Congratulations America! With the American electorate[1] having given a resounding endorsement[2] of the policies of the Revolutionary Islamic Socialist Party of Kenya, America will finally see a form of healthcare financing reform. Depending on who you read, this reform seems to be either an insane policy that will bankrupt America, or not much change. I think I speak in concert with 314,731,000 Americans when I declare that I’m no expert on American healthcare – let’s face it, a system that complex is hardly going to be comprehensible to mere mortals – but from my position of limited knowledge I’m inclined towards the latter view. But in health financing, not much change can mean a lot to the minority of the population who are most vulnerable to healthcare-related financial catastrophe, and so not much change is probably, in this case, a Very Good Thing. Just how good will become more apparent over the next few years, and I’m guessing that for health system researchers around the world Obama’s election victory is a huge boon, because it means they can watch what is pretty much the only largely private health financing system in the developed world being reformed from a radically different perspective to the standard vision of universal health cover.

Although reading conservative commentators one gets the impression that Obamacare is a massive socialist-fascist system of monolithic oppression, in reality it appears to be an attempt to impose careful, minimalist regulation on the system, to ensure that it maintains its character of essentially privatized healthcare insurers, but regulates it to improve efficiency and reduce inequality. The efficiency improvements are intended to reduce long-term growth in costs, and the inequality improvements to ensure that everyone gets coverage of some kind, regardless of ability to pay or pre-existing conditions. These latter improvements are intended to eliminate the problem of the uninsured without disrupting the essentially private nature of the marketplace for health insurance. Whether this will work or not is a big gamble, but in the long term it could have huge benefits economically and socially for ordinary Americans.

I’m struck by the extent to which the problem of healthcare-related financial catastrophe is researched in developing countries but left largely undescribed in the USA. I’m also struck by the ease with which developing nations like Indonesia, the Philippines, Thailand and other places have been able to introduce innovative financing schemes, while the USA has languished. So I thought while I’m taking a break from a busy work schedule, that I would consider an alternative to Obamacare based on a careful restructuring of the entire US insurance market, using the existing Medicare system as a base. I lack any in-depth knowledge about the American system, and so this post is entirely speculative, but it gives an opportunity to think about ways of gradually moving from a private to a public system, using primarily market means, and allowing the users of the system to determine the final mix of private and public insurers through their consumption decisions. Once again, it’s entirely and completely speculative, being done purely for fun, and comments demolishing it on all its particulars are welcomed, nay, encouraged.

First, though, a word about the flaws in the current Medicare system.

Does Medicare work?

The New England Journal of Medicine (NEJM) has been running a series of opinion pieces (and some research) on health policy reform for a while now, and on the week of Obama’s reelection it published a fascinating article describing the failings of Medicare. The key message of this article is that Medicare fails as both an insurance package and as a cost containment mechanism. I was shocked to discover that Medicare does not include a cap on costs, so although it is an insurance package it doesn’t stop beneficiaries’ out of pocket expenses from destroying their budget. Compare this with, for example, Japan’s universal insurance scheme, implemented in 1961, has a cap on personal expenses and has been responsible for restraining costs to below the OECD average of 9.6% (according to wikipedia[3]). Granted, other universal health coverage schemes are universal, so they have better risk sharing (Medicare is for the elderly), but still … the USA is the richest country in the world, you’d think sorting this out wouldn’t be soooo hard. According to the NEJM article, in 2009 15% of Medicare recipients faced payment of 5000 $US or more, when the maximum(?) income for pensioners in the USA is something like $15,000. In studies of financial catastrophe in developing nations, this sort of statistic is considered disastrous, though it should be noted that the stats in the article aren’t sufficient to identify rates of financial catastrophe[4]. The article then notes that because of the lack of a cap, Medicare recipients often pay for secondary insurance to pay the out-of-pocket expenses. This has the dual effect of increasing their insurance costs and, if they choose a good insurance package, encouraging unnecessary use of medical care, since a good secondary insurance package enables free healthcare usage and thus increases costs. The article also references a paper suggesting that half of America’s increase in healthcare costs in the last 40 years can be slated home to the growth of private health insurance (I haven’t read this reference and have no idea how good it is). The article’s recommendation is that the government should put a cap on medicare costs while simultaneously restricting the ability of insurance companies to cover Medicare’s out of pocket costs, and references many other reports that have suggested the same thing.

