Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Medical Economics
Some Philadelphia physicians are contributors to current national debates on the financing of medical care.

New Health Insurance Reform Proposals

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a) reduced small-claims insurance costs
b) reduced "moral hazard" overutilization costs
c) compounded internal investment of reserves
d) utilization of the now-wasted labor potential of young retirees

It does not aim directly at the goal of reducing the number of uninsured, except on the principle that if something becomes cheaper, more people can afford it. {bottom quote}
Dr. Fisher

1. HIGH DEDUCTIBLE. The annual deductible of health insurance should be high, in the range of $ 3000 per year. The main reason for a high deductible is to make health insurance premiums cheaper, especially for currently uninsured people. But high deductibles serve other important purposes. 80% of costs concentrate in the most expensive 20% of illness episodes, but these "big ticket" expenses generate far less than 80% of administrative costs. The cost of healthcare to society can be markedly reduced (at least 30%) by eliminating small-claims administrative costs, as well as the disproportionate "moral hazard" costs of minor illnesses. "Moral hazard" includes wasteful utilization of services and insensitivity to price, both deriving from interposing insurance "third parties" rather than paying the providers directly. Note: the advantages of deductibles are not present in "co-pay" features, which in fact increase administrative costs, particularly when a second, or coinsurance, a policy is employed to cover them.

2. COVER DEDUCTIBLE PORTION WITH MEDICAL SAVINGS ACCOUNT. Because high-deductible insurance may give poor people a financial barrier to access, the 2003 Law encourages linking high-deductible policies to a tax-sheltered Medical Savings Account, renamed Health Savings Accounts. Thus, although medical bills (up to the deductible threshold) require cash, reimbursement reserves are supplied by the individual's Account.

These reserves also create new and unexpected value, including portability between jobs, a more level playing field for tax preferences, a longer horizon for health coverage than traditional one-year policies, and neutrality of employers to individual employee health preferences. Although conventional health insurance could be paid for by credit or debit cards, it has somehow never been conventional to use them. Medical Savings Accounts, by contrast, commonly use credit cards, because they simplify record-keeping for the deductible.

What is the source of the money in Medical Savings Accounts? High-deductible premiums are roughly a third of conventional health insurance, depending on the individual's age. The remaining two-thirds go into the tax-deductible savings account. Current law permits additional contributions (out of pocket, but tax-exempt), scaled to the individual's age. If the account is mostly untouched by a healthy person for two years, it becomes increasingly difficult to exhaust it later because of a) its internal income generation, and b) the top limit on expenditures created by the insurance policy. For low-income individuals, funding might be publicly supported.

3. NOTICE THE TWO DIFFERING PROVIDER PAYMENT-METHODOLOGIES. The level of $3000 annual deductible was chosen as within the current band of outpatient-inpatient price separation and requires an inflation adjustment clause to keep it there. One of the chief advantages is to permit two different reimbursement approaches to co-exist, one for outpatients and one for inpatients, without mandating either one.

A high deductible is intended to save cost, preserve individual choices, and to restore consumer negotiating power: consumers gain control to negotiate prices for better service. They can readily observe what is happening, and can readily move to another provider.

However, for incapacitated patients within an inpatient complex, such advantages become unrealistic. Their bundled services (psychiatry may be an exception) should be priced by diagnosis. Although the present DRG (Diagnosis Related Group) system badly needs revision, its introduction by Medicare in 1983 proved so superior to item reimbursement and cost reimbursement, that almost all health insurers employ it.

Moral hazard, which is much lessened for services within the deductible, reappears when the deductible is satisfied, especially when the decision is made to enter the hospital. A financial incentive exists for patients to prefer more expensive but fully insured inpatient care. 1) Accordingly, it would be wise to allow the deductible threshold to rise when excess funds appear in the Medical Savings Account; since that would lower the insurance premium further, the individual has some incentive to agree to it. 2) The patients who select more economical care should share the savings they create. Therefore, policymakers (and providers) should reconsider their instinct to limit the benefits of health insurance strictly to health expenditures. 3) To this end, Medical Savings Accounts should be unified with some or all federal, and federal qualified, tax-preference funds, including possibly Social Security itself. 4) In order to sharpen the focus of most concern to the matters where moral hazard is greatest, a series of insurance carve-outs should be added. These carve-outs would focus on issues where other concerns are greater than the moral hazard feature, for example, obstetrics and terminal care, or where the moral hazard is significantly different, as in-home care and durable medical equipment.

In all efforts to structure incentives away from moral hazard concerns, it should be remembered that draconian countermeasures have already been tested and failed. If individuals desire care-managers to work on their behalf, they should be charged for that unbundled service out of their Medical Savings Accounts, shifting the risk it will lower their medical costs, and the profit if it does, to themselves. Rationing has been firmly rejected by the public, as well as deliberate limitation of medical facilities in order to ration by shortages. All of these approaches are bad politics. Finally, it should be noted that the preference for insured inpatient services has historically been addressed by expanding the limits of insurance to include outpatient care and home care. This might be good politics, but it is not good arithmetic since it has been one of the main sources of healthcare inflation in recent years.

