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.

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.

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