Solving Heath Care Insurance

The US has gotten into a spiral of health insurance spending with no viable alternatives in sight. As the cost of heath care goes up the insurance becomes more expensive and covers less of the cost. In addition large segments of the population are left out altogether. They are unemployed, underemployed, working for companies with no plans or in poor health and thus uninsurable. When these people need health services they either get them from public sources or charities or do without. This leads to poorer health, raises the costs of supporting these people and makes them less able to contribute to a productive society.

Those that have insurance are paying for two different services. The one that most people notice is the routine, minor or recurring care. This includes drug maintenance programs for things like diabetes, HIV or high blood pressure as well as acute care for non life threatening incidents. This type of care can cost from hundreds to the low thousands of dollars. It's a lot of money, but for most people in the middle class does not threaten their financial stability.

The second service is protection against catastrophic health events such as heart surgery, cancer or severe trauma. These events can cost in the tens of thousands of dollars or more. Very few people can pay for this without financial ruin. It is the fear of this type of cost which motivates us to buy health insurance.

The solution to the insurance problem is to separate these two cases. If insurance covered only catastrophic events the premiums would be much lower. The money saved on premiums for routine care can be applied directly to the payment of those expenses. One approach would be to set up a quasi-public corporation like Fannie Mae (Federal National Mortgage Association) to offer catastrophic coverage. The buying power of a entity like this would enable the company to negotiate fees and drug prices and help keep costs down. In addition as a government sponsored entity it would not be necessary for the company to make a profit.

Another approach is a private, non-profit corporation such as TIAA (Teachers Insurance and Annuity Association) which provides retirement plans to college staff and professors. By being private it would be free to compete with existing insurance plans and would not be covered by restrictive limitations such as those in the Medicare drug plan.

Companies could choose to pay the premiums on this catastrophic plan as a fringe benefit of employment if they wished. Let's assume that a typical current family plan costs $14,000 per year. If we assume that catastrophic insurance would be in the range of $4000 (since the number of incidents expected would be relatively small) then an average family would have $10,000 per year to cover routine or moderate expenses. Most families don't typically have average annual costs of this magnitude so there would be a net savings for them or their employer.

Costs would be lowered since people paying with their own money will be more careful shoppers for health services and the negotiating power of the catastrophic insurance company will help restrain other expenses. Private, existing insurance companies would be free to offer competitive plans as well as gap insurance for the amount before the catastrophic policy applies. Different thresholds for catastrophic insurance could be offered for different levels of premiums.

Can this work? Well TIAA has been providing non-profit services since 1918. It was started with seed money by Andrew Carnegie and has sustained itself ever since. Perhaps some forward thinking foundation will follow suit.

Moral: Follow the money

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Copyright © 2004 Robert D Feinman
Feel free to use the ideas, but the words are mine.