proposals for restructuring the u.s. medical...

DateLastModified:December14,2016 AvailableOnline:cs.pdx.edu/~harry/reform

HealthcareReform

ProposalsforRestructuringtheU.S.MedicalSystem

HarryH.PorterPh.D.November15,2016

Manypeoplearedissatisfiedwithourcurrenthealthcaresystem—andwithObamacareinparticular—andareasking,

Howcanweimprovetheexistingsystem? orHowcanweoverhaulthesystemandcomeupwithanewandbetteralternative?

Inthispaper,wegobacktofirstprinciplesandtakeafreshlookatthesequestions.Thenbasedonouranalysis,weprovideacollectionofconcreteproposalstoimprove,reform,andreorganizetheU.S.healthcaresystem.

HealthcareReform/Porter Page2of63

FundamentalGoalsLet’sstateourobjectivesfirst.Therearefivefundamentalgoalswe’dlikeanyreformtoaccomplish.•Wewanttolowerthecostofmedicalcare,bothtoindividualsandtothenationaleconomyoverall.•Wewantthesystemtoprovidemoreandbettermedicalcaretopeople.Thatis,wewanttoimprovethequalityand,atthesametime,increasethequantityofmedicalcare.

•Governmentshouldprovidesomeleveloflow-costorsubsidizedhealthcaretopeoplewhoarebothunhealthyandunabletoafforditthemselves.•Wewanttoavoidincreasingtaxesorexpandingthegovernmentdeficit.•We’dallliketoreducethecomplexityofgovernmentrulesandreducetheinterferenceofthegovernmentinourownpersonalmedicaldecisions.

Ideally,we’dliketoachieveallthesegoalsatthesametime,butthesegoalsareinconflict.Howcanweprovidemorehealthcareandyetspendlessatthesametime?Howcanweprovidesubsidizedhealthcaretoourpoorestcitizenswhilenotincreasingthewelfarestateandbreakingthegovernmentbudget?AProposalBasedonEconomicPrinciplesByunderstandingmoderneconomictheory,andbyacceptingthedifficultyoftheproblemandtherealitiesofhumannature,andbythinkingrationallyandclearlyabouttheissuesinvolved,ourcountrycanatleastdobetterthanwe’redoingnow.


Thispapermakesanumberofconcrete,specificproposalsthataddressourconflictinghealthcaregoals.Takentogether,theyconstitutearadicalreorganizationofourhealthcaresystem.TheproposalshereconstituteacompleteandtotalreorganizationoftheentireU.S.healthinsuranceandmedicalcaresystems.Theplanproposedhereiscomplexandismadeupofmanyindividualproposals.Thispaper,whichdescribesandmotivatestheseproposals,islong,detailed,andfulloftechnicalargumentsandismeantforpeoplewithaseriousanddeepinterestinpublicpolicy.Webeginourquestwithafundamentalbeliefthatthefree-marketeconomicsystemcanmostefficientlyprovidethehigh-qualitymedicalcarethatmostpeopledemandandexpect.Butwealsorecognizethatagovernment-fundedhealthcaresafetynetmustexistforpeoplewhocannot,ontheirown,affordthecostsofaprivatefor-profitmedicalmarketplace.ATwo-TieredSystemThus,weproposeatwo-tiersystem.Westartwiththefirst-tieranddescribetheoperationofafree-marketprivatesystem.Thenwemoveontodescribingthesecond-tier,whichprovidesasafetynetatthebottom.Itiscriticaltopromotefreedomofchoiceforpatientsconcerningtheirpersonalmedicaldecisions.Thefederalgovernmentmustnottrytopickwinnersandlosersthroughtaxpolicyorspecializedfundingprograms,ordictatetopeoplewhichprocedurestheycanorcannothave.Wehaveahealthyrespectforthefree-marketaswellasforthewisdomofindividualAmericans.Thegovernmentmustnottrytopickandchoosewhichmedicalprocedures,products,suppliers,treatments,andbehaviorsaremosteffective.Forexample,scientificresearchtellsusthatthehealthiestdietdoesnotincludemeat,butter,ordairyproducts,alcohol,orsugarssuchascandy,sodasordesserts.However,Americanshave“unalienablerights,includingthepursuitofhappiness”,evenifthisincludesdoingsomethingthatbureaucratsinthefederalgovernmentdonotapproveof.Wemustpreserveourrighttoeatbeeforcandyordrinksugarysodas,notbecausethesearehealthychoices,butbecausethegovernmentshouldnotmakeanyofourmedicalchoices.


Withtherighttomakeourownchoicescomestheresponsibilityfortakingcareofourselvesandthisincludesmakingourpersonalmedicaldecisions,evenifourdecisionsarepoorones.Sinceweaimtoprotectandpromoteindividualrights,ourproposalsmustpreventgovernmentpolicymakersfrommakingourmedicaldecisionsforus.Toachievethisgoal,ourproposalsdramaticallysimplifyandminimizetheroleofthefederalgovernmentinhealthcare.Atthesametime,werecognizethatthegovernmentneedstostepinandhelppeoplewithnoinsurance,especiallypeoplewithgravehealthissuesaswellaspeopleatthelower-levelsofincomewhoarenotinapositiontoaffordprivatemedicalcare.Ourplanachievesthesegoals,butitisrathercomplicated.Webeginwithaneasypiece.MandatoryPriceDisclosureOurfirstproposalisformandatorypricedisclosure.Thefirststepincontrollingcostsinanydomainistolearnwhatthosecostsactuallyare.Soourfirstproposalistoenactalawthatrequiresalldoctors,hospitals,clinics,andotherproviderstotellpatientsthecostoftheirservicesaheadoftime.Ultimately,itshouldbedoctorsandpatientswhomakeindividualhealthcaredecisions,notbureaucratsworkingforcorporationsorthegovernment.Buttogetthere,wemustfirstmakesurethatdoctorsandpatientshavecostinformationinadvancesotheycanmakegooddecisionsaboutwhetherornottoperformvariousprocedures.Forexample,doctorsneedtotellpatientshowmuchanMRIisgoingtocostbeforeitisperformedforthesamereasonarestaurantshouldtellitscustomershowmuchahamburgerwillcostbeforetherestaurantdeliversit.


ProhibitPriceDiscriminationandPrice-FixingOursecondproposalisconcernsthecurrentpracticeinwhichtheexactsameserviceisbilledatdifferentrates.Theamountreceivedbythemedicalproviderdependsnotonlyonwhatservicewasperformed,butalsowhichinsuranceprogramispayingforit.Forexample,MedicareandMedicaidpayatbelow-marketratesand,tomakeupthedifference,medicalprovidersmustbillprivatepatientsatover-marketratestocompensate.Thispracticeintroducesdistortionsandinefficiencies.ThepriceofaMRIoughttodependonthecostofperformingthatMRIandnotbeinfluencedordistortedbyinterferencefrominsurancecompaniesorgovernmentrules.Tofixthis,weneedasimplemandatethatendsthispracticeandrequireseachmedicalprovidertochargeallpatientsthesamepriceforthesameservice.Ofcourse,somedoctorsmaychargemorethanothersforessentiallythesameservice,butthisisanissuethatmustberesolvedbythefreemarket,notthegovernment.Thegovernmentmuststopengaginginprice-fixingandmustalsopreventlargehealthinsurancecorporationsfromusingtheirmarketpowertogainunfaircompetitiveadvantagethroughprice-setting.Thisisbasic,common-senseeconomics.EliminatingtheRoleofEmployersOurnextproposalismuchmoreradical.Itistoeliminateemployer-providedinsurance.

WeproposetocompletelyremoveemployersfromparticipationintheU.S.healthcaresystem.

