Kevin Delaney at y-intercept has during the last few weeks been developing the concept of a medical savings and loan as an alternative to traditional private or public third-party health insurance. He has established the domain http://www.medicalsavingsandloan.com/ “to start a debate about a free market reform called a Medical Savings and Loan.”
The third-party problem
One of the main problems in all third-party payment systems is that the third-party payer is the actual customer, while the patient is simply a byproduct. The actual consumer — the private or public insurer — pays for and gets products and services it wants. In turn, it markets insurance plans. The third party’s demands only somewhat align with patient desires.
It is telling that most individuals have little choice in which private or public health insurance plan they can ‘buy.’ The plan is mandated by law for some and others have their plan chosen by their employer using hidden wages to pay most of the plan’s premiums. They make a lot of hoopla about being able to pick among various plans and care providers, but in reality, the most important choices are controlled by the government, the employers, and the private insurance companies. To be blunt, it wouldn’t work this way if everyone was free to buy any health insurance plan they wanted.
The upshot is that care providers are effectively working for insurers, not for patients. While many providers do their best to take patient desires into consideration, the incentives in the system ultimately cause them to cater primarily to the demands of the insurer, who is their actual employer. This misalignment of incentives increases both costs and patient dissatisfaction.
The underfunding problem
Moving to a purely patient funded health care system would restore the proper relationship between the care giver and the patient. The patient would become the customer and care giver would begin primarily serving that customer base rather than primarily serving third-party payers.
However, such a system would cause unacceptable funding mismatches. This is the basic problem with health saving accounts, which combine a saving mechanism with high deductible insurance. People are left with a great deal of exposure until they save a lot of money. Moreover, those with more health care needs, such as the elderly and those with chronic disease, may find the minimum care they need unaffordable.
The free market solution
Kevin proposes the Medical Savings and Loan as a remedy to these funding problems that would still establish a proper customer relationship between care providers and consumers. Rather than purely paying insurance premiums, each person would save money to be used for medical purposes in a saving mechanism through the MS&L. He would also pay low premiums for catastrophic insurance. The MS&L customer would be guaranteed a ‘loan’ for the difference between the amount of savings and the high insurance deductible.
The entire concept is explained quite well in this article, where Kevin discusses issues such as loan defaults, dealing with high need patients, and incentives in the system. The article does a much better job of exploring the issue than I have done here.
Many people are rightly disgusted with the power that insurance bureaucrats have over their lives. Transferring that power to government bureaucrats under the rubric of having no profit motive would hardly make matters better. In fact, such an immense concentration of power could not help but make matters much worse.
The MS&L would largely remove bureaucrats from the equation, causing a decentralization of power that would produce the kinds of cost reductions and quality improvements we have seen in other freer markets such as food and clothing over the past 40 years. Yet it would still provide ways to properly care for those that would be most vulnerable under a pay-as-you-go system. This plan deserves serious consideration by everyone that is sincerely interested in actually improving our health care system.
Addressing the employer problem
It seems from my reading that Kevin would still seek to preserve the element of employer payment to fund MS&L accounts. I believe that it would be more prudent to completely decouple the employer from the MS&L. My employer has no more business paying into my MS&L account than into my homeowner or automobile insurance account.
The current employer funding of health insurance is nothing more than a substitution for wages that is incentivized by a tax exemption subsidy. The market would work its magic better if the subsidy were eliminated and overall tax rates were reduced accordingly to keep the tax change neutral.
This would more fully expose the pay differential between different employers and would free small businesses from constant harangue about their failure to provide health insurance, caused not insignificantly by their inability to negotiate volume discounts with insurers. This would also reduce the current government-caused market preference for large employers.
Rather, the market would function better if employers simply paid their employees their full wages, allowing employees to use their own funds to invest in whichever MS&L account they wished. MS&Ls would have to compete for customers, much as casualty insurers do currently. Taking the employer out of the loop would create incentives to better serve customer wishes.
So, there you have it: a way to increase freedom in the health care industry while providing a useful safety net. This beats the tar out of all of the centralized coercive systems that aim to restrict freedom with an undeliverable promise of security. Those that oppose the kind of freedom offered through the MS&L in favor of coercive centralization either willingly ignore the evils of centralization of power or else actively seek such power. Liberty has its hazards, to be sure. But it’s the right way to go.
This article is a thousand times better than anything I've written on the subject.
I tend to rant.
The idea was actually the product of a mathematical model I created when I worked analyzing insurance claims.
Actuarial analysis works by analyzing the health needs of pools of people from year to year. Insurance can't work for small businesses or individuals as they are effectively a pool of one.
A superior approach would be to create a model around the lifecycle of the individual. This model has people building equity in times of health and spending in times of need.
As for the role of the employer. I realized that the form of a system usually dictates how it plays out in the market. Function follows form. Insurance is based on the analysis of a pool. It really can't handle small pools or cover people leaving the pool.
The MS&L has people building equity in their account. As it is centered on the individual, it is inherently portable.
Even if the system started as an option for employees, it would tend to become a market separate from the employer.
Healthcare costs can be astronomical, especially for those of retirement age. And upon retiring, you’ll face not having employer-provided health coverage and suddenly be relying on Medicare, which doesn’t cover everything.
Many Americans must navigate COBRA benefit rules and regulations following job losses or retirement. COBRA benefits allow former employer-based group health insurance coverage to be retained for several months following job separation. But the benefits are expensive as the employer no longer pays any portion of the premium, and it can also be very difficult to keep.
This is a great idea.
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