Philadelphia Reflections

Health Insurance Design.

Around 1970, the American Medical Association offered a supplemental health insurance policy to its members. It was a $25,000 deductible policy, costing $100 a year. That is, it offered insurance against the worst possible health disasters, and its cost was negligible. Even then, the marketing department struggled with a catchy name for it, and finally produced terms like "excess major medical coverage." Right away, you know the marketing department wasn't terribly anxious to sell it.

Nevertheless, the major difference in cost between catastrophic coverage, which I needed, and Blue Cross/Shield which I didn't particularly need because of my employer, was the germ of the Health Savings Account idea. It snapped into place when John McClaughry of Vermont told me that Senator Roth of Delaware was preparing to offer IRAs as a tax-exempt savings idea. Linking the two together, you got Health Savings Accounts, which the Texans Bill Archer and John Goodman finally got enacted. A third component was the cross-product of my son and an old surgery professor of considerable renown. One day, he leaned over to me and muttered, "The only reason to have health insurance is to keep the hospital from fleecing you."

My son gave real substance to this reasoning by telling me a famous Boston hospital had sent him a bill, charging $12,000 for a screening colonoscopy. I responded I thought it was far too much, worth at a guess $500. So he called his insurance carrier, who got him a revised bill for $1000. Overcome with gratitude, he immediately sent a check for $1000 to the hospital because he had just saved eleven times that much. Any $500 overpricing seemed trivial compared with saving a much larger surcharge. And this particular insurance company had been clever enough to notice it was this larger surcharge they were really selling protection against, not some minor markup from audited costs.

But let's get back to the catastrophic insurance, which under the name of "excess major Medical" had started this whole train of thought, decades earlier. The insurance pattern followed by excess major medical was the model of maritime insurance of Lloyds of London, one of the oldest and best-established forms of insurance. Maritime insurance made handsome profits using combined deductibles plus catastrophic coverage with a "cap". That is, the top limit to the liability was definable because by an act of Parliament it was the value of the hull. The English treasure their juries, but the Common Law knew better than to leave the upper limit of any liability, up to a jury to decide. Why then, couldn't health insurance follow the same pattern of defining liability limits? Malpractice liability is the case in mind, but it might be any disputed issue.

One suspects that hospitals in 1955 had a virtual bed surplus created by better home environments and transportation. But in 1965, Medicare and Medicaid really created an actual surplus of (40-person) ward beds, by offering to pay for semi-private accommodations. Given a choice of paying for insurance or accepting a 40-bed assignment, enough of the public chose ward beds rather than pay for extra insurance, so insurance patterns became fixed around the reality; an invisible ceiling was created over what they would provide for in pre-payment health insurance. The illusion of employer payment and the politically consequent tax exemption promoted the continuation of this obsolete pattern of two beds in a room. The substitution of "service benefits" for indemnity was, among other factors, a concession to the primitive hospital accounting systems, once again a holdover from the glory days of private charity. When you have no idea what something costs, you guess.

--------------------------------------------------------------------------------

That continues to be true. The struggling hospital industry responded slowly to the implications of Payment by Diagnosis in the 1980s, and only recently began to shift inpatient care to outpatient care in satellite clinics. Up until that time, outpatient care in doctors' offices had been markedly cheaper, but hospitals began to imagine that free-standing physician practices were a threat to their business plan. For twenty years, this friendly competition expanded into a life-and-death struggle, which physicians largely lost. It was a fairly slow process, held back by the ability of physicians' offices to raise prices, even in spite of differential reimbursement for the same services, often by the same doctors inside hospital walls. After 2000, a new carnivore entered the gladiator ring: the parent university of university-owned hospitals. Innocent new entrants into a competitive situation often over-react by adopting aggressive behavior they eventually come to regret.

Doctors in teaching hospitals were put on salaries where that was possible, but the bulk of the public had individual preferences for certain physician practices and resisted enlistment into hospital clinics, which had a welfare sound to them. Some patients preferred a hybrid: large group practices, many of them controlled by physicians or physician organizations. For the most part, the finances of such group clinics can be stated as paying generous salaries to "feeder" physicians, subsidized by procedural surgeons who could still generate, and share with the hospital, rather large surpluses from a large volume of surgical procedures which the feeders could provide to them. The public has difficulty estimating the quality of its surgeons, but when they can, or when the group's aura suggests it, they will willingly pay extra for procedures which are dangerous or painful, or both. Innumerable entrepreneurs in the hospital industry have broken their lances against this irresistible force of human nature because the public has so far drawn a red line in the sand around a matter affecting their own personal well-being.