Afterall,whatbusinessisitofyouremployertobeinvolvedinanyaspectofyourmedicalcare?Ofcourse,weallwantsomeoneelsetopayforourexpensivehealthcare,andcorporateemployerssureseemlikeagoodsourceofmoney,butthisismuddled


thinking.Itmakesnosensetoinvolveemployersinhealthcaredecisions,forthesamereasonthatwedon’twantemployersmakingdecisionsaboutwhowemarryorwhatcolorwepaintourkitchens.Healthcaredecisionsshouldnotinvolveunnecessarypartiesandtheexistingsystem,inwhichaprofit-orientedcorporationisinvolvedinaperson’shealthcare—indecisionsaboutyourmedicalcare—makesnosense.Amongotherproblems,itaddsinefficiencywhichincreasescosts.Asanexampleofoneinefficiencyofthepresentsystem,considerthediscriminationthatnowoccursagainstelderlyworkersandemployeeswithhealthissues.Ourcurrentsystemmakeselderlyorunhealthyworkersmorecostlytoemployers,andtheyaredefinitelybeingdiscriminatedagainsttoday.Butifsuchpeoplearewillingandabletoperformthework,whyshouldtheybearbitrarilylockedoutoftheworkforce?Theyhaveanequalrighttoemploymentandourcountryneedstheircontribution.Forcingemployerstobeinvolvedinhealthcareintroducesinefficiencies,suchasthis.Asanotherexample,considerthelargenumberofyoungpeoplewhoonlyseemabletofindpart-timejobs.Onereasonissimple:Manyemployersarelimitingthenumberofhourstheiremployeescanwork,becauseincreasinganemployee’shourswouldrequiretheemployertoprovidehealthinsurance,therebyaddinganadditionalcosttotheemployer.Thegovernmentwantedpeopletohavehealthinsurancesotheymadealawrequiringemployerstoprovideitincertaincircumstances.Theemployersrespondedbyreducingthehoursanemployeecanwork.Thisisanexampleofthe“lawofunintendedconsequences,”whichhasmadepart-timeworkerslessexpensivethanfull-timeworkers.Insteadoffullyachievingthegoal,thegovernment’srulesarereducingthenumberofhoursthatsomeemployeescanwork.Obviously,wedon’twanttocreateanenvironmentwherecompanies,actingintheirownself-interest,reduceagivenworker’shourswhentheywouldotherwisepreferthattheemployeeworkedmorehours.Anyeconomistknowsthis:ifthegovernmentwantstoincreaseemployment,itneedstoreducelaborregulations.Anylawsuddenlyendingtheinvolvementofcorporationsinhealthcarewouldbeablunt-forceblowandcausesignificantdisruption.Soourproposalistoeliminatethedeductibilityofanyandallhealthcarecostsasabusinessdeductionforemployers


and—atthesametime—totaxallhealthcarebenefitsinanyformasnormalincometoemployees.Theeconomicincentiveofthis“doubletaxation”willencouragebusinessestocompensatetheiremployeeswithwagesinsteadofbenefits,removingtheemployerfromthehealthcarecomplex.Youmightreactbysayingthatthisisaterribleidea!Itwouldresultinendingalotofpeople’shealthcare.Mostemployeescannotaffordtopayfortheirownhealthinsurance,andtheywouldsuddenlyhavetheirhealthinsuranceterminated.Keepinmindthatthemoneydoesn’tjustdisappear.Theemployerscan,iftheychoose,simplygivethemoneytheywerepayingforhealthinsurancedirectlytotheiremployeesintheformofhigherwages.But,somepeoplewillsay,“Employerswouldn’tdothat,theywouldjustkeepthemoney.”Yes,theycoulddothis.Butinafree-marketsystem,theplayersmustbefreetomaketheirowndecisions,andthisincludesthenegotiationsbetweenemployerandemployee.Inatrulyfreemarketplace,employeesarefreetodemandhigherwagesandtoquitandfindworkelsewhereifanemployerdoesn’tcompensatethemwellenough.Somepeoplewillrespondbysaying,“We’dhavetoprotecttheworkersandforcetheemployerstopaythemmore.”Ifthisisyouropinion,thenitisstatedveryclearly:Yourgoalistoforceemployerstopaytheirworkersmore.Ingeneral,suchpoliciesareinoppositiontofree-marketeconomics.Thegoalofgettingemployerstobenicertotheiremployeesisunrelatedtowhetheremployersshouldbeallowedtointerfereinthemedicaldecisionsoftheiremployees.Whetherornotyouwantthegovernmenttoforceemployerstopaytheiremployeesmore,itiscriticalthatitisdonedirectly,andthroughfederalmandatesthatkeepemployersinvolvedinhealthcare,whichisnottheirbusiness.Wemustremoveemployersfromthehealthcaresystem.Employerswillbeencouraged—throughthisnewtax—toshifttheircurrenthealthcareexpensesdirectlytotheiremployeesintheformofincreasedwages.Theywillwanttodothistoavoidthedoubletaxation.Notethatifanemployersimplyshiftstheirhealthcareexpensestotheiremployees,thereisnoconsequencetotheirprofit-and-lossstatements.Ofcourseremovingthelinkbetweenemploymentandhealthcarewilltakesometimesinceemploymentcontractswillhavetore-negotiated,wageswillhaveto


readjust,andindividualswillhavetogetusedfindingtheirownhealthinsuranceandmedicalcare.But,inthelongterm,itistherightthingtodo.Tomakegreatleapsofprogress,weallneedtofocusonourultimategoal,theplacewe’dliketogetto.Oncewecanseewherewearegoing,gettingtherebecomespossible.OnCapitalismandFreeMarketEconomicsOurfourthproposalismorecomplex,difficulttounderstand,andevenmoreradical.Itisbasedonafundamentalconfidenceincapitalism—theprivate,free-marketsystemwhichAmericaholdsasacorevalue.Thereisreallynoquestion:Thecapitalisteconomicsystemworksbetterthanallknownalternatives.Itencouragesinnovation,greaterproduction,andincreasedefficiency.Capitalismworksbetterthansocialismindeliveringahigherqualityoflifetocitizens,onaverageandoverall.Letusnotforgetthat,inthe19thand20thcenturies,capitalismturnedtheU.S.economyfromalmostnothingintothestrongestintheworldandraisedthestandardoflivingofAmericanswellaboveallothercountries.Wemustacceptcapitalism,andunderstandhowtoharnessit.

Anysolutionmustembracethefree-marketandallowittofunctionifwehaveanyhopeinimprovingourhealthcaresystemandgettingmorebettermedicalcareforlessmoney.

Oppression,Exploitation,andRedistributionofWealthSomepeopleassociatecapitalismwithoppressionofthepoor.Oppressionofthepoordefinitelyoccurs,butdon’tbecomeconfused.Oppressionisnotuniquetocapitalismandthepooralwaysneedprotection.Inamoderncapitalisteconomy,governmentcharityandredistributionofwealthcanexistcomfortablyandoperateeffectively.


Somepeoplepointoutthatcapitalismrequiresgovernmentregulationandintervention,orelsecrimesandexploitationwilloccur.Thisisabsolutelytrue;thereisnoquestionthatgovernmentwillstillbeneededtoinsurethateveryoneplaysfair.Butthereisnothingtosuggestthatmedicalcareisdifferentfromanyotherindustry.Medicalcarecanbedeliveredefficientlyandfairlyinapurelyfree-marketsystem.Intheopinionofmanypeople,thefederalgovernmenthasalegitimateresponsibilityinredistributingwealthtohaltthewideningincomegap.Whetherornotyousupportthisresponsibility,wealthredistributionisadistinctpolicyobjective,verydifferentfromthegoalofimprovingourhealthcaresystem,ofloweringcosts,andimprovingcare.Tomakeprogresswithhealthcarereform,wemustseparateoutthegoalofwealthredistribution.Anyattemptstoredistributewealthmustbedealtwithinotherprograms,andwewon’tdiscussthemhere.Wemustbecarefulofpeoplewhowanttosneakotherpolicyobjectives,suchaswealthredistribution,intohealthcarereform,lestweendupcreatingamessy,inefficientsystemthatachievesneithergoalverywell.Itisimportanttounderstandthatthegoalof“supportingandhelpingourpoorestcitizens”isdifferentfromthegoalof“wealthredistribution”.TheU.S.governmentalreadytakesaveryactiveroleinsupportingourpoorestcitizens.Regardlessofwhetheryouagreeordisagreewiththedegreetowhichthegovernmentshoulddothis,wetakeitasagivenfactthatitwillcontinue.Instead,theproblemwemustaddressishowcanweallowcapitalismtoworkproperly—anddeliveritsbenefitsinthemedicalsector—while,atthesametime,providingsomesortofmedicalsafetynetforallcitizens.TheFreeMarketisNotForEveryoneTherearemanyAmericanswhoaredoingwellandourfirst-tiersystemisforthem.Buttherearealsomanypeopleforwhomacapitalistwillnotwork.Therearemanyreasons.Somepeopledon’thavemuchmoney.Somepeoplehavelowcognitiveability,orareemotionallychallenged.Andmanypeoplehaveverycostlymedicalconditions.Inshort,thereisalargegroupofpeoplewhoare,insomewayoranother,unabletopayforthemedicalcaretheyneed.


