The Benefits of Ideal Health Insurance

Ideal Health Insurance Is Patient Centered

A large portion of our healthcare dollars would be placed in accounts that we individually own and control. Patients would pay for the vast majority of medical services from these accounts, and doctors would be free to act as agents for their patients rather than for third-party payers. Because patients would be spending their own money in the medical marketplace, physicians would be encouraged to become financial advisers as well as health advisers. Doctors would compete not just on the basis of price and quality, but also on the basis of delivering value for money.

Ideal Health Insurance Allows Insurers to Specialize in the Business of Insurance

One of the consequences of the managed care revolution is that insurers have been turned into providers of care. Often the entity that pays our medical bills is the same entity that delivers our medical care. This development has had three negative consequences.

First, when the businesses of insurance and healthcare merge, health plans have perverse incentives to deny care. The rash of news stories reporting on the tragic consequences of underprovision of care is testimony to what can go wrong.¹

Second, when the choice of insurer is also effectively a choice of provider networks, consumers must make decisions that are humanly impossible. Ideally, one should not have to choose a cardiologist until one has a heart problem. One should not have to choose an oncologist until one gets cancer. But in today’s market, when you choose your insurer you are at the same time choosing your heart specialist and your cancer specialist, whether you are aware of it or not.

Third, the managed care revolution has delegated to those on the buyers’ side of the market (insurers) the responsibility of forcing those on the sellers’ side of the market (doctors, hospital administrators, etc.) to deliver care efficiently. In no other market do we depend upon buyers to tell sellers how to produce their product. Undoubtedly, there are good reasons why other markets are not organized this way.

Ideal health insurance, by contrast, allows insurers to specialize in what they do best: price and manage risk. The supply side of the market would be encouraged to organize into focused factories and adopt other efficient techniques to produce high-quality care for a low cost. The market would still be free to combine insurance and healthcare delivery where the combination makes sense. It may turn out that for such specialized services as cancer care, efficiency warrants specialized insurance products. Ideal health insurance would allow those market developments by providing a mechanism for people to leave one insurance pool and join another (without extra cost) when their health condition changes.

Ideal Health Insurance Is Improved by the Free Flow of Information

Under the current system, consumer information is a threat to the stability and peace of mind of typical third-party payer personnel. The more patients learn, the more they are likely to demand. Under ideal health insurance, by contrast, accurate consumer information is a positive. The reason is that the insurer and the insured are on the same team, with a similar interest and objective: acquiring good value in a competitive market.

Needless to say, the changes outlined here will require appropriate changes in public policy. Of these, three are particularly important.²

First, federal tax law must create a level playing field between third-party insurance and individual self-insurance through Health Savings Accounts. As noted, we have already made major steps in that direction. Individual preference and market competition, not the peculiarities of the tax law, should determine the appropriate division.

Second, federal tax law must create a level playing field between employer purchase and individual purchase of health insurance. Although employers can purchase employee health insurance with before-tax dollars, people who purchase their own insurance get virtually no tax relief and must pay with after-tax dollars. (An exception to this generalization is the self-employed, who get partial tax relief.) Employers may have an important role to play in helping people obtain health insurance, but this role should be determined by the marketplace, not by tax law.

A third important change needs to be implemented at the state level. Many employers would like to move to a defined-contribution approach for employee health insurance. As a result, employees could enter a health insurance pool and stay there—taking their insurance coverage with them as they travel from job to job. Personal and portable health insurance is an idea whose time has come.

These changes will not solve our most important health insurance problems. They will create a legal environment in which individuals, their employers, and their insurers—pursuing their own interests—are likely to create the institutions they need.

1. One well-known case was profiled in the movie Sicko. See Linda Peeno, “Managed Care Ethics: The Close View,” Prepared for US House of Representatives Committee on Commerce, Subcommittee on Health and Environment, May 30, 1996.

2. Mark V. Pauly and John C. Goodman, “Tax Credits for Health Insurance and Medical Savings Accounts,” Health Affairs 14 (1995).

[Cross-posted at Psychology Today.]