Health Care and Insurance Reform: A Blueprint (part 2 of a 3 part series)


The major disagreement on health care in America comes down to a single issue: is every citizen entitled to care? A cascade of issues follow any answer to that question. Ones answer to that question, I would argue, is a state matter, though the recent SCOTUS ruling on the Affordable Care Act (ACA) proves, at least for now, otherwise. However, the ACA does not provide an answer to that fundamental question; rather, it begs the question and requires, under penalty or fine (or tax if you are John Roberts) that all Americans have health insurance.

With the ACA, the Democrat Congress tried to stop the wildfire in health care cost by smothering it with more wood.

Health care was broken before the ACA; it’s worse now. The ACA has been in effect for three plus years and many millions of American still do not have health insurance. Many others lost their employer plans because of the ACA and were forced to the ACA exchanges. Most have insurance today that is in fact, far more expensive than before ACA was passed, even if their insurance is largely employer provided. Uninsured people with chronic health problems were able to take advantage of open enrollment opportunities. (This feature existed in employer provided plans prior to ACA.) The poor were always directed to Medicaid and still are. A new “poor” has emerged; young healthy adults, primarily millennials, who find themselves underemployed and with little income. They too have been directed, or rather recruited, to enroll in Medicaid. Still, healthy young citizens continue to ignore the mandate and refuse Medicaid largely because they don’t think of themselves as poor. The burden on small business has been disheartening. Many small company owners simply refuse to grow their companies beyond the fifty employee limit that triggers the ACA requirement. Others juggle part-time employees to avoid the expense. But the bigger problem with the ACA is not its unwieldy administration or the distortion it causes in the economy. The problem with the ACA is its utter disregard for the fundamental problems in the health care delivery and finance system that predicated it. It didn’t help. The ACA simply added an overwhelming section of tympanies to an already massive and terrible band. It needs to be repealed.

Money is always no object when someone else is footing the bill.

This problem looms large within the existing health care system. The current system has its copays, deductibles and out of pocket maximum values, however consumers remain almost completely divorced from the cost of their care. Yes, we are directed to “network” caregivers and sometimes, generic drug prescriptions, but other than that, we are blind and dumb to the cost of our care. To fix our healthcare system we need to become careful consumers, scrutinizing cost and quality. We need to feel that we are footing the bill, which we are! Employer premium subsidies are as much our earned compensation as are wages. Our money is buying that insurance; employer premiums and our contributions, copays and deductibles; it is all our money; 100%. So we have an interest in this system.

It is easy in the current environment to live in a fantasy world where our health insurance is backed by an infinite amount of cash, monopoly money, with unending purchasing power unaffected by claims and costs. It is not. Our premium payments are aggregated with those of other policyholders and set aside to pay claims as well as the insurer’s cost of administering the plan. If the claims exceed premiums earned, the insurer incurs an underwriting loss. No insurer can withstand underwriting losses for long. Facing rising healthcare claims, they have but one option when underwriting losses mount: to raise premiums. Likewise, insurance companies that efficiently manage claim costs and achieve underwriting gains, gains sufficient, when combined with investment income, to cover administrative costs, achieve a profit. Profits are necessary to accumulate sufficient surplus to achieve an independent solvency rating of B+ or better, a requirement to write policies in most states. These ratings qualitatively indicate the financial resiliency of the company; that is the likelihood that it could have a bad year or two and still remain financially capable of paying claims.

So we all, as policyholders, benefit if claims are controlled and minimized. The most efficient insurers, especially those with underwriting gains, are the least likely to raise premiums. And these insurers are not static or complacent. They are competitive and want to grow to achieve even greater profit. They will use underwriting gains to actually lower premiums so that they can secure more business and garner greater profits. To bring this all back to the individual policyholder, we benefit if health care costs are controlled, even lowered. But in the current system, we cannot yield our negotiating skills and discretion to scrutinize claims costs. We are incredibly good at this but have been left out of the equation. We need back in.

We can’t control what we don’t understand.