Butbeforeturningtoourproposalsforthesecond-tiermedicalsafetynetforthosewhoneedgovernmentassistance,let’sdiscussthefirst-tierandaskhowwecanstructurethehealthcareindustrytomaximizecapitalistcompetitionandfree-marketeconomics.TrustingtheIndividualPatientWebeginbyexpressingourgreatfaithintheindividual.Thistoo,isacoreAmericanvalue.Inparticular,webelievethatallhealthcaredecisionsshouldbemadebypatientsanddoctors.Notthecentralgovernment,andNotprofit-orientedinsurancecorporations.Wetrustpatientstoactrationallyintheirownbestinterests;afterall,whocaresmoreabouttheoutcomethanpatientsandtheirlovedones?Andwebelievethatthemajorityofdoctorsreallycareaboutthewelfareandhealthoftheirpatientsandwillworktoachievewhattheyfeelarethebestmedicaloutcomes,giventhepatients’conditionsandtheavailable—butlimited—resources.Capitalismisbasedonasimpleidea,whichismanypeoplehaveforgottenormisunderstood.Theideaisthis:Twopartiesshouldhavethefreedomtointeractandconductbusinesswhenevertheybothwantto,underwhatevertermstheybothagreeto.Buttheyalsohavethefreedomtoavoidatransactionwhenevertheychoose.Ofcoursetherearecaveatstobemade.Noonequestionsthatthereisaroleforgovernmentinregulatingthingssuchasmonopolies,externalitieslikepollution,fraudandothercrimes,andsoforth.Buttheessentialideaisthateverytransactioninvolvestwopartieswhoarefreetoactinwhateverwaystheyeachthinkareintheirownbestinterests.EliminatingUnnecessaryPartiesUnfortunatelyinhealthcaretoday,therearenotjusttwoparties,butfiveparties:Patient,doctor,insurancecompany,employer,andgovernment.Ourproposalistoeliminateinsurancecompany,employer,andgovernmentfromthedecision-makingprocess.Wetrustdoctorsandpatientsaboveallto


makethemostrationaldecisionssincetheyaredirectlyinvolved,theyhavearealstakeintheoutcome,andtheyhavethegreatestamountofknowledgeabouttheparticularsofthecase.SevenMandatestoCreatetheMedicalMarketplaceToimplementthefirst-tierinourproposedsystem,weimposethefollowingsevenmandates.Togethertheycreateapurelyfree-marketmedicalhealthcaresystem,vastlydifferentthantoday’ssystem.1. Allhealthinsurancepaymentsmustgodirectlytothepatient,andnottothedoctororotherserviceprovider.

2. Allinteractionbetweeninsurancecompaniesandmedicalcareprovidersiseliminated.Awallbetweeninsurancecompaniesandmedicalprovidersmustbeerected.

3. Doctorsandotherhealthcareprovidersservetheirpatients,andnooneelse.Theycontractdirectlywiththepatients,billingthemdirectlyforanyservicesrendered.

4. Insurersmustinteractwithpatientsdirectly.Patientsmustbetrustedtointeractwithinsurers.Thepatientbecomestheoneandonlycustomerofthehealthinsurancecompany.

5. Doctorsandpatientsmustbetrustedtomakegooddecisionsaboutmedicaltreatmentswithoutanygovernmentorinsuranceoversightandcontrol.Theinsurancecompaniesandthegovernmentshallnotinterferewithorinfluencemedicaldecisions.Neitherthegovernmentnorinsurancecompaniescandictatetodoctorsorpatientswhatpricestochargeorwhichproceduresareallowed.Patientsandmedicalcareprovidersarealwaysfreetochoosenottodobusinesstogether.Thechoicesthatpatientsmakewillnotalwaysbegoodandwillsometimesbereallybad,but—onaverage—theirdecisionswillbemorerational,andmoreeconomicallyefficientthandecisionsmadebygovernmentorbycorporatefiat.


6. Alldoctorsandhealthcareprovidersoperatinginthefree-marketfirst-tiersystemarefreetosetpricesastheywish.Thereshallbenogovernment-regulatedorfixedprices.Doctorscanchargewhateverpricestheywant.

7. Healthinsurancecompaniesshallprovidetheirservicesdirectlytopatients.Wemusttrustpatientstospendtheirmoneyonhealthinsurancewhen—andinsuchwaysas—theyfeelitbenefitsthem.

TheBasicScenarioApatientgoestoadoctor,orothermedicalprovider,anddecidestopurchasesomemedicalservice.Aftertheserviceisperformed,thedoctorbillsthepatient.Thepatientisresponsibleforpayingthedoctor.Thepatientmayormaynothavehealthinsurance.Andthatinsurancecompanymayormaynotreimbursethepatient.Butthekeyisthatthesecondtransaction—thereimbursement—remainsanissuebetweenthepatientandtheinsurancecompany.Whatwaspreviouslyacomplexinteractioninvolvingpatient,doctor,andinsurancecompanyissplitintotwoseparateandindependenttransactions.Thereisafree-marketformedicalcareandthereisafree-marketforheathinsurance,andtheyareisolatedfromeachother.Howwillthisworkinpractice?•Foratypicallow-costprocedure,thepatientwillpaythedoctorimmediately.Simultaneouslythepatientwillasktheirinsurancecompanyforreimbursement,perhapsbyforwardingthemacopyofthebill.Theinsurancecompanywillthensendachecktothepatient.•Forahigh-costprocedure,thepatientwouldprobablycontacttheinsurancecompanyforpre-approvalortofindouthowmuchtheinsurancecompanywillpay.Thepatientmightelecttonegotiatethepricewiththedoctor.Insomecases,apatientmightshoparoundforlowercostprovidersorchoosealess


costlyprocedure.Inothercases,apatientmightchoosetoforegosomecostlyuncoveredprocedurealtogether.•Somepatientsdonothaveexcesscashandtheywon’tbeabletopaythedoctoruntilaftertheinsurancecompanyhassentthemthereimbursement.Areasonablestandardforpayingallmedicalbillsis30days.Areasonablestandardforinsurancecompaniesisthattheywillreimbursepatientspromptlywithin2weeks.Ifinsurancecompaniesaregoingtopay,theyneedtodoitpromptly,within2weeks.•Doctorsmightrequirepre-paymentforsomeprocedures,ashappensinotherindustriesalready.Thiswillalwaysbetheirchoice.•Insteadofobtainingpreauthorizationfromaninsurancecompany(asmighthappentoday),thepatientcanaskthedoctorormedicalprovidertogenerateaprice-quoteinadvanceoftheprocedure.Itisthenuptothepatienttonegotiatewiththeinsurancecompany.•Insuranceindustrygroupsarefreetopromotestandardizedbillingproceduresandformatsfordoctorsandmedicalproviderstouse,inordertomaketheirreimbursementproceduremoreefficientandreducetheburdenonpatients.

PotentialProblemsObviously,therewillbedisputesbetweenpatientsandinsurancecompanies,particularlywhenaninsurancecompanyfailstoreimburseapatient.Today,thereisalarge,existingbodyofcontractlawthatdealswithcorporatemalfeasance.Insurancecompanieswillbefinedand/orsuedforbreachofcontractwhentheyfailtoreimbursepatientsastheyhadpromised.Thereisalegitimateroleforgovernmentinregulatinginsurancecompaniesandmakingsuretheybehaveandliveuptotheirpromises,justasthereisforotherindustries.Alsoinsurancecompaniesthatcontinuallycheattheircustomerswilleventuallybepushedoutofbusiness.


InsuranceCompanieswillServePatientsTheradicalsuggestionwearemakinghere—forbiddingtheinsurancecompanytointeractdirectlywithdoctorsandhealthcareproviders—forcestheinsurancecompaniestorecognizeandcatertotheirultimatecustomers,thepatients.Thisiswherecapitalismwillshowitscreativeforce.IncentivizingDoctorsandPatientsIntoday’ssystem,thereisalackofmotivationfordoctorsandpatientstoavoidexpensive,unnecessaryprocedures.Weassumemostdoctorsandpatientsarehonestandresponsible.Buthumannatureiswhatitis.Whetherwelikeitornot,wemustacceptthatpeopleactontheironself-interest.Today,doctorsandpatientsarequicktoorderexpensiveprocedures.Patientswantthemostcaretheycangetanddoctorswanttogivethemostcaretheycan.Ourplanwillincentivizedoctorsandpatientstobecomecost-conscious.Asaresult,lower-costoptionswillbeconsideredandmyriadefficiencieswillbediscoveredandadopted,outoftheself-interestofdoctorsandpatients.Withourproposal,insurersmaystillpayforsomeexpensiveandunnecessarytests,butatleastpatientswillnowseethebillsandberesponsibleforpayingthem.Underourproposal,doctorsandpatientswillbeencouragedtomakerational,economicallysensibledecisionsaboutmedicalcare.Pressurewillbeappliedtothepeoplemakingthemedicaldecisions:patientsandprovidersofmedicalcare.ThePatientistheCustomerOurproposalwillforcetheinsurancecompaniestotreatpatientsascustomers.Webelievethatthispressureoninsurancecompanieswillforcethemtoprovideauseful,cost-effectiveservicetopatients.Wetrustconsumerstomakesound,economicallyrationaldecisionsabouthealthinsurance.


Ofcoursemanypeoplemakefoolishchoices,suchasfailingtopurchaseanyhealthinsurance.Then,whentheyneedmedicalcare,suchpeopleareinserioustrouble.Wediscussthislater,whenwediscussthesecond-tiersystem.Butfirst,letusrecognizethatdoctorsandmedicalcaregiverswillnotlikehavingtodealwithpatients.•Patientscanbeuniformedanduneducatedaboutmedicalprocedures.•Patientscanbesick,elderly,ormentallyincompetent.•Patientscanbefinanciallyirresponsibleorpoor.•Patientscanbeunreliablewhenitcomestopayingtheirbills.