Not all universities have medical schools, but current agitation about doctor shortages is colored by the wish of many universities to catch up with those who do have such schools. Since the central function of most university presidents is to raise money, it has not escaped their attention that the budgets of many universities of international rank are heavily lopsided toward their medical schools. Or that the revenues of most medical schools are heavily weighted toward research grants with 70% "indirect overhead" allowances. Or that the captive teaching hospitals only generate a 2% profit on inpatients (suppressed by the DRG payment method), but a 15% profit on emergency care, and a 30% profit on satellite clinics. Tuition and other medical student revenue can run $50,000 a year, for which the students go heavily into debt, but which the parent university can often easily do without. Transfers from medical student revenue to non-medical student costs of the rest of the university are a closely guarded secret, and very few people are in a position to speak of them. But it would be a very strange world if long-haired undergraduate students in the arts, much given to demonstrations about "rich doctors", were not, in fact, subsidized by medical students carrying quarter-million-dollar educational debts. One might even conjecture that some of the multi-million dollar salaries of university presidents are enhanced by trickles from this same stream, although I have no proof of it, and perhaps this is too crude a formulation. The fact is, these prestigious universities do contain some very attractive honey-pots of medical revenue, and also contain a few egregious salaries for administrators in a position to decide how the surplus, or excess, revenue should be spent.

This brief excursion into the "inside baseball" of medical economics is meant to be convincing about one central point: this is all getting to be too complex to survive. Instead of responding to complexity with more complexity, we must simplify. We have tried little dictatorships; they don't simplify, they make more rules. We have tried virtual finance, substituting concepts and abstractions for a cash transaction. We have tried subsidies, interjecting moral principles and elaborate circumvention into the simple process of just doing a few things free of charge. We have stopped firing people for incompetence and sloth, we must re-educate them. We even are considering a raise in the minimum wage, in order to keep welfare payments from exceeding the labor market. Eventually, this must come to an end, so let's start with paying for medical care.

Let's start with paying for it in cash; indemnity insurance rather than service benefits, debit cards instead of claims forms. But let's also be realistic; when people are helpless in a hospital bed, they need a financial surrogate, or at least a payment system that does not require personal judgments. The DRG system needs to be calculated with a computer, not a table look-up, and therefore made much more precise.

Let's save for lifetime medical costs within a highly mobile real lifetime, by allowing the patient to identify the state which regulates his policies as he moves around, but transfer between policies by establishing a medical exchange on the pattern of the stock exchange. Direct-pay from patient to insurance should be permitted but phased involuntarily. It will be noticed that this system eases out the employer as a middle-man, but permits it to continue when it is mutually agreeable. And let's devise a scheme for a maximum safe investment of the savings between those of healthy youth and a sickness-prone retirement. And that means, not merely guaranteed renewal, but lifetime policies. All of that seems to be a Health Savings Account, but notice what it doesn't include. It definitely isn't one insurance for 80%, second insurance for 20%, a third, major medical, for outliers. Nor is it one insurance for hospitals, another for drugs, another for doctors, and eventually as many insurance components as there are medical components. It's, like, simple. Cash or cash equivalents. And for a mobile society, an end to state monopolies, by the expedient of national exchanges for sales transactions while administrative regulation remains true to the Tenth Amendment, largely state-regulated.

The final simplification is -- that's enough for now. The managers know perfectly well there is more to be done, but they deliberately don't do it, out of respect for getting started and seeing how it goes. However, some future projects can be foreseen, so as you go along, you try not to make things harder to do in the future. And one thing that can be done is to foresee that we must start thinking about paying for a lifetime of healthcare, not just healthcare for next year. Why should I pay insurance including care for appendicitis, when my appendix has already been removed? Why should I join interest groups and carry placards to include my condition (whatever it is), when I have plenty of money in my HSA to pay for it? And why can't I have guaranteed insurance renewal after decades of paying my premiums?

In short, we must try our best to devise a system of life insurance to supplement, if not replace, the year at a time term insurance we now have. Its advantages are numerous and there are no natural opponents. The hesitation all relates to getting the mechanics of it right, or right enough to get started. Since working age people ultimately pay for all of it, we need a system for young people to borrow from themselves when they get older, and another system for old folks to pay for themselves when they earned the money earlier in life. We need a way to dispose of unintended surpluses, and a way to subsidize the poor. We need a way for the individual to own his own policy, but pool his investments to reduce administrative costs. Someone must monitor the system, to notice changes in the environment, suggest mid-course changes, but have the integrity not to warp the system to his own advantage. It is possible to see ways to accomplish all of these things, but some things are easier than others, and doing almost any of it for 300 million people is a daunting prospect. We, therefore, propose that we go ahead with the relatively simple structure outlined in Chapter FOUR, but start talking right now about how much we could add, and how gradually we could add it, in the rest of this Chapter FIVE. My preliminary advice is we start with a monitoring system.

Originally published: Friday, December 13, 2013; most-recently modified: Tuesday, May 21, 2019