Philadelphia Reflections

Whole-Life Disbursement Model

Although we intimated retirement funding vastly exceeds the rest of health funding as a problem, everyone in America is also aware that paying for health costs is a tangled, expensive mess. Far from simplifying matters, computers have forced us to stop to justify every step of the process. For a simple example, it would be a great comfort to know someone has seriously studied the details and can assure us the cost of examining claims generates more savings than its cost of doing it. No one doubts more cheating would occur if we paid claims without looking at them, but are we really confident the savings justify such a cost?

After all, the cheating is encouraged by passing it through a third-party, which makes it appear to be cost-free. Meanwhile, the Health Savings Account essentially pays claims with a debit card, relying on the depositor to howl when the charge seems unwarranted. Most managers of HSA would rebel at imposing extra claims processing costs onto a system which keeps customers quiet with a 30% reduction in overall costs. The vast majority of personal expenditures are paid directly by a two-party transaction. Are we really so concerned about chiseling we wish to impose a third-party system on the whole retail economy? Put it another way. Is there something so especially evil about healthcare costs which forces us to single its transactions out for the undeniable costs of claims processing? The problem, dearest friends, is not whether claims processing costs so much. The real problem is why in the world do we use a third-party system to pay for them.

The Health Savings Account asked that question three decades ago and lets the customer be his own policeman with his own money, so long as the amount is less than the deductible. It really is necessary to have insurance to spread the risk of health catastrophes, and so catastrophic health insurance is the cheapest form of it. It happens a reasonably high deductible and the minimum cost of a hospital admission are pretty much the same, so third-party reimbursement is pretty much a hospital problem. There's not much difference in cost between one breakfast and another, so I would interject the comment the hospital problem boils down to the accounting fiction of indirect overhead. Every single hospital expenditure must be assigned to reimbursement, so by calling it indirect overhead it gets paid for by someone, no matter who, and "costs" go up, employees get raises, equipment gets purchased. Just call in ten CPAs drawn from the phone book, and ask them to establish a justification system for any item to be included as indirect overhead. If that doesn't solve your problem, you don't have a problem and might as well stop complaining about it.

So to return to the whole-life model, it seems reasonable to include the Health Savings Account as a model for expenditures. It might be reasonable to impose some standards for catastrophic high-deductible insurance compliance, with the indirect overhead approach as a default option in cases of dubious performance. Otherwise, cost overruns can be restrained by dropping insurance company participation where suspicions are warranted.

Design of the insurance approach is thus fairly simple, leaving energy left over for designing incentives and efficiencies, which we would hope would collectively generate another one percent investment return or its equivalent. Together with the one percent picked up with revenue efficiency, the additional 2% return on investment income might be going far enough. As I see it, we still haven't got to the crux of the matter, however. It's to generate sufficient profit and reserves to carry the system several decades through the transition to full implementation. Unfortunately, everybody wasn't born on the same day, and won't have the same personal reserves. Either we implement this system in stages, or we find some massive funding mechanism to carry it through the rough spots. It isn't adequate to dump the transition problem on the Congressional staff and go on to unrelated matters; this is the make or break issue. Even at the best, it will take several decades to be fully implemented, satisfactorily running, and solvent. So even if we do it this way, it will displease many people, unless--. Unless the scientists soon find an inexpensive cure for two or three major diseases.

So let's look at several pieces of the financing puzzle which might be included within the main structure, or they might remain independent. The choice must save money, however, or it won't serve the purpose.

Originally published: Wednesday, June 29, 2016; most-recently modified: Wednesday, June 05, 2019