A Modest Proposal for Improving Health Insurance and Care

by Levi Russell

I want to start off by saying I'm not an expert in health insurance or healthcare economics. That said, I've read my fair share of analysis on the subject and understand how the math of insurance works. In the current debates over the ACA vs the AHCA, "high-risk pools," redistribution, and (largely academic) discussions over the inability of insurers to accurately price risk due to regulations, I thought I'd sketch out what I think is a basic free-market healthcare "system." Please note that I often talk about the mistake of committing the Nirvana Fallacy, so none of what you read below should be interpreted as a claim that "markets are perfect" or any other silly Utopian view. I think there's a lot that can be done to simply improve on current policy. Here I discuss how I would like to see that happen.

Health Insurance

The way I see it, the primary problem with the current health insurance system is that it isn't actually insurance. It's a third-party payer system in which people pre-pay primarily for routine care. These plans have low deductibles, co-pays, and high "premiums." Again, a large percentage of one's "premiums" aren't really premiums.

These generous "insurance" plans are a product of decades-old payroll tax policy. Employees are taxed on their earnings, but are not taxed on so-called "fringe benefits." Employers, competing for the best talent, provided more and more generous fringe benefits rather than increase taxable wages. This led to the current comprehensive health insurance plans prevalent today and created the perverse third-party-payer incentives that have driven up the cost of insurance and care.

Due to concentration in the (massively regulated) medical care industry, hospitals are able to dramatically inflate the cost of care, which pushes up premiums. Insurance companies, also a highly concentrated industry partly thanks to the ACA, have very little incentive to negotiate for lower prices resulting in a bizarre circumstance in which paying out of pocket for routine care is cheaper than using comprehensive care "insurance."

Given these problems, what can we conclude about policy changes that could improve insurance?

1. Stop favoring "fringe benefits" with payroll tax policy. This will allow for a divorce of employment from health insurance, partly solving the pre-existing condition issue.

2. Stop forcing insurers to ignore basic health factors in pricing insurance and to cover pre-existing conditions. This has led to more concentration and certainly hasn't helped drive premiums down overall. However we handle redistributive aspects of health care, we certainly need a functioning price system.

3. Remove caps on contributions to health savings accounts. Provide subsidies to low-income people in the form of tax credits so they can afford catastrophic plans and can contribute to their health savings accounts (HSAs). This will allow parents to ensure that their children have insurance for horribly tragic terminal conditions long before they are born. This would also go a long way to solving the pre-existing conditions problem.

4. Provide something like Medicaid/Medicare for the (I suspect relatively small number of) people who would fall through the cracks if the changes in 1, 2, and 3 above were made.

For more of my thoughts on HSAs, including an example, see this FH post.

UPDATE - Joshua Hendrickson at Ole Miss pointed me toward this article on health insurance by John Cochrane at U Chicago. I recommend checking it out.

Health Care Costs

It stands to reason that one primary cause of high insurance costs is that the care itself is expensive. All sorts of laws restrict the ability of consumers to find primary care at affordable rates: certificate of need laws (which put the power to increase the quantity of medical care facilities up to a state-level board consisting of hospital administrators; discussed here and here on FH), scope of practice laws (which restrict the ability of nurses and nurse practitioners to provide routine care, thus decreasing the supply of care and increasing costs), restrictions on direct primary care (a fee-based service that connects doctors and patients directly without the use of "comprehensive care insurance"), and a whole host of other things I'm probably missing.

In my mind, whatever happens at the federal level, we will continue to see states move away from their restrictive laws and increasingly allow doctors and patients to make decisions about health care on their own. As this article notes, monthly fees for all-inclusive primary care through a "direct primary care" physician can be as low as $25 per person thanks to the reduction in bureaucratic paperwork. This podcast interview has more information. Thanks to innovative medical entrepreneurs, there's even a surgery center in Oklahoma that posts all-inclusive prices for all the procedures they perform on their website. I assume I don't need to tell you that their prices are far below what a typical hospital would charge an insurance company for the same procedures. Imagine that; the price system works to provide care at low costs when it is not chained down by bureaucracy.

As Milton Friedman said, there are no panaceas. Health insurance and health care will never be free and some people will have a tough time taking care of their medical bills. This is true regardless of the institutional structure; the world isn't perfect. However, I think the points discussed above would improve outcomes across the spectrum, especially for those in the bottom two income quintiles. Reduce restrictions on health care providers, allow doctors and patients to interact directly without excessive red tape, level the playing field for HSAs and catastrophic insurance plans (i.e. actual insurance), and provide cash assistance or some other means of helping those who fall through the cracks. As a result, we'll get lower costs, more choice, and far less deadweight loss. What are your thoughts?