Nevertheless,theresponsibilityformakingallmedicaldecisionsmustfalltothepatientsandmedicalcaregivers,evenifthisputsadditionalburdensonthedoctorsandcaregiverstoeducatetheircustomersandtospendmoreeffortonbillcollection.Thepatientisultimatelytheconsumer.Medicalcaregiversmustcatertotheircustomers,howeverdifficultthismaybe.Thisiscapitalism.Inafree-marketeconomy,participantsarealwaysfreetoavoidatransactionandthismeansthateverydoctorisalwaysfreetoturnawaycustomerswhodonotpay.WhatExactlyisInsurance?Insurancecompaniesprovideausefulservice,butitiscriticaltodistinguishbetweeninsurancecompaniesandhealthcareproviders.Insurancecompaniesreducerisk,whilehealthcarecompaniesprovidemedicalservicesforafee.Today,thesefunctionsareoftenmixedtogether.Tomakeprogress,weneedtodiscusstheseparatefunctionofinsurance.Insuranceisusefulwhenthereisasmallpossibilityofsomethingverybadhappeninginthefuture.Thisbadeventiscalleda“threat”:Athreatisstatisticallyimprobable,whichjustmeans“highlyunlikely.”Butifthebadthinghappens,itwillbeverybadandwillcostalotofmoney.Examplesofhealththreatsinclude:contractingararecontagiousdiseaseorgettingadiagnosisofbraincancer.Thesetragiceventsareveryunlikely,butiftheyoccur,


theywillbeverycostly.Insuranceagainstthese“healththreats”isagoodidea,unlessyouarewealthyenoughtopayforyourcaredirectly.Avoidinginsuranceandelectingtotakeontheriskyourself,payingallcostsout-of-pocket,iscalled“self-insurance.”Itappealstowealthypeopleandthosewhoprefertogambleandtakerisks.Let’sreviewthebasicideasofinsurance,usinghomeinsuranceasanexample.Everyyear,afewpeopleareunluckyandtheirhomesaredestroyedbyfire,hurricane,etc.Inthecaseofhomeinsurance,averylargenumberofpeoplepayasmallyearlypremium,whileaverysmallnumberofpeoplereceiveahugepaymenttorebuildtheirhomes.Atthebeginningoftheyear(beforethefires,hurricanes,etc.),allhomeownersfaceathreat.Afewhomeswillbedestroyed,butwecannotknowaheadoftimewhichhomesitwillbe.Theimportantpointisthatallhomeownersfaceaprobabilitythattheirhomewillbedestroyedinthefuture.Thethreatitselfisarealcostofowningahomeandeveryhomeownerhasthiscost,althoughthecostissmall.

Itisimportanttounderstandthatthethreatoffuturedisasterisareal(althoughsmall)costtoallhomeownersinthepresent,sinceallhomeownersfaceapossibilityofdisaster.Similarly,thepossibilityoffuturemedicalcostsisarealcostinthepresenttoeveryoneofus.

“Risk”hasaspecificmeaningineconomicsandstatistics.The“threat”ofhomedestructionisprettymuchthesameforallhouses,butdifferenthomeownerscanchoosedifferentlevelsofrisk.Highriskimpliesthatastatisticallyunlikelyeventmayoccur,butifithappensthecostswillbeveryhigh.Lowriskmeansthatthereismuchlessvariability;thecostsandtheirlikelihoodsarepredictable.Withoutinsurance,allhomeownersfaceahighrisk.“Highrisk”meansthatafewhomeownerswillfaceahugeout-of-pocketexpensewhilemosthomeownerswillhavenoexpense.Withinsurance,theriskisreduced.Evenifthehomeisdestroyed,theout-of-pocketcostsarestillsmallandpredictable.

Thefunctionofinsuranceistoreducerisk,notreducethecostofthethreatitself.


Thepurposeofinsuranceistospreadtheriskaround,therebyreducingtherisk.Insteadofaveryunlikelybutverylargecostinthecaseofadestroyedhouse,everyhomeownerpaysasmallbuthighlypredictableamounteverymonth.Thosepeoplewhounderstandstatisticsandprobabilitywillknowthattheinsurancecompanydoesnotchangethe“expectedcost”ofthethreatofahomebeingdestroyed.Thesmallprobabilityofaverylargeexpenseisequaltoasmall,highlypredictableexpense.Likewise,inthemedicalarea,insurancedoesnotsomehowreducethecostofhealthcare;insuranceonlyreducestheunpredictabilityoftheexpectedpayments.Wemustallunderstandthatinsurancecompaniescanneverbeexpectedtoreduceourcosts;onlytomakeourpaymentsmorepredictable.Theserviceprovidedbyaninsurancecompanyistochangeahighriskgambleintoalowriskpredictablemonthlycost.Theinsurancecompanydoesn’treducethecostofthethreatitself.Manyhomeownersarewillingtopayforthisreductioninriskandthisallowstheinsurancecompaniestomakeaprofit.

Insuranceneverreducescost.Infact,thecostofreducingtheriskisanadditionalexpense,ontopofthecostofthethreatitself.

Ifyouownahome,thereisathreatthatyourhomewillbesuddenlydestroyedbyafireorhurricaneandthecostofthisthreatisarealcost.Thecostofthethreatcannotbeavoided.Thehomeownerhasonlythechoiceofwhethertogambleornot.Arisk-lovinggamblerwillnotbuyinsurance,whileamoreconservativehomeownerwillbuyinsurancetoreducetherisk.Buteitherway,thereisnoquestionthathomeownersultimatelypaytheexpensesassociatedwithfires,hurricanes,etc.

Inthesameway,healthinsurancecanneverreducethecostofmedicalproblems.Allhealthinsurancecandoisreducetheriskassociatedwithunpredictable,randomfuturebadluck.

Thepracticalconsequenceofthisisthatinsurancecanneverpayforexpectedmedicalcosts.Inthefinalanalysis,thecostsassociatedwithyourhealthmusteitherbepaidbyyoudirectly,orbysomeothergroupwhichwillbeforcedtosubsidizeyourmedicalcare.


Allhealthinsurancecandoisreducethevariabilityandsmoothouttherandomunpredictableevents.Peopleinpoorhealthhavehighexpectedmedicalcostsandinsuranceispowerlesstochangethatfact.BuyingInsuranceAftertheFireHereisakeyquestion.Itseemssilly,butthinkingaboutitwillhelpclarifythings.Whydon’tpeoplejustwaituntilaftertheirhouseisdestroyedbyfireandthenbuyhomeinsurance?Thisisacrazyidea.Aninsurancecompanywouldneveragreetothis;itwouldmeancertainlossesfortheinsurancecompany.Tomakethispossible,thegovernmentwouldhavetoenactalawrequiringinsurancecompaniestosellhomeinsurance,evenafterthehousehasalreadyburneddown.Andwithsuchalaw,onlyafoolwouldbuyhomeinsurancebeforetheirhomeburneddown;itwouldbeawasteofmoney.Obviouslythisscenarioiscompletelyunworkable.Withthiscrazypolicy,insurancecompanieswilleithergobankruptorwillhavetochargeapremiumthatissolargeitequalstheentirecostofthehome.Inotherwords,thelawmandatingthatinsurancecompaniesmustsellinsurance,evenafterhouseshavealreadyburneddown,wouldeffectivelydestroythepurposeandfunctionofinsurance.Insuranceisausefulfunction.Butinordertohaveafunctionalinsurancesystem,therehastobeastatisticalriskthatsomeeventsmayormaynothappeninthefuture.Sellinginsuranceaftertheoutcomeisknownmakesnosense.Risknolongerexists,sotheconceptofinsurancebecomesmeaningless.


