The road not seen: an elegant way of reducing health insurance costs and expanding coverage

Clark Coleman writes:

I believe the path to reforming medical insurance is pretty straightforward. Let’s look at reducing costs and expanding coverage first.

Two decades ago, the Golden Rule Insurance Company of Richmond, Virginia, noticed an odd mathematical fact. They were paying $4,300 in medical insurance premiums for the typical worker with dependents, under the standard low deductible plan that most employers offered. They priced the same plan with a $3,000 deductible, and the premiums were only $1,300. Add $3,000 and $1,300 and you get the $4,300 they were already spending. A light bulb went off.

If they got their employees the high deductible plan, they could put $3,000 into a medical account for each employee. When the employee pays for medical care, he can get reimbursed from the account. If the employee and dependents use less than $3,000 in a year (and a good percentage of employees will always fall below a high deductible), they take the money remaining in the account on December 31 and split it between the employer and the employee.

Now, the employee has a reason to be concerned about medical costs. The money is no longer funny money from an insurance company. The employee is an actual consumer in a marketplace.

The current numbers, after two decades of inflation, are approximately $13,000 for a good medical and dental plan that covers a family, compared to $4,000 for a plan with a $9,000 deductible. Same principles still work.

Big problem: Golden Rule discovered that the $3,000 they would put into that account would be considered salary under our tax laws, meaning the money is taxable, whereas the whole $4,300 premium they were paying was not taxable income to the employee, due to stupid and outdated tax laws. This could easily be solved by making both of these funds taxable or both non-taxable. Making them both non-taxable would create more demand from prospective employees for the accounts, which would encourage more employers to offer them. More on that below.

Let’s look at a concrete problem in medical costs. Investigative reporters call around to various imaging labs and find that an MRI of your knee costs $500 at some labs, $800 at some labs, $1,000 at some labs, even $1,500 at some labs. Today, the employee has no idea how much it costs, and does not care. The referring physician does not know the prices at different labs in town, does not care, and has other ways to spend his time than calling around checking prices. Insurance companies try to impose fixed prices on “preferred providers” to deal with this, and providers often try to work around that limitation by charging for an MRI and some other procedure as well, which they claim was necessary. There is no real marketplace with an informed consumer checking prices. Some providers refuse to provide prices to anyone but insurance companies. That could be solved with a pretty simple law requiring price disclosure. Employers could list prices for employees and list expensive providers that you cannot go to except on your own dime.

The funny money non-market where we each have an incentive to consume medical services of unknown price and questionable value would be replaced by a real market where consumers armed with price information (and information about treatment and procedure effectiveness, which employers and others would now have an incentive to disseminate) would decide whether to spend money or not. Employers would see costs actually decline for a while, especially due to receiving half the unspent money in the accounts. The cost reductions would motivate employers to offer these plans, and some employers who offer no medical insurance would find it more feasible to do so and would offer the plan in order to compete for employees. The $9,000 accounts, and the employee half of unspent money in the accounts, could be deductible by the employer but non-taxable to the employee if we want to motivate wider coverage of uninsured workers through tax incentives rather than through government programs.

Even Medicare and Medicaid could operate in this fashion, so that we don’t have a large population of consumers who don’t care about prices.

The cost savings that other ideas provide (tort reform, fraud elimination in government programs, repealing the anti-trust exemption for insurance companies, and repealing the prohibition of insurance competition across state lines, among others), would provide savings on top of the savings from the new plans.

The remaining problems in medical insurance (portability, policy rescission, pre-existing condition issues, etc.) can be addressed independently of this proposal. I won’t make a long proposal longer by addressing these other matters.

The bottom line: An informed, empowered individual in an actual marketplace. The exact opposite of what the Democrats want for us.

- end of initial entry -

Steve D. writes:

Reading Clark Coleman’s comment brought back a memory of my own from the early 1980s. I was at that time an employee of the Louisiana State Medical Society. They offered employees what was at that time a very innovative health plan called the Consumer Health Investment Plan, or “CHIP.” In its broad strokes, it was identical to what Mr. Coleman described, except that the money belonged entirely to the employee upon his termination of employment. In practical terms: I worked there three years; in each of those years, the Society invested a certain amount of money—I believe it was $2000 at that time—in a trust account (if that’s the right term), from which money could be disbursed only to pay medical expenses. At the end of my period of employment, all the money still in the account was mine, to do with as I pleased.

At this point, I have to rely on my not-entirely-reliable memory; but I believe that, yes, it was taxed as income … but only in the year that it was removed from the account. And even though the tax was a considerable chunk of change, the amount left over was much larger, and was entirely a windfall. It was the only time in my life that I received what was essentially severance pay equal to many months’ salary.

I don’t know if the Society actually saved money on the program; but even if no money was saved, the health care system itself was relieved of some of its burden. The cumulative effect was scant, of course; but if CHIP had been implemented widely, the demand for medical services would have dropped drastically—and so, the cost of both medical care and health insurance would have dropped as well.

A description of the CHIP program—the only mention I could find on the Internet—can be found here. Again, if I recall correctly, I believe the LSMS took the plan to Congress, with the sponsorship of Sen. John Breaux; but of course, nothing came of it. It made too much sense. But I’m one of the few people who can attest that it did work, and worked well, in a real-world test.

Kristor writes:

The solution Clark proposes is already in place. It is now in its 3rd or 4th version, I forget which. This is all to the credit of the President of Golden Rule, who was the major engine behind the project. One of the achievements of the Bush Administration was to make this solution available to all Americans, circa 2003. Before, it had been available only on a limited basis, to only a few taxpayers each year. As a result, few insurers other than Golden Rule itself bothered to put themselves through the hassle of getting their policy forms for such plans approved by state insurance departments.

This form of medical coverage is called a High Deductible Plan with an associated Health Savings Account. Since the plans became universally available, most group carriers have promulgated the relevant policy forms. Contributions to the Health Savings Accounts grow tax free, just as with an IRA. Withdrawals to pay for medical expenses are also tax free. Wikipedia’s article on the idea is here.

So this solution is already out there, already percolating through the economy. Somewhere around 8% of workers covered by group plans are using HSAs. As more people get clued in to the idea, more of them will adopt it. The big factor preventing this from happening more quickly is fear, due to ignorance and confusion (not uncommon when it comes to thinking about insurance; people’s brains lock up). Employees are scared of the words “high-deductible” and reject it without further thought. If the insurance companies would market these contracts as “cash value” medical insurance, the public would know how to think about them, and would begin buying in earnest. NB that insurers would love this. They hate the low deductible health insurance contracts, because they impose an immense administrative burden on insurers, as compared to high deductible plans.

If the contracts were issued to individuals early in life, and directly—rather than as employees covered under a group plan—changes in coverage provisions and benefits—e.g., add coverage for acupuncture, increase the annual deductible, and so forth—could be handled on an a la carte basis. Even changes of carriers could be accommodated this way. You’d park your tax-deductible health savings account at the bank or broker/dealer or insurer of your choice, and then direct the custodian of the account to honor charges you incurred with your medical debit card and to pay premiums to the insurer of your choice. You would negotiate with the insurer for the suite of benefits you wanted. These could become extremely powerful financial arrangements. When the IRA started, few took advantage of it. Now there are trillions of dollars in IRAs. Ditto for the 401k. No reason HSAs couldn’t be the same.

Posted by Lawrence Auster at March 17, 2010 03:57 PM | Send