Is there any solution to the health insurance crisis in America?

The problem:

As health insurance costs in the U.S. continue to skyrocket, more and more Americans join the ranks of the uninsured, either voluntarily or not, as many employers drop unaffordable coverage for their employees. Over 40 million Americans now have no health insurance coverage at all. Unfortunately, current discussions and proposals to deal with the lack of affordable health care and/or health insurance primarily involve arguments about who should pay for the steadily rising costs, without truly addressing the problem of why costs are rising in the first place. There are calls for the government to solve the problem, by either providing financial assistance to buy health insurance, or by instituting a Canadian-style national health care system. So far, the federal government has only responded by creating a drug program for Medicaid patients. Is there a free market solution to the health care crisis in America?

Short answer:

Yes, if the link between money and treatment effectiveness is restored with appropriate financial incentives. In other words, insurance companies should pay doctors more if they heal us more cheaply, and insurers should charge their customers less in premiums if the customers make efforts to stay healthy.

Explanation:

The main problem with current approaches is that only a very weak link exists between money and treatment effectiveness, which has caused insurers to actually reward inefficient medical care and unhealthy behaviors.

For example, with fee-for-service insurance in it's current form, the financial incentive is for doctors and hospitals to bill as much as insurance companies will pay, whether the treatment was effective or not. When insurance pays without considering the effectiveness of each effort, it acts like a government price support, encouraging more treatments. If a patient can see a doctor several times for the same problem and the insurance company pays for every attempt, then this is like paying a plumber for several attempts to fix a leaking pipe, instead of paying just once for the task to be completed correctly. We do not accept that behavior in plumbers, but we have accepted it in doctors, primarily because we as patients do not have the medical knowledge required to evaluate performance, and because we do not control the money that is paid to doctors. Some limits are imposed by the insurance companies, (or more likely, the extra charges are shifted to the patient), but the bottom line is that the amount of money involved has little relation to the well-being of the patient. And for the doctor, there is a financial incentive to do as much treatment as possible, or simply make changes to the diagnosis when insurer limits are encountered, in order to collect more money from the insurer.

HMOs came into existence to address the problem of rising costs, but they seek to lower costs by simply rationing health care. The main problem with this approach is that to compete with other HMOs, or to increase profits, they must ration more and more, which in turn only encourages more government intervention to mandate coverage for various health conditions. It also tends to put doctors and patients at odds over treatment decisions, because the HMO doctor has a financial incentive to withhold treatment from the patient, even when the patient could benefit from treatment. With HMOs, there is still no direct relationship between effective treatment and the amount of money spent. Using the above plumbing analogy, this is like paying a plumber a lesser amount to fix a leaking pipe, but instead of fixing it, the plumber says to just use a bucket.

Neither of these two options is desirable. What we really want and need is for doctors to heal us as quickly, as completely, and as cheaply as possible when we're sick; therefore, that is precisely the behavior that must be financially rewarded. That is the only approach that will align the financial interests of the caregivers with the interests of the patients and insurers.

What kind of approach would accomplish that?

The approach recommended here is basically a modified fee-for-service model. In fact, it is arguably how the fee-for-service model should have been implemented in the beginning, but over time, participants lost sight of several fundamental principles, with very destructive consequences. To resolve the problem, there are four major principles that must be adopted:

Principle #1: Pay for Performance

This means that insurance companies should pay doctors just once for the degree of improvement in a patient's condition or quality of life, up to a pre-set limit established for that condition. The doctor no longer seeks reimbursement from the insurance company for every office visit or every treatment effort made -- if there is no improvement, the doctor will receive no reimbursement. However, if a condition allows for a patient to be 20%, 40%, or 50% improved, for example, then the doctor can be reimbursed for a similar, though not necessarily equal, percentage of the total amount available.

The key feature however, is that doctors would be entitled to keep the full amount available for reimbursement (assuming the patient received the maximum amount of improvement), even if the doctor's actual expenses were much lower. This means it is now in the doctor's own financial self-interest to treat patients as quickly, as completely, and as cheaply as possible. It also means that doctors are similarly discouraged from withholding treatment when real improvements in the patient's condition would be likely. Other advantages of this method of reimbursement are:

Won't doctors just say they have cured their patients?

Under this method of reimbursement, there would obviously be a financial incentive for a doctor to pronounce a patient cured who wasn't, so insurers would rely exclusively on the treatment doctor's determination only on relatively inexpensive conditions. For most others, the insurer would ask the patient directly or obtain independent lab results, since collusion between doctors and patients would be unlikely if the patients would have to say they were cured when they knew they weren't. For those conditions that are relatively expensive to treat, a second doctor -- a diagnostician selected by the insurer -- would be used solely for the purpose of diagnosing the patient's condition before and after treatment. This separation of duties -- in this case separating diagnosis from treatment -- is a common auditing approach to combat fraud, and is similar to the current practice of obtaining a second opinion prior to surgery or other expensive treatments.