ObamacareIgnoresPreexistingConditions

“AllMarketplaceplansmustcovertreatmentforpre-existingmedicalconditions.Noinsuranceplancanrejectyou,chargeyoumore,orrefusetopayforessentialhealthbenefitsforanyconditionyouhadbeforeyourcoveragestarted.” — www.healthcare.gov

Obamacareincludesamandatethathealthinsurancecompaniesmustsellinsurancetopeoplewithoutregardtotheirexistinghealth.Inotherwords,theinsurancecompanymustinsureapersonwhohasalreadybeendiagnosedwithanexpensivediseaseandcannotadjustthepremiumrateaccordingly.Bythislogic,insurancecompaniesmustsellhomeinsurance,evenafterthehousehasburneddown.Ofcoursesomethingiswronghere.WhateverObamacareisdoinghere,itisnotinsurance.Let’sbackup,slowdown,andsortthingsout.PreexistingConditions:InsuranceisTooLateManyAmericanstodayhavepreexistingmedicalconditions.Apreexistingmedicalconditionisnotsomethingthatmayhappen;itisaconditionthatalreadyexists.Herearesomecommonpreexistingconditions:

•ArteriosclerosisandCardiovascularDisease•Cancer•Stroke•RespiratoryDisease•Diabetes•Alzheimer’sDisease•KidneyDisease

Forpeoplewiththeseconditions,thereisnolongeranyfunctionforinsurance,asitisproperlydefined.Statistics,probability,andriskarenolongerissues.There


isnotafuturethreat;thefuturehasalreadyarrivedforthemandthemedicalconditionexists.Unfortunately,forpeoplewithdiagnosedmedicalproblemslikethese,itisnowtoolateforinsurance.Thetimetobuyhomeinsuranceisbeforeyourhouseburnsdown.Likewise,thetimetobuyhealthinsuranceiswhileyouarehealthy,beforethemedicalneedarises.Afterthemedicalneedarises,thereisnothingbutcost.Andformanymedicalconditions,thecostisvery,verylarge.Withoutinsurance,youtakeagambleandyoumaylose.ExpectedFutureHealthcareCostsManyAmericanshaveconditionswhichmakefuturehealthproblemslikely.Theseinclude:beingoverweight,smoking,drugandalcoholabuse,poornutrition,variousgeneticissues,andthepresenceofsecondaryhealthconditions.Therearealsomanyelderlypeoplewho,whilestillhealthy,willinevitablyhavehealthproblemsinthefutureastheygetclosertotheendoflife.Allofusfacethethreatoffuturemedicalexpenses.Itiscorrecttothinkofthatfuturethreatasarealcostthatcanbemeasuredtoday.Somepeoplewhoarenowhealthyhaveahighprobabilityoflargemedicalexpensesinthenearfuture.Others,suchasahealthyyoungperson,areverylikelytoremainhealthyformanyyears.Theyhavealowprobabilityofhighcosts.Butallofuswillgrowold,withtheinevitabledeclineinhealthasweage.EachAmericanhasadifferentmedicalhistory,differentgenes,differentexistingconditions,differenthealthbehaviors,anddifferentriskfactorsforfutureproblems.Tomoveforward,weneedtotalkabouthowmuchaperson’smedicalcareisgoingtocost.It’sgoingtotakeadifferentamountofmoneytoprovidethemedicalcareforeachperson,sinceeachpersonhasadifferenthealthprofile.Thecostofcaringforapersonconsistsofthemoneyneededforexistingmedicalproblems,plusthemoneyneededformedicalproblemsthatariseinthefuture.


Aperson’snetmedicalcostisthesumofcurrentmedicalexpenses(totreatexistingconditions)andexpectedfuturecosts(totreatconditionalthreatsformedicalproblemsthatmightariseinthefuture).

Letusdefineaperson’s“healthliability”asthatperson’stheexpectedcostforfuturemedicalcareplustheknowncostsfortreatingexistingmedicalconditions.Thehealthliabilityistheamountofmoneythatisrequiredforthemedicalcareofaparticularperson.Weprefertheterm“healthliability”sinceiscombinesbothexistingcostsandexpectedfuturecosts.Eachperson’s“healthliability”(thenetexpectedhealthcarecost)isdifferent.Somepeoplearehealthierandfacealowerhealththreatforfutureproblems.Their“healthliability”islow,sincetheyhavelowexpectedfuturecosts.Otherpeoplearelessfortunateandhavemanymorehealththreats,includingthoseofcurrentlyexistingmedicalconditions.Thesepeoplehavealarger“healthliability”.

Itisirrefutablytruethatdifferentpeoplehavewidelydifferent“healthliabilities.”Themedicalcareofsomepeoplewillbemuchcostlierthanothers.

Unfortunately,insurancecannotchangethisunderlyingreality.Somepeoplehavegreatermedicalneedsthanothers,andinmanycasesthedifferencesarehuge.Ahealthyyoungpersonhasalmostnomedicalneed,whileotherpeopleareundergoingextremelyexpensivetreatmentsforseriousmedicalconditions,withenormouscosts.Thedifficultquestionis:Whatshallsocietydoforthosepeoplethathaveveryhigh“healthliabilities”?Wehavediscussedthefirst-tiermedicalmarketplace.Forpeoplewhoareabletoaffordtheirownmedicalcosts(bothexistingandexpectedfuturecosts),thereisnoproblem.Thesepeoplecanandshouldpayfortheirowncareinthefree-marketmedicalsector.Thedifficultquestionhasasimpleanswer:thisgroupofpeoplewillpayfortheirowncare.Asasociety,wewanttogettoaplacewherethemajorityofcitizensplanfortheirownmedicalcosts,wheremostpeopletakeresponsibilityforboththeircurrentandfuturemedicalcosts.Formany,thisinvolvesbuyinginsurancetoreducetheriskof


unlikelyhighcostmedicalconditions.Formanypeople,itinvolvessavingforfuturemedicalexpenses.Buttherearemanypeoplewhocannotaffordtopayfortheirhealthliability.Thismaymeanthattheyareunabletopayforthetreatmentthattheyneedtoday.Butitmayalsomeanthattheirexpectedfuturehealthcostsaregreat.Theymaybehealthytodaybuttheymaybeunabletoaffordtheirfuturemedicalcosts.Theirhealthmaybesopoorthattheycannotaffordtopurchaseadequatehealthinsurance.Forpeoplelikethiswhoareunabletoaffordinsurancetocoverfuturemedicalcosts,thereisaproblem.Theyneedsomeoneelsetopayfortheirmedicalcosts.Forpeoplewithpreexistingmedicalconditionsthatexceedtheirabilitytopay,someoneelsemustpaytheirmedicalexpenses,iftheyaretohavethecaretheyneed.Wemustconfrontthefollowingreality.

Peoplewhocannotaffordinsuranceagainstfuturehealththreatsaredependentonthesubsidiesprovidedbyanothergroup.Apersonwhose“healthliability”exceedstheirabilitytopay,mustrelyonsomeoneelsetopay.

Itisanindisputablefactthattherearemanypeoplewhocannotaffordtopayforthemedicalcarerelatedtotheircurrentcondition.Andtherearemanypeoplewhofuturehealthissoproblematicthatnoinsurancecompanywilloffertheminsuranceinafreemarket,atleastatapricetheycanafford.Wewilldiscussthisgroupofpeoplelater,whenwediscussthesecond-tiergovernmentsafetynet.Fornow,westayfocusedonthemajorityofpeoplewiththemostmoney,whocanaffordtopayfortheirownmedicalcare,currentmedicalexpenseandexpectedfuturecosts.


ReorganizingtheInsuranceIndustryNext,weturntotheinsuranceindustry,asitwillbereconstituted.

Insurancecompaniesprovideausefulservice,namelytoreducetheriskoffutureunknownbadevents.

Inthecaseofhealthinsurance,therearemanybadthingsthatmayhappenbutprobablywillnot.Healthinsuranceagainstfuture,unlikelymedicalproblemsmakesgreatsenseformostpeople.Wewantthisserviceandweneedthisservice.Forexample,thelikelihoodofadiagnosisofbraincancerisverylow,butthecostofbraincancertreatmentisveryhigh.Therefore,itmakessensetopurchasehealthinsurancethatcoversadiagnosisofbraincancer.Webelieveinthepoweroffree-marketsandwebelievethatindividualsandinsurancecompaniesshouldbefreetoengageinsuchtransactionsthataremutuallyagreeabletobothparties.Theyshouldnotbeforcedtoparticipateintransactionsthataredisagreeable.Therefore,thefollowingmandatesshallapplytothehealthinsuranceindustry:• Nopersonisforcedtobuyhealthinsurance.• Healthinsurancecompaniesmakepaymentsdirectlytotheircustomers,nottodoctors,hospitals,orothermedicalproviders.

• Healthinsurancecompaniesarefreetoscreentheircustomersandchargepremiumsbasedonwhateverinformationtheychoose.Theycanbasepremiumratesonage,gender,race,preexistingmedicalconditions,health-relatedbehaviors,etc.

• Healthinsurancecompaniesarefreetosetpremiumratesastheychooseandtoenactwhateverdeductiblestheywant.


• Healthinsurancecompaniesarefreetowritepoliciesthatexcludevariousconditions,includingpreexistingconditions.

• Healthinsurancecompaniescontractwithandinteractwithpatientsonly,andnotwithmedicalcareproviders.

• Theinsuranceindustryisafinancialindustryand,assuch,itwillberegulatedandpolicedbythegovernment.

• Allinsurancecoverageshalloccurwithintwoyearsafterthecollectionoftheassociatedpremium.Immediatelump-sumpayoutsareencouraged,whereappropriate.

