Saturday, August 01, 2009

OT: Solution to Health Care Reform

The following message sent to the Clinton Transition Team on December 15, 1992 is still valid, and politicians are still misdiagnosing the problem leading them to advocate changes that will make matters much worse and more expensive. Economics Professor and Nobel Laureate Milton Friedman wrote in 1992 regarding the following proposal for a Medical Savings Account with linked variable deductible major medical insurance that “Your health insurance reform, except for details, is identical with one that I have long favored. ... I agree with you completely in what you regard as the fatal flaw.” This solution to health care reform provides universal coverage for 100% of medical expenses (unlimited), with cost consciousness because patients (not government or insurance companies) are put in charge!

Re: Health Insurance Reform / Medical Savings Plan

Dear President Elect Clinton:

Health Care costs are out of control for one reason only: Health Insurance was erroneously formulated from its inception, containing a fatal flaw:

Flaw: “Health Insurance” makes medical cost appear to be free to patients, physicians, and hospitals because it is not insurance. Workable insurance must provide a pre-specified payoff that is triggered by events not under the control of the insured, not the ability to spend without limit at no personal cost.

Patients need to be cost conscious. My 8 year old daughter, Becky, is ready to buy toys without limit if her parents are buying, but is unbelievably frugal and prudent with her own savings—yet this elementary lesson was lost on the health insurance industry and the error was perpetuated in the design of Medicare and Medicaid.

During a decade and a half of directing Computed Tomography facilities at a University Medical Center, not a single one of the hundreds of physicians I trained contradicted my claim that if each patient were to be offered a free color television in place of the insurance paid CT scan they were about to undergo (economically equivalent), we would do far fewer CT scans—a true measure of the huge resource misallocation caused by flawed health insurance. Value is always subjective, so only a patient spending his or her own money can decide whether a health care expenditure is “necessary”. Current reform proposals such as “managed competition” won’t work because they perpetuate the “health insurance” flaw that causes cost to rise uncontrollably, and because they eliminate the crucial information and direction that detailed price fluctuation conveys to producers and providers. The disastrous ineffectiveness of central planning, overall funding caps, and price controls is the key lesson that should be taken from the eastern bloc having lost the “cold war.”

To minimize these perverse effects of health insurance, while creating a huge pool of capital for investment in the economy, I suggest the following evolutionary approach to limiting health insurance to catastrophic major medical coverage, utilizing the best features of self-insurance, IRA’s, cash value life insurance, variable annuities, credit/debit cards, electronic funds transfer, and asset management accounts:

Solution: Every American should have a tax-deferred freely investable MEDICAL SAVINGS ACCOUNT into which is directly deposited the monthly equivalent of at least the amount of health insurance premiums, or more if an individual chooses. The fundamental idea is that the amount of the deductible of a linked health insurance policy varies and is equal to the current medical savings account balance, with changing monthly insurance premiums automatically paid from the account. This self-insurance approach with linked major medical backup maximizes cost consciousness while providing 100% coverage.

Medical costs are paid electronically by using a medical savings account debit card. Account overdrafts for medical costs are automatically paid by the linked private health insurance policy but since most payments are not account overdrafts, most insurance administrative costs are avoided. Buildup in the value of the medical savings account thus results in an accelerating decline in health insurance premiums. As account balances become larger, self-insurance increases, cost consciousness increases, health insurance premiums dramatically decrease, investment earnings cover the costs of medical care, and monthly contributions can decrease [as Einstein commented, compound interest is mankind’s greatest invention].

Account balances must be perceived as being personal money. Amounts accumulated in excess of the expected total cost of future health care during the individual’s remaining lifetime may be withdrawn, and any balance remaining at death goes to the designated beneficiary. Family members would be free to combine or transfer funds between accounts, and dependents could be freely added to accounts. Insurance policies should have no exclusions for prior conditions, and be universally available with community ratings except for temporary premium increases only to offset individual insurance reimbursements exceeding DRG norms while providing actuarial discounts for preventive care and safety measures such as air bags and smoke detectors, and surcharges for voluntary risk taking such as smoking, motorcycling, and skydiving. Various arrangements by insurance companies, fee for service health care providers, HMO’s, care quality auditing firms, information services, mutual funds, and banks, etc. in various combinations would be innovated to serve this new market.

