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?

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