An Obamacare Alternative

After criticizing Obamacare at a party, another person said something like "well you can't criticize it without suggesting an alternative."  This of course is total bullsh*t.  The passage of a bad law to imperfectly achieve objectives with which I disagree does not obligate me to craft alternative legislation to achieve those objectives.

But I decided to take a swing at it anyway.  Taking a step back, I said that I thought there were two overriding problems in health care that the government might address.

The first is a problem largely of the government's own creation, that incentives (non-tax-ability of health care benefits) and programs (e.g. Medicare) have been created for first dollar third-party payment of medical expenses.  This growth of third-party payment has eliminated the incentives for consumers to shop and make tradeoffs for health care purchases, the very activities that impose price and quality discipline on most other markets.

The second problem that likely dominates everyone's fears is getting a bankrupting medical expense whose costs are multiples of one's income, and having that care be either uninsured or leading to cancellation of one's insurance or future years.

So my suggestion I made up on the spot (and I am a little fuzzy on the details as my friend had actually cracked open a bottle of Van Winkle bourbon for a few of us, my first taste of that magic elixir) was to scrap whatever we are doing now and have the government pay all medical expenses over 10% of one's income.  Anything under that was the individual's responsibility, though some sort of tax-advantaged health savings account would be a logical adjunct program.

I obviously make policy better when I am drinking absurdly rare and expensive bourbons, because Megan McArdle (who knows a hell of a lot more than I about health care economics) has apparently been advocating something similar for quite a while

How would a similar program work for health care? The government would pick up 100 percent of the tab for health care over a certain percentage of adjusted gross income—the number would have to be negotiated through the political process, but I have suggested between 15 and 20 percent. There could be special treatment for people living at or near the poverty line, and for people who have medical bills that exceed the set percentage of their income for five years in a row, so that the poor and people with chronic illness are not disadvantaged by the system.

In exchange, we would get rid of the tax deduction for employer-sponsored health insurance, and all the other government health insurance programs, with the exception of the military’s system, which for obvious reasons does need to be run by the government. People would be free to insure the gap if they wanted, and such insurance would be relatively cheap, because the insurers would see their losses strictly limited. Or people could choose to save money in a tax-deductible health savings account to cover the eventual likelihood of a serious medical problem.

The missing piece here, as was in my plan, is I have no idea how much this would cost.

  • Thomas Reid

    It's not going to work. You'll create perverse incentives to take a lower paying job, quit your job or seek more expensive treatment once you cross the threshold at which the government will pick up the tab.

    If you're going to make it market based you'll have to make it market based and let the chips fall where they may.

    What do you think would happen if the government got out of health insurance and health care altogether except for clinics it runs directly such as VA hospitals?

  • Glen Purdy

    The problem with this approach is that it still has "eliminated the incentives for consumers to shop and make tradeoffs for health care purchases" specifically for the most expensive health care procedures. I think maintaining a market based approach to healthcare is very important in keeping costs down so I would suggest an alternative that reduces the % paid by the consumer as the total costs increase relative to the adjusted gross income.

  • Richard Harrington

    Don't forget intrastate commerce - insurance companies should be able to operate nationwide. Also, it would be nice if medical savings accounts were actually functional.

  • glenn.griffin3

    And need to provide some sort of financial incentive to lower costs on the doctors' end, too. Else, once the patient has crossed the 10% threshold, what shall prevent the doctors/hospital from throwing more and more expensive tests and treatments at the problem?

    [Disclaimer: I am married to a doctor. And I strongly support fee-for-service for my own financial reasons, rather than any sort of capitation or other bizarre MMO/HMO schemes. But even I can see it's a lousy way to run a ship.]

  • Tanuki Man

    As Karl Denninger repeatedly says - repeal medical monopolies and the market will take care of the rest.

  • bigmaq1980

    You might want to provide links and elaborate a little bit for folks here. I read some time back and he has some interesting details.

  • bigmaq1980

    IDK. 10% in any given year can be rather hefty.

    If one has a chronic medical case, would agree that there would then be no incentive.