Result: Millions of Americans spending their own money for health care will impose market discipline, currently absent, and will receive better care with dramatically reduced health care expenditures due to elimination of care judged by patients to be unnecessary, avoidance of cost shifting, and elimination of most current administrative costs. Health insurance also becomes portable, eliminating “job lock”, and account balances help fund medical care when not working while account overdrafts due to unpaid premiums by the unemployed could become tax loans as in the Clinton student loan proposal. A huge investment pool accumulates for investment in the economy and funding of retirement, and a savings model is established that can be developed to provide a funding mechanism for other social insurance needs.





Obamacare website 'access denied' Oct. 25, 2013

28 Comments:

Anonymous Anonymous said...

What the hell this have to with with trains or CPRR Museun

8/01/2009 3:01 PM  
Blogger CPRR Discussion Group said...

Quite a lot, actually, as the Central Pacific Railroad was a pioneer in healthcare and built its own hospital to care for its workers. The CPRR Hospital was the very first multi-location Health Maintenance Organization in the world, and its success over much of a century of operation without any price increases provides an important and valuable historic lesson in understanding healthcare!!!

8/01/2009 3:56 PM  
Anonymous Blessy's Insurance Guide said...

the central pacific railroad did a good thing for their labourer by establishing health care for them

8/01/2009 10:21 PM  
Blogger CPRR Discussion Group said...

Michael Tanner, Director, Health and Welfare Studies at The Cato Institute responded to this proposal for a medical savings plan for self insurance with linked major medical insurance having a varying deductible equal to the medical savings plan balance based on free market principles, expressing concern with our idea that universal coverage with some form of community rating is necessary to avoid coercion and imposed rationing, as he and other free market scholars have reached the opposite conclusion about universal coverage.

We agree that coercive mandates are wrong, but it seems that the coercive action is to go through life with insufficient insurance to cover catastrophic losses with the plan to “cost shift”, i.e., steal from your neighbors the money necessary to pay for any catastrophic losses you experience. Isn’t this what a person of ordinary means is doing when they decide that they are “better off” not buying market priced major medical coverage?

The mandate for universal catastrophic insurance coverage arises not from coercion, but from the essentially universal decision to freely choose expensive medical care rather than death or preventable suffering when a serious or life threatening condition occurs that involves uninsured costs exceeding current savings (less future capital needs for self and dependents and to offset lost future earning capacity due to disability). Certainly individuals with assets exceeding maximum potential lifetime medical expenditures, and those who conscientiously object to medical care must be able to opt out, but even these rare instances represent poor decisions as it is inexpensive for the very wealthy to protect their assets from being dissipated by extraordinary rare huge medical expenses, and religious objections to medical care may not last beyond the first serious illness.

Once having accepted the necessity of universal lifelong catastrophic insurance coverage, age modified community rating logically follows, as the only correct time to buy such an insurance contract is in advance at the start of life when there is almost perfect ignorance. The whole point of insurance is to equalize costs by agreeing in advance to unknowable future cost shifting among neighbors before the individual costs become manifest in order to avoid later coercive cost shifting and countervailing attempts at rationing once insurable events have occurred.

8/02/2009 8:27 AM  
Blogger CPRR Discussion Group said...

Robert D. Reischauer, at the time (1993) the Director of the Congressional Budget Office responded with some questions and concerns.

In this plan everyone would have a Medical Savings Account plus supplementary insurance with deductible equal to the account balance. The proposal can also coexist with other health care reforms. For example, Hawaii Governor John Waihee wrote regarding this plan that “I believe the investable ‘Medical Savings Account’ proposal you make is compatible with the health care financing system in Hawaii and increases the individual ‘medical consumer’ awareness of the true costs of medical care.”

We're delighted that Mr. Reischauer believes that our diagnosis of the health care cost problem “hit the nail on the head” — i.e., the absence of a cost conscious consumer. ...

Reischauer: “Where do the original contributions come from? — who pays them? The individual? If not, costs in the short run will rise because the businesses will have to pay for the contribution plus the existing insurance.”

