Healthcare Reform Part 2: Understanding Incentives
By Roger A. Forsyth, MDOctober 20, 2009
If a major factor in the escalation of healthcare cost is the increase in specialty visits and technology and if the institution of incentives designed to change individual behavior is the best way to reverse this, how should reform in the US proceed? Let us look at the data.
With the exception of the occasional unexpected event, most healthcare costs occur in the last one to two years of life. As a result of this skewing, in any given year 80% of the policyholders who have a comprehensive policy will receive benefits that amount to only 20% of the premiums that they paid. This results in a large dollar gap between cost and benefit and creates an incentive for policyholders to try to “get their money’s worth” by requesting services of questionable value. Reform must be structured in a way that reduces this incentive to overuse.
This gap also creates an incentive for those who are low risk and not eligible for employer-paid insurance to forego buying insurance on their own. This constitutes about 20 million of the 46 million who are uninsured. Their lack of insurance creates problems. If those at low-risk do not participate, this increases the average cost of insurance; if they experience a catastrophe, society may have to bear the cost of their care; if they delay obtaining coverage until their age and risk increase, their premiums become unaffordable; if they are not insured, they do not contribute to the pool that subsidies the low-income population.
Reform must narrow the cost to benefit ratio for the uninsured and give them an incentive to participate. Most of the steps that will create incentives for the uninsured will also provide incentives for the currently insured to reduce their use of services and tests.
The first step is to make insurance mandatory. This will improve the cost/benefit ratio as the addition of the low-risk population lowers the cost of a policy.
The second step is community rating (charging the same for all age groups). This will also lower the cost of a policy.
The third step will replace a single comprehensive policy with two policies that cover services that are applicable to everyone. One policy will be for public healthcare (maternal care, infant care, and immunizations) and one for catastrophic costs. This will reduce premiums by eliminating the charges in a comprehensive policy for services that most people cannot use. A public health policy will primarily benefit the young and a catastrophic policy will mostly benefit the old so this is a balanced combination. If the public health policy is exempted from any deductibles or co-pays, this will further increase the benefit for the low-risk population and encourage their participation.
The fourth step will lower the cost of self-purchased insurance by ending the taxation on the funds used to purchase such policies Currently, individually purchased insurance must be bought using post-tax dollars (unless a health savings account is used).
The fifth step will mandate that individuals rather than employers will be responsible for purchasing a policy. Ownership allows individuals to benefit from any savings that they are able to achieve. Payment should be through payroll deduction.
The sixth step will mandate deductibles and co-pays to discourage care of marginal value. We have proof that a deductible causes individuals to use fewer services. A major insurer will reduce the cost of an individually purchased comprehensive family policy from $10,500 plus co-pays to $7,200 with no co-pays if there is a $3,000 deductible. While the public dislikes deductibles, they do not cause individuals to pay any more than they would otherwise. They shift the premium from the comprehensive policy where it is non-refundable to the patient’s control where there is an incentive to avoid spending it. As previously mentioned, the deductible should not apply to public health since this should never be discouraged, is unlikely to be overused, and will be used by all individuals. Non-public health costs should be subject to both a deductible and high co-pays in order to increase the individual’s incentive to keep utilization to a minimum.
The seventh step (for those with an employer-paid policy) will be to mandate that any funds remaining after purchasing a public health and a catastrophic policy must go into a refundable, tax-deductible health savings account (HSA) that will pay for the deductibles and co-pays by using a debit card. (Those with self-purchased policies can choose their level of participation up to a pre-determined maximum. This flexibility will encourage participation). Pre-positioning money in the HSA will provide advance funding for the deductibles and co-pays so that they never become an impediment to needed utilization. The ability to get a refund on unused HSA funds will provide an incentive to manage the account wisely. The refunds will become income that can be taxed to pay for subsidies. Tax-deductibility will lower the cost of the deductibles and co-pays and encourage participation in the HSA. The debit card will reduce the losses due to unpaid bills, reduce fraud, and reduce billing costs.
The eighth step will mandate that physicians, hospitals, and laboratories must post the charges for their most common services. This will lower prices by promoting cost-competition. Where this has been instituted, it has been effective.
To summarize, there are a number of steps that could be enacted at no cost that would create incentives for individuals to reduce health care expenditures. If 80% of 100 million policyholders cut the cost of a $10,000 policy by 20% ($2,000), withdrew this amount from their HSA, and paid a 20% tax of 32 billion dollars, that amount would fully pay for catastrophic coverage and deductibles for the 10 million who cannot afford insurance. The imposition of new taxes would be unnecessary.
There would be severe consequences if these proposals were not enacted simultaneously. The insurance industry could not survive a 20% decline in income if there was not a simultaneous influx of new subscribers. Conversely, new subscribers would overwhelm insurers and raise costs if there was not a reduction in usage. The next installment will address the problems inherent in the Congressional proposals.
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