    Yes, perhaps a sliding decline in percentage for income above a threshold...but, lefties would probably be all over that as "unfair".

  • jdgalt

    The big problem with this proposal is government control of the top end, which implies "death panels" whether called by that name or not. I predict the same degree of preference for friends of big government that already exists in IRS treatment of non-profits.

    And as your own business shows quite well, any such program would certainly be run better and cheaper by private insurance companies and private hospitals than by government, even if taxpayers are paying most of the tab. Yes, even for veterans. (I'm astounded that even Obama has not replaced the head of the VA in all these months since its scandal broke.)

  • bigmaq1980

    And, would like hospitals and doctors post prices. It is rather difficult to shop for medical services, given the lack of transparency.

    Would also like to see drug import limitations lifted, allowing one to buy pharmaceuticals anywhere in the world.

    And, how about having the FDA automatically approve medicines / procedures that have been approved by 3 other nations (out of, say, seven western nations). They don't have any lesser lack of concern in those countries for their citizens than we. We also don't have a monopoly on the knowledge required to test, review and validate research.

  • marque2

    You should look at some of the healthcare ministries and see how they do it. I pay 525 a month for my family and have to pay $500 per event. If I can bargain down the insurance providers the ministry will forgive the deductible as well.

    I of course have to pay for normal medical expenses like check ups and tests (unless they exceed $500 for the incident), but there are discount places for these.

    With Obamacare, I had to pay $1300 a month with a 6K deductible. the healthcare ministry costs half as much and actually pays out much sooner than the Obamacare.

    Of course when folks discovered the ministry loophole congress banned them, except for ones that already exist. It would be great if we all could join affinity groups for shared healthcare, if they were allowed to be created again. Also should note, because they exist, they were put in as an exemption to Obamacare, so you don't get the penalty.

  • fotini901

    The problem with shopping for health care is that it is generally impossible to do so in any kind of urgent situation.

  • tex

    First we need to reduce cost by adding competition. Healthcare providers all benefit from regs to protect their higher than market income at our expense.

    The docs by licensing. The only thing we, as citizens, need, is anti-fraud laws so docs claiming to be “MD's” are MD's publishing their requirements (training, education, etc) for membership. In many cases “RN's” would be able to compete against “MD's” driving down their costs. Yes there would be Chiropractors, & Aroma Therapy Practitioners, & Faith Healers (which sometimes seem to work by the way for the believers – placebo effect?), etc. But they exist anyway. Apparently we even have exorcisms!

    The hospitals by forming Hospital Cartels exactly like the Taxi Cartels requiring a “Certificate of Need” to expand any hospitals or build new ones. The Hospital Cartels are usually called Hospital Boards composed of the existing hospitals in their market area. Nearly all hospitals operate under such cartels which were encouraged to form by some president long ago.

    Medical Labs also by licensing. There is an iPh Ap a doc can use for pennies in his office saving an $800 lab test. A doc I know explained he cannot use it because regs would require him to spend a few $1000 to take lab courses, pass lab exams, and be a lab. So, instead of 1 trip to the doc, there are 2 doc visits plus a lab visit for the $800 exam.

    One decent reg would require all providers to publish prices and stick to them for all whether self pay or ins pay.

    Then like Singapore, citizens are able to receive ~$10K/yr tax free for a healthcare/retirement family account that all family members can contribute to and take from. Individuals pay all routine med costs and for any large med bills the gov kicks in an increasing % but patients still pay some to monitor costs.

    Solves med problems & retirements (SS problems), stops the GROSS unfairness that employer provided health ins is pre-tax while other workers pay after taxes. AAA would then be selling health ins.

  • kidmugsy

    Plus the asymmetry of information.

  • jdgalt

    Agree in principle, but if we immediately open the medical field to unlimited competition, the present doctors (who certainly left med school in 6- or 7-figure debt) will never be able to recoup their costs. Something would need to be done about that.

