Discussion on my last post about how well Obamacare is working led to the mention of a functional free market-based system to solve America’s healthcare problems. In this post I thought I would consider a few possible policy alternatives to Obamacare that might encourage a “free” market solution to the problems that the current system faces.
Obviously a true free market system doesn’t require any policy – just a let-’em-at-it laissez faire market – but nobody believes this is going to work, and most free markets aren’t really “free” in the strict sense, so some kind of policy prescriptions are required to get the whole thing in line[1]. The obvious baseline consists of basic licensing requirements for doctors and nurses, and mandatory minimum quality standards for hospitals. Obamacare appears to have added to this set of standards with mandatory minimum standards for insurance products on offer on the free market[2]. There is also an obvious basic public health and health management infrastructure – for drug licensing, monitoring serious infectious diseases and the like – that is usually government funded and run but of equal value to all players in health markets, be they private or public. But beyond this a free market-oriented policy framework can – and I guess most people would argue, should – be remarkably light touch.
The problem with health financing is that such a light touch system will not deliver cost containment and equity outcomes, and over the long term as health technology develops and demand increases more and more people will find more and more treatments becoming unaffordable. So if we want to have a functioning “free” market in healthcare, we will need some additional policy prescriptions. What do these prescriptions need to cover?
From a health policy planning perspective, a good health financing system should guarantee quality, access and coverage. That is, as many people as possible are able to access as much, high quality care as possible without facing undue burden. As the Chinese government found a few years ago, high coverage is meaningless if the system provides such poor financial protection that people are unable to access care; some nascent universal health coverage systems have good access and coverage but they only provide very low quality service. In contrast, the treasury generally wants to see a system that delivers quality, cost containment and equity. That is, the system is able to deliver high quality care at a reasonable cost, and to as large an extent as possible income should not affect your ability to access that care. These goals can conflict with or complement each other in any system, but in a free market system they’re particularly hard to achieve because of the problems of free riders, moral hazard and free choice. Any policy to manage a free market system has to find ways to handle these problems.
The main way that Obamacare aims to achieve the cost containment goals is through competition and widening the risk pool, by getting more young and healthy people to sign on for insurance. This is the least popular aspect of the plan, because it does so through the “mandate” – a legal requirement for everyone to purchase insurance, with a tax penalty for non compliance. Competition may also not push prices down – it could be for example that with prices already high and the size of the health workforce acting as a constraint on scaling up services, hospitals decide to compete on quality rather than price, offering boutique accomodation packages and better quality services at higher prices, rather than broadening and cheapening their services. In a truly free market system there is nothing to stop hospitals moving away from offering cheap services if the constraints suggest that’s a better plan. Sow what are some alternatives to the mandate?
Force back-payments of non-insured when they sign up
One option is to allow free choice, but to allow people to retrospectively enrol in insurance when they need it – but on the proviso that they pay that company for all the years they were uninsured, back to their last serious full-time insured period. So for example if someone leaves their parents’ insurance plan at 25, then doesn’t buy anything, but gets hit by a bus at 28 and suddenly needs a lot of expensive healthcare, they don’t have to pay it all out of savings – they can sign up to an insurance plan that will cover them. However, that insurance plan will charge them three years’ worth of back pay. Obviously payment plans would have to be generated, and it might be possible for those in need to sign up to some sort of government support scheme so that they are not bankrupted by the cost of insurance. Also, in order to discourage moral hazard in which every young person free rides until they get sick, past premiums would have to be anti-discounted to ensure there was some kind of penalty for late sign-ups.
This system would encourage sensible people to sign-on early, but would essentially guarantee universal coverage, since it would enable poor young people to go a few years without paying coverage in the hope that a future salary increase would cover the additional costs. It would be particularly useful for people like me, who were abandoned by our parents in our late-teens and have to make our way in the world with no capital and very limited income, but hopes of improvements in income in the future. It would also offer insurance companies some certainty about future income – they could do some fancy accounting on the basis of the market share of uninsured people they would be able to grab in the future as those people age, knowing that the income would be back-calculated. There would be an obvious risk that some proportion of the poor would become health insurance peons (HIPs): after a serious health scare, they had to sign up to a plan with such a huge back payment that they will spend the next 5-10 years up to their neck in repayments. Who would marry a HIP?