In some cases, like unknown new conditions, or to initially establish treatment maximum amounts, insurers would solicit bids from doctors for treating certain conditions, or special arrangements would be made to monitor the treatment progress to determine an appropriate amount. Once determined, all insurers would have to pay the same reimbursement rates, allowing for some regional adjustments.

The maximum reimbursement amounts would be re-adjusted periodically -- presumably downward in most cases, as doctors discover more cost-effective treatments. Doctors would quickly adopt new drugs and technological advances if they truly benefited the patient more and/or lowered a doctor's costs in any aspect of his or her operation. However, doctors would be less susceptible to marketing pressure of drug companies if the new drugs were more costly or less effective than current options.

Paying for performance would help resolve another disconnect between patient care and money. Currently, drug companies pay bounties to doctors if the doctor will refer the patient to the company's drug trial. Doctors can be paid several thousand dollars to encourage a patient to try a new drug rather than sticking with conventional treatments, and patients are often not told that their doctor is profiting by encouraging them to be a "guinea pig" rather than accept conventional treatment. Drug trials are of course necessary in the development of new medications, but doctors should not be given a financial incentive to withhold care. By paying for performance, doctors will be much less tempted to forego treatments that work. A drug company could offer to pay a doctor what was not paid by an insurance company if the drug proved ineffective, and it could pay the patient for the additional risk, but it could not keep a failure from being reflected in the doctor's performance statistics, as described later.

Principle #2: The Doctor is in control

Another problem with current systems is that health care decisions are often placed in the wrong hands. Administrators, drug companies, and even persistent patients can influence a doctor such that no one is solely responsible for the outcome. This principle resolves that lack of accountability by letting the doctor control both the flow of money and the treatment decisions.

This means that all insurance reimbursements and medical expenditures pass through the doctor's office -- including hospital care, supplies, medications, and lengthy travel expenses, for treatment of the condition itself as well as treatment of any related side effects. This is necessary so that the doctor can effectively monitor and control all of the costs, and it prevents costs from being improperly shifted to the patient. The patient may have to physically go to a pharmacy to pick up medications, but the insured patient does not have to pay the doctor or anyone else for medical care. (It may be necessary for the patient to pay a small co-payment to the insurance company to discourage overuse of medical care, but there would be no separate co-payment to the doctor or others for medication or other medical supplies.) Patients pay only the insurers, insurers pay only the doctors, and hospitals, pharmacies, and other vendors would bill only the doctors, who would handle payments and also negotiate, either individually or as part of a group of physicians, for more predictable, lower costs with those vendors.

This principle restores accountability, since the doctor will bear the costs of ineffective treatments, with the side effect that good doctors will become proficient in their treatments, while ineffective (bad) doctors who order unnecessary procedures or make too many mistakes will suffer financially. This is what should happen, too, since chronically bad/inefficient doctors tend to drive up costs.

This approach is also necessary because the doctor is the only one who knows the complete situation. The laws of supply and demand work well, but they assume that the buyer has perfect information about existing alternatives. Shifting the decision-making to the patient assumes that the patient has the knowledge and ability to make appropriate medical decisions, which is not true. Patients should certainly be informed and options discussed, but when a patient is on an operating table, and a decision has to be made immediately, there can be no discussion with the patient about the most cost-effective treatment at that point in time. This is one reason why reliance on Medical Savings Accounts (MSA) will not be the answer to rising costs, because most patients do not have the medical training needed to make appropriate treatment decisions.

Principle #3: Identify the good doctors

Currently, no objective information about doctors' effectiveness is available to patients in their desire to select effective ("good") doctors, so inefficient doctors who drive up costs are as likely to be selected as efficient ones.