• Statelawsrestrictingtheinsuranceindustryshallbeeliminated.Insurancecompaniesshallbefreetodobusinesswheretheychooseunderasinglesetoffederallaws.

Thefirstcondition—thatnooneisforcedtobuyinsurance—isafundamentalconditionforafree-market.TodaymanypeoplecomplainaboutObamacarebecausetheyareforcedtoenterintoatransactionagainsttheirchoice.Whenpeoplearefreetochoose,thentheyaremorelikelytoaccepttheirchoices.Generally,peopleareunhappywheneverthegovernmentforcesthemtoactandtheywillbemoreagreeablewhentheyonlypurchasetheinsurancetheywant.Thesecondcondition—thatinsurancecompaniesmaketheirpaymentsdirectlytotheircustomersandnottodoctors,hospitals,andothermedicalcaregivers—putsthepatientinthecenterofthedecisionmaking.Inourplan,patientswillhavefullresponsibilityincontractingwiththeirmedicalcareproviders.Patientswillnowhaveadramaticallyincreasedroleindecisionmaking.Increasedefficiencyinmedicalcarebecomespossibleoncewestophidingthemoneyfromtheprimarydecisionmaker,thepatient.


Age,Gender,andRaceAffectHealthExpectationsPremiumdifferentiationbasedonage,gender,andraceisjustifiedbecausethesefactorshaverealandunquestionableconsequencesforhealthoutcomes.

Differentdemographicgroupshavedifferent“healthliabilities.”Somegroupshavegreateraverageexpectedmedicalcoststhanothers.Thereiscertainlythephilosophicalquestionofwhetherthisisfairorjust.However,thatquestionisnotaddressedhere,sinceitdoesnotaffectouranalysis.Instead,wesimplyrespectscientificrealitythatage,gender,andraceaffectaperson’sexpectedfuturemedicalliability.Sinceage,gender,andracematter,differentdemographicgroupswillcosttheinsurancecompaniesmore.Insurancecompaniesprovidetheserviceofreducingtheuncertaintyoffuturecosts,notreducingthosecosts.Whilewemaywishthateveryonewascreatedequalandthateveryonehadequallygoodhealth,thisisnotreality.Sometypesofpeoplehavegreaterexpectedhealthcoststhanothertypes.Wemustavoidaskingtheinsuranceindustrytoaddressissuesoffairnessorjustness.Weonlyasktheinsuranceindustrytoreducetheuncertaintythateachindividualfacesinhisorhersituation.Clearly,peoplewithcertainpreexistingmedicalconditionsaregoingtocostalotmorethanhealthypeople.Forthesepeople,insuranceistoolate.Theyalreadyhaveaknownmedicalconditionandthereisnolongeruncertaintyorrisk.Ahypotheticalcostforapossiblefutureconditionhasbecomearealmedicalcostforanow-diagnosedcondition.(Ofcourse,insurancemaystillserveafunctionwhenuncertaintiesremain,suchastheexactnatureofthecondition,ortheeffectivenessandprognosisforvarioustreatments.Butthisisaminorcaveatwhichshouldnotdistractus.)


Don’tForceInsuranceCompaniestoSubsidizeGroupsSomepeoplehavegreaterhealthcoststhanothersand,insomecases,muchlargercosts.Intheinsurancemarketplace,wespecificallyavoidanythingthatallowsorforcesonegrouptosubsidizeanothergroup.Wearebeingcarefulheretoguaranteethatamorehealthygroup(withlowerexpected“healthliability”)doesnotendupsubsidizingthecostsofalesshealthygroup(thosepeoplewithagreater“healthliability”).Inotherwords,byallowingtheinsurancecompaniesthefreedomtodiscriminateandsettheirratesaccordingly,weavoidcreatingacharitysystemwithintheinsuranceindustry.

Charityhasaplaceinoursociety,buthidingitwithintheinsuranceindustryismisguidedandwillnotworkaswellasmakingitexplicit.

Insurancecompaniesareallowedtodiscriminatebasedonhealthandsetpremiumsfreely.Byallowinginsurancecompaniestosettheirownterms,weallowthemtoselltheirservicedirectly.Insurancecompaniesmitigateriskandlowertheuncertaintyfortheircustomers.Insurancecompanieshavethefunctionofdeterminingorestimatingaperson’sactual“healthliability”andthentakingtheuncertaintyoutandpresentingthecustomerwithasinglepredictablecost.Healthypeoplewillhavelowerpremiumsthanunhealthypeople,inexactproportiontotheirexpectedfuturehealthcosts.

Insurancecompaniesarenotresponsibleforkeepingpeoplehealthy.Theinsuranceindustrydoesnotexisttosolvetheproblemofthehighcostofmedicalcareortoprovidemedicalcaredirectly.Theonlyfunctionofinsuranceistoreduceuncertainty.Peoplewithpoorhealthstillhavepoorhealth;theirexpenseswillbehigh.Thepurposeofinsuranceisnottoreducethecostofpoorhealth.Insurancecannotdothatanditisirrationaltoaskthatoftheinsuranceindustry.


DeductiblestobeSetbytheMarketConcerningdeductibles,weallowinsurancecompaniestostructuretheirpolicieswithwhateverdeductiblestheyandtheircustomerswant.Manypeoplehaveanumberofsmallmedicalexpenseseveryyear.Forexample,thingslikeminorscrapes,bruises,theoccasionalcold,andminorinfectionscanbeexpectedtooccureveryyear,soitmakessensenottoinsureagainstthese.Smallexpenseslikethesearepredictableandtobeexpected.Thereisnoneedtomitigatetheriskassociatedwiththem;theycansafelyremainuninsured.Thepurposeofadeductibleistoeffectivelyexemptsmallpredictableexpensesfromcoverage.Thisissomethingthatmanypeoplewillwanttodo,sinceitwillnaturallyreducetheirinsurancepremiums.PolicingInsuranceCompanyMisbehaviorInsurancecompaniescanbeexpectedtobehavepoorlyfromtimetotime.Thishappensinmanyotherindustries,too.Capitalismembracestheprofitmotive,althoughweallunderstandthatgovernmenthasaroleinmakingsurethatcompaniesdonotmaketheirprofitsthroughunscrupulousorillegalbehavior.Healthinsurancecompaniesareessentiallyfinancialinstitutions:theycollectmoneyinadvancefromcustomersandusethatmoneytopaytheircustomersbacklater.Therewillalwaysbeanincentiveforthemtorenegeontheirpromisesand,assuch,theyneedthelevelofoversightthatbanksrequire.Forexample,consideraninsurancecompanythatoffersalifetimepolicywithaone-timefixedpremium,protectingthecustomeragainstacollectionofrarediseases.Imaginewhatmighthappenifthepersonhappenstocontractoneoftheserarediseaseslaterinlife.Thecustomerhastheexpectationthattheinsurancecompanywillpayalargelumpsumofmoneytocovermedicalexpensesforthisunexpecteddisease.Effectively,thiscustomerisdepositingmoneyinoneyearforafinancialbenefitthatmaycomedecadeslater.


Forsuchcompaniesthereisatremendousincentiveforthecompanytocollectthemoneyupfrontbutfailtomeettheircommitmentsseveraldecadeslater.Itisafamiliarpattern:Theoriginalexecutivesarelonggoneandthecompanygoesbankrupt.Anyfinancialcompanyofferingalong-termplanmustbehighlyregulatedbythefederalgovernment.Ingeneral,peopleshouldbeverycarefulwhenmakinganyfixed,irrevocablelong-terminvestment.Ahighleveloftrustandfaithisrequired.Forexample,itmayseemreasonabletopurchaseinsuranceagainst,say,T-celllymphomawhenyouareyoungandhealthy.Butdecadeslater,itmaybeimpossibletocollectthepaymentwhenyouareunexpectedlydisabledwiththisdiseaseandlearnthatthecompanyisunwillingorunabletomeettheirresponsibility.Perhapsthecontractcontainssomefine-printburieddeepinalengthycontractortheamounttobepaidoutforthisconditionisunreasonablymeager.Butatthispoint,thepoorpatientishelpless.Becauseofsuchconcerns,weforbidinsuranceinwhichthepremiumsarepaidmorethantwoyearsinadvanceoftheperiodofinsurancecoverage.Ofcourse,manymedicalconditionspersistovermanyyearsanddecades.However,thepurposeofinsuranceistomitigateandreducetheriskofcontractinganexpensivemedicalcondition.Theinsurancecompanymustprovideinsuranceagainsttheoccurrenceofdisease.Diseaseappearsrelativelyquickly—youarehealthyatonetimeandthenyoubecomeunwell—althoughthediseaseorconditionitselfmaypersistforyearsordecades.

Theinsurancecompany’sworkisdoneafterthediseaseonsetsincetheuncertaintytheywereaddressingisnolongerpresent.

