Fixing Health Care the Right Way

The economics of health care are relatively straight forward.  The goals for a system are nicely defined in this article by David Cay Johnston in Tax Notes

http://taxprof.typepad.com/files/131tn0619.pdf

“In addition to saving money, a modern healthcare system would reduce paperwork, eliminate

time wasted by businesses on health insurance, and make labor markets more fluid because small employers would not be forced to discriminate against people with preexisting conditions.

A well-designed modern system also would focus on prevention to minimize preventable chronic

conditions and reduce the massively wasteful use of costly technology like MRIs, which are needed for only very limited diagnoses.

A modern system would cover everyone. Currently about one in seven has no insurance, and at

some time during the year one in four goes uncovered, a situation not found in any other modern

country. Universal coverage would cut emergency room costs and provide care for chronic diseases

like cancer and diabetes.

It would end the practice of doctors who deny care getting bonuses, as detailed in my book Free

Lunch.”

Economists know how to make a system like this work.  It involves changing the health care payments system from one of “pay for procedure” to one of fixed payments to provide health care to an individual.  Under pay for procedure the incentives are all about raising health care costs, since each dollar of increased health care cost is a dollar of income to health care providers and health care organizations.

An example of a fixed payment system for Medicare would work like this.  Medicare would make a fixed payment, say $15,000 per person covered for example to a health care organization to cover all of the medical treatment for an individual in Medicare.  That organization would provide all health care services (with a small deductible and co-pay to prevent abuse) for the individual covered.  The organizations would be privately organized companies, in effect  Health Care Alliances, and could be organized by physician groups, hospitals or even insurance companies. 

Now under such a system the incentive would be to reduce costs and increase efficiencies. A Health Care Alliance with 10,000 enrollees at $15,000 each would have $150 million in revenue, and its profit would be determined by the difference between the cost of providing care and that $150 million.   Health care providers could still make a very high income, but they would do so by providing quality care at the lowest possible price.  If for example an individual did not need any care during the year the provider would have the entire payment as profit.  The incentives for an Alliance would be to keep the enrollees enrolled by providing quality care and keep them very healthy to reduce costs.

Individuals would choose the Alliance, (and change at least once a year) and competition among competing groups, along with regulatory oversight would insure treatment was not denied.  Organizations would be created by “co-operative alliances” between physicians, hospitals, and other facilities and providers.  The Alliances would have to provide enrollment to any eligible Medicare recipient who wanted to enroll, and the payment from the government would be the same regardless of age or health condition of the individual.  Obviously the most successful organization would be the ones that had high enrollment of a broad group of Medicare recipients, efficient operations, and successful programs to maintain the health of enrollees and prevent injury and disease.

Such a system would get the federal government out of the business of setting prices and a huge amount of paperwork.  Administrative costs would decline and the long term health of the population would increase.  Physicians would become salaried employees, not entrepreneurs and spend their time treating patients, not doing business plans.

Politically such a system should appeal to Conservatives, as it gets government out of the health care business and gives recipients the power to control their health care as they would be the ones choosing the Health Care Alliance.  Liberals should accept the system since it provides for universal coverage of a group and provides for safeguards to prevent abuse or lack of adequate care.  Once set up, an Alliance would not be limited to Medicare patients, and it could compete for employer health care plans, Medicaid patients and even individual enrollees.

Conclusion:  We know how to fix the health care system in the U. S., we just need the will to do it.