I just read an interesting passage in The Undercover Economist which directly applies to the current healthcare debate even though it was published back in 2005.
Hartford, the book’s author, describes the current failure of the “free market” in providing an adequate healthcare system in the United States as four-fold:
- Imperfect information, patients know more about how likely they are to make a claim than insurance companies. In the market this can be solved through self-selection. Younger and potentially more healthy individuals would self-select less coverage with a higher deductable. Older and potentially less healthy individuals would self-select greater coverage. Due to the fact that the majority of Americans get their healthcare coverage through their employers, healthier employees subsidize less-healthy employees in the form of higher average premiums.
- Patients have a lack of understanding regarding the full cost as they generally do not have to foot the bill. This leads to a situation where doctors run every expensive test possible, since hospitals are businesses you know. Patients, wanting to get better as quickly as possible would like to have the tests run, even though they might not understand the full cost. Health-insurance companies, also business and also very aware of the cost push back and use varied tactics to deny coverage.
- Company provided healthcare benefit plans are ineffective based on the one-size fits all approach taken by Human Resources. These plans are ineffective for the same reasons outlined in number 1.
- The programs run by the Federal government (e.g., Medicare, Medicaid) are extremely costly. On the order of seven times more expensive than other developed countries providing a similar level of care.
It is important to also note that Hartford points out that government run systems are not all that much better for patients. For example in the UK there is a organization which determines which procedures to cover and in which situations. This is based on the number of quality living years a treatment would provide compared to another treatment, even for very different diseases. Once again, the patient is not in control of their care, a bureaucracy makes all the decisions.
Hartford’s solution? Combine the current “market-based” system with some minor government intervention. Require patients to pick up more of the up-front cost of healthcare, putting them in control of the decision making while providing a safety net in the event something major happens.
Government mandates and establishes as Health Savings account for individual citizens linked to a debit card. Patients are able to contribute money tax free to these accounts up to a certain limit. For individuals who do not pay any taxes or who face hardships preventing them from contributing a certain minimum amount, say $1,500, would receive that benefit from the government. (This is still cheaper per capita for the government than the programs they run now.) Individuals would use this money to pay for things like routine medical visits and simple diagnostic tests. By forcing patients to use this money to cover the “everyday” expenses individuals will take a more active role in their healthcare and really think hard weather it is worth the time and money to run 50 tests.
Finally, individuals would buy catastrophe insurance. This insurance would kick-in to cover the costs in the event that a major medical emergency such as surgery or a life-threatening illness affects the individual.
The benefit with this system is that younger individuals who are generally healthier would be able to save money in their early years to cover expenses in their later years. A 21-year old saving an average of $1,500 per year for 34 years would have $51k by age 55. Employers can even still provide a “benefit” through this plan by contributing a certain amount tax free to the employees savings accounts. I do not believe that individuals should be able to invest this money due to the fact that losses may result in a problematic situation. These accounts can be housed in regular banks in high-interest savings accounts and linked to a debit card for easy healthcare-related purchases.
Hartford notes that a similar system has been in place in Singapore for the past 20 years and seems to be working just fine. I think this is a very compelling alternative to both the current system and any proposed government run system.