Arnold Kling  

A Health Care Proposal

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from Kevin Drum:


But if it's price signals and competition you're after, why not cut out the middleman and have consumers pay doctors directly? For example, imagine a national healthcare plan that paid 75% of all medical expenses but required you to pay the other 25%. Your maximum out-of-pocket expense each year would be capped at, say, 5% of income at low income levels, 15% in the middle, 30% at the next level, and 50% for the rich.

...why not a simple single-payer system with copays instead of a massive new regulatory structure designed solely to keep health insurance companies in business? What's the point?


To me, this idea sounds much better than what we have now. It's simpler. It has most consumers paying more out of pocket at the margin than today. My guess is that when all is said and done, government spending on health care (if you include the tax subsidy for employer-provided health insurance as "spending") would be less than what it is today. I'm thinking that although the share of spending paid for by government would rise, total spending would decline, because consumers would be more careful in choosing procedures and shopping for better prices.

From my point of view, we could do better in terms of health care reform. However, we are much more likely to do worse.

I really want to see health care providers paying attention to consumers rather than third parties. Drum's off-the-cuff proposal seems like a step in that direction.


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COMMENTS (11 to date)
Dr. T writes:
To me, this idea sounds much better than what we have now. It's simpler. It has most consumers paying more out of pocket at the margin than today. My guess is that when all is said and done, government spending on health care... would be less than what it is today.

These statements would be true only if the government simultaneously banned the purchase of "gap" policies. If gap policies exist, then the sensitivity to costs is lost, and there is no pressure to lower health care costs.

I also believe that we would have to become the Dictatorship of the United States of America to make this happen. The average person gripes about health care costs and health insurance hassles. But, when asked about alternate schemes that require greater out-of-pocket expenditures, those average people nearly always say they'd rather stick with the existing system.

Don writes:

If you trust Nancy Pelosi, Harry Reid, Barack Obama and Hillary Clinton to run a fair and honest single payer plan without political interference and meddling, I think you have been looking into Mr. Putin's eyes.

Gary Rogers writes:

Once we have all this health care stuff handled, I am going to to push for a similar program for taking my car in to the shop. This $65 every time I need an oil change is just too much for me to handle, and when something really goes wrong it can break me. There should be a single payer system out there to make sure I don't have to pay so much to keep my car running. There must be some rich people out there that we can tax to make this happen.

James A. Donald writes:

If we are unwilling to let the broke croak, I recommend the Australian healthcare system:

Free Socialist neglect^H^H^H^H^H healthcare at government deathcamps^H^H^H^H^H^H^H hospitals. Genuinely private healthcare for the middle class and rich.

Josh writes:

Or slightly different - why not reimburse 75% of all medical expenses that are paid out of pocket (perhaps paid in 12 monthly installments to increase price sensitivity)? Then, people are free to insure for large costs, but they get no government support (except against the premiums). Those without insurance (or with copays or deductibles) must pay the full cost at the time - making them extremely sensitive to the price - but are not pulled into bankruptcy by it. This way you don't need rules regarding alternate treatments, etc. If people are willing to pay for 100% of something for a month or more, they probably see some value in it.

I hate the government as much as the next guy, but by simply paying money rather than getting all totalitarian on our a$$es, it seems like a much better compromise.

spencer writes:

In a free market a buyer is always free to purchase the good and/or service from a different provider. So the consumers power is the ability to shift to another provider.

Under Medicare individuals are free to select their doctor. So the consumer under Medicare has exactly the same power to shift to another provider that they have if they were paying out of their own pocket.

In all your analysis you seem to ignore this point.

The initial postings on your father showed this.
At first, you looked through your libertarians blinders and blamed Medicare for everything that made you unhappy. But as you continued to analyze the problems you native intelligence and analytical abilities showed through and you came to see the problems as ones of the medical systems, not a product of Medicare.

The bottom line was that even though your fathers bills were being paid by Medicare you were still completely free to go to a different doctor and have the different doctor be paid by Medicare.
You didn't though, and I'm sure their were many good reasons, but the fact that his bills were being paid by Medicare was not one of them.

bingo writes:

Arnold:

I've spent a considerable amount of time thinking about this. I am a specialist; my specialty has little overlap with general medicine. The need for the services of my specialty are universal, and the medical outcomes resulting from interactions with my specialty are extremely positive. However, the costs associated with some of these very successful interactions are quite high due to unavoidable capital investments necessary to engage in these interactions. I have recently come to the conclusion that there is a fundamental, unavoidable, unsolvable economic difference between specialty medicine and primary care medicine.

Elsewhere in the blogosphere there is a spirited conversation taking place about so-called "concierge medicine" or "subscription medicine" wherein a patient pays an up-front or on-going fee to a primary care physician. In return the patient is contractually guarenteed of a certain level of access, etc. This seems to be an "overshoot", a solution that is more extreme than what might be necessary to solve the healthcare finance problem.

The solution is already in the hands of the primary care physician: stop participating in insurance contracts including Medicare and Medicaid. This type of practice, known as "Direct Care", removes any incentive for the doctor to respond to the insurance company and its regulations; this type of practice is patient-centered. The patient pays for a visit and is given the data necessary to file a claim with their insurance, a claim that will reimburse them for whatever contracted amount has been negotiated by whatever entity purchased the policy. Some practices will charge a premium over the prevailing local contracted fees, providing service, customer care, and outcomes that justify the premium. The vast majority of practices will be within a rounding error of the contracted fees. A small group will undercut the local mean or median, seeking to profit on volume by providing a bare-bones, low value-added service to price-concious patients.