  • Thomas Reid

    Same situation is true with my plumber and electrician. I only call them for an emergency and I am totally at their mercy because I know very little about how to fix any major problem with either and/or I don't have the necessary equipment. Actually, as a percentage of overall expenses, I would imagine emergency expenses are a higher percentage of plumbing and electrical expenses than are medical expenses. It's the expenses for chronic conditions that are driving the overall costs in medicine.
    One thing that keeps plumber and electrician costs down, however, is transparent pricing.

  • tex

    I don't think it as worrisome as you. It is estimated there is a 90,000 looming doc shortage which will keep doc income relatively high. Further, doc routine visits are mostly covered by ins which used to cost docs 40-50% of the bill & docs would recover $'s with self-pay for routine care. I don't really expect too drastic a change. But. . .

    Suppose it is a problem. What is the scale? According to Business Insider as of 2012 the total medical school debt doctors faced was $1.7B which includes some undergraduate college debt. The avg was $170K but some up to $300K each.

    So far gov has spent ~$5B on Obamacare Web sites alone, and some stories suggest gov will spend $10s to $100s of Billions on Obamacare over some coming years. Certainly any doc debt problem can be handled & then some.

    This is complex & there are other problems of people being hurt initially. Hospitals may have been built with borrowed money with the entire business plan dependent upon Hospital Cartel Revenue so there may be other debts that must be addressed. Further, hospitals sign year or longer contracts with middle men who have too big a mark-up leading to hospitals paying much more than the $1/bag of saline soln Mfr selling price (hospitals mark up whatever they pay to $500/bag to patients). I believe there is something funny about the hospital supplier market.

    Still with accountants & economists (not Gruber, of course) looking things over any unjust dislocations can be handled and still save large $'s over some short term & many times that over the long term.

  • jdgalt

    I believe the biggest source of market distortions is the sweetheart deals that both doctors and hospitals make with large insurance plans, especially Medicare. A large part of Obamacare is paid for by cuts to Medicare reimbursements. Naturally the hospitals have to make up the loss by trying to make all their other patients pay through the nose.

  • slocum

    "It's not going to work. You'll create perverse incentives to take a lower paying job, quit your job.."

    No. In the worst case, you have to pay 10% of your salary for medical care. Why would you want to reduce your income in order to reduce the tax. Cut your salary from 100K to 50K and, yes, you pay 5K less in taxes. But you've cut your income 50K in order to save that sum and you've made yourself much worse off financially.

    "...or seek more expensive treatment once you cross the threshold at which the government will pick up the tab."

    Well, yes, it's inevitable that whoever is providing the catastrophic coverage (government or an insurance company) would have to limit coverage. But there wouldn't be any reason to prevent you from buying additional catastrophic insurance to cover what the government plan didn't (sort of like 'Medigap' plans).

  • slocum

    The same thing that prevents it now -- the insurance provider will say, "No".

  • slocum

    Two modifications. 1) Some amount has to go into an HSA. If you don't spend it in a given year, you roll it over. When an adverse event happens, you have to empty your HSA before the catastrophic policy starts paying. 2) percentages should be income sensitive -- wealthy people can afford to spend a greater percentage of income on healthcare (and we shouldn't be subsidizing billionaires' health care at any point)

  • David Zetland

    Best way to START this process is by ending employer-provided insurance. Convert the premia into salary and require employees to buy insurance. They will (1) shop more carefully and (2) move away from gold plated plans.

    I live in NL, where individual insurance is mandated and NOT from employers. I pay $100/mo for what would cost $400/mo in California (where I'm from).

  • ano333

    What is it about Obamacare that doesn't also do this?

  • HenryBowman419

    True, but I think most medical needs are not emergency situations. There are lots of ways that costs can be reduced, but one of the simplest methods is to simply require that prices be posted.

    Dr. Keith Smith provides some examples, and descrbes what he considers the collusion between insurance companies and hospitals:

  • MB

    > The missing piece here, as was in my plan, is I have no idea how much this would cost.

    As a start, you can use the existing medical deduction for a ballpark of the direct costs, I think. There were 9 million returns with $44 billion in "expenses in excess of AGI limitation"[1]. This is for 2013, and I think the medical deduction was 7.5% of AGI - but that's pretty close to your 10%.

