We still have an essentially capitalist society here in America. This is in light of a landslide election of a liberal Democrat and a high degree of populism as a euphemism for legislation to regulate the upper classes.

A capitalist system reveals a continuum of perceived value from the insignificant to the essential based on the consensus of a culture. We’ve made many decisions as a society to protect these essential assets and to allow people to protect those things that they find to be essential in their personal lives. 

Along those lines, many institutions have also made decisions that certain individuals are worth more than others and that these essential individuals are more worthy of protection than the average person. For example, the Secret Service protects the President and many other government officials. Many corporations budget for security detail for their company’s building and even the floor the chief officers work in. Of course, individuals are free to spend their money to protect themselves and their assets with home security systems, SUV’s, and firearms.

The point of all of this is that some people can afford to protect themselves at a greater order of magnitude than others can afford to. In some cases outside entities insist on the protection for particularly valuable celebrities however, in most cases it is up to the individual himself to choose to pay for protection or to expose themselves to risk. America’s capitalist economy recognizes this reality more than other much smaller nations where socialized health care may be a feasible solution.

There is another way our society has allowed people to protect themselves and that is through insurance. Insurance is licensed in two separate sectors. The first is property & casualty to primarily insure assets such as homes, cars, and financial liability. The second sector is life & health coverage to primarily insure people in cases of death, disability, and medical care.

Reading that list in terms of insurance, one can imagine the catastrophic events that may occur in those important areas which give someone good reason to pay premiums to an insurance company to accept the risk if such an unlikely event were to occur. The problem with insuring medical care is that it’s a routine event that, without insurance, ranges from the cost of a nice dinner to the cost of a used car. The medical care then typically increases for a person later in life to cost as much as a penthouse in Manhattan absent any coverage.

A very brief history of health insurance shows that it was initially designed similar to other types of insurance to protect a person from financial calamity in the case of very expensive medical care. Health insurance used to be called “major medical coverage” and featured a deductible of a few hundred dollars (when that was a lot of money) before insurance kicked in to pay the claimant. The problem with this was there was no incentive to go to the doctor to get a checkup to catch diseases early. Patients were diagnosed much later than had they gone to the doctor more frequently. New technologies were also being developed to test for serious disease as well as treat minor ailments.

The insurance companies were paying higher and higher bills year after year as diseases were caught very late and technology to treat those diseases was getting better, but more expensive. Then in the 1990’s came the push by insurance companies for HMO’s and managed care with a focus on prevention by featuring first-dollar coverage to encourage people to go to the doctor. Unfortunately, people have taken this to mean go to the doctor… for everything all the time! Add in the “health crisis” – that Mike Huckabee has described of obesity, smoking, and sedentary lifestyles that are “cured” with this new technology of gastric banding, patches, and cholesterol medication – and you have American health care costs spiraling out of control.

The status quo has gotten so ridiculous that one of the clients I work with has their top company officers (with an average net worth of $100 million each) in a very-rich health insurance plan because it is worth it to them to pay the very high premiums for a plan featuring a $10 doctor visit copay to cut down on administration of balance billing that’s not worth their time to figure out. And if any of them need high-cost care, the sum total of premiums over the years will often be less than if they paid for major surgeries out-of-pocket.

This isn’t how insurance is meant to be used. So now that our society has transitioned the paradigm from insurance for the worst-case medical scenarios to funding for the best-case scenarios to keep people as healthy as possible from the first-dollar of care, let’s discuss a hybrid solution to spread catastrophic risk amongst a large population while funding preventive care to maintain health and catch diseases early.

A new solution is needed because the most notable current solution calling for Health Savings Accounts (HSA’s) has major flaws. An HSA is a tax-sheltered savings account that is funded by an individual (and sometimes the employer) to be used for medical care in the short-term or more wisely to build up over a number of years for high-cost medical care later in life. The main idea behind these HSA plans was to create a marketplace of consumer-driven health care where patients see the true cost of procedures so they can shop for the best combination of quality and cost.

Due to IRS regulations, HSA’s can only be initially offered if a person has a high-deductible health plan “underneath it”, hence the patient seeing the true cost of care. In other words, these plans are designed like the old major medical plans where there is no insurance paying for care until the deductible is satisfied. The IRS-mandated deductible for 2009? $1,150 for an individual and $2,300 for a family. The HSA is then funded to be at least a portion of the high deductible or to even exceed it if that was a person’s choice. The idea of the consumer paying so much before the insurance company pays anything combined with the idea of a savings account make HSA’s far more appealing to younger people than older people. The problem is younger people are not users of health care so it doesn’t matter if they share in more of the cost or become smart consumers of health care, they aren’t using the plan.

Now some high-deductible HSA plans do cover doctor visits with copays before the deductible needs to be satisfied, but HSA plans with deductibles that high are still intimidating for people accustomed to first-dollar coverage for preventive/minor care. These same people are concerned about the cost of outpatient procedures, prescription drugs, and MRI’s that would exceed the deductible before they can put enough into the HSA to cover it.

There’s reason to be concerned because the purpose of these plans was to introduce consumerism to health care. Insured members who were expected to become true consumers of health care have not been given the tools to shop for the lowest-costing facilities and doctors. There has not been the transparency needed to illustrate price differences between providers that was supposed to create the open marketplace to drive prices down through competition. It doesn’t help that the there are too many regulations from the IRS and other governing agencies about how HSA’s work and what they can be used for. This has caused a much slower than anticipated adoption of these plans and dissatisfaction from those that did enroll.

So what can be done about managed care plans that cannot control costs and high-deductible plans that are not going to be the solution they were promised to be?

The system we need should be a hybrid of first-dollar managed care and catastrophic major medical coverage in its current HSA form. We need to more seamlessly transition preventive care into maintenance care so healthy people are still encouraged to go to the doctor while the higher users share in more of the costs which would encourage them to become better consumers. The catastrophic situation will be explained shortly.

There should be a medical plan design with escalating copays for the insured. For example, an annual physical should be free and the next office visit within the same policy year for say, a cold or minor pain, is $10. The third visit is $20 and then the next visit is $30. After that, maybe the next 5 visits (the fifth through ninth visits) are $40 each and so forth. As you can see, the users are paying more, while the healthy people are receiving low-cost preventive care once or twice per year to maintain their health and catch serious illnesses early on. Medications will also be covered via copays the way current managed care plans pay versus the high-deductible HSA plans that require the full cost of the drug to be paid on the way toward satisfying the deductible.

After maybe 30 doctor visits and/or $6,000 of total medical costs (combined use of prescriptions, outpatient surgeries, MRI’s, etc.), then there can be that high deductible where the patient pays at or close to 100% of the cost for several thousand dollars worth of care before insurance pays once again. At this point the insurer will now be paying completely for the remainder of care. For those of you familiar with Medicare Part D, this is very similar to the donut hole. And of course, the IRS needs to permit a tax-sheltered HSA for these plans so people can save for future medical costs when they need to satisfy that donut-hole deductible.

Now there can be tremendous flexibility to purchase plans like these. Two examples on opposite extremes would be the following. A younger, healthy person would want to purchase a plan with copays that are initially higher and escalate more quickly with a large donut-hole deductible of $5,000. An older person that is consistently going to the doctor and on medication would be looking to purchase a plan with lower copays that escalate slowly with a small donut-hole deductible of $2,000. Of course, the latter plan covers a lot more so it would be significantly more expensive than the former plan. The higher utilizer would pay more in premium and would still have cost-sharing within the plan.

This could also allow pricing for the uninsured and citizens ineligible for Medicaid where private insurers can offer plans like these to finally allow these newly insured to receive several episodes of care, but will unfortunately need to have a large donut-hole deductible in order to keep the premium costs down. More serious care may be unaffordable to them at that point. However, it is better than having nothing like they do now.

If public or private entities felt it was essential to insure them, then they would do it. So far, we’ve made a judgment that it is not.

The next article will be on string theory and world peace.

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