Arnold Kling  

Free-Market Health Care?

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Could we have free-market health care? I suggest that it requires two reforms.

On the demand side, I propose event reimbursement in health insurance instead of procedure reimbursement. On the supply side, I propose reputation systems instead of credential-based regulation.

...Event reimbursement insurance would give you a lump sum if you become injured or seriously ill. The lump sums might be in multiples of $5000. You might get $5000 for a broken wrist that requires surgery, $25,000 if you are diagnosed with stage one breast cancer, etc. The insurance contract would spell out which events result in which dollar amounts.

...The fact that procedure-reimbursement insurance breaks down in the private market is not an indictment of the private market. It is an indictment of procedure reimbursement. Event reimbursement would solve the pre-existing condition problem that plagues the current system

Concerning credentials and regulation,

In most industries, government does not get involved in defining work rules. If a company decides to have a financial analyst do computer programming or a computer programmer do financial analysis, that is none of the government's business. In the medical industry, however, the government does dictate such work rules.

...these regulations ride in under the banner of "consumer protection."

The free market principle is that as consumers we should protect ourselves. The key to protecting ourselves in a deregulated environment for medical care would be reputation systems.

For Discussion. What would be some of the challenges with implementing either event-reimbursement health insurance or reputation systems in place of regulation of medical practice?

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COMMENTS (9 to date)
John Johnson writes:

It sounds nice, but I wonder how much "event reimbursement" would lead to intentional misdiagnosis. For example, I wonder how many wrist injuries all of a sudden would require surgery. Not that the problem doesn't already exist with the current procedural based system, but I wonder how it would be better with the event-based system.

rvman writes:

Event-reimbursement also loses half of the value of insurance. Health insurance insures against disease, but it also (as it stands) insures against complications. Not all broken wrists (say) are the same. One "breast cancer" costs $5000 to treat, another $50000, depending on progression, size, resistance to treatment, etc. You would end up with a very subjective schedule of payouts, or a very arbitrary one.

This is how disability insurance works, but disability typically covers a limited and fairly arbitrary set of problems. "One foot" is worth x, "one hand and one foot" something else. Comprehensive insurance of health risks is more difficult to handle this way. (If it were so efficient, wouldn't an insurer have offered it by now?) :^)

Kevin Carson writes:

While you're at it, get rid of drug patents.

I'd also support mutualizing municipal hospitals (i.e., placing them under the cooperative control of their clientele) as an alternative to both government and corporate ownership.

If we ever have a free market in health care, it'll probably look like a cross between the Ithaca Hours insurance system and the Berkeley Co-op clinics--with a med school curriculum designed by Andrew Weil.

Arnie Kriegbaum writes:

Doctors would not agree, but medical care has become a commodity for many people. Commodified goods have lost their large profit margin. A surgery that "costs" $16,000 is re-embursed at less than $3,000 (based on personal experience). The real value of the surgery was, therefore, less than $3,000, not $16,000.

Commodified goods are ripe for price reductions, if knowledge of how to achieve those cost cuts is made evident to the consumer. Health care providers have the typical dis-incentive to reduce prices.

Paul N writes:

Unfortunately for the "event reimbursement" proposal, medical "events" are often highly correlated with each other, so the pre-existing condition problem is not solved as AK suggests. Sure, breaking a bone is pretty random, but morbidly obese people, for example, have a lot of correlated risks: heart disease, diabetes, orthopedic problems, etc.

Not that this is the least of the problems with this proposal. People will never support a system that is so vulnerable to fraud. What's the payout under the "event reimbursement" system for chronic undiagnosable headaches? To prevent fraud, it has to be $0, but then the person with headaches is screwed compared to their situation if they had conventional insurance, where their treatments are covered.

Tom Kaminski writes:

Won't "event reimbursement" lead to a form of moral hazard? Let's say I am diagnosed with diabetes, and I am paid $200,000 for my life-time care. Well, there are things I'd rather spend that money on than insulin and other therapies, so I blow it all over the next couple of years. I now have no money for care, yet I still have the disease. I will have proven myself an irresponsible citizen, but I am still ill. I will then rely on the public to take care of me. So I will have placed double costs on the system by mis-spending my insurance and still taking money from the government.

Wouldn't a combination of the following offer decent free market coverage: private insurance (catastrophic coverage) for very large expenses; health savings accounts to pay for regular visits to the doctor; and a combination of local clinics and govt reimbursements for the poor? tk

Lawrance George Lux writes:

Your 'reasonable access to health care' is the best line in your article. Event reimbursement insurance is a good, but limited, idea. Insurance policies would cover very little, or would come in books the size of Tolstoy's 'War and Peace, this being the major argument against. I favor a Basic Health Care insurance which is basically not insurance, but a Savings Account much better than the Bush plan. It would be specifically designed to exclude high-cost procedures.

Your reputation system is costly to crate and maintain. I would suggest deferral to a Bonding procedure requiring a high Bond, letting Bonding Lenders determine the risk. lgl

Sena writes:

Starting a business, we've given healthcare coverage a lot of thought for our employees. What we've felt would be the best for our employees is a Health Savings Plan and seeking doctors who accept "cash" payments. Employer and employee both contribute to the employee's individual Health Savings Plan (it belongs to the employee, and travels with the employee from job to job). Add in a low-cost major medical policy for disastrous medical needs, and the employee is in full control of their routine health need costs and treatments, and not at the mercy of obtaining "permission" from an HMO or out of luck because of "pre-existing conditions". Advantages include having a say in their medical treatment, control over expenditures, being able to borrow against it, in some states it can be used as a tax deduction, and if they don't spend it out, they can use it as a supplementary retirement fund. Downside: they could spend it out and be without funds when they most need it. Some safeguards are in place to ensure the funds are spent primarily on medical needs, but with pharmacies also selling groceries and toys, that's not a given. anyway, it's an option we find very attractive.

mcannon writes:

the posts re moral hazard and the detail that likely would be required in event-based insurance contracts are on point. if the event-based approach can fly, it will have to overcome these issues. e.g., they might have to require that if a problem persists, subsequent claims will depend on patient adherence to minimum treatment protocols. insurers would provide another set of eyes to monitor quality.

perhaps the resulting length of contracts will dictate that insurers hew to standards set by a just a few independent, competing private bodies whose contract models earn reputations and become a (the?) dominant feature of the insurance product. consumers could check the reputation of the "Acme" event-based contract model with a number of sources (friends, ratings organizations, disease-specific and other patient advocacy groups, their doctor, etc.).

whatever its challenges, wouldn't event-based health insurance provide an upper-bound in terms of waste/fraud? i.e., if we had it as an alternative to procedure-based, health spending (and waste, fraud) could only grow as much as the more efficient approach would permit.

which brings us to the question of why it hasn't happened yet. my guess: third-party payment really took over the market in the 1940s. i would imagine that event-based health insurance was made impractical by the culture of third-party payment and the resulting (a) lack of health care ratings systems a la "Consumer Reports," (b) patient illiteracy, (c) patient reluctance to make high-dollar treatment decisions for themselves on the basis of costs & benefits, (d) fear of a health insurance policy that would "run out," (e) lack of individual savings to insure against the risk of a (perceived or real) failure of event-based insurance, (f) . . . . .

perhaps if health savings accounts turn some of these factors around, event-based health insurance could make an appearance.

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