by: Raymond L. Richman

Link: Trade & Taxes

In the preceding blog on this subject (11-27-09), we wrote:

“The average household can afford to be self-insured with regard to health care costs that are not cataclysmic. We can expect falls and fractures, expect to catch cold, expect to need eyeglasses and hearing aids, expect to have children, expect cavities in one’s teeth, and to need dentures, and so on. Setting aside part of their income in a health savings account at regular intervals would enable the vast majority of our citizens to pay for these “normal” expenditures out of past savings and current income.”

“What we need is insurance against catastrophic illnesses not against the easily affordable costs of relatively minor medical episodes. Were the hundreds of millions of health-care consumers to pay the full cost of their own minor health care expenditures, they would have an incentive to economize and seek-out more economical treatments. And providers would soon compete for their patronage. Competition is the force that makes a private market economy innovate and achieve constantly growing productivity.”

Critics of health savings accounts argue that this could possibly work for the rich but not for the poor. What about those in poverty? Their past savings and current income are very likely to be inadequate to pay for all ordinary non-cataclysmic health care expenditures. Some special arrangement needs to be made for them. The current solution is Medicaid which like Medicare pays for all the expenses of getting treatment subject to a small co-payment which varies from state to state. Medicaid is a state administered program and each state sets its own guidelines regarding eligibility and services.

And these costs have been exploding. As we pointed out, expenditures in the United States on health care surpassed $2.2 trillion in 2007 or about $7,400 for every man, woman, and child, and has tripled since 1990. Neither the House or the Senate Bill creates any incentives to prevent or control rising health costs. They continue to insure the consumers of Medicare and Medicaid against all medical services. The problem is how to create incentives among Medicaid participants to economize on health expenditures. How can we create HSAs for those who have little or no income?

Medicaid is administered by the states. Philip Klein, the Washington correspondent of the American Spectator, wrote recently that the Congressional Budget Office (CBO) estimated that the proposed Obama health care bills

“would add 15 million to 20 million more people to the Medicaid rolls. The cost of such an expansion ‘could vary in a broad range around $500 billion over 10 years.’ But the catch is that such an estimate is of the anticipated federal cost of the Medicaid expansion. In actuality, the federal government typically pays around 57 percent of the cost of Medicaid, while the remaining 43 percent is picked up by the states. So what’s the full cost of a Medicaid expansion at both the federal and state level?”

According to these numbers, expenditures would increase $943 billion, not counting any rise in prices resulting from increased demand for medical services and prescriptions.

Currently, many of the poor uninsured use emergency room facilities, which are alleged to be very expensive. The National Institute of Health (NIH) estimated the average cost of such a visit to be $274 compared to $88 at community clinics. It attributed the difference principally to “the higher levels of fixed cost and indirect cost seen in the emergency department.” As we wrote in the first of this series, that it is alleged that the uninsured go to hospital emergency rooms for illnesses that could be attended to by a qualified nurse, paramedic, or intern. It is asserted that this imposes huge costs on the hospitals.

If the alleged illness can be diagnosed and treated without hospitalization and expensive tests, it imposes no greater costs on the hospitals than an ordinary clinic does. The costs of maintaining and staffing emergency facilities — having specialists, and testing and operating facilities on call to diagnose and treat really serious illnesses and injuries — is expensive. But such costs are not applicable to patients who are diagnosed and treated in a fifteen-minute visit and sent home. The allocation of such expensive overhead to such patients is not justified. The marginal cost of treating minor illnesses in emergency facilities is often zero. The personnel are there on a stand-by basis and often have little or nothing to do. Those who use emergency rooms as a clinic create a costly problem only when the staff and facilities are operating at capacity. In that case, the cost of treating patients with minor health problems in the emergency room is not zero but it is not infinity either. Having a general practitioner on call – MD or nurse or paramedic – is not expensive.

And there are many general practitioners and residents on duty in every hospital in the country. Still there is a need to reimburse the hospitals. Is there a way for every user of such facilities to pay for some if not all of the hospital’s reasonable charges, thus creating an incentive to restrain exorbitant cost increases. Many states require a Medicaid co-payment if the enrollee has any regular wage income. But this does not create a sufficient incentive for the consumer of health care or the provider to economize.

What we propose is assigning each enrollee to a primary private physician, clinic, or hospital-sponsored clinic of his choice. We expect there will be competition among providers to be his primary care provider. Some pharmacies have a clinic in their stores and they may qualify as primary providers. If treatment beyond primary provider’s abilities is required, the patient will be referred to an appropriate qualified co-operating provider of such required services.

An HSA account could be created in a local bank in the name of the enrollee and a fixed amount deposited in it by HHS, perhaps, $100 per month per enrollee or by depositing a single lump sum. A family of four would have $4800 paid into the savings account in a year. The account will be charged for each care provider’s services to the household. The bank will be reimbursed by HHS for withdrawals that exceed the balance in the account. Banks can be expected to compete for such accounts. An incentive to economize on the enrollee’s part would be a provision that half of any balance in the account that remains at the end of the fiscal year will be paid to him.

We need to think anew about providing or subsidizing health care. The above is a start.