Monthly Archives: July 2012

Simple Switch to Defined Contribution Health Insurance Can Cure Many Ills

This is a story of what could have been and what still could be.  A simple switch to defined contribution health insurance would likely spark a cascade of events that can restore market forces, empower patients with ownership, make policies portable, restore the doctor-patient relationship, end the largest source of waste, negate many costly coverage mandates, and even curb defensive medicine.  Yes, all that and even more.  My only caution is to not dismiss it as trite.  As Ronald Reagan said, “There are simple solutions, just not easy ones.”

Mentioned mostly in relation to pensions and 401k arrangements, defined contribution has useful applications to health insurance as well.  This should have been central to conservative arguments as an alternative in opposition to  Obamacare and should now be promoted for its total repeal and replacement.

Due to the tradition of employer-provided health insurance employees have become disconnected from the cost.  Few employees have any idea what their health insurance costs.  They don’t think about it except will complain if asked to contribute more from their paycheck, as if it wasn’t all their money that could be otherwise paid in higher wages in the first place.  They become satisfied with and then desire plans that cover almost every need with low deductibles and copays.  They accept a plan that is just like the plan of all other employees with no regard to their unique life or  financial situation.  In accepting third-party payment they accept third-party decisions on what will be covered, even for treatments within their ability to pay directly, where only they would be in charge.  They accept all this without ever asking if the money could be better spent otherwise or if they are getting a good deal.

They have stopped being health insurance consumers because they have ceded that responsibility to their employer and have thereby lost their connection to the transaction.  The employer continues to give them what most say they want even when squeezed by higher and higher premiums and even as what they say they want is not in the best interest of most who say they want it.  The insurance companies continue to play along with this even though they know the low deductible prepayment scheme approach benefits no one more than them and has been their license to print money for years.  This is the price of a population, including many very smart people, who know far too little of personal finance and market economics.

Implementing defined contribution forces both employers and employees to do many very healthy things resulting in many healthy outcomes.  First they must look at the health insurance expenditure as part of the total cost of employment.  This provides the reconnection to cost and consideration of alternatives.  Under defined contribution, the employee would be given a voucher to buy their own plan in an existing online exchange or from an agent of their choice.  So long as employees get to keep any unspent voucher amount for other purposes employees will use their money as wisely as possible.  In doing so many will discover the benefit and good sense of high deductible insurance where some may even save enough in the first year to fund a health savings account in an amount that fully covers the deductible!  This is not outside the realm of possibility when compared to the cost of the low or no deductible approach.

Since the health savings account offers triple tax advantage and retains any unspent funds most folks starting at a young age could build substantial balances over time and many would reach retirement with no use for medicare and the ability to enjoy the low-cost of much higher deductibles while still protecting their assets.  Whatever their plan choice, every employee would have a policy they own that fits their particular financial needs and eliminates the portability issue.  The unhealthy connection to employment would be effectively broken even as employers offer vouchers for the purchase of insurance plans.  This is a great way to transition away from the bad habit of employer purchase that has taken root over time.  Habits, after all, die hard.

For those under or part-time employed the opportunity to combine vouchers from several different employers either of one employee or members of a family could provide the opportunity to purchase insurance where one small employer alone may not be able to fully fund the cost of premiums.  Again where costs are confronted and value scrutinized, high deductible choices quickly rise to the top of the list.

Large numbers of employees incentivized to choose high deductible plans due to the reconnection to the cost of insurance would then likewise reconnect to the cost of services.  Spending their own money ahead of someone else’s restores the forces that decide how that money is spent wisely.  They want and need to know what a service costs and will shop for the right combination of cost and value as with anything else.  Their power is restored in the transaction.  The provider no longer needs to hire staff to constantly interact with third parties who dictate what and how much they will cover.  The single largest waste, overuse caused by the illusion of free or almost free largely ends.  The power of the free market is restored, prices are set, and assets are allocated in accordance with it, all due to the power of the direct connection of consumer and provider as the driving force.  Questionable cost inflating coverage mandates that conform to the deductible are effectively negated and the single greatest expense of the tort issue, defensive medicine, is kicked to the curb by questions of necessity, even if signing off on some recommendations as “declined”.   Add to this a prohibition to preset prices with network/PPO arrangements (at least with high deductible plans) and a requirement to post asking prices for all standard procedures and the stage is set for market derived prices that could be the basis for medicare allowances rather than the other way around.

Markets work.  We know that.  The proof is all around us every day.  It is why our economy functions so well and always much better than any attempt at central planning.  So where are the healthcare/insurance free market defenders?  Indeed, where are the free market understanders (George Bush word)?  And why is it taking a non-degreed non-credentialed retired postal employee with a passion for finance and economics to explain all this?