    [1] (see 2013 Individual Income Tax Returns with Itemized Deductions: Sources of Income, Adjustments, Itemized Deductions by Type, Exemptions, and Tax Items)

  • mlhouse

    Totally disagree with the 10% concept. That would jsut drive up costs.

    Here is how I would redo the "system".

    1. I would eliminate the state regulation of health insurance to create a nation wide market.

    2. I would tax employer sponsored health insurance out of existence. Step 1 and 2 eliminate all of the problem of portability. As long as you pay the premiums of your insurance you will have health insurance.

    3. I would create an individual mandate that requires every family/individual to have health insurance. But this mandate would only mandate a catastrophic plan, rather than the complex and expensive plan required under ObamaCare. You would be able to purchase health insurance on a nationwide network, finding plans that fit your needs.

    4. For people with "preexisting" conditions I would create a plans that would be essentially "reinsurance". You would be required to have coverage for everything but the preexisting condition. Why should you not have health insurance if you break your arm because you have diabetes?

    5. I would establish state and national insurers of last resort. In Minnesota we have such a program that will underwrite anyone rejected by private health insurance. They pay premiums about 25% higher than normal but they were not insurable at the other prices. I would fund this with a 2% tax on health insurance premiums and all medical procedures.

    6. I would create a system of age specific vouchers for welfare people that would pay for some normal preventative/diagnostic cares like immunization, PAP smears and mammograms, and prostrate exams. In fact, fulfilling these exams would be a requirement to receive welfare.

    7. I would encourage the establishment of charitable organizations that would help people pay their premiums and deductibles. In fact, I would establish a special government charity that would be funded by a check box on your tax return like the political contributions. Just check the box and increase your taxes by 5% to help poor people pay for their medical costs. Lets see if all of the ObamaCare supporters would make this voluntary contribution.

  • Lawrence Karch

    I would add that states would be required operate risk high pools for persons having chronic and costly diseases. The cost per patient for such persons is so high that both the states and the federal governments have an interest in operating such pools for maximum performance at a reasonable cost to taxpayers.

  • jdgalt

    You wouldn't need to tax employer sponsored insurance -- you could just take away the tax benefit it now gives the company (and the penalty introduced by Obamacare for not having it). Employer sponsored insurance didn't exist before the 1940s when that tax benefit was created.

  • jdgalt

    The existing medical deduction is a very lowball estimate — because most people who don't have a mortgage don't have enough deductions to itemize.

    Still, if we do want to subsidize health care, let's start by lowering, preferably to zero, that "floor" (which used to be 7.5%, and is now 10% of AGI) under the medical deduction.

  • Thomas Reid

    You could say the same about auto mechanics. You would need something like AAA for health care.

  • jdgalt

    I can ask my buddies if they know a good transmission shop or brake specialist without embarrassing myself. Can't exactly do that with doctors even if I knew 10 people who had had the same problem I do at the time.

  • fotini901

    Plus, if your car gets repaired incorrectly, you'll live.

  • McMegan

    This is true to some extent. But there's no incentive for that now. Functionally, at the top end, in that 15-20% of AGI range that I'm talking about, 0% of the population is spending their own money on procedures. There's simply no way to get around that. The question is not "is this plan what we would do in an ideal world" but "does this plan fix the biggest problems with our current system without making any of them substantially worse".

  • Thomas Reid

    Not necessarily if it's your brakes or your ball joints.

  • Thomas Reid

    We shouldn't encourage government takeover of an industry to prevent people from having to ask embarrassing questions.

  • jdgalt

    Agreed. But we should restore real competition to medicine, and the way to do that is to eliminate group insurance and Medicare.

  • frankania

    Completely free enterprise medical care is the best answer. Let in any doctor who wants to immigrate, let insurance companies compete everywhere without absurd govt. limits, let charities take care of the helpless.
    Here in Mexico, we have very cheap medical/dental care AND a govt. program that is slow and full of paperwork (for 2nd opinions?)