Healthcare reform game changers

By Don McDaniel

There’s so much discussion about health reform – how to bend the cost curve, how to drive a higher take-up of insurance coverage, etc. All of the banter seems to ignore, or worse, disabuse any notion that the virtues of free enterprise and competitive markets can free our health care system of its run-away costs, marginal quality, and opportunistic innovation.

They say, “Markets have been tried and don’t work in healthcare; look at the evidence.” Well, as complex as healthcare is, there are a small handful of changes that, if implemented, could be game changers.
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Of course, probably the biggest single game changer of them all would be true payment system reform – moving third-party payments away from evil fee-for-service to a payment system focused on paying for the care of a population or true outcomes-based payments.

Don’t get me wrong, there is still room for fee-for-service payments in medicine – especially in cases where the diagnosis of the ailment is highly speculative, requiring a necessarily iterative problem-solving approach. However, as science evolves, and as diagnosis becomes more predictable, we should need less and less of fee-for-service and more fee-for-outcomes.

That being said, following payment reform, my list of game changers is as follows: reforming medical malpractice; eliminating state’s coverage mandates on health insurers; allowing individuals to purchase health insurance in any jurisdiction; either eliminating the tax deduction for employer-sponsored plans or extending the deduction to individuals as well; and only providing tax deductibility for “true” insurance policies.

Malpractice reform will eliminate most or all of the costs of the practice of defensive medicine – most experts peg this at 10 percent of total health system expenditures or about $250 billion per year, predominantly in over-ordered procedures and diagnostics to protect from frivolous lawsuits.

Many states mandate that insurers cover certain procedures or services regardless of the size or class of the employer purchasing the insurance. This creates an artificial cost floor that places health insurance out of the reach of many employers. To add insult to injury, large employers are typically not impacted by mandates as they are self-insured and exempted by the ERISA law. These mandates can add at much as 5 percent, 10 percent, or more to premiums in many states – and I thought the goal was to innovate products to provide coverage to more folks, not less!

According to the Council for Affordable Health Insurance, my home state of Maryland mandates over 60 benefit requirements, which add at least 15 percent to the insurance premiums of health plan subscribers.

President Obama’s administration claims there’s not enough competition? There are well over 1,000 insurers in the domestic U.S. But I do agree on one thing, there’s not enough competition among differentiated products, payment methodologies, and benefit designs. To nip this in the bud, we ought to allow those seeking the purchase of health insurance to buy it from any insurer sanctioned in any state. This would create significant competition not only among insurance products, but among states that want to become a haven for health insurers.

Finally, with respect to true insurance market reform, there’s a valid argument that the tax-advantage of employer sponsored plans ought to be eliminated, for many reasons. It would raise almost $200 billion in tax revenue, individual purchasers lose out, and the system is regressive in that lower wage earners gain less of a benefit. Let’s create a market for true insurance in healthcare by allowing deductibility only for policies that provide insurance for events that are uncertain, infrequent, and financially significant, forcing Americans to become true consumers of healthcare – and provide that deduction to both individual market consumers and those purchasing through an employer group.

The current lack of consumer sovereignty and prevalence of third-party payments, even for mundane services, creates an artificial supply/demand dynamic that undervalues health care services, thus creating an incentive for overconsumption. We need to pressure of the consummate to truly reform healthcare.

Don McDaniel, president and CEO of Sage Growth Partners, LLC, is an entrepreneur, economist, technologist, educator, speaker, and writer. He is a skeptical contrarian, and writes about the power of free markets, disruption, innovation, and technology in healthcare.