Since that first Blue Cross/Blue Shield list of care options, our health care financing system has revolved around units of care that resemble the “book” car dealers use when they fix your car, except that caring for sick people is far more complex and difficult. This has led to a long and cumbersome “book” of billing units which, even to the clever consumers that we are, are inscrutable and difficult. If we want to unleash the incredible power of consumer discretion, we need a better, far simpler, more intuitive system for measuring and determining the cost of our care. This system needs to be transparent, universal, accountable and public. It also needs to be sufficiently detailed to allow us to understand and measure efficiency.

Here’s what we do understand: time. Professional services are almost always described in hourly rates, a system we are used to and comfortable with. This is how lawyers, accountants, plumbers and electricians bill for their services; there is no reason why the services of doctors, nurses and medical technicians cannot be billed to us in hourly rates, by the quarter hour. Health professions and certifications are universal and lend themselves to easy comparison. That’s all consumers need. We can do the rest.

We also understand rent. A small car, for example, can be rented, all in, for $30 a day. A room at the Bellagio can be rented for under $400 a night on most weekends, half of that on weekdays. So why can’t we be charged rent for a day in ICU or recovery, to use CT scanner for a half-hour or to rent a surgical facility for a few hours? Again, these are relatively standard facilities universally equipped providing a meaningful way to compare one provider’s cost against another’s.

In fact, other than medication, the costs of professionals, facilities and common medical technology can all be universally described in hourly or daily terms. These basic units could be historically accumulated to describe common procedures, capturing average actual cost, which could be compared to the costs at competing facilities. Give us a universal and intuitive way to understand, aggregate and compare health care costs and we will drive them down.

When an employer purports to provide your health insurance, they have simply borrowed your watch to tell you the time.

It makes no sense to continue the myth of employer provided insurance. Premium subsidies are compensation, just compensation that has evolved to be free of payroll and income taxes. So to unleash the full discretion and scrutiny of the American health care consumer, we must break the link between insurance and employment and give the consumer the power to select both health insurer and healthcare policy options. This is messy from a tax perspective, so my suggestion is that a special “health care savings” or similar account be used to offset that loss. Employers could ratably increase wages to offset the lost subsidy and employees could be encouraged to contribute that value to a “health savings” or similar account to fund health care costs. Steps would have to be taken to allow health care premiums and health savings contributions to be excluded from table income, perhaps even exempt from payroll taxes. Everyone would benefit from these exclusions, not just taxpayers with employer provided insurance.

We will never fix our health care finance and delivery system until we acknowledge how profoundly stupid it is to purchase our health care from insurance companies.

That statement paraphrases the sentiments expressed by Ricochet member @JudgeMental in response to the first essay in this series and it is exactly right. Health care is perhaps the most expensive, difficult and important thing we will purchase in our lifetimes, and we have accepted a system where unseen, unknown people, people looking for a bargain, are buying our care. These are not doctors, nurses or even health care professionals. They are insurance claims professionals and accountants.

We need to stop. The role of insurance companies in the financing and delivery of health care is mitigation of financial risk, not the delivery of services. That’s not to say that insurance companies should accept each and every claim submitted. They should not be expected to pay unreasonable claims or for costs that are well out of line with industry norms. In each and every other insurance line, insurers expect to negotiate the costs of major claims. We should assume that with better information and industry data, insurers will be able to exercise their cost mitigation responsibilities when faced with major claims. This responsibility, however, should leave the consumer entirely in control of health care decisions. The insurer should have exactly zero say in the what, where and who of health care; their only purvey is in “how much?” To provide the insurance providers the assurance level necessary to accept this delicate position, a law defining and prohibiting health care “pricing collusion and price gouging” may need to be enacted.

For this to work, people need to have skin in the game.

This quote, attributed to our happy founder, @RobLong, and now taken completely out of context, is completely appropriate in this argument. But it might be an easy concept to recognize and articulate, but is a difficult to deliver. In most insurance markets, smaller claims make up the majority of losses, so first dollar coverages, that is deductibles, cover the majority of claims exposure. Health care, with its inscrutable and inconsistent pricing, may not currently fit into a reasonable or predictable distribution of claims. Nonetheless, an initial “self-insured” limit should be a part of any insurance structure. This might be the first $1000-$2,500 per insured. In other words, policy holders would be responsible for the first dollar of coverage for each insured person under a policy; that is the likely costs of well and routine care. As a practical matter, it makes sense that insurers would be the fiduciaries maintaining “health savings” accounts, making payments at the direction of the insured.

The next layer of coverage would be for those common secondary claims, perhaps to a limit per insured of from $5,000-$10,000. Within this first “insured” layer of coverage, costs would be shared 50-50 between the insured and the insurer. The assumption here is that the 50% consumer borne cost exposure here would provide sufficient skin in the game to unleash our natural Yankee frugality. A final layer of insurance, perhaps from an entirely different insurer, could cap total annual policy health care cost exposure. Claims costs could be shared or not with the policyholder; that would be a pricing decision. For an additional premium, consumers could elect mandatory continuing coverage, with limits on annual premium increases, or they could roll the dice each year and re-write coverage.

Summary for this essay, but another installment is required to address the mandate, the poor, the old and the infirm

This was an ambitious undertaking and I find I need more time to deal with the exceptions that do not fit into the above healthcare finance blueprint. To summarize the above; the ACA must be repealed first. Next and most important, we need to unleash the discretionary power of the individual American consumer in the purchase of health care and insurance. To do that we need to reorder how health care is sold in America, that is reduce health care to per hour professional fees and temporal rates for the use and rental of health care facilities and technology. Next we have to break the health insurance-employer link and put consumers in charge of their own health insurance and options. And we need to stop buying our health care from insurers. Insurers should be relegated to their role in mitigating risk and managing claims. However, in this delicate role, insurers need to be assured that the market is open and straight forward; that is free of both collusion and price gouging. And last of all, policy holders should have enough skin in the game to stimulate their interests in minimizing the cost of care and negotiating the best pricing. That means that they will cover the first lawyer of routine cost and share significantly in a secondary layer of claims cost, with insurance carrying the cost of a significant claim. Regarding portability, that would be entirely at the discretion of the consumer. They could guarantee renewal and limit possible premium increases by purchasing a renewal option. Or they could elect to go to market the following year and risk being placed in a high risk, high premium pool.

Next week: Dealing with the mandate, the poor and the infirm.

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There are 8 comments.

  1. PHCheese Member

    Everyone is entitled to access to healthcare which is not the same as being entitled to healthcare.

    • #1
    • January 28, 2017, at 6:51 PM PDT
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  2. I Walton Member

    Agree with the thrust but we can’t mandate these developments. Free it and markets will sort it out. Markets means medical practitioners in all shapes and sizes, insurance companies and individuals as in all other goods and service markets over time in an iterative adaptive process. The issue is what to do with poor people and preexisting conditions. These are not medical insurance issues, they are matters of welfare. Deal with them separately, but in ways that do not empower the government to make determinations about health fees, insurance content, or anything else related to health care. Buy them insurance rather than distorting the entire market for their sake. Or find other ways to subsidize individuals. Emergency rooms are crowded but they and things like them can be grown. We say these are the most expensive medicine we offer, but that is simply book keeping. Emergency rooms have to be equipped and staffed to handle anything and everything so their fixed costs are enormous, volume brings the costs per patient down until they become over crowded. We used to have public health clinics staffed with nurses who could handle most common ailments. We killed them probably because of the issue of abortion, but I don’t know. The key is to turn medicine over to market solutions and poor people and pre existing conditions over to direct subsidy in some form.

    • #2
    • January 29, 2017, at 4:33 AM PDT
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  3. Doug Kimball Member
    Doug Kimball Post author

    Here’s what we can do: we can deploy a group of health care professionals and consumers to help restructure how costs are billed. We need a “blue book” of rental rates for common hospital facilities and technology. We need to attribute an hourly range of hourly rates to each and every professional working in health care, then encourage hospitals and providers to bill their time and for their facilities.

    We can require “fair” pricing in a healthcare environment by defining collusive tactics and price gouging. This would include the break-up of PPO network pricing.

    We can eliminate the employer-health insurance connection. We can change how health premiums and costs are treated from a tax perspective. We can codify the operation of health savings accounts in the broadest way possible.