Forexample,itmakessensetopurchaseinsuranceagainstadiagnosisofT-celllymphoma,arareandexpensivedisease.Apersonmightreasonablypurchaseinsuranceagainstsuchaunwelcomediagnosis.Whenthatdiagnosisisconfirmed,theinsurancecompanywillthenpayoutalumpsum,accordingtothetermsoftheinsurancepolicy.Thepatientcanthenusethatmoneytopaythecostsassociatedwithtreatmentoverseveralyears.WhatabouttheproblemofpurchasinginsuranceagainstT-celllymphomaoccurringatanytimeduringyourlonglife?Simple:Youwouldwanttopurchaseayear’sworthofcoverageeveryyear.Ifyouremainhealthythisyear,youwillwanttopurchasethesamecoverageagainnextyear.Mostlikely,thecoverageforT-cell


lymphomawouldbeincludedinalargerpolicythatcoveredmanyotherdiseasesandconditionsaswell.Youmightbeconcernedthatthecostofthetreatmentishighlyvariableanddependsonmanythings.Thisiscorrect,butdonotunderestimatethepoweroffreemarkets.Forexample,someinsurancecompaniesmightofferspecialplansforthoseinitiallydiagnosedwithT-celllymphoma,inordertomitigatetheuncertaintiesassociatedwiththisparticulardisease.Thereisanotherconcernaboutinsurancecompanymisbehavior.Humanbiologyiscomplexandmostpeoplehaveverylittleinformationaboutmedicalconditionswhichtheymightacquireinthefuture.Theinsurancecompanieshavemuchmoreinformationandcanbeexpectedtousethatinformationtobamboozlecustomers.Imaginepurchasinghealthinsuranceinoneyearandlearninginthenextyearthatyouareveryill.Imaginethatyoulearnyouhaveanobscureandveryexpensivedisease,butthefineprintofyourinsurancepolicydoesnotcoverthisparticulardisease!Orimaginethattheypay,buttheamounttheypayismuchtoolittletocoverthetreatmentyounowneed!Inaveryrealsense,youhavebeenscammedbytheinsurancecompany.Thisisarealpossibilitysinceanyinsurancecompanycanbeexpectedtohavemuchgreaterknowledgeaboutmedicalconditions,theircosts,andtheirlikelihoodsthananyconsumer.

Unfortunately,wecanfindnootherwaytoprotectconsumersotherthanthroughconstantandpervasivegovernmentregulation,oversight,andauditing.

Inadditionthemarketplaceitselfwillfindnovelsolutions.Withourplan,insurancecompaniesareforcedtocatertotheircustomersand,justasinotherindustries,somecompanieswillprovidebetterservicethanothers.Thosecompanieswithbetterreputationswillbefavoredbyconsumers.Wecanexpectasecondaryindustrytoarise,inwhichinsurancecompaniesareratedandreviewed,justashappensinotherindustries.Itmakessenseforthegovernmenttoformulatevariousstandardizedinsurancepolicies—perhapssimilartothebronze,silver,andgoldplanswehavetoday—inwhichthepayoutratesforvariousdiagnosesarepredetermined,fixed,andstandardized.Theninsurancecompaniescanofferthesestandardproducts,while


retainingthefreedomtosetpremiumsastheywish.Inthisway,consumerswouldhavesomeguaranteethattheyarepurchasingtheproducttheythinktheyaregetting.Freemarketcompetitionworksmosteffectivelywhenthegoodsinvolvedareidenticalandsubstitutable.Thegovernmenthasaroleinmakingthishappen.Finally,weremovestate-by-statebarrierstocompetition.Theprofusionofdifferentstatelawsonlycreatesamorecomplexenvironmentforinsurancecompaniestooperatein.Wewanttoencouragecompetitionandthebenefitsitbrings.Thebestwaytoencouragecompetitionamonginsurancecompaniesistocreateasinglelargeuniformmarket.PatientsWillSeekCost-EffectiveMedicalCareAnimportantaspectofourproposalforafree-marketinhealthinsuranceisthatpatientswillreceivetheproceedsfromtheinsurancecompanyimmediatelyandthemoneywillgostraighttothepatient,nottheirhealthcareproviders.Forexample,whenapatientfindstheyhavecontractedsomeparticulardiseaseorcondition,theymayreceivealargelump-sumpayoutfromtheinsurancecompany,meanttocoverthecostassociatedwiththatdisease.

Afterreceivinganinsurancepayout,thepatientisfreetonegotiatewiththeirmedicalcareproviders.

Withourplan,thereisfullincentiveforeachpatienttochoosethemostcost-effectivetreatments.Anymoneywastedonunnecessaryproceduresismoneythatcouldbespentelsewherebythepatient.Thepatientishighlymotivatedtoavoidunnecessaryorcostlytests,treatments,andprocedures.TherecanbenodoubtthatthiswillbringmedicalexpendituresintheU.S.waydown.Requiringtheinsurancecompanytogivethemoneydirectlytothepatientandallowingthepatientthefreedominchoosinghowtospenditwillresultinachieving


greaterefficiencyinthemedicalandhealthindustries.

GivingpatientstheinsurancemoneydirectlyandallowingthemtochoosehowtospenditwillreduceU.S.medicalexpendituresdramatically.

WhyMakeYoungPeoplePayforOlderPeople?Somepolicy-makershavesuggestedthatweshouldjury-rigtheinsurancesysteminsuchawaythatthepremiumspaidbyyoungandhealthypeopleareavailabletotheinsurancecompaniestopaythemedicalexpensesincurredbyolderorlesshealthypeople.ThisisoneofthecoreideasbehindObamacare.Anysuchschemewillfaceanever-endinghead-windofnon-compliance:By-and-largeyoung,healthyworkerssimplydon’twanttopayforotherpeople’smedicalcareandthey’lltryallkindsofclevertrickstoavoidanysuchpayments.Wemustacceptthisreality.Andreally,whocanblamethem?Askingonegroupofpeopletopaythecostsofanothergroupofpeopleisessentiallyaskingthemtobecharitable.Thegovernmentcanalwaysaskpeopletogivemoney,butunfortunatelyvoluntarycontributionsneverseemtogeneratequiteenoughmoney.Thisisasimplefactofhumannature.Instead,thegovernmentmustforciblycompelpeopletocontribute.Weneedtosteerawayfromanysuchinterferenceintheinsurancemarketplace,andkeepthefirst-tiermarketplacefree.

TheObamacarepolicyofmakingyounghealthypeople—whodonotneedinsuranceormuchinsurance—purchaseinsurance,isreallyaformof“forcedcharity,”mandatedbythefederalgovernment.

Whendescribedintheseterms,wecanseethatObamacareistryingtoachieveapolicyobjectiveofcharitybutisessentiallysneakingitinundertherug.


Wewilladdressthecharityobjective—thatit,askingyoung,healthyworkerstopaythemedicalexpensesofolder,lesshealthyAmericans—lateron,whenwedescribeoursecond-tiersafetynet.TheProblemofMalpracticeAwardsandTortReformUnfortunatelyproblemswilloccasionallyariseduringmedicalprocedures,anddoctorsorothercaregiversmakemistakes.Thesemistakescanresultinverybadoutcomesforthepatients.Forexample,apatientmayelecttohavesomesurgerywithahighlikelihoodofsuccess.Theyexpectafullrecovery,butendupbeingparalyzedandinterriblepain—orevendead—perhapsbecausethedoctormadeapoordecisionorfailedtorespondappropriatelytosomeinformation.Asanotherexample,perhapssomepatienthasarare,fatalreactiontoamedication.Thisisjustrandom,badluck,eventhoughthedeathmighthavebepreventedifthecaregivershadbeenmorecloselymonitoringthepatient.Whathappenstodayaftersuchadisaster?Thelawyersarecalledin,thereisamalpracticelawsuit,andthedoctorisforcedtopayahugesumofmoneytocompensatethepatient.Intoday’ssystem,doctorsandmedicalcaregiversfearmalpracticelawsuitsandbuyinsurancetoprotectthemselves.Malpracticeinsuranceisexceedinglyexpensiveandisamajorcontributortothehighcostofmedicalcaretoday.Intoday’ssystem,doctorsorothercaregiversmakemistakesor,forotherreasons,theoutcomeislessthanexpected.Insomecases,minorerrorscanresultintrulyawfuloutcomes.Thepatientsandtheirlovedonesarequiteupsetandthejudgeorjuryfeelsthattheyhavebeensomehowwronged.Inattempttocompensatethevictim,alargeamountofmoneyisawarded.Inmedicine,accidentsareinevitableandoftentimestheoutcomesaremuchworsethanhopedfor.Buttheproblemisthatthesehugemalpracticeawardsarehurtingthesystemasawhole.


Webeginbymakingtheseobservations:• Medicalcareisfullofuncertaintyandrandomvariation.• Doctorsandothermedicalcaregiversaregenerallydoingtheirbest.• Innocentaccidentswillhappenoften.Medicalcarethatoughttoworkwilloftenfail.