It is highly unlikely that the vast majority of patients could afford the cost of care in my specialty out of pocket. Indeed, most would not be able to carry the cost of the care until they were reimbursed by an insurance company (the same would certainly hold true for care provided in and by a hospital). But you could incentivize specialists to provide better care (better outcomes, more cost-effective care) as well as a better customer experience if balance-billing (the right of a physician to bill a patient for the difference between the doctor's fee and the insurance payment) was restored to the system. The same three price scenarios would likely occur. As a patient and as a physician I am biased: I would continue to allow all third-party payers to negotiate fees with hospitals and disallow balance-billing here because IMO it is HERE, in the hospital bill, where the majority of waste occurs.

A three-proned attack: Un-couple primary care from third-party reimbursement, restore balance-billing for specialists, and allow continued negotiation by payers for big ticket hospital charges.

anoni writes:

Speaking 'off-the-cuff',

You are right, it does seem 'weird' to have third-party payers. For example, imagine driving off the lot in a new car, and having the bill sent to insurance, or buying a new wardrobe, or taking a vacation... These purchases are budgeted for by the 'first-party', not third.

Ultimately, insurance is about hedging risk, spreading out that risk to parties who are willing to analytically take it on; the greater the risk, the greater the reward (or so the saying goes). This seems natural enough. Presented in this light, one can understand that there is low likelihood of adversity regarding a wardrobe purchase or even a car purchase (CDO-meltdown not withstanding), but that there is enormous opportunity for someone well-versed in basic Poisson distributions, and such things, to tabulate likelihoods of heart-attacks or asthma, take on the risk, and reap reward. Nonetheless, analysis non-withstanding, yes 'third-party' reimbursements are 'weird'.

So, no quarter-given, none asked for- I will work within the framework of the proposition- eliminate private health insurance. Does this solve the problem, does it go to even address the larger issue of cost-reduction, transparency, and competition? Lets get back to an earlier example. You just pulled off the lot in your new car. Due to an earlier collapse in the CDO market, 60months leases are no longer available... in fact now you have to put down 25% (depending on your income) and pay into a national CDO fund that pays the remaining ladder of everyones' mortgages and car-payments.... Again, that is fine within the framework of the argument and it eliminates the third-party payments (as well as their analysis). But here is where divergence kicks in, imagine there is only one car company. So yes you dont finance that car against hedged CDOs, you pay for it through a national plan and must provide a proportioned down-payment, but again imagine if there were only one car company licensed to sell. Now of course in this scenario, there is never enough production, quality is hard to measure, things are very opaque, and forget about competition (or as my father used to say, "things are outright feudal!") Imagine Toyota trying to sell its Prius if only GM controlled the licenses for sale. Im sure the ACA(american car assoc.) would issue statements of how concerned they are with public safety, make dealers take oaths, etc.

Well this post is getting long. But innovations thrive on competition- quality, service, price all fall into line when this truly unfolds. I see this type of health reform as nothing more than a subsidy to doctors. Recently Consumers Checkbook won a landmark case to datamine Medicare reimbursement data, only to have the HHS seek appeal, with the AMA hypocritically intervening despite its own datamining sales to pharm industry. CVS and Walmart have faced this same backlash from doctors groups- (IL block to McClinics with 1 physician limited to 4 nurses, but a first-year resident can be the only one on the night floor in most major hospitals). Well, I dont want to seem naive, so I will conclude that the hypocrisy is well alive and runs deep when monopolistic, ('outright feudal') trade guilds are allowed to thrive.

So yes we should look closely at the point of sale, but not only one side. How are those sales made? Why is there only one brand in the market? Why should a medical school have the only right to sell access to licenses? Toyota only has to pass EPA and safety laws set for all, why does Toyota not have to enroll in a Ford school for an extended period of indentured servitude? Well for some answers to these questions and more, look here: artificial scarcity

Victor writes:

Arnold --
I fail to see how his proposal is substantively different than most insurance policies now. Most have coinsurance rates today ... consumers are free to shop and negotiate today. They just choose not to. I doubt you can find much data to suggest that the coinsurance maxes in today's plans are limiting their behavior on that dimension. Regardless, Drum's coinsurance cap is tighter than almost all plans today, anyway.

And as a previous commentator posted, if you make benefits too slim, people will clamor for "gap" products ... much like when the government screwed up with the Medicare benefit and private companies offered what have evolved into the Med Supp market.

You do great work, but I can't follow your thinking on this one. Seems to me like this is a minimalistic reform in terms of the healthcare cost incentives to consumers, and will remove somewhere between 15-25% of the benefit to working (we work today to buy healthcare, and in Drum's proposal you don't have to work to get healthcare, you work to pay the taxes to fund other people's care ... there's a very large financial and motivational difference with what is surely a huge deadweight loss).

Please post follow-ups in more detail if this post represents your true thoughts, because I can't understand where you are coming from. Or, rather, I understand where you are coming from, but I don't see the connection to Drum's idea.

Casey Schulte writes:

WE all agree that healthcare in this country is extremely overpriced. And the goverment does not do enough to help the average family pay for health care. We pay these extremely high health insurance rates to protect our familys from the really serious injuries we can have. But for the most part the average person does not have these injuries. I agree with Drum in saying that this plan would plan would increase goverment spending but overall total but total spending would decrease because people would be forced to shop around for the best buy.

anoni writes:

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