Econ 531 Healthcare Proposal

Details

In this proposed healthcare system, the government mandates insurance coverage for all citizens. Revenue for insurance comes from moderately progressive payroll taxes, not premiums, and the government uses it to pay private insurance providers, who must accept everyone. A system similar to Medicare Advantage is in place that people pay into throughout their career and receive insurance from when they retire. There’s no separate system for poor people, who receive the same insurance as everyone else. Children are included on their parents’ insurance plans. Hospitals are private and doctors are salaried.

Rationale

Since they’re already paying for their insurance in taxes, people shouldn’t need much prodding to get coverage. Funding insurance by taxation rather than premiums makes healthy and wealthy people subsidize sick and low-income people, reducing inequality in healthcare access and outcomes. This predominately private market healthcare system is more responsive to patient needs and preferences and more innovative than a single payer system. If everyone is required to buy insurance, then there’s no adverse selection and the market doesn’t go into a death spiral.

Acknowledgements

This economic system emphasizes equity over wealth, so it would be hard to implement in a nation with strong conservative elements, who would chafe at the idea of the government presuming to garner their wages to subsidize other people’s insurance. If the country in question had a developed insurance industry like the U.S.’s, it would require a radical restructuring of health insurance providers into essentially nonprofit entities heavily regulated by the government. This would of course be unpopular among insurers.

Details

Details

To cut down on overconsumption of healthcare and introduce accountability on costs, this proposal employs copayments—insurance covers 60-80% of costs and people come up with the rest or buy optional copayment insurance. Payment for medical care is fee for service (FFS), with two components included to address inefficiency, price transparency between hospitals and salaried doctors. Even though they are required by law to accept both types, insurance providers have an incentive to enroll healthy people and avoid sick people. Since insurance is now divorced from employment, un- or underemployed people may be discouraged from working.

Rationale I

Rationale I

Copayments make people feel some of the cost of purchasing healthcare, which should make them less likely to consume medical services unless they really need them and thus curtail wasteful healthcare spending. Poor folks who wouldn’t be able to afford paying 20-40% of their medical bill are eligible for government-provided copayment subsidies on a sliding scale based on income. Having FFS care with doctors whose pay isn’t based on how many treatments they prescribe avoids the twofold problem of having government set price schedules for treating a condition, namely 1) the incentives that arise to over- or undersupply a treatment if the price is above or below marginal cost and 2) the adversarial relation that can arise between physician and patient.

Rationale II

Rationale II

FFS care normally incentivizes doctors to recommend unnecessary procedures or treatments, but I propose to make doctors salaried employees of hospitals whose pay is fixed from year to year rather than varying based on the number of services they provide. This would remove their incentive to recommend unnecessary treatments, and since they would be employees of the hospitals they work at, they would have reason to keep costs low. This would also help solve the problem of doctors always encouraging the adoption of new medical technology by making the cost of said technology come out of the same pool which they’re paid from. No gatekeeping necessary because with copayments, specialists are more expensive than primary care doctors, so the moral hazard of people going to a specialist when they don’t really need to is ameliorated.

Rationale III

Rationale III

To address perverse incentives in the insurance market, viz. insurers’ trying to avoid sicklier patients, this plan will employ risk adjustment. A government agency will calculate average health expenditures for a particular subset of unhealthy customers (like 50 year-old men with heart disease) and then pay insurance providers what such a person “should” have cost them. This makes high-risk customers not necessarily unprofitable, and actually provides insurers with an incentive to figure out how to treat that disease efficiently. As to employment incentives, there’s not much incentive either way for poor people because they will have insurance whether they work or not, and there’s a sliding scale of copayment subsidies rather than a cutoff point, so they don’t really have much to gain from not getting a job.

Acknowledgements

While they would effectively address moral hazard, having copayments might make people more reluctant to go to the doctor when they should. Giving hospital doctors a fixed salary might lead to them trying to take less cases or leave to start their own clinic.

My plan doesn’t really address doctors who run their own clinics, but it may be necessary, if there’s a movement toward clinics, for government to disincentivize going to a clinic doctor by increasing copayments for non-hospital care. Since they’re receiving a fixed salary and are only indirectly affected by the financial wellbeing of their hospital, doctor’s incentive not to recommend unnecessary medical equipment might not be very strong.

Details

Government sets minimum standards for insurance plans, which results in approximately standardized plans being available. Insurance providers cannot turn away any customers or charge differential rates to sicker customers. Government-run risk adjustment compensation makes it more profitable for insurers to cover sicker people and thus cuts down on them avoiding covering them. Insurance providers are regional and negotiate prices with hospitals in their region and copayments are higher for individuals if they go outside of their region. Hospitals are private, but anti-trust regulation will prevent monopolies from forming via mergers and government will review applications to build new hospitals. Instead of government set price controls, public access to medical service prices will be legally mandated. Hospitals will to have to put their prices for services on regional health cost databases that would allow customers to compare prices between hospitals.

Rationale

Having essentially standardized health insurance plans that everyone has access to promotes equity and prevents people who have already paid a fixed ‘premium’ in taxes from flocking to one insurer that covers more or is somehow better than others. Risk adjustment scheme removes incentive not to enroll sick customers and motivates efficient care for them (so that the insurer can keep the difference). Making insurance providers regional rather than national allows insurers more leverage in negotiating compensation with hospitals and flexibility to adjust for cost-of-living differences between different areas of the country. Private hospitals are more responsive to customer preferences, market trends, and new technology than public hospitals. With publically accessible medical service price databases, the market becomes transparent and hospitals have to compete based on price (which customers will still be sensitive to because of copays) instead of new medical technologies. This forestalls the medical arms race and makes the market more efficient.

Acknowledgements

Because of the standardization, there is a loss of choice in insurance plans and in treatments, which may be politically unpopular. Government officials, in conjunction with medical professionals and representatives from major insurers, decide if a procedure is cost-effective, and if not, it isn’t covered. This may result in a secondary insurance market for these types of procedures, which would be available only to the wealthy. This model doesn’t have any government price regulation or DRGs (except for risk adjustment) because I knew those could cause over- and undersupply distortions, but it’s possible that increased price transparency and the competition it would foster between hospitals wouldn’t be effective in keeping prices down.