There would also be a residual moral hazard risk. If this system were only minimally regulated, then one would see the unedifying spectacle of insurance salespeople at the bedside of young, healthy people who suffered accidents and injuries. They would offer discounted past premiums in exchange for a promise of future guaranteed premiums, on the logical basis that these kids are not in hospital due to a long-term (expensive) condition, they’re just random bad luck. This would lead to a culture amongst young people of not signing up for insurance until you got injured, then taking the best deal on past premiums that the bedside dealer offered you. This creates a kind of moral hazard through competition, which, while it might suit the insurance companies, would be extremely unfair on sensible hard-working people who signed up from the start. But it would lead to a form of virtual universal coverage, and offer a way to reduce the pernicious effects of income inequality in free market health-financing systems.
HECS-style loans and late sign-up penalties
Another way to attack the equity and cost-containment aspects of free markets could be to offer loans similar to the Australian education system. Under this loan system, people who cannot afford healthcare could take out a loan from the government to purchase insurance, and then repay the loan when their income goes above a certain threshold, through taxation. This would remove all disincentives to signing onto health insurance for young and poor people, and help to deal with one of the biggest quandaries of health insurance systems: the people that the insurers most want to buy the product (the young and healthy) are the ones who least need it; and the people who least need it are also at the stage in life where they can least afford it (young people generally being poorer than older people). Whether HECS-style loans have reduced inequality in Australia’s education system remains a disputed point, I think, though as the cost of education increases I think they become increasingly important, but I think they’d have a clearer equity-improving effect in health financing.
This system would not alleviate the moral hazard problem of people just not signing up for anything until they are older, but it might be effective if combined with some kind of rolling penalty – currently in Australia if people over a certain income do not sign up for private health insurance, the cost of insurance when they do sign up will increase by a few percent for every year unsigned. This is not a “mandate” (you can “choose” to pay the excess) but it incorporates a big stick to encourage people to sign on earlier. In Australia private health insurance is a luxury, but in a free market health system it would be a necessity, so in combination with this stick the HECS-style system would help people who would otherwise be forced to spend years uninsured and then sign up at a grossly inflated price that they could not afford. A system of late sign-up penalties by itself leads to the unedifying sight of two completely equal individuals – same sex, same age, same health state – paying considerably different amounts for the same product simply because one of them comes from a poorer background. But a HECS-style system would alleviate some of this, by enabling the poorer person to pay back the cost of those earlier years of insurance later, when their income was higher. It’s also worth noting that some poor people might be able to afford cheap insurance plans, but unable to also cover the excess those plans contain, so just don’t bother; but a HECS-style scheme would alleviate the cost of the plan in the short term, making them more likely to be able to take the excess, and thus more likely to see even a low-grade insurance scheme as worth signing up for.
Welfare-based systems
A very simple solution to the equity issues inherent in free markets is to have a public option for everyone below a certain income (i.e. medicaid) that protects the poorest. This won’t handle cost-containment though, and it creates a kind of drag on the private insurance market, since it’s likely that a lot of the potential customers of the private companies that those companies most want (the young and healthy) will be eligible for medicaid for a few years, and thus removed from paying into the private risk pool by the government. The government could make up for this by cross-subsidizing the private insurers for this pool, in exchange for conditions on e.g. adherence to a fee schedule for a set of basic services. By fiddling with the threshold and cross-subsidies, the government might be able to do something towards controlling the worst excesses of the private industry.