For this system to work well, patients should have objective performance information about the doctors available to them to use when selecting a physician. If insurers pay for performance, they could publish basic statistics about the percentage that they had reimbursed individual doctors for treating various conditions. This percentage is calculated by dividing the total that the insurer actually paid the doctor by the total amount the doctor would have received if all the patients had been completely cured. They would also publish industry-wide comparison percentages along with the number of times the doctor had treated that condition. (It should not be necessary to publish a doctor's costs or the actual dollars paid to the doctor -- only the percentage paid relative to the maximum amount available, as a measure of a doctor's success in treating various conditions.) Here is an example of the data that might appear on a doctor's "report card":

Dr. John Smith, M.D. Period covered: 5 years preceding 1/1/2003

Condition

Number of cases

National average number of cases

Percent paid of maximum available

National percent paid of maximum available

Broken arm

6

9

100%

99%

Cancer, skin

13

4

52%

78%

Gallbladder failure

2

3

100%

96%

Sinus infection

46

36

94%

93%

From this example, a prospective patient could see that Dr. Smith was generally quite competent, since insurers had paid him close to 100% of the maximum amount available, which indicated he was slightly better than the average doctor at successfully treating nearly all of the conditions he had encountered. However, he might not be the best doctor to treat skin cancer, since he has encountered more cases than the average doctor but his success in treating the condition is noticeably lower than the average doctor. (In actuality, it might be more useful to break down the national statistics into quartiles rather than simple averages, but the idea is to provide relatively simple but meaningful "grades" that the majority of patients can understand).

Publishing this type of information would again encourage doctors to become more proficient to be able to retain patients. It would also allow doctors to make appropriate referrals to other physicians for conditions that could be handled more effectively by that other physician. Doctors would undoubtedly compare their own results to the averages, and would be willing to pay for training to learn more efficient methods from the more successful doctors, thus encouraging the most efficient practices to proliferate in the areas that really needed improvement. It might even enable comparisons of effectiveness worldwide, if foreign countries collected the same statistics.

Principle #4: End discrimination by insurance companies

Currently, insurance companies tend to "cherry pick" their customers, preferring young healthy customers and refusing to cover those who really need medical care, with the result that the number of insured progressively shrinks as insurance companies try to lower their costs by dropping their sickest customers. Legislation should be adopted to require insurers to accept everyone who applies, with no waiting period and no pre-existing condition limitations, and charge everyone the same rate regardless of age, sex, health status, and genetic makeup.

Since the above change by itself would tend to raise premiums considerably, significantly higher premiums could be charged for unhealthy behaviors that the insured person has the ability to change, such as smoking, drug use, not getting physical exams, unhealthy diet, not exercising, dangerous activities, etc. Higher premiums could be charged to an individual -- but not to a group -- if such behaviors can be shown to be detrimental and if it can be proven by tests that the person engages in them. In this way, patients would have personal responsibility and a financial incentive to stay healthy and get regular exams -- to reduce their insurance premiums. But patients would still have the freedom of choice to do what they wanted if they were willing to pay for the increased risk. There would undoubtedly be some self-destructive individuals who would prefer to do without insurance rather than stop their unhealthy behaviors, but at least they would have a financial incentive to make positive changes.

To put insurers on a level playing field, they would all need to offer the same standard policy of catastrophic coverage, with essentially identical provisions that described what specific conditions were and were not covered. Since an insurance company would be required to charge the same rates to all of its customers, and the reimbursement amounts would be standardized throughout the industry, insurers would compete by keeping their administrative costs low, or by offering additional services or optional coverages. However, insurers could not decide to increase their profits by refusing to cover certain catastrophic illnesses, (unless some federal governmental agency was willing to take over coverage of those conditions), because these various "cherry-picking" practices are what precipitated the current downward spiral of diminishing numbers of insured.

Summary of principles

While modifications to handle some details will almost certainly be necessary, the above four principles should be followed, at a minimum, to achieve a health care system that provides the desired results of effectiveness and efficiency. All four principles must be adopted for it to work -- they cannot be adopted piecemeal -- and all insurers and caregivers must adopt them, including the federal government's Medicare and Medicaid programs.

However, universal adoption does not mean that everyone is required to purchase insurance. Individuals can choose to forego insurance and see the doctor of their choice on an as-needed basis, and doctors can charge those patients whatever they want. Only insured patients are protected by their contract from additional charges as well as catastrophic events. This protection is the economic value that consumers need to see to encourage them to buy coverage. When hospitals and doctors are allowed to charge the patient over and above what has already been paid for insurance, individuals perceive insurance as being less and less valuable.

What about prescription drug coverage?

The subject of medication cost is avoided because drugs are included in the doctor's delivery of care, although any effort to reduce the costs of bringing effective drugs to market is certainly worth consideration. It is assumed that under this new system, doctors would negotiate with drug companies or pharmacies for lower prices, since the money now comes out of the doctor's pocket. Doctors would use lower-priced generics, herbal remedies, or even over-the-counter medications when available, if they were as effective as higher priced options.

Would this system provide health care for everyone?

The discussion about who should pay the cost of insuring every American is avoided here, since in the end the consumer will eventually be the one to pay, either directly or indirectly, through changes in the price of insurance or through higher taxes. There are several possible mechanisms of payment, and the preferred method would be the one that was most efficient.

