27 June 2009

Health Care Reform: A Solution


In a burst of enlightenment and drawing upon discussions in which I've previously taken part, I've formulated the concept for a solution to the health care and health insurance problem. While this may seem simple, it employs the necessary principles to force prices to their appropriate market levels, and all this without a government takeover.


There are two key components I bring to the table: First, let the market bring prices down by empowering patients to make all decisions, including their choice of doctor, the procedures they will receive (provided they will pay the price), medicine they will purchase and so on. Second, since insurance companies are allegedly responsible for much of the health care fiasco, reduce the role they play in order to reduce the problems they create. In reality, this is a business model as much as it is a solution. Also, I do not claim that these ideas are original.

How to make things cheap

Competition. Competition for business, competing for customers--that's what drives prices down in a free market--not policies, not regulation, not higher taxes. When businesses compete for customers, they will lower their prices to a value somewhere between what it costs them to provide the service and the price at which you will pay for it--and you're only willing to pay as much as the lowest bidder offering the service you desire at an acceptable level of quality.

The dilemma with insurance and government

There are four principle entities in the market. Computer purchase examples of each: A) When you buy a computer for yourself, with your own money, you look for a good price and a good computer, because you will be left to deal with both. Your choice with determine your satisfaction with the product and the dent left in your bank account. B) If you get a computer but are not paying for it (as with college students whose parents agree to pay for any computer their child chooses) then you will get a good computer, but not necessarily at the best price. C) If you are (like the parents in this scenario) buying for someone else, you are most concerned about the effect on your bank account, not the quality. So, if you actually communicate with your child, you may encourage them to shop carefully, or set a price cap. D) If you are buying a computer for someone else, using money from someone else, you neither care very much about the price or the performance and quality of the computer. You're not going to shop around.

Governments fall into class (D), they are purchasing services they don't use with someone else's money, so they are not concerned with price or quality. This leads us to wonder, so how would a government health care plan give us high quality service at a low price when this group has the least incentive for either low prices or high quality?

Insurance companies are somewhat more difficult to classify, but essentially, once they have you as a customer and your payments become their money, they are in class (C), paying for the care of others with their money. Whatever you don't spend, they keep. Your insurance policy is similar to a parent's love for their child (although likely less generous). It is the only reason you get anything. Because an insurance policy is not as complete and generous as a parent's love, they are concerned more about profits than the quality of your service. They will not insure that you get the best service, but it will be at a reasonable price to themselves. They do have overhead costs though, so insurance companies still add extra cost to health care. Because you pay their salaries, prices will approach the highest level you are willing to pay while profits fill the gap between their costs for your care and your payments.

In summary, government is definitely not the solution and insurance companies appear as a necessary evil.

Addressing the dilemma

So how do you do it? How can you drive prices lower while improving quality (which is the banner of the President Obama's government plan)? Two things: 1) Patients should be able to pay more money to receive better procedures. This is a necessary part of any free market. 2) Reduce the role of insurance companies in providing health care. If their overhead costs are part of the problem, reduce their role. Instead of complete plans for all medical needs, we can simply create savings accounts (independently or as part of some more comprehensive insurance plan) to cover our predictable health care needs. (Wouldn't that motivate us to live more healthily if at the end of the year, we could spend whatever excess money was available in our account). For the less common yet financially devastating health problems, we can seek out providers who will insure us for only the high cost treatments. Of course, our level of coverage will be commensurate with the agreement we enter at the start, which will reflect the price we are willing to pay. You only pay for the coverage you want. That would be a good business model: pay for the coverage you want. You want maternity insurance, choose that. If you want cancer insurance including radiation, chemotherapy and options for a surgery of your choice, check the box. If you don't want coverage for treatments under $1000, then check the box and don't pay for it. In this way, you are only insured for what you want and what you can afford. You can use your own savings to cover procedures not included in your plan. You may decide to forego a new car to afford better treatment options in your insurance plan. You will make the choices. Since you will be paying directly for most routine doctor visits, you will be totally free to choose your doctor at his or her going rates. You will determine the kinds of choices you have for insured treatments when you establish your insurance plan with your insurance provider, if you choose to purchase a plan.


In order to minimize costs and maximize the quality of health care, you must maximize the choices of the consumer. You can only truly and permanently increase their choices as you increase their accountability. Otherwise, you will face shortages and rationing. If you want more choices in your health care, search out companies that offer flexible health care policies that give your more choices. As consumer choice increases, prices will fall and quality will improve. That will all occur naturally through the work of Adam Smith's invisible hand.


  1. I agree Dallan, this is the way forward.

    Two other things to mention here:

    1. Insurance ought to be disassociated with employment. It's a connection that just doesn't make any sense. It didn't use to be tied up with employment. The question is how this can be done since everyone now expects employers to do this...

    2. A lab-mate of mine from Canada went to the doctor and got some x-rays. She didn't realize she needed an in-network doctor, so the insurance wouldn't cover it. The cost to insurance would have been around $600. After speaking to the doctor's office, they negotiated an 'out-of-pocket' price of ~$300. So another part of this equation is that health care is so expensive because health care providers will charge as much as insurer's will tolerate (and this is much more than 'people' will tolerate).

  2. I had never considered the need to disassociate health insurance from employers, but there really is no need to have them tied together. Since unlinking them would empower patients to make more choices about their health care, it would be better to unlink them--if only for that reason.

    I find it very insightful and logical that it was cheaper for your lab-mate to pay for the x-rays when she payed for it herself. What surprises me and suggests that patients are too passively and indirectly involved in the health care market is that dealing with the doctor directly cut the cost in half! When customers make more choices and directly pay the bills, prices will fall, not when they become oblivious to the prices charges. Good points John.