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An Unrealistic, Impractical, Utopian Plan for Dealing with the Health Care Opportunity

Felix Salmon deploys me as a weapon in an internecine struggle with his fellow Portfolio magazine writer Russ Mitchell Kevin Maney by blogging a piece of our coffee yesterday at Strada, at the corner of Bancroft and College, in Berkeley:

Finance Blog - Market Movers by Felix Salmon: How to Deal With Rising Healthcare Costs - Russ Mitchell weighs in on the subject of healthcare today, and specifically the problem that healthcare technology is driving prices up so far and so fast that at present rates it won't be all that long until there's no money left over for anything else. Mitchell's solution... is, in a nutshell, better healthcare for the rich.... "A real menu of health care packages, so people can choose from a variety of programs matching their needs with their ability to pay, from basic Mazda to luxury Mercedes. Employees (and the government, for the uninsured) can decide what packages they'll provide for how much."...

By coincidence, I'm in Berkeley myself right now, and took the opportunity to have coffee yesterday with Lance Knobel and Brad DeLong.... Brad painted a picture of people having spare eyeballs and kidneys stored... in a hospital basement... to... replace the existing ones if they failed for whatever reason.... I'm sure I'll get the details wrong, but in a nutshell, Brad would like to see a health insurance plan or plans in which the deductible is very large: 20% of any individual's pre-tax income in the previous year. Insurance would... [be] against catastrophically large medical expenses, as opposed to the present situation, where consumers have no real skin in the game and therefore no incentive to try to drive down prices. Where consumers do pay their own money, Brad notes, as with laser eye surgery, prices have a tendency to come down quite impressively.

Brad's system isn't perfect, of course. The cost of very expensive procedures would probably not come down much, since people would be losing their entire deductible anyway.... [M]any people might end up not getting necessary healthcare because they didn't want to pay for it. But it's still a very interesting idea which tries to seriously tackle the problem of health-cost inflation – an area where the present health plans from Democratic presidential candidates are quite weak...

Well, now that I am outed, let me explain. First, it's definitely not a plan, and it's certainly not a proposal for the current or any forseeable future policy and political environment. Think of it as a utopia--and think of it as a utopia coming from a guy who is not a real health economist but has an undeserved reputation because he was good at translating the economese spoken by real health economists like David Cutler, Sherry Glied, Ken Thorpe, Len Nichols, et cetera in a way that made it intelligible to senior Bentsen aides like Marina Weiss and Michael Levy.

So here it is:

20% Deductible/Out of Pocket Cap: The IRS snarfs 20% of your family economic income. 5% of it is an increase in taxes (but that replaces your and your employer's current health insurance premiums). 15% of it goes straight into your Health Savings Account. That HSA is then used to pay all your family health bills. If your expenses in a year are less than what's in your HSA, the balance is rolled into your IRA (or, if you prefer, returned to you with your tax refund check).

Single-Payer for the Rest: If your HSA is emptied and you still have more health bills that year, the federal government pays them. The main point, after all, is insurance: if you fall seriously sick, you want right then and there to be treated whether or not your wallet biopsy is positive.

Sin Taxes: on Tobacco, Gorgonzola, Three-Liter Bottles of Liquid High-Fructose Corn Syrup, Tanning Clinics (Melanoma), et cetera: Sin taxes (and, perhaps, someday general revenues) pay for an army of barefoot doctors and nurses and mobile treatment vans roaming the country, knocking on doors, and providing preventive and other long-run lifestyle services for free: Let me examine your prostate. Mind if I check your refrigerator and tell you how to eat healthier? Have you exercised today? I'm a Pilates instructor, and we could do a session now? Are you up on your immunizations? Anybody here have a fever and need antibiotics? Come on out to the van and I'll clean your teeth." The idea is to make the preventive care cheaper-than-free, to insure that nothing with a high long-run benefit/cost ratio gets left undone because people would rather get a bigger check the next April to use to buy an HDTV.

A Lot of Serious Research on Best Public-Health, Chronic-Disease, and Hospital Practices: Made easier, of course, by linking the payment records from the health branch of the IRS to hospital records to the wirelessly-transfered logs from the barefoot doctor vans.

That's it. No deduction for employer-paid health expenses. No insurance companies.

The key is that we face not a health-care financing crisis but a health-care treatment opportunity. Technologies are going to do marvelous things: we are going to have livers grown from our own tissue on reserve in hospital basements in case we go picnicking and eat the wrong mushrooms. We need to figure out (1) how to spread the benefits of current and future medical treatment options as widely as possible while (2) also making sure that a lot of thought and energy goes into figuring out what effective treatments have the highest benefit/cost ratios--i.e., cost least--because those are the ones we can collectively afford to do the most of, and while (3) making sure that we collectively earmark as much of our total resources to health as we really want. Government programs are good at (1). Markets are good at (2). And insurance is good at (3) if we can deliver the right incentives to insurers. These three goals are in considerable tension.

The package above strikes this relatively ignorant economist as likely to give us the best chance of getting as close as possible to utopia.

Why the 20%? Because I am very impressed by the use of technology to drive the cost reductions--which means the reductions in doctor and nurse time: the increases in the number of procedures that a given treatment unit can perform, and thus in the number of people whom we can, collectively, treat--in beneficial-but-optional areas like eye surgery and lenses. It does seem to matter that consumers are cost conscious and economize when they have financial skin in the game. This is the mother of all Health Savings Account proposals.

Why the barefoot nurses? Because there are an awful lot of games where we don't want economization. This is the mother of all public-health and subsidize-preventive-medicine proposals.

Why single-payer above 20%? Because I think there's no space left for insurance companies. Insurance executives' and actuaries' incentives are horribly wrong--they are either to figure out how to exclude the sick from their coverage or to skimp on preventive stuff because twenty years hence the patient will be covered by some other company. You want doctors to have incentives to deliver necessary and appropriate care better. You don't want insurers to have incentives to deliver shoddier and cheaper care in hard-to-monitor ways.

But for the current political climate, I like Obama and I like Edwards (and I am likely to like Rodham Clinton too, when it emerges): either they would succeed enough to get us to a much better place than we are at now, or if they fail they will fail in interesting ways that will make it obvious both policy-wise and politically what the next step is.

If, for example, we were to adopt Obama's plan and it were to start leaking money because young healthy yuppies were going uhcovered in large numbers, it would be clear that the needed fix was a mandate. If Obama's plan were to start leaking money because insurance companies were using the Health Exchanges and figuring out how to insure only the healthy while dumping the expensive sick into the the public part, that would create the--currently nonexistent--political will to shut the health insurance companies down.

And I am not a real health care economist. I just play one in the weblogosphere.