A. The contributions to each individual’s medical savings plan consist of all current payments for health insurance from whatever source they are now made, plus whatever additional savings the individual chooses to contribute (just as the individual makes voluntary retirement contributions now). These include all employer and employee health insurance contributions, all private health insurance premiums, capitated Medicare/Medicaid payments, worker’s compensation and automobile insurance medical premiums, etc.

Individuals will want to make additional Medical Savings Plan contributions if they can possibly afford them because their return on investment from self insurance will be a “bonanza” if they can stay healthy and will be large if they choose to limit their utilization of expensive discretionary medical care. What your question calls “cost” is instead cash flow — since the individual owns the balance in the Medical Savings Account, the immediate total cost is actually less than the present system, because of immediate insurance cost savings. For example “In a city with average health care costs, families can save about $1,315 a year by choosing a $1,000 deductible rather than a $250 deductible—savings that are more than twice as much as the value of the coverage forgone.” [See Goodman, John C. and Musgrave Gerald L. “Patient Power.” Cato Institute, 224 2nd St., S.E., Washington, D.C. 20003, 1992 at page 236. $16.95] Thus depositing $750 one time into a medical savings account that previously had a $250 balance gives a guaranteed instant cost savings (return on investment on the amount deposited) between about 100% for one year (if sick) and 200% per year for life (if well)!! Why would anyone turn down such a spectacular investment?

8/02/2009 8:39 AM  
Blogger CPRR Discussion Group said...

[continuing]

Reischauer: “Wouldn’t this system allow insurance premiums to vary by health status? A sick person would use up his/her MSA and have to continue to pay top dollar for the backup insurance because his/her MSA balance would be close to zero. A healthy person would continue to build up his/her MSA balance thereby paying lower and lower premiums for the backup insurance.”

A. No in two ways. First, regarding the backup insurance, community ratings would be used and prior condition exclusions would be prohibited. Second, since the Medical Savings Plan consists of self insurance plus backup insurance, the “insurance premium” is the constant amount deposited to the Medical Savings Account, not just the variable amount deducted from the account to pay for the backup major medical component. The amount contributed to the Medical Savings Account does not change with sickness. What varies from person to person is the amount of profit the patient ultimately gets to keep in my proposal, i.e., what currently goes to insurance company profits and waste (premiums less essential medical costs, less discretionary medical costs, less policy and claim processing costs).

Reischauer: “Allowing the individual (or his/her heirs) to pocket a fraction of the excess balance in the MSA, in effect lets the healthy folks reap a bonanza.”

A. Yes, the huge amount of medical cost savings possible is precisely the bonanza President Clinton has identified as being necessary to fund our future. [There is no free lunch, but you can still save a fortune by eating an economical diet at home instead of eating out at expensive gourmet restaurants (while also paying the accounting department to audit the expenses). The bonanza is the savings from the instantly modified behavior when you pull the plug on the expense account.] In our proposal, the heirs get the entire balance (that meanwhile is invested in the economy). Allowing individuals to pocket a fraction of their excess balances is needed to motivate cost consciousness — so that they perceive themselves to be spending their own real dollars for health care.

Reischauer: “The nature of insurance is that those who are unfortunate (the sick) are subsidized by the fortunate (the well). Who would pay for the sick in your system?”

A. Wrong! Self insurance has no such subsidization. As long as you have the savings to cover a potential loss, raising the deductible saves a fortune in premiums with medical insurance, just as it does with homeowners, or automobile insurance. The sick pay for 100% of their own costs up to the balance of their Medical Savings Accounts (their deductible) with no insurance claim processing costs or hassle and with maximum cost consciousness. Catastrophic losses can be insured very cheaply by the backup insurance by using it only for the rare large losses that need to be subsidized by pooling sick and well people. For typical (small) expenses, the “well” cannot ever subsidize the “sick” because the administrative costs consume the entire amount of the intended subsidization. The idea of the “well” subsidizing the “sick” is also largely illusory because an individual is likely to be in both categories at various times even within a year, certainly within a lifetime.


To summarize, there is indeed a “bonanza” to be had consisting of insurance company expenses and profits for coverage that is uneconomical under all scenarios, the avoidable costs of processing most insurance claims, and medical luxuries that the patient would be perfectly happy to forego.

8/02/2009 8:39 AM  
Anonymous Anonymous said...