The Argument FOR an Individual Mandate – Where Heritage Gingrich and Romney Went Wrong

Before knee-jerking on out of here, this is an argument that needs to be made in the face of continued charges from the left that the individual mandate to purchase insurance or pay a fine (or a tax) was an idea that came from the right.  It did.  Much of the reasoning was and remains sound.  The conclusions, however, while understandable were wrong.  Very wrong.  Being able to explain this will avoid an increasing number of situations, where the left makes the “right’s idea” claim and the person on the right cedes the point and moves on with no idea of how to address it.  Knowing how to address the mandate origin issue not only shuts this leftist attack down, deflecting hits on Romney and Romneycare, but presents opportunities to swing back and teach market principles as well.

The justification for a mandate starts with accepting universal coverage as a fact of life that has existed since the 1986 Act that required treatment at emergency rooms without the ability (or willingness for some) to pay…..anything!  Following on that, it is hard to imagine conservatives taking the position that ultimately we wish to refuse life saving treatment and let people die as a matter of choice and public policy under any situation.   This is rather a position embraced by Obamacare as part of the atrocity of the Independent Payment Advisory Board (IPAB), that will impose rationing and refusal and delays.

Universal coverage will not go away because, in the end, the life of a fellow human is not a car or a house that over time can be replaced.  To be fair, the situation therefore demands universal participation, the rationale that every individual to the extent possible should do what they can to protect others from them, to not present themself as a burden on their fellow citizen.  It is this view that resulted in the understandable but misguided conclusion that everyone should be forced to buy health insurance because anyone without it becomes a free rider and danger to others.

The flaw comes in our approach.  Who pays is of critical importance.  The mistake of Heritage, Gingrich, Romney and others was following the path of overindulgence in third-party payment.  Nowhere else in our economy do we have a situation in which the vast majority of all transactions involve someone else’s money, even when there is no good reason for it.  Unexpected car repairs can sometimes be expensive but we find the resources within our budget to pay for them directly.  Doing so over the long run saves by not needing the services and expense of anyone else to be involved in the transaction, but more importantly constrains usage and costs by the use of market forces that can only happen by the direct interaction of consumer and provider.  A third-party payer disrupts normal market forces that efficiently set prices and allocate resources in repairing cars or sick humans.  It encourages overuse by creating the illusion of free or almost free to the user at their time of use.  A central goal in healthcare/insurance policy should be the reduction of third-party payment and increase of direct payment as much as possible.  The fact is that we all pay in the end, going through a third-party only adds to those costs, and studies have shown those additions to be considerable.

Had Heritage approached the concept of a mandate with direct payment objectives in mind they may have been on to something.   Consider a system of forced limited budgeting as an alternative to forced third-party prepayment schemes we foolishly accept as insurance.  This is a radically different approach that respects economic freedom and market forces.  Rather than a requirement to buy typical cover everything insurance think of a requirement to direct a percentage of income to a health savings account independent of insurance up to a certain limit that is then indexed to inflation.  The amount may be $30,000 to $50,000 but the vast majority of people would reach this over a surprisingly short amount of time.  Importantly, a huge portion of the money spent on healthcare would then stay with the user, never passing through the hands of any third-party who thereby gains the right to direct decisions in the transaction.  Direct payment puts the consumer in charge and restores the long ago disrupted doctor-patient relationship as nothing else can.

A limited budgeting mandate would importantly be applied to everyone and a percent of any public assistance would be directed to a health savings account as well.  Such accounts would have to be limited in their use without any exceptions.  This approach would all but eliminate the current situation where anyone would receive medical services and pay nothing.  Everyone would almost always have available at least a portion of the payment as well as the freedom and dignity of making their choice as to when and where to spend it.

Of course the need for insurance remains, but limiting that to true insurance for the unexpected and beyond the ability to pay otherwise benefits all, again, by restoring market forces.  It is not the failure of the market that has created the healthcare/insurance mess, but rather a market that can no longer properly function due to the disruption caused by excessive third-party payment and government regulation.  Proof of this can be seen by looking at those procedures not normally covered by insurance.  Lasik eye surgery, cosmetic surgery, and dental implants are all examples and what we see is what the market always does.  Quality improves as prices come down.  Free markets work and bring the only forces that will ever bend the cost curve.

Beyond limited forced budgeting, any consideration of a mandate to limit public liability by buying insurance needs to itself be limited to very large deductibles but with very high or even no limits.  Because very few individuals get involved with the highest of medical expenses this approach could be made affordable to almost all with the participation of all, especially where a budgeting mandate is applied first.  The mandate idea in healthcare/insurance has merit but creative out of the box thinking is required in its implementation, taking care to first and foremost promote a maximum of direct payment that preserves market forces.