Saturday, October 03, 2009

Should We Replace Comprehensive Health Insurance With A Combination Of Catastrophic Health Insurance And Health Savings Accounts?

David Goldhill, a media and technology executive, recently experienced the death of his father through botched hospital care. What should have been relatively simple treatment for pneumonia despite his age (83) became complicated by several hospital-borne infections which led to his demise. The experience provoked much thought on Goldhill's part, and he decided to share his thoughts with the public in a seven-page article published by Atlantic.

In the article, entitled "How American Health Care Killed My Father", Goldhill suggests that the biggest problem with American health care is the existence of comprehensive health insurance. First originated by some companies as a form of alternate compensation during wage freezes, it became an almost universal standard for many companies. As a result, many consumers no longer pay for much of their care, so they overreact to medical anomalies and over-medicate. Fueled by motivational advertisements from Big Pharma, they rush off to the doctor for the latest designer drugs that never "cure" you because your "condition" never goes away. Or an overprotective mother will bundle her child off to the ER or the doctor at the very first sniffle. The same people who wouldn't dream of using their auto insurance card to buy gas or repair services for their vehicle think nothing of using their health insurance card to get aspirin or cough medicine.

Thus there is no market incentive to decrease price and increase efficiency.

But unlike Barack Obama and the Democratic-controlled Congress, David Goldhill doesn't propose to rearrange the deck chairs on the Titanic. Instead, he wants a brand new boat. He proposes to replace comprehensive health insurance with two measures; catastrophic health insurance, and health savings accounts. He also proposes to make participation mandatory for all Americans; he cites a projected ballpark cost to the average American of $2,000 per year for catastrophic health insurance, and a mandatory contribution of at least $3,000 per year to a health savings account by a typical American. He implies these numbers could slide up or down depending upon income.

On page 6 of the article, Goldhill delivers his "money shot" on catastrophic health insurance:

First, we should replace our current web of employer-and-government-based insurance with a single program of catastrophic insurance open to all Americans—indeed, all Americans should be required to buy it—with fixed premiums based solely on age. This program would be best run as a single national pool, without underwriting for specific risk factors, and would ultimately replace Medicare, Medicaid, and private insurance. All Americans would be insured against catastrophic illness, throughout their lives.

Proposals for true catastrophic insurance usually founder on the definition of catastrophe. So much of the amount we now spend is dedicated to problems that are considered catastrophic, the argument goes, that a separate catastrophic system is pointless. A typical catastrophic insurance policy today might cover any expenses above, say, $2,000. That threshold is far too low; ultimately, a threshold of $50,000 or more would be better. (Chronic conditions with expected annual costs above some lower threshold would also be covered.) We might consider other mechanisms to keep total costs down: the plan could be required to pay out no more in any year than its available premiums, for instance, with premium increases limited to the general rate of inflation. But the real key would be to restrict the coverage to true catastrophes—if this approach is to work, only a minority of us should ever be beneficiaries.

Of course, this opens the question about paying for non-catastrophic care. So Goldhill delivers his "money shot" for health savings accounts:

How would we pay for most of our health care? The same way we pay for everything else—out of our income and savings. Medicare itself is, in a sense, a form of forced savings, as is commercial insurance. In place of these programs and the premiums we now contribute to them, and along with catastrophic insurance, the government should create a new form of health savings account—a vehicle that has existed, though in imperfect form, since 2003. Every American should be required to maintain an HSA, and contribute a minimum percentage of post-tax income, subject to a floor and a cap in total dollar contributions. The income percentage required should rise over a working life, as wages and wealth typically do.

All noncatastrophic care should eventually be funded out of HSAs. But account-holders should be allowed to withdraw money for any purpose, without penalty, once the funds exceed a ceiling established for each age, and at death any remaining money should be disbursed through inheritance. Our current methods of health-care funding create a “use it or lose it” imperative. This new approach would ensure that families put aside funds for future expenses, but would not force them to spend the funds only on health care.

What about care that falls through the cracks—major expenses (an appendectomy, sports injury, or birth) that might exceed the current balance of someone’s HSA but are not catastrophic? These should be funded the same way we pay for most expensive purchases that confer long-term benefits: with credit. Americans should be able to borrow against their future contributions to their HSA to cover major health needs; the government could lend directly, or provide guidelines for private lending. Catastrophic coverage should apply with no deductible for young people, but as people age and save, they should pay a steadily increasing deductible from their HSA, unless the HSA has been exhausted. As a result, much end-of-life care would be paid through savings.

The bottom line: A financing "trifecta" for health care costs. Routine care funded largely out of our incomes; major, predictable expenses (including much end-of-life care) funded by savings and credit; and massive, unpredictable expenses funded by insurance.

Goldhill acknowledges that the transition to this system would be complicated, and might take a full generation (20-40 years). Such a transition would require the slow reduction of Medicare taxes, premiums, and benefit levels for those not yet eligible, and a corresponding slow ramp-up in HSAs. And the national catastrophic plan would need to start with much broader coverage and higher premiums than the ultimate goal, in order to fund the care needed today by our aging population. Nonetheless, the benefits of a consumer-centered approach should have early and large dividends for all of us throughout the period of transition. His point: The earlier we start, the less a transition will ultimately cost.

Analysis: Some of David Goldhill's assumptions are flawed, nost notably his assumption that income automatically rises with age during one's working life. That may have been the case in the old economy, when there was a better balance between Wall Street and Main Street, but in this new predatory turbo-capitalistic economy, where Wall Street is allowed to run roughshod over Main Street, this is no longer a certainty. Even the public sector is not exempt; Anchorage Mayor Dan Sullivan is faced with the prospect of laying off 75 city employees to cope with budget deficits caused by and inherited from former spendthrift Mayor Mark Begich. Thus many workers are and will be faced with the prospect of "re-inventing" themselves several times during their work lives, with corresponding fluctuations in income.

But the concept itself is promising and worthy of more serious exploration. It will introduce greater individual responsibility into health care, leading to more market-driven corporate responsibility. Health care will no longer be held hostage by the insurance industry. But no system can be perfect simply because no size fits all; each person has a unique health profile.

I still oppose the idea of forcing people to buy health insurance. I would also oppose being forced to contribute to an HSA; that should be my own decision. But I am open to the idea of mandatory catastrophic insurance, since that would improve financial certainty in people's lives.

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