"China has embraced capitalism to keep the socialist elites entrenched while, more lately in the west, we've embraced socialism to keep the capitalist elites entrenched." -- Jim Chanos
To Chanos, we say, well ... at least the Chinese have some modest talent at capitalism. We, on the other hand, are really bad at socialism.
With this insight in mind, we offer a response to President Obama's call for health-care system reform alternatives in his State of the Union address last month:
[I]f anyone from either party has a better approach that will bring down premiums, bring down the deficit, cover the uninsured, strengthen Medicare for seniors, and stop insurance company abuses, let me know. (Applause.) Let me know. Let me know. (Applause.) I'm eager to see it.
We believe that the fundamental weakness of our current health-care system lies in the irrational incentives it has created, which conspire to reduce the responsibility of individuals for their own care, and encourage providers to focus on cures rather than prevention.
How we got here
These incentives (and disincentives) exist because under the current system, people other than the consumers and providers with a direct interest in the outcome -- namely, insurance-company bureaucrats -- are making resource-allocation decisions, or at least setting parameters for those directly involved to make those decisions. While this is theoretically well-intended, in practice this convoluted system encourages suboptimal choices by both consumers and providers, by driving costs up while simultaneously degrading the quality of care.
The very concept of employer-provided "insurance" that covers standard health-care expenses -- as if it is just bad luck that folks need to see their doctors every now and then -- is fundamentally dysfunctional. People covered by health insurance typically get only indirect feedback on the cost of medical treatment, because they are charged only a token fraction of the fee.
Consequently, patients have no financial disincentive to pursue the greatest amount of treatment available -- even past the point of diminishing returns, medically speaking -- since it doesn't make any difference to them, cost-wise. And health-care providers often have incentives to overprovide care too, either to maximize billing, justify underutilized equipment, or reduce the risk of a potential lawsuit. Worse still, if you find a new treatment that is more effective, less painful, and/or cheaper, unless your insurance company approves it, you can't use it (unless you can pay the entire cost out of pocket).
How things got even worse
And, of course, there's the problem of how to extend coverage to people who are not employed. With no employer to foot half or more of the insurance bill, such folks often find it hard to afford the cost of health insurance. (By the way, while it is beyond the scope of this article, for anyone wondering whom to blame for designing our weird health-care insurance system -- unlike anything anywhere else -- the answer is serendipity, as is well-explained in an excellent edition of This American Life.)
Even more insidious is the current cultural focus on fixing problems once they arise, as opposed to preventing them in the first place. It is much more cost-effective and better for overall health, for example, to teach children optimal diet and exercise regimens, than to wait for them to grow up and develop serious medical problems.
But instead of focusing our efforts on ounces of prevention with health education and preventive medicine, we allow ourselves to become unhealthy or sick, and then scramble around to find pounds of cures: emergency-room treatments, a variety of heroic and expensive responses to conditions such as heart disease that could often have been prevented much more cost-effectively, and expensive drugs for (preventable) chronic conditions. No wonder the United States spends more per capita than any other nation upon health care, while getting only mediocre results!
What should we do?
We believe that a genuinely "better approach" must address both the cultural and financial issues.
The key component on the cultural side would be comprehensive education to combat and eventually eradicate health-care illiteracy. The focus -- for both consumers and providers -- would be on the efficacy of preventive care and the imperative to attend to results in making medical care choices.
The role of government here would be to:
- Work with content experts to develop and distribute standards for health education curricula.
- Oversee the creation of electronic medical records to facilitate coordinated holistic care between providers for each individual.
- Serve as an honest broker to collect and distribute outcomes data, so that consumers can make informed choices with respect to health-care providers.
- Conduct needs assessments to identify and address inefficiencies (e.g., if a rural county does not have adequate preventive health-care providers, providing incentives to redress that situation).
On the financial side, we propose universal health savings accounts (HSAs) combined with mandated catastrophic medical insurance coverage. Each individual would contribute at least a minimum number of pre-tax dollars -- which may vary depending on demographic data and medical history -- into his or her HSA each year, as well as contributing the requisite funds to the HSA of any minor dependent. For individuals who cannot afford the minimum contribution, the government will cover the difference.