For example, if universal coverage is a desired goal, it could largely be achieved by requiring employers to deduct for catastrophic coverage, and deducting similar amounts from unemployment compensation payments or other government payments. Portability of coverage could be enhanced by encouraging labor unions and other professional organizations to administer medical coverage (and probably retirement funds as well) to their members instead of employers. Employers could then just make contributions to those organizations in the employee's name. This would also enhance privacy, by eliminating the need for employers to have medical information about it's employees. And it could encourage more professional development of employees to maintain their membership in these organizations. Of course, any organization that accepted the responsibility of administering insurance or retirement funds would need to be accountable to it's members through annual independent audits and similar requirements, as a condition of any favored tax status.

If health insurance is deemed to be an entitlement of every American, the federal government could take over the operation of the catastrophic coverage portion from insurance companies, as long as there was no violation of the above four fundamental principles. The government would not be negotiating with drug companies or caregivers, except to establish reimbursement rates based on historical analysis of actual costs, and the government would be in a position to evaluate actual cost claims by virtue of the financial information collected through the Internal Revenue Service. However, the federal government does not currently offer hunger insurance, or personal relationship insurance, or insurance against many other events that could arguably be more important than health insurance, so there is the danger that letting the federal government manage the system would encourage public demands for many more entitlements. The much larger danger, however, is that politics would have a strong influence on medical concerns, which would eventually destroy the efficiency of the system as politicians try to either expand benefits to unsustainable levels, or balance budgets by reducing payments to doctors, thus imposing destructive price controls. Politics would also introduce a higher degree of uncertainty into the medical system, where long-range plans would be much more difficult to implement if there were fears that the next election would impose massive changes again.

Options that will NOT work

The above principles rely on the free marketplace to enhance efficiency whenever possible. For the readers who are unfamiliar with the laws of supply and demand, here is a brief recap of the more relevant points:

Admittedly, it is not always easy to detect price controls and supports, because the practices are often given much more appealing names. However, following is a list of proposals that are virtually guaranteed to fail to produce the desired results:

Although the above options sound nice, they are all thinly disguised price supports, and if implemented, they will only encourage prices to rise even further. Proposals similar to the following have also been discussed:

The above two options are basically price controls, and are sure to result in shortages of medical care. This has already been evidenced in Canada and Great Britain, where government-regulated systems require that people wait months, if not years, for non-emergency care, because fewer doctors will be willing to invest all the time and effort in medical school just to work for low pay thereafter.

Aren't all reimbursement limits price controls?

It is important to note that the pre-established reimbursement limits described in the recommended system are not price controls, as long as the limits are set above the actual costs that doctors incur. If the limits were set below the actual costs, then they would become price controls and the incentive value would be destroyed, so this must be avoided to prevent shortages from developing. It will be very tempting for insurers to pay doctors less than the standard reimbursement amounts if they see that doctors are making large profits in treating certain conditions; however, insurers cannot be allowed to reduce the reimbursement amounts outside the normal review process in an attempt to shift those profits to themselves.

Some other suggestions ignore finances completely, such as these:

If contrary to a patient's or doctor's own financial self interest, efforts similar to the above are unlikely to be very successful at reducing costs, although they may help some people feel better emotionally.

It is true that the anti-discrimination requirement in Principle #4 does prevent the marketplace from working most efficiently, but if we have decided as a society that fairness is a requirement of the new system, then we must accept this bit of inefficiency to meet that requirement.

What happens if we don't change the system?

There is one other option that is viable, although painful, and that option is to do nothing. The most likely result of inaction will be that increasing costs and declining numbers of insured will cause most insurers to either go out of business or stop offering medical coverage. The loss of insurance money would then result in the bankruptcies of hospitals as well as many doctors and possibly some drug companies. Many people will have to do without some forms of health care in the interim. But in the aftermath, alternatives to health insurance would appear, such as the discount health plans that are already available, and prices of medical care would fall dramatically when insurance money was no longer available, so that the uninsured could perhaps afford at least some level of medical treatments.

A cynic might say that this is what the government wants to happen, so that large organizations can escape legal requirements to provide insurance for employees and retirees if health insurers no longer exist. However, if the HMO model was the only survivor, then we should expect increasing government regulation to mandate coverage, medical procedures, limits on payments to hospitals and doctors, and similar restrictions, until we effectively end up with a single-payer, government-run, system in the U.S., along with its unavoidable shortages and inefficiencies.

It will take time to implement, and some modifications will probably be necessary, but if the recommended principles outlined above are adopted, health care costs should stabilize and then actually decline over time. That should, in turn, help resolve many of the other health-related issues, such as who pays, the large number of uninsured, etc.