On the basis of that report, Medicare hardly seems to be a good starting point for health insurance reform, does it?

An alternative vision for Obamacare: extending Medicare

Given Obama’s approach to healthcare reform, it seems that a fundamental assumption of any alternative vision is that it should not radically alter current market structures. Obamacare appears to be, fundamentally, a suite of regulatory changes to the current marketplace. He hasn’t suggested, for example, nationalizing all existing insurers to form a single-payer government-run monolith. So, any alternative vision for Obamacare that is going to be consistent with Obama’s obvious preference for creeping incrementalism is going to need to use existing systems to achieve its goals. How can we do this? Let’s try building on Medicare.

The first step of the Faustian plan would be to put a cap on expenses under Medicare – looking at the tables in the NEJM, about $1500 seems like a good limit. Then, to achieve a gradualist change in the American healthcare system, Faustuscare would consist of a simple decision to allow anyone to enrol in Medicare. In Japan the cost of the single-payer insurance system varies by state, so Obama could implement a similar system: anyone can join Medicare, based on paying a rate that varies according to the population and its distribution in their state. This would make Faustuscare cheap in the most populous and youngest states (just as it is in Japan). The one condition on Medicare would be that it can’t ban people from joining on the basis of pre-existing conditions, and has no age-dependent pricing structure… or, if you want to be really brutal, the price a member pays is fixed by the age at which they join, not their current age.

The idea, of course, is to use the power of the government to tax rich idlers like Mitt Romney. Obama fixes the cost of joining Medicare at less than that of the popular big medical plans, and makes up the shortfall from general taxation. It’s almost certain that making Medicare available to people under 65 – even those with pre-existing conditions – is going to reduce overall risk, so he can afford to lower prices. Then, he offers companies a further concession – they can move employees to the new system at some reduced rate, provided that they cut half of the difference with their employees. With such a condition he is going to recruit lots of new members quickly, and everyone who gets recruited is going to essentially get a pay rise.

The plan here is obvious – use the power of general taxation to supplement a reasonably priced health insurance plan, with no health-related joining conditions, to undercut existing insurance companies. The new entrant to the insurance market already has everyone over 65 as a customer, and by introducing the (equality-improving) cap on payments, has caused a lot of those seniors to ditch their existing supplemental insurance. In order to compete with this new market entrant the existing companies are going to have to find a way to drop prices and do away with pre-existing-illness conditions. The result of this will be a massive, across-the-board efficiency gain. The likely survivors of the government’s entry to the market will be the HMOs, which are already ruthlessly efficient, comparatively cheap, and already offer reasonably good health outcomes. Obama can choose to restrain Medicare’s power to ensure that some insurers survive in a mixed market, or he can use the power of general taxation to force them all out of business, nationalizing them one by one as they fold. I would recommend the former, since the American health market is obviously built on competition between both providers and commissioners. Keeping Medicare in the market as the insurer of last resort will ensure that the other insurers lower their prices and/or offer a basic package that is competitive with Medicare, but they will still offer “bonus” packages that appeal to the rich or the health-obssessed.

I have a suspicion that much of this plan could be achieved through administrative rather than legislative changes. It can be sold as a partially free market solution to the health insurance problem, and I suspect a lot of big companies would jump on the chance to shift their insurance payments to such a system. I think the American system needs two forms of competition: competition at the bottom of the market, and plans that don’t discriminate on pre-existing conditions. Any such plan needs to be able to recruit low-risk people to balance its risk profile, and (probably) additionally need some form of subsidy. Medicare is the obvious vehicle, since it already exists, and offering it at reasonable cost to young people could potentially rapidly expand its coverage. Since it already is huge, further expansion of coverage would give it additional power to negotiate cost-cutting with providers – which would force other insurers to do the same.

America’s problem in reforming its health system gradually (rather than the crash-through or crash approach of the original NHS) is to find a way to manipulate free markets to be equitable. Obama appears to be taking the road of regulation, but the alternative is nationalisation by stealth, and Medicare offers the vehicle by which to do this. What do you think?

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fn1: Well, six swing states anyway

fn2: When results are measured to at least two decimal places

fn3: I really should be able to do better than this

fn4: I’ve not done a literature search but I have a strong suspicion that healthcare-related financial catastrophe – a very real phenomenon in the modern USA – is better-understood in developing nations than it is in the USA. What does this have to say about health services researchers attitudes towards the world?