• Thereisnoguaranteethatmedicalproblemscanbefixedorcured.Wecannotalwaysavoidpainandsuffering.Wecanneveravoiddeath.

• Mostpeoplehavetroublereasoningwithprobabilityandstatistics.Whenthingsgowrong,theyseenothingmorethanamistakethatistoblame.

• Malpracticelawsuitsmustbelimitedifwearetoreducethecostofmedicalcare.

Eachoftheseisself-evidentlytrue.Medicineisfullofuncertainty.Thereisoftenincompleteknowledgeaboutapatient’sconditionorwhatexactlytheproblemis.Sometimescaregivershavetoactwithincompleteinformation.Medicineandhumanbiologyareverycomplexsubjectsandweknowonlyasmallpartabouthowthehumanbodyworksandhowvariousdiseasesandconditionsfunction.Onethingisveryclear:thereisatremendousamountofrandom,statisticalvariationbetweendifferentpatients,differentpathologies,differentdrugs,andhowtheyallinteract.Thepracticeofmedicineisimprecise,unpredictable,andreliableonlyinastatisticalway.Medicalcaregiversaretrainedtoactconfidentandcertain,buttheyareoftendoinglittlemorethanguessingandbettingontheoddswithincompleteunderstandingandinformation.However,webelievethatdoctorsandothercaregiversare,forthemostpart,tryingtheirhardesttohelptheirpatients.Unlikesomeotherlesssavoryprofessions,medicalworkersarealmostalwayswell-meaninganddoingwhatevertheythinkisbestforthepatient.Insomeprofessions,workersaresimplyouttomakemoneyandcannotbetrusted,butmedicalworkersare,onaverage,ethicallygood


peoplewhoareworkingtomakethelivesoftheirpatientsbetter.Thefieldtendstoattractthissortofcaringpeople.Wecannotdenythataccidentshappen.Peoplearehumanandmakemistakes.Medicalcareisverychallengingand,inspiteofeveryone’sbestefforts,therewillbemanystupid,preventablemistakesthathaveverybadresults.Unfortunately,thereisnoguaranteeofhealth.Youdonothavearighttobehealthyorfreeofpain.Governmentlawscanguaranteesomerights,buthealthisnotamongthem.Sadly,manypeoplewillcontracthorrible,painful,fataldiseases.Thisisanunpleasantrealitytoconfront,butnecessary.Wemustallacceptthatunalterabletruththatthehealthoutcomeforsomeindividualswillbeverybad.Naturally,patientsandtheirlovedoneswilllookforsomeonetoblame.Acceptingdiseaseandinevitabledeathisnoteasy.Butinmany,manycases,nooneis“atfault.”Thereissimplynothingthatcanbedoneandsufferingisofteninthenatureoflife.Intheend,wewillalldie.Whenpeopleelecttohaveamedicalprocedureperformed,theymustacceptthatthereissomeprobabilitythatitwillfailorthatbadthingscanhappen.Whenjudgesorjuriesareconfrontedwithaninstanceofsomeerrorormistakeleadingtoahorribleoutcome,theymustacceptthatonlybadluckistoblame.Badluckisnotareasonableexcusefordamageawards.Butmostjudges,juries,andlaypeoplecannotsimplyacceptthat“accidentshappenandnooneistoblame.”Sowemustrecognizethatsufferingusuallydoesn’timplymalpractice.Peoplenaturallyseektoblamesomeoneandtoseekcompensationforthesuffering.Asasocietywemustcometogripswiththerealitythatbadoutcomeswillhappen.Wemuststopblamingmedicalcaregiversforbadoutcomes.Wemuststopcompensatingthevictimsattheexpenseofthedoctorsforsufferingthatoccursasaresultofmedicalproblems.Instead,wemustprotectdoctorsandmedicalcaregiversfromegregiousmalpracticeawards.


Toalterthemalpracticelitigationlandscapeoftoday,weofferthreesimplelaws:

• Doctorsmaynotbeblamedforincompetence,randomaccidents,unintentionalerrors,innocentmistakes,orminornegligencetheymakewhenprovidingcare,eveniftheyresultinextremelypoormedicaloutcomesordeath.

• Patientscannotbecompensatedforsufferingasaresultofmedicalcaretheyreceive,aslongthesufferingisnottheresultofmaliciousorintentionalacts,egregiouscarelessness,orgrossnegligence.

• Apatientmayonlybecompensatedwhencriminalmalpracticeisproved,whichisdefinedasharmcausedbyintentionallymaliciousactsorgrossnegligence.

Wehavecarefullywordedtheselaws,keepingthemsimplesoastogetacrossthemainidea:thedoctororothercaregivercannotbeaskedtopayforabadoutcomejustbecauseheorshecouldorshouldhavedonebetter.Alawsuitisonlyreasonablewhenthecaregiverbehavedupinacriminalway.Inotherwords,themalpracticemustrisetothelevelofacrime.Herearesomeillustrativeexamples:Nomalpractice:Asurgeonaccidentlycutsanerveduringasimpleoperation,resultinginlifelonginsufferablepain.

Malpractice:Thesurgeonwasintoxicatedwhileoperating.

Nomalpractice:Anurseaccidentlyswitchesmedicinesandapatientgettingtreatedforaminorconditiondies.

Malpractice:Anurseunilaterallydecidestoprematurelyendasufferingperson’slifeandsecretlyadministersalethaldrug.Thisisalsomurder.

Whatweproposemayseemextremeatfirstglance,butthesenewlawsarenecessarytoreducethemalpracticeburdenencumberingourcurrentsystem.


Ourproposalsplacegreatresponsibilityonthepatient.Patientsmustchoosetheirmedicalproviderswithcare.Reputationamongdoctorswillbecomemoreimportant:gooddoctorswillcommandhigherpricesinthefirst-tiermedicalmarketplace.Wegetbacktoourfundamentalprinciple:trustthedoctorsandpatientstomakegoodchoices.Onethingtonoteisthatbadoutcomesareaconstantrisk,althoughtheyarestatisticallyrare.Thisisexactlywhatinsuranceisfor.Thereisnothinginourproposalstopreventinsurancecompaniesfrommitigatingtherisktopatients.Forexample,ifyouaregoingintothehospitalforasurgery,itmightmakesensetopurchaseaninsurancepolicy,justassomepeopleelecttopurchaseflightinsuranceincasetheirplanecrashes.Ormorelikely,ahospitalmightautomaticallybuyinsuranceonbehalfoftheirpatients,sothatanespeciallypoormedicaloutcomewillresultinsomemeaningfulcompensationtothepatient.WhatAboutHealthSavingAccounts?Somehaveproposedvariousprogramswherebythegovernmentencouragespeopletosavefortheirfuturemedicalexpenses,forexample,byprovidingincentivesforpeopletoputmoneyintosomesortofaspecialhealthcare-relatedsavingsaccount.Thechoiceofwhethertosave,andhowmuchtosave,shouldbeafree-marketdecisionmadebyindividualsbasedontheirparticularsituationsandparticularchoices.Governmentshouldnotinterfereinthesedecisionsbycreatingprogramsthatencouragesavingoverconsumption,anymorethantheyshouldencourageconsumptionoversaving.Whenthegovernmentcreatesprogramssuchasspecializedsavingsprograms,itdistortsthedecisionsthatpeoplewouldotherwisemake.Theresultingsmallinefficienciescostindividualsdirectlyandadduptoalargefinancialburdenontheeconomyasawhole.


Furthermore,governmentprogramslikehealthsavingsaccountsaddtothegrowing“complexityburden.”Governmentrulesandregulationsarewearingoutsmartpeopleandcripplingpeoplewithlowerintelligence.AllowNaturalConsequencestoEncourageSavingThestrongestandbestincentiveforpeopletosavefortheirownfuturemedicalcostsistorequirethemtopayforthosesamefuturemedicalcosts.Furthermore,thisisreallytheonlyreasontosave:Ifpeoplehopetoobtainfirst-tierfree-marketmedicalcare,theywillneedtohavethemoneyavailable.Theneedtopayfortheirowncareisexactlytherightincentiveforsaving.Byunnaturallyincentivizingsavingthroughvariousgovernmentprogramsormandates,thegovernmentonlyencouragespeopletomakeeconomicallyinefficientdecisions.Wetrustmostcitizenstomakegoodchoices,andonechoicewebelievethatindividualsshouldmakeistodeterminehowmuchtosavefortheirfuturemedicalneeds.Afterall,theyhavetheinformationabouttheirownmedicalconditionsandlikelyoutcomes,aswellasdetermininghowimportanttheirownhealthandmedicalcareistothem.Thegovernmentneedstoletpeoplemaketheirownchoicesandtheproperincentiveistofacethenaturalconsequencesoftheirpoorchoices.But,ofcourse,manypeoplearefoolishandwillmakechoicestheylaterