Discover more from Risk+Progress
Healthcare for the 21st Century
Solving the impossible trinity
Healthcare is one of society’s greatest challenges. We simultaneously desire equal access, high-quality care, and low prices, an impossible trinity. We may never develop a healthcare system that satisfies everyone, but we can do better than the status quo. I propose the use of Risk-Adjusted Vouchers to strike a reasonable balance between cost, quality, and equality.
Singapore’s Hybrid Approach
To find the best means of balancing the impossible trinity, we first turn our attention to countries that appear to get healthcare mostly right. That is, nations that have affordable, universal coverage, with strong outcomes. The first nation that comes to mind is Singapore.
Singapore’s health system places personal responsibility at the forefront. The cornerstone of the system is the MediSave account, a health savings account to which all Singaporeans must contribute at least 7 percent of their paycheck. Money deposited into the MediSave account is tax-free upon both deposit and withdrawal and can only be used for healthcare. Contributions are mandatory; MediSave is an “individual mandate” of personal responsibility, an oxymoron for Americans, but a concept that works.
The idea behind MediSave is that it gives consumers ‘skin in the game.’ As Milton Friedman wrote, “Nobody spends somebody else's money as carefully as he spends his own.” When consumers are required to use their own money, they do so more frugally than any government bureaucrat or insurance company could.
Consumer mindfulness forces healthcare providers to compete with each other, bringing better quality and lower prices. The government helps this process along, empowering consumers with transparent pricing for most procedures, enabling them to make informed decisions as to how they spend their money.
MediSave accounts aren’t bottomless, however. What happens should their account be exhausted? This is where a separate program comes in, MediShield. MediShield is a low-cost catastrophic insurance plan intended to assist individuals with prolonged chronic or serious illnesses that would drain their MediSave accounts. Citizens are automatically enrolled in MediShield, though they can opt out if they choose.
MediShield premiums are extremely affordable and can be paid via MediSave deposits. Keeping with the self-responsibility principle, MediShield only activates once deductibles and coinsurance has been paid by the insured.
Singapore might seem like a free market panacea, a validation for libertarians that if the government simply “got out” of healthcare, prices would fall and quality would improve. But behind the scenes, the government owns most hospitals, imposes price controls, fixes the proportion of high-end wards against standard wards, and heavily subsidizes the latter.
Rather than a free market panacea, Singapore takes a hybrid approach; combining the heavy hand of the state with personal responsibility. The results are stunning. Singapore spends just 4 percent of its GDP on healthcare, compared to 18 percent in the United States. Yet, Singapore has among the highest life expectancy and lowest infant mortality rates in the world.
While Singapore’s results are incredible, caveats are in order. Singapore is a city-state. It does not have the geographic span or variations that most nations need to confront. It’s possible that Singapore’s system cannot be replicated in a large country like the United States.
Managed Competition in the Netherlands
Another model for reference is the Netherlands. The Dutch health care system has two kinds of insurance: the Ziekenfondswet (ZFW), which provides primary and short-term hospital care, and the Algemene Wet Bijzondere Ziektekosten (AWBZ), which covers catastrophic medical expenses, like serious illness or disability
Like Singapore, participation is mandatory. Dutch citizens are required to buy health insurance, and stiff penalties await those who do not participate. Unlike Singapore, however, the cornerstone is private health plans, subsidized by the government through a risk adjustment capitation scheme. More on that later.
Under the ZFW, individuals make earnings-scaled payments, with their employers matching, into a central sickness fund. This revenue covers about 90% of the required funds and is distributed to the sickness plans using the aforementioned capitation mechanism.
The remaining 10% of the required funds are raised through a community-rated premium. That is, a premium levied at the same rate on all members. The AWBZ is not capitated this way, but is a more traditional insurance pool that pays on a ‘fee-for-service’ model.
The Dutch system produces strong results. It provides universal coverage, ranks third in the World Index of Healthcare Innovation, while spending a relatively modest 10 percent of GDP, and achieving a life expectancy among the highest in the world.
The Dutch and Singaporean healthcare systems are some of the best in the world, and they achieve this status in very different ways, but some common threads emerge between them:
A basic care package
Universally mandated coverage and,
An emphasis on personal responsibility
Utilizing the lessons learned from the above models, we can design our own healthcare system.
Basic Health Package
Insurance is a product that is purchased to manage risk, in this case, the risk that the insured might have a heart attack, a serious injury, or an illness. The problem with medical plans today, particularly in the United States, is that they have evolved beyond this purpose. Health insurance is used for preventative care, routine check-ups, and procedures that shouldn’t require dipping into a safety net.
Case in point: You use your auto insurance for repairs after a collision, not to pay for an oil change. You use your homeowners’ insurance when your home is damaged by hail, not hire a landscaper. Paring back the scope of health coverage will limit the cost. My plan requires health insurers to provide a Basic Benefits Package only. Insurers may offer additional services in that package if they chose. This Basic Package would include maternity care, hospitalization, as well as dental and vision coverage.
Independent Medical Administration Boards would be set up around the country to certify that all insurers have the resources necessary to offer the Basic Package and to ensure that they meet minimum quality standards.