4. LIFETIME COSTS RATHER THAN ANNUAL COSTS. BEGIN WITH TERMINAL CARE. Medical costs are rapidly concentrating in two places: the first year of life and the last year of life. Because of the technology cost to achieve that transition, it makes take several decades for it to become obvious. Meanwhile, the design of health insurance should begin the process, incrementally, of moving to lifetime health insurance instead of annual insurance. Eventually, it can be expected that the cost of living too long will be equal to the cost of dying too soon, but cost predictions are presently difficult. We could rather easily begin the process -- by carving out the cost of terminal care, insuring it separately from the rest of Medicare, and demonstrating to the public the remarkable power of COMPOUND INTEREST ON INTERNAL INSURANCE RESERVES. For example, it has been loosely stated that two thousand dollars invested at birth, compounded tax-free, would roughly pay for an average lifetime's medical expenses.

Carving out terminal care could be accomplished without the public much noticing it, by the following means. Medical care would continue to be paid for by conventional methods, but all costs which fall in the last year of life would be designated "terminal care" and retrospectively reimbursed to the insurance entity which paid them. Since substantial proportions of Medicare funds are now being paid out during the last year of someone's life, the reduction of Medicare's pay-as-you-go "premium" would be considerable. Accordingly, a comparable amount could be set aside from Social Security payroll taxes, invested at compound interest, and eventually made available to pay the individual's terminal care. Transition costs, future cost projections, interest rate risks, and methodology of investment are set aside in this discussion since this project would have to develop some actual experience before a final design is possible.

5. CARVE-OUTS. By limiting health insurance premiums to the current year, the uncertainty of future medical cost inflation is addressed. However, this insurance advantage is confounded by treating all medical costs as if they were random events, including any costs which can be deferred into a different premium year, and other costs (like birth and death) which lack the individual potential for occurring randomly in multiple years. To the degree that such medical costs can be teased out of their mixture with more random risks, opportunities for patients, providers, and insurers to game the system are reduced.

A carve-out system for terminal care has been mentioned, as well as a carve-out of managed care management costs. The latter might be paid for outside of the Medical Savings Account, just as investment advice is often paid for outside an IRA, in order to preserve tax-exempt funds. (The same may be true for preventive care costs). If managed-care management advice actually saved money, fee-based advice might be a prudent option to adopt. It seems very likely that prescription drug costs will be handled as a carve-out. Psychiatry has long proved unsuitable for payment by diagnosis; failure to confess to this has almost destroyed inpatient psychiatry, and there is some urgency to carve out and significantly revise psychiatric care reimbursement. The same applies to home care, durable medical equipment, and probably other areas of healthcare. No reimbursement system can be carried to the present extreme of "one size fits all, let's extend it to other things."

A carve-out of the COST OF OBSTETRICS AND POSTNATAL CARE sounds radical but could be mostly transparent, as well. It is more likely to provoke political resistance, however, since it represents a reversal of parents paying for children, to individuals paying their own birth costs. One birth cost per person paid for by health insurance in the usual way and repaid to that health insurance like a mortgage or a tax on the Medical Savings Account. Just as is true of a mortgage prepayment, the individual would have various options for early, average, or late repayments, reflecting the accumulated funds in his account.

PREVENTIVE, OPTIONAL, COSMETIC AND OTHER ELECTIVE MEDICAL COSTS should also be carved out, for the reason that present rules excluding them from coverage are unworkable. (Preventive care has already been carved out of Health Savings Accounts by excluding them from the deductible; it might be wise to demand proof of effectiveness before making this sweepingly inclusive). It would be equally unworkable to insure them all. It seems better to create carve-out insurance for these costs, provided with funding that does not affect traditional healthcare premiums. Such a system would provide a funding mechanism which must be paid for, rather than the present system of futilely insisting that these costs are illegitimate when in fact they are not. The main argument against using insurance to pay for preventive care is that there is no risk, everyone ought to have it. So the insurance just adds unnecessary costs. When Medical Savings Accounts become more widely adopted, this issue may disappear.

6. CCRC Retirement communities should be encouraged to become the center of health care delivery in their regions, by removing regulatory or tax obstacles, particularly the IRS opposition to accumulating healthcare volunteer activity credits against later healthcare needs of their own. Tax and regulatory obstacles to the use of vacant infirmary and outpatient facilities, community physician and laboratory/x-ray facilities, and pharmacy/durable equipment providers should be removed. Since this trend conflicts with locally established providers, mechanisms should at least be developed to match these transitions to the migrations of elderly populations in any particular region. * * *

IN SUMMARY, this whole scheme can be described as "SUPPLY SIDE" HEALTH INSURANCE REFORM. It generates new funds for healthcare by a) reduced small-claims insurance costs b) reduced "moral hazard" overutilization costs c) compounded internal investment of reserves and d) utilization of the now-wasted labor potential of young retirees. It does not aim directly at the goal of reducing the number of uninsured, except on the principle that if something becomes cheaper, more people can afford it.

Originally published: Thursday, June 22, 2006; most-recently modified: Friday, May 24, 2019