"Free Our Health Care NOW!" Petition.

8/06/2009 12:06 PM  
Anonymous Anonymous said...

The above solution to health care reform will quickly make medical care affordable once again! We know this because when patients pay as with unreimbursed Lasic eye surgery and cosmetic plastic surgery, prices stay reasonable. When insurance companies and government pays, patients no longer care about costs which skyrocket out of control. Another example, is uninsured veterinary medical care — our dog had a huge tumor removed (1/4 of his body weight) and is cured, the entire care including surgery for less than the cost billed for a single human MRI. The care for our dog which we funded was very quick (a week from diagnosis to post-op care) and superb. The veterinary surgeon gave us an excellent discharge summary with color photo, typed up with clear and concise information. At the same time my mom was in the hospital and in contrast got a discharge summary consisting of a handwritten scrawl, poorly done, incoherent, not even written by the doctor, without a clear diagnosis, and so illegible that we couldn't read the medications that the hospital want her to take. This from a "Top 100" hospital.

8/11/2009 10:15 AM  
Anonymous Anonymous said...

"The problem with socialism is that eventually you run out of other people’s money." —Margaret Thatcher

8/13/2009 2:28 PM  
Anonymous Anonymous said...

See "The Whole Foods Alternative to ObamaCare" by JOHN MACKEY writing in the Wall Street Journal.

8/13/2009 2:39 PM  
Anonymous Anonymous said...

See The Top Ten Myths of American Health Care: A Citizen's Guide by: Sally C. Pipes, Pacific Research Institute.

8/14/2009 11:58 PM  
Anonymous Anonymous said...

See ObamaCare Is All About Rationing by MARTIN FELDSTEIN.

8/18/2009 5:12 PM  
Anonymous Anonymous said...

See the CNN Money articles on ObamaCare:

Designing the ideal health care system.

Don't like Obamacare? Here's an alternative.

Obamacare could cost you $4,000 a year.

4 hidden costs of health care.

White House drug deal won't save money.

The crazy math of health-care reform.

5 freedoms you'd lose in health care reform.

9/07/2009 9:59 AM  
Anonymous Anonymous said...

See, Health Savings Accounts very successful in Indiana according to Governor - 70% adoption while reducing costs.

3/02/2010 1:30 PM  
Anonymous Anonymous said...

Government meddling is the underlying cause of all of today's health care mess: "Under the 1942 Stabilization Act, Congress limited the wage increases that could be offered by firms, but permitted the adoption of employee insurance plans. In this way, health benefit packages offered one means of securing workers." This horrendous economic malpractice caused the domination of third party payers resulting in an utter lack of healthcare cost consciousness that seven decades later threatens to bankrupt us. Obamacare completely fails to understand the problem and so makes all this much worse.

3/03/2010 3:42 PM  
Anonymous Anonymous said...

Explaining why patient power leads to cost consciousnes:

"Nobody ever washed a rental car." —Ronald Reagan

3/05/2010 10:50 PM  
Anonymous Anonymous said...

"We have to pass the [Obamacare] bill so that you can find out what is in it ... " —House Speaker Nancy Pelosi

3/10/2010 9:13 PM  
Anonymous Anonymous said...

Rep. Conyers discovers new clause in constitution more than 200 years later:

Question – CNSNEWS: "What part of the Constitution do you think gives Congress the authority to mandate individuals to purchase health insurance?"

Answer – House Judiciary Committee Chairman, Rep. John Conyers, Jr. (D - MI): "Under several clauses. The good and welfare clause, and a couple others."

3/24/2010 12:02 PM  
Anonymous Anonymous said...

Obamacare is the right move for America according to Fidel Castro.

3/26/2010 9:11 PM  
Anonymous Anonymous said...

"The President said he's going to cut the deficit – it [Obamacare] will not cut the deficit; he said he will raise taxes on the rich $1.2 Trillion – it won't bring in that money; he said he will not tax the middle class – he will tax the middle class. It [Obamacare] is a fabrication from beginning to end." —Stuart Varney

3/30/2010 4:14 PM  
Anonymous Anonymous said...

