate plan (like the one discussed in the last article) and who had only routine medical issues, would have yearly medical expenses of only $3,600 ($200/month insurance + $100/month flat rate plan). This is less than half of the current average cost.

Further, it is more than likely that the cost of such insurance will fall significantly when the rest of the reforms kick in. As you will see in the summation, the savings under this plan could be vast. Presumably, some portion of that would be reflected in a reduction in the cost of insurance.

How To Encourage People To Switch Over

Now, it is easy to say, “encourage people to rethink”, but how do you actually get people to switch over to the new system? To encourage (NOT FORCE) people to make this switch, CommentaramaCare proposes:

• Making the premiums on the catastrophic policy tax deductible to the individual (I would suggest treating them like an HSA);

• Making medical debts non-dischargeable in bankruptcy; and

• Making the first year deductible limit $10,000 rather than $5,000 to discourage people from waiting until they are sick to sign up for the insurance. (This would be implemented in the future, after the plan is established and people had the chance to switch over.)

Moreover, to encourage (NOT FORCE) people to give up their current plans, which are distorting the pricing mechanism in the current system, we also recommend eliminating the tax deductions for any coverage that exceeds the catastrophic coverage. This would not prevent individuals from obtaining coverage that is superior to the catastrophic coverage, it simply won’t be tax deductible.

How Such Policies Would Be Created

Now comes the tricky part. To make this plan work, such insurance must exist. In fact, three things must be guaranteed:

• That such catastrophic plans, which cover all expenses after the $5,000 deductible, will exist and will be generally available to anyone who wants such a plan;

• That persons with pre-existing conditions can obtain such coverage, and at reasonable rates; and

• That providers cannot terminate individuals who experience high medical costs.

This could be achieved by imposing such mandates on the insurance industry. However, CommentaramaCare opposes mandates because people should be free to buy whatever insurance they want, on whatever terms they wish. Imposing coverage requirements violates that principle. It also could be achieved with a government-run option, but CommentaramaCare opposes that for obvious reasons.

So we favor a third alternative. Under this method, the federal government, through the Health Care Administration (“HCA”), will procure such insurance and make it available for the public. Here’s how this would work:

The HCA will divide the United States into geographic districts. For each district, HCA will open a series of $0 contracts for competitive bidding. A $0 contact is one under which the government promises no money. Any insurer in the country could bid on any of these contracts, without regard to state licensing requirements (subject only to obtaining HCA certification).

These contracts will require any insurer who submits a bid to agree to cover a certain number of people (specified by the insurer) at a fixed price (specified by the insurer). The contracts will specify the precise coverage terms, which would include the requirements detailed above, plus whatever other coverage requirements are deemed necessary by the HCA administrator to effect the coverage plan.

By bidding, insurers agree to accept any person who signs up for the plan (up to the number of persons specified in the insurer's bid) at the fixed price, without regard to age or medical condition or any other factor (although family plans should be allowed).

HCA would then accept all conforming bids, and would publicly list these providers and their fixed prices. After that, any member of the public can contact these providers directly and sign up at the fixed price bid by the insurer until that plan is full.

Here are the benefits of this plan:

• This method ensures that anyone can get access to such insurance, regardless of employment status or pre-existing condition;

• This method reduces insurance costs through the use of competitive bidding and large scale pooling;

• No money is given to the government under this plan; and

• Private insurance will continue to exist. Indeed, not only does this plan rely on private insurers, but it leaves private insurers free to offer superior or inferior (and presumably cheaper) coverage as they see fit. If you want more coverage than the minimum, you can buy it. If you want less coverage than the minimum (e.g. a $10,000 deductible or a plan with co-pays or limited coverage), you can buy that too. You can even continue under your current plan and ignore the new system entirely. And since there is no government-subsidized insurance to compete with, the government will not crowd out private insurers.

(** The government currently does something similar for its own employees.)

Saving The Government A Fortune AND Expanding Coverage

This biggest surprise in this program comes in the remake of government insurance, i.e. Medicare/Medicaid/Tricare, etc. CommentaramaCare proposes eliminating these programs entirely and replacing them with one program to be run by the HCA. This can save the Government a fortune, if done right. . .

Rather than trying to develop a separate insurance plan for these recipients, as is currently done with Medicare/Medicaid, etc., the HCA should use the money that would have been spent on such insurance to instead (1) buy these recipients commercial catastrophic insurance, as just discussed, and (2) provide some level of subsidy for the $5,000 deductible (depending on income-level, age, military status, etc.).

Consider this. . . if the cost of the new catastrophic insurance remains around $2,400 annually, and (for the sake of argument) the government chooses to pay the full $5,000 deductible for each of these recipients, and they all use the full $5,000 deductible, it would cost the government $7,400 per recipient to pay all of their medical expenses during that year. The government currently spends $11,093 per Medicare/Medicaid recipient. Thus, by switching to this plan, the government could save $3,700 per recipient. With 81 million recipients, that means a total saving of $299.7 billion dollars -- and this is an annual figure, not a fake 10 year projection.

Moreover, still assuming the projected cost of $7,400 per person, this means that the government could ADD another 40.5 million people to this program without spending a penny more than is currently spent. Since only 7.3 million Americans truly can’t afford insurance, this allows the government to extend coverage to those persons and still generate cost savings of $245.7 billion per year!

(** This assumes full 100% subsidies and full use of the program -- thus, the savings figure likely will be higher. It also does not include any cost savings from eliminating vast amounts of bureaucracy at the state and federal level.)

Finally, to make the deductible subsidy work, HCA would pay the insurers directly on behalf of those receiving subsidized policies, and HCA would issue a health insurance credit card directly to the covered individuals. Those cards would allow the holders to acquire only health care products and services (using product codes). And depending on the level of income subsidy desired, each card could contain any amount up to $5,000.

Illegal Aliens

Lastly, on the issue of illegal aliens, it is clear that these costs should not be borne by the states or by individual providers, as only the federal government has the power to stem the flow of illegal immigration and to deal with foreign governments. Thus, CommentaramaCare proposes (1) that the federal government fully reimburse providers for the costs of providing such care, and (2) that the federal government seek to charge the home countries of these aliens for the costs they have incurred.

CONCLUSION

Without forcing anyone to participate, without raising taxes, and without endangering anyone’s current plan or private insurance, this plan should reduce the cost of medical care within the country, reduce the cost of insurance to individuals, reduce the cost of providing care to persons on government assistance, and ensure that everyone in the country who wants coverage can get it at reasonable rates.

For further analysis, particularly related to costs, see the next post. . .