Next, as we see around the world, universal coverage is the norm, though there are different means of achieving that. Often, this involves some kind of mandate to purchase insurance, which is crucial. The reason is that insurance is subject to adverse selection. There is an asymmetry of information; patients know themselves better than the insurance company does. Patients who know they will utilize insurance tend to sign up, and those who think they won’t, tend not to.
As a consequence, the risk pool fills with people who make disproportionate use of those funds. Insurers have no choice but to raise rates to survive. The price hikes, in turn, further distort personal incentives, driving more “healthy” people out of the pool, forcing further price increases...and so on. Absent a mandate of some kind, the system unravels to the detriment of everyone.
Now, forcing participation in a health plan engenders questions of freedom, and often cries that it is one’s “right” to not participate. These cries create a contradiction, however, with the Hippocratic Oath taken by doctors, as well as societal norms. Doctors are ethically bound to treat anyone, whether they can pay the bill or not.
In effect, under the guise of “rights", these individuals have full access to the healthcare system without any accompanying financial obligation or contribution. They become free riders, forcing their debts to be redistributed amongst everyone else. This is not only unsustainable, but it is also fundamentally unfair to those who do pay for insurance.
My plan sidesteps the issue by offering the Basic Package for “free.” No one turns down free healthcare. The Basic Package, instead, is paid via a VAT tax on goods and services. Revenue generated by the VAT is distributed to the local Medical Administration Boards, who then, in turn, redistribute the funds to health plans via risk-adjusted vouchers. Not unlike the Netherlands.
Vouchers are useful here as they ensure that everyone gets coverage while preserving the consumer’s right to choose between providers/insurers. Insurers cannot deny coverage due to preexisting conditions. They are free, however, to upsell and offer packages with better benefits for an additional premium.
Unlike fixed-value vouchers, as I proposed for education, however, healthcare vouchers will vary in value according to an individual’s risk score. This score would be generated by the local Medical Administration Board based on that individual’s health and demographic characteristics. The aim is to generate a voucher value that roughly approximates the expected cost to insure that individual for a given year.
The beauty of risk-adjusted vouchers is, if done correctly, insurers no longer have an incentive to “cream skim” the best patients or otherwise avoid the worst. The adverse selection issue is neutralized, and insurers are now free to compete on cost and quality instead. Insurers that find innovative ways of holding down costs get to keep the surplus from their vouchers as profit.
It may make sense to establish an excess or reinsurance coverage system for extreme cases of serious illness or chronic disease. This excess coverage would protect insurers from extreme losses, and disincentive them from skimping on care for expensive patients.
Excess coverage would only engage for costs beyond a certain limit, perhaps two standard deviations above the mean expected cost. Funding for excess coverage could come from Pigouvian taxes, like the Sugar-Sweetened Beverage tax I explored here, and tobacco taxes. The taxes would simultaneously internalize negative externalities while using the revenue in a socially beneficial way.
The competition between insurers will go a long way toward curbing healthcare costs, but what of goods and services that are not covered under the Basic Package? I have previously illustrated how tort reform, patent buyout auctions, occupational license reform, and regulatory streamlining, can accelerate innovation and reduce costs. But healthcare needs greater still market exposure.
Between 1998 and 2001, the prices for Medical Care services in the US rose 132 percent, this is compared to a 66 percent rise in overall consumer prices over that same period. While there are many factors at play, among them appears to be that medical services are typically paid for by third parties and not the consumers themselves.
We know this because we can look at medical services that are not paid by third parties. Of the 16 most popular cosmetic surgeries, the average price increase was just 31 percent in that same period, less than half of the overall increase in consumer prices. Some services even declined in cost. Take LASIK eye surgery, for example. Since the debut of LASIK in the 90s, the inflation-adjusted cost per eye has dropped from about $4000, to as little as $1000.
To further inject competition into the healthcare system and limit the taxpayers’ cost for the Basic Package, it should come with a relatively high deductible, requiring consumers to be mindful of their spending and prevent abuse of the system. This deductible could be in the $500-$1000 range.
This concept is already being employed in Indiana, where high deductible plans are paired with health savings accounts, resulting in huge behavioral changes. Consumers are 67% less likely to go directly to expensive ERs for treatment, instead opting for cheaper urgent care facilities. They also opt for cheaper generic drugs compared to name brands. In total, residents with high deductibles spend about 35% less on healthcare compared with those on traditional insurance plans.
This also hinges on the ability of consumers to compare prices. Currently, however, prices for medical goods and services are hidden in charge-masters that are accessible only to insurers. In fact, these list “prices” are not truly prices at all, but arbitrary anchors for negotiations with insurance companies.
Like Singapore, this plan would mandate that all medical providers publicly list the cost of procedures, and do so in a “bundled” pricing format. This is a prerequisite for empowering consumers to make informed choices and tilt the balance of power back in their favor.
But what about individuals with little or no income? There is also an answer for this: a Negative Income Tax. For people who have low or no income, the government would already be depositing money into their personal accounts, which can be used for health products and services. No one gets left behind.
This plan is far from perfect. No healthcare design is going to satisfy everyone. What I have done is proposed a system that gives everyone basic coverage at no cost to them. It does this while preserving the innovative spirit, enhancing consumer choice, and restraining medical inflation. It’s about as close as we can get to solving healthcare’s impossible trinity.