Plan already certified to work by the Congressional Budget Office, Medicare, and Social Security to grandfather people age 55 and over while making healthcare and retirement permanently affordable and solvent and also totally eliminating the federal debt by replicating the existing federal employees' healthcare and retirement in the future for the entire population currently under age 55.

6/04/2010 10:51 AM  
Anonymous Anonymous said...

Goods cannot be rights because they are costly.

7/21/2011 9:29 AM  
Anonymous optometrists said...

When people tackle the US's healthcare reform, I just look at other country's health plans and concur, perhaps ours is just way too expensive to maintain.

10/03/2011 1:50 AM  
Anonymous Anonymous said...

But U.S. healthcare is too expensive only because third party payments make it seem almost free. We can keep the quality and lose the excessive cost due to inefficiency by having only major medical insurance plus health savings accounts so that everyone gets healthcare while being cost conscious. For cosmetic plastic surgery and LASIK eye surgery which are not paid for by third party payers, the cost has not escalated as it has for the rest of U.S. healthcare.

The unaffordable waste would quickly vanish if the cause, third party reimbursement by government and insurance, were removed.

For healthcare and education, if patients and parents are trusted to spend the money while they are able to keep all the money that they do not waste, excellent quality at much reduced cost will quickly be achieved for medical care and education.

In addition to perverse incentives, there is another serious and insoluble problem with central planning (whether by private insurance companies or by government): the information needed to organize an efficient and productive economy is eliminated. In a market economy shoppers constantly are voting with their dollars (providing critical information about preferences). No matter how smart, central planners have nothing to substitute for the distributed information in variable free market prices and sales volumes necessary to guide innovation, and help determine what work, production, and distribution is most useful.

So, for example, discussions of healthcare and education often completely miss the point. It is not whether the federal government, states, or insurance companies should control healthcare as third party payers (causing healthcare decisions to appear to be almost costless to patients and doctors) - the solution is instead for the money be in the hands of the patients who with advice of their doctors should make all the decisions while spending their own money. Similarly in education, arguments about whether the federal government, states, or local school boards should be in charge again completely misses the point - the actual solution is for the parents to get to spend all of the money based on their choice as to how to best educate their children, again while keeping the money that they don't waste.

It would be very surprising if patients and parents couldn't get better healthcare and education at half the cost if they were making the decisions while spending their own money. Anyone rejecting this out of hand should stop for a moment and imagine what groceries would be like if they were absurdly organized and paid for like healthcare or education are today with food insurance or a local food board that assigned you to a public free supermarket (picture the empty shelves of underpriced/free food and endless lines of the USSR, and the famines). If lobster and filet mignon cost supermarket shoppers no more than chicken (just like healthcare after Congress messed up the incentives since WW II), don't you think feeding the population would cost more?

10/03/2011 1:17 PM  
Anonymous Anonymous said...

Regarding insurance mandates, "Ronald Coase won the Nobel Prize in Economics for showing that social costs are symmetrical."

5/23/2012 2:18 PM  
Anonymous Anonymous said...

"Milton Friedman, who would have turned 100 on Tuesday, helped to make free markets popular again in the 20th century. His ideas are even more important today."

7/31/2012 11:42 AM  
Anonymous Anonymous said...

"You paid in to Medicare for years, every paycheck ... Now, when you need it, Obama has cut $716 billion from Medicare. Why? To pay for ObamaCare. So now the money you paid for your guaranteed health care is going to a massive new government program that's not for you." Mitt Romney TV commercial

8/19/2012 8:57 AM  
Anonymous Anonymous said...

Video:

"So, let me get this straight (this is a long sentence), we’re going to be gifted with a healthcare plan we are forced to purchase, and fined if we don’t, which purportedly covers at least ten million more people, without adding a single new doctor, but provides for 16,000 new IRS agents, written by a committee whose chairman says he doesn’t understand it, passed by a congress that didn’t read it, but exempted themselves from it, and signed by a president who smokes, with funding administered by a treasury chief who didn’t pay his taxes, for which we will be taxed for four years before any benefits take effect, by a government which has already bankrupted Social Security and Medicare, all to be overseen by a surgeon general who is obese, and financed by a country that’s broke. So what the blank could possibly go wrong?" Barbara Bellar, M.D., Esq.

10/06/2012 3:17 PM  

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