If I were running this welfare-based system, I would be surely tempted to also market my network as a private insurer to people above the threshold, or offer people on the network to buy into a “gold” version when their income goes above the poverty line. This would mean that the medicaid part of the health-financing system would slowly grow, and begin to put cost pressures on the private insurers. This would lead to a natural choice in the market place – the private insurers have to keep their costs near some government-set level, or slowly the market will be consumed by the government system until it becomes a kind of single payer. The insurers can then make a choice about what segment of the market they want to compete for. If this system worked, it might have a similar effect on cost containment to a single-payer system, but through the competitive pressure on multiple payers.
Specific interventions to distort markets
There are a range of interventions that governments can make relatively easily into markets to try and discourage certain activities and encourage others. Some examples include:
- Tax breaks for companies that sign up their employees into selected larger insurers, in order to encourage the growth of a small number of large risk pools. Fragmentation of risk pools in private markets is one way in which costs grow, since a smaller risk pool is less robust to extreme events
- Tax breaks for non-profit and industry-wide (industry-assocation) insurers, and support in establishing them. For example, the fishing industry might form a single industry-wide non-profit insurer, that covers all members in the industry. These kinds of associations often have associated mutual benefits – for fishers, for example, there might be low-cost financing to purchase or improve industrial equipment – which make them attractive to younger, healthier people (my industry association here in Japan, for example, offers low-cost mortgages). Again, this process would be partly intended to encourage the growth of very large risk pools, and the advantage of industry-based associations is that they target working-age people, who are healthier than retired people, and their pool of retired members is always in proportion to their employed younger proportion (due to cohort effects). The disadvantage is that they are restricted to the size of the industry, so there is a limit to the risk-pooling benefits they can obtain
- Block funding for hospitals that sign up for government cost-containment plans, so that hospitals that agree to stick to a certain schedule for the provision of core services receive a guaranteed annual income in exchange. These hospitals will in turn become attractive to HMOs and other forms of restricted-network insurance providers, since they offer predictable and manageable costs, which in turn means that the services they bill are less likely to be scrutinized and rejected, reducing administrative overhead (which is apparently a large problem in the current US system). Such hospitals would also be attractive investment items since, though they don’t offer astronomical profits, they are a stable source of income for an investment portfolio.
Combinations of interventions
There is no reason that these interventions can’t be merged. I think it would be interesting to see how rapidly Obamacare expanded coverage if a HECS-style repayment scheme were added to the mix: getting people to sign up would then be simply a matter of overcoming laziness, and would be preferentially effective on the young and poor, improving coverage and equality. My guess is that a HECS-style system would be anathema to most Republicans and a sizable minority of Democrats, though. I also doubt that any Republicans of note have given an alternative, genuinely free-market healthcare plan that aims to improve coverage and access, while containing costs and reducing inequality, any more thought than I have put into this blog post. And that is the really sad thing about the American healthcare system today: while a classic universal health coverage scheme has so many enemies it will never get off the ground, a genuine free-market scheme also has so few friends that it will never happen. Which leaves only one alternative: the highly compromised, heavily contested and distinctly imperfect chimaera that is Obamacare.
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fn1: Plus a blog post about a genuinely free market healthcare policy would consist of “we have no policy” which is pretty boring.
fn2: And it is astounding to me that the US government only just thought of this. The basic stipulation “you can’t sell products that are a complete rip-off” was only introduced in 2013 … wow.
Compromise and Conceit 
August 10, 2014 at 9:43 pm
“Plus a blog post about a genuinely free market healthcare policy would consist of “we have no policy” which is pretty boring.”
Apparently the Australian Senator from the LDP has suggested acceptance of gay marriage on the basis that the government shouldn’t be controlling marriage.
It’s a good first step, but doesn’t take the next logical one that marriage (from a governmental perspective) should be abolished and replaced with a standardised set of agreements for partnership on tax, welfare, inheritance and dissolving the partnership. Ideally these should be written to support N participants (which is bound to lead to some really lengthy conditional clauses for divorce and death).
