Christmas Present: All Problems Solved

By John Goodman, president, National Center for Policy Analysis

In his final post of the year for The New York Times, Uwe Reinhardt left us with this gloomy thought:

After wrestling for decades and in futility with the triple problems facing health care in the United States – unsustainable spending growth, lack of timely access to health care for millions of uninsured Americans and highly varied quality of care – any new proposal to address these problems is likely to be a recycled old idea.

Bah. Humbug.

He then goes on to give us a brief history of the “old idea” of “managed competition,” as it evolved from Paul Ellwood to Alain Enthoven …. to ….. well …. to …. just about everybody who’s anybody. As depression overcame me, I vacillated between reaching for a tissue or another cup of eggnog …. until it dawned on me that all of the people who are recycling this (basically failed) idea are people who don’t believe in prices.

To a man (are there any women in here?), they believe that no one should ever have to face a real price – certainly not for health care and not for health insurance either. My one contribution to this discussion is the observation that if everyone faces perverse incentives, you are going to get very perverse outcomes. My only regret: my conclusion has not been recycled enough to stop the policy wonks from continuing to think they can give people incentives to do perverse things and then successfully stop them from doing those things.

Okay, halt. I’m going to put these people out of their misery.

Folks, we already know enough to design an insurance plan that will cut health care spending in half and improve quality and access to care at the same time. Explanation below the fold.

Here’s how it works:

All elective, inpatient care must take place at a low-cost, high-quality facility (and this may require travel to another city) or the patient must pay the full marginal cost of going out of network.
Special health accounts for the chronically ill will allow them to manage their own care as well as the money that pays for that care, and encourage provider networks to compete for their patronage.
All other outpatient care (certainly all primary care, preventive care and most diagnostic tests) is paid for from the health saving accounts of the patients.

We already know from the RAND Corporation that health saving account (HSA) plans cut health care spending by almost 30 percent, and that’s with a crude design. How much more would spending be reduced if the diabetics, the asthmatics, the heart patients, etc., could manage their own funds? Everyone with a better idea on how to solve these patients’ problems (from medical homes to electronic monitoring to integrated care to coordinated care to …. whatever) would have appropriate incentives to compete for the patients’ patronage.

As for the rest of outpatient care, who can doubt the impact of letting patients control the money? All doctor visits, MRI scans, cancer screenings, etc. would be subjected to the market test: is the medical service more valuable than other uses of those same dollars.

As for inpatient care, what I am proposing is what some call “value-based health insurance,” or “domestic medical tourism,” or what I once called the “casualty insurance model.” Evidence suggests that this practice can cut the cost of elective surgery in half.

Note the common denominator for all three provisions of the plan: the patient pays the marginal cost of all of his spending decisions.

What about quality? As I have pointed out previously, providers do not compete on quality if they are not forced to compete on price. The reverse also holds: when providers are forced to compete on price they will compete on quality as well.

What about access to care? Since non-price barriers to care appear to be greater obstacles than price barriers for both the middle class and low income families (see here and here), empowering patients with money in the medical marketplace is the most effective strategy we have for increasing access.

Oh, and I guess I must confess. This too is a recycled idea. I first proposed it at a Harvard Business School conference hosted by Reggie Herzlinger in 1999.

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