Individuals have total control of the funds in their own HSAs, with the exception that they can only use those funds for their own health care, and that they are required to use some of that money to maintain catastrophic medical insurance coverage. And teaching financial literacy -- so that folks can responsibly manage or delegate the management of their HSA funds -- must be part of the comprehensive education initiative discussed above.
Unlike the Flexible Spending Accounts that exist under present law, at the end of the year any funds remaining in the HSA are not forfeited, but instead roll over to the next year. Over the course of your career, you would be encouraged to build up a growing surplus in your HSA, to ensure the availability of funds for retirement medical expenses. If you succeed in gaining enough of an excess surplus, you can -- after paying back government contributions to your HSA from prior years, if any -- withdraw the excess funds and use them for any purpose. (Of course, you would have to pay income tax on any such withdrawal used for non-medical purposes.) If your HSA is still funded when you die, the proceeds become part of your estate (again, after paying back government contributions, if any).
How does this approach stack up with respect to President Obama's five criteria?
Well with respect to (1) bring down premiums, (3) cover the uninsured, and (5) stop insurance company abuses, we get full marks. Under our plan, anyone who prefers having some bureaucrat dictate which doctor he or she can see and which treatment is "covered" is welcome to spend their HSA funds to buy traditional "health insurance" -- but we would bet that not many people will prefer that option.
To retain any such business at all, insurance companies would have to compete hard. But for most folks, paying health-insurance premiums and pleading to get coverage for a visit to the chiropractor, or for an herbal or homeopathic remedy, will be merely a not-so-fond memory. And by definition, everyone is required to have an HSA, so everyone is covered.
As for (4) strengthening Medicare and (2) reducing the deficit -- which, on the face of it, would appear to be contradictory objectives -- under our proposal Medicare would be redundant, and can be eventually phased out. During a transitional period, many retired and low-income seniors will need government assistance funding their HSAs each year, because they will not have had the opportunity to build up a surplus during their working years. But as the years go by, more and more newly retiring folks will be self-sufficient with respect to health-care expenses (not to mention healthier).
Eliminating one of the entitlement black holes most definitely qualifies as deficit reduction. It would also bring systemic efficiencies, by reallocating the energies of all those folks currently dedicated to inventing clever ways to deny medical insurance claims toward more productive work.
So ... how do we get there from here?
Clearly, the politics will be tough. With the opportunity to service and manage HSA funds, some of the large financial services companies such as Bank of America (NYSE: BAC) and JPMorgan Chase (NYSE: JPM) would probably support our plan. But insurance companies such as UnitedHealth Group (NYSE: UNH), Aetna (NYSE: AET), or WellPoint (NYSE: WLP), faced with the potential loss of a lot of business, would be far less enthusiastic.
Big Pharma companies such as Merck (NYSE: MRK) and Pfizer (NYSE: PFE) may find the emphasis on preventive medicine a hard pill to swallow, since it could potentially zap the market for expensive new drug cures. We believe the best strategy would be to appeal to Americans' sense of fair play and concern about pocketbook issues. On that basis, this proposal is miles ahead of the current system.
Implementing the proposed approach will put cost back in the decision-making equation for both consumers and providers. And it will result in the creation of government-capitalized data systems to enable patient record information sharing by different providers, facilitating coordination and making available provider results data, to help consumers get the biggest bang for their health-care bucks.
Consequently, the percentage of GDP spent on health care will decline, while quality will improve.
But the best things about this approach are that it plays to our strengths in exercising liberty and independence in the pursuit of happiness; it utilizes market forces to promote quality and cost-effectiveness; and it provides incentives for us to take more responsibility for the welfare of ourselves and our families, and educate ourselves about health (and perforce science) issues.
To the extent that it succeeds, we will end up with not only healthier and wealthier, but more responsible and well-informed citizens.
What are your thoughts on health-care reform, Fools? Are Brad and Madge onto something? Join the debate in the comments section.