So ultimately even a policy on “We don’t get involved in that” is likely to be lengthy if you need to specify the ways you don’t get involved. And speaking as a Project Manager, what is not in scope (i.e. the stuff your not doing) is very bit as important as the stuff in scope (i.e. what you are doing). A safe rule of thumb is to assume that on topics that are unclear, everyone (or at least one important person you don’t want to piss off) will assume something that is most inconvenient vis-a-vis your scope.
August 10, 2014 at 10:06 pm
” Obamacare appears to have added to this set of standards with mandatory minimum standards for insurance products on offer on the free market[2]
fn2: And it is astounding to me that the US government only just thought of this. The basic stipulation “you can’t sell products that are a complete rip-off” was only introduced in 2013 … wow.”
Some of the complaints about Obamacare are precisely on this point. Setting all healthcare to cover some conditions become effectively a pointless impost if you’re incapable of contracting those conditions. The obvious example here is pregnancy [1] but it’s unlikely to be the only one. I haven’t bothered researching this is the slightest but the first place I’d look is conditions with strong racial associations for inclusion/exclusion then at sex based correlations [2].
I can’t say that including a condition that “threatens” 50% of the populace [3] is a bad thing, but I suspect for guys, women who used reliable protection and post menopausal women losing a health policy that was otherwise ideal and cheap so that some lady somewhere can get affordable pregnancy coverage isn’t seen as a good example of “If you like your plan you can keep you plan.”
[1] I’d argue the bigger issue on pregnancy is it’s seen purely as the woman’s problem, but any move to address that would swiftly move into areas that contest the idea that a woman owns her own body (i.e. if an abusive father of a new kid was paying for half the birth, then why shouldn’t he be present? Or allowed to select an abortion instead? So… eww risk of nasty line of thought)
[2] I’d expect the legislators to have done a better job on sec based condition such as “Breast cancer included, penile cancer excluded” than on conditions associated with race as I suspect the racial conditions are more likely to be the ones you’ve rarely heard of (sickle cell anaemia being the obvious one that clears the threshold for awareness)
[3] That’s pregnancy in case it was unclear. “Threatens” in this scenario is just a fun medical-ish term to use 🙂
August 11, 2014 at 10:22 pm
I can see you’re obliquely referencing the Hobby Lobby decision on contraception here. Re: the Hobby Lobby decision, the reason that contraception is generally included in universal health coverage (it isn’t in Japan, btw) is that doing so is an effective way of reducing infant mortality, and any healthcare system that can’t reduce infant mortality should be ashamed of itself (and any politicians who had a chance and didn’t act, should be really really ashamed of themselves). Although I’m sure some people on both sides of the aisle would like to think so, it’s got nothing to do with feminism or human rights and everything to do with the excellent, practical benefits of easy access to contraception, especially contraception that liberates women from men’s whims. The fact that it’s an issue in the US is, frankly, embarrassing. And even more embarrassing for the Hobby Lobby folks: they were being given tax breaks to offer one of Obama’s accredited plans, but they want to take the tax breaks and not offer the plan. But this is potentially disastrous for the insurance system because it opens up the possibility of exactly what you describe: every man and his dog demanding to be excluded from paying for things that they don’t use. The first victim of this will be vaccination, and most likely HPV (since a lot of childhood vaccinations are covered anyway). The argument you describe is a really slippery slope. Why should I pay for polio vaccination? Only three countries have it, and yet every govt demands that children be vaccinated against this dead disease. I’m never gonna need this service. Plus I’m going to be paying insurance as an adult, and polio, measles etc. are children’s diseases. Or better yet: currently there is an epidemic of rubella in Japan, affecting children who are too young to be vaccinated, that is being spread by unvaccinated adult males (in the 1970s and 1980s males weren’t vaccinated). Why should I get a vaccine to prevent someone else’s disease? Why should I pay for an insurance system that vaccinates healthy men to protect someone else’s children? I’m not gonna need this service. Let their children die. What about rugby players? Fucking personal responsibility man, those guys choose to take those risks. They should pay for their dumb decisions. And oh look – do you see a car in my driveway? What are the chances I’m going to have a serious traumatic injury? Count me out thanks. Also I don’t smoke, so I’m not paying for lung cancer, and I won’t pay for diseases of obesity either. Furthermore, a lot of people in Japan got Hepatitis C from tainted blood donations. I’m not haemophiliac, zero risk for me. I’ll donate blood but I won’t pay for their interferon. Why should I? Haemophiliacs should pay more, and actually they should probably pay more for the cost of maintaining the blood donation system. That’s only fair.