    Legislation is required to accomplish this.

    • #3
    • January 29, 2017, at 7:12 AM PDT
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  4. MarciN Member

    A great analysis. Thank you.

    It is so hard for us to move in any direction as fifty states. I wish we could get the feds out of health care and education altogether. The American people would be so much happier with the result.

    • #4
    • January 29, 2017, at 9:04 AM PDT
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  5. Judge Mental Member

    Agreed on the prescription so far, but of course the people to be dealt with in Part 3 is the sticky part of the equation.

    But one part that I think is important is putting the people who can’t afford to pay into the same system as everyone else. Prior to Obamacare, statistics said that there was no effective difference in health outcomes for people who have Medicaid compared to those who don’t have any coverage at all. Since Obamacare, at least one study has said that the outcomes for Medicaid are now worse.

    Subsidizing those people into catastrophic policies within the same system as those people who can afford their own coverage, will not only improve health care outcomes for that group, but it’s also great politics. When they pull out their insurance card, the hospital or doctor’s office will accept it without question, rather than sending them elsewhere.

    • #5
    • January 29, 2017, at 11:34 AM PDT
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  6. Chuck Enfield Coolidge

    MarciN (View Comment):
    It is so hard for us to move in any direction as fifty states. I wish we could get the feds out of health care and education altogether

    I share your sentiments, but the answer is yes. Unfortunately, the states can’t do this. There are the obvious problems of Medicare, Medicaid, and the ACA, but the insurmountable problem is the tax code.

    Doug hit on the immediate and manageable problem of tax deductability for employer provided insurance, but the bigger obstacle is the tax structure. The feds have all the money. If the individual states are to deal with this on their own, they need much higher tax revenue. I can’t speak for you, but I’m going to oppose a large state tax hike. I pay plenty already. If the states want more money from me, the feds gotta take less. That ain’t gonna happen, so federalism is effectively dead.

    • #6
    • January 29, 2017, at 9:12 PM PDT
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  7. Songwriter Member

    Doug – another great essay explaining the system to us in terms we laymen can understand. Thank you.

    Question: How long do you think it would take to move from the system we currently have to a system such as you are describing? (More than several years, I suspect – considering how deeply entrenched the current system is.)

    I fear that any reasonable solution to the problem (and so far, your ideas have all sounded reasonable to me) will take long enough that we Americans, who are used to immediate fixes, will lack the political will to see the process through to the end.

    (I look forward to Part III.)

    • #7
    • February 1, 2017, at 6:04 AM PDT
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  8. Doug Kimball Member
    Doug Kimball Post author

    Songwriter (View Comment):
    Doug – another great essay explaining the system to us in terms we laymen can understand. Thank you.

    Question: How long do you think it would take to move from the system we currently have to a system such as you are describing? (More than several years, I suspect – considering how deeply entrenched the current system is.)

    I fear that any reasonable solution to the problem (and so far, your ideas have all sounded reasonable to me) will take long enough that we Americans, who are used to immediate fixes, will lack the political will to see the process through to the end.

    (I look forward to Part III.)

    Good question. We’ve experienced these kinds of sea changes before in recent memory. When Reagan was president he virtually eliminated the syndicated tax shelter business. The was an entirely artificial construct of the tax code that was both entrenched in our economy and pernicious in its effects, artificially inflating the values of trucks, real estate, planes, trains. It was just ended. The economy was freed of the detrimental effects, including commercial overbuilding, which did take a while to work it’s way through the economy.

    The AT&T break-up was another sea change, imposed by the courts. The effects have been nothing short of amazing on that change.

    Moving Health Care Finance and delivery to a more market based, consumer oriented system, could be more powerful than the AT&T break-up in its effect on economic growth and innovation. But to do that, people have to buy their own health care, not insurers, and they have to know and understand what it is they are buying. The market will do the rest. Insurance is a part of this, to pool the risk of a major outlay, but that’s it. Put the health care dollars into the hands of consumers and let them bargain. Their money, their responsibility.

    • #8
    • February 1, 2017, at 9:47 AM PDT
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