Everyone has a reason not to contribute to the commons. That way lies madness. It’s of a piece with the “don’t tax me to pay for your army” approach to taxation that some libertarians and leftists take. We all have to get along in this world, but it appears some of us didn’t learn this lesson. The prevalence of this attitude in US public discourse – and the existence of controversies over things like subsidized contraceptive services, that in places like Australia and the UK would leave people saying “meh, I hope they have fun” – is a possible explanation for why they still don’t have universal healthcare after all this time.
Putting aside that small distraction, the Obamacare minimum standards don’t just include what should be covered. They also stipulate rules about minimum reimbursements, caps and copayments, and I think also rules about how much bullshit the insurer can pull when you claim. This is the principle behind the bronze/silver/gold ratings, as well, I think. Those people who didn’t get their plan were being offered a plan that basically didn’t cover them for anything less than being shot in the face. I think the “you are making me pay for gender reassignment surgery when I don’t want to” aspect of the new system is far outweighed by the “Oh! I can now be confident that my health insurer is offering me a product that vaguely resembles health insurance!” aspect. Not that you’d know it, from the uproar over cheap pills.
August 12, 2014 at 10:29 am
My understanding was that the pregnancy I was referring to was actually pushing a baby out. That’s a pretty expensive process (check-ups, doctor time, clean room with imposing stirrup thingys). For a single male who’s totally pro-contraception [1] paying for that coverage can seem an unecessary impost.
Even in Australia the medical insurance all comes with a pregancy covered/not covered option. And you have to have been on that coverage for a year prior to pushing the baby out for the insurance to apply (so if cuttting it a bit fine, it’s another reason to not want your kid born early [2]). Now in Australia that’s not too big an issue as all that happens is you fall back on the public system.
The only way I’d see it as a significant issue is due to communicaton failure. Saying something stupid like “If you like you plan…” or any message other than “This is how it’s going to be. It’s a good idea because reasons. Suck it up.”
So poor politics leads to political problems. Who’d have thought?
I don’t see this as a policy problem. I see it as a communication/political one. I suspect that there would be policy problems based on edge cases (i.e. treatment for sickle cell anemia being excluded from policies because it’s much more prevalent in black communities). There are going to be enough such edge cases that no law can catch them all, so the broader question should be “How do we deal with things that are rare enough to not generate realistic risk pools without mandating that everything under the sun be included?”. A reasonable solution is something like a public option covering the rare cases because the cost impost isn’t signficant to the public purse and the community wants to ensure everyone gets coverage. Or you know, explicitly admit that you like dead guys in gutters and reveal yourself to be a monster.
[1] “Yo bro, I don’t want no ho’s getting knocked up”
[2] As if the potential health effects of premature birth weren’t enough by themselves.
August 14, 2014 at 5:16 pm
I agree that it’s a communication/political problem. Somehow the US political commentariat have gone through the looking glass, and they can’t see out to the rest of the world on the other side who think “let’s cover as much as we reasonably can, and not worry too much if some people free-load on the rest of us” is a reasonable starting point for policy. In most of the rest of the world it really does come down to a public conversation about how to handle edge cases (did you know that Medicare doesn’t cover Lyme Disease in Australia? I was shocked to learn this!) but I suspect that the tactic of dismantling Obamacare via Supreme Court bludgeoning is going to lead to some really weird policy debate over there. There could be some popcorn involved as they tie themselves up into multi-dimensional knots trying to argue their sides… while the rest of us just say “What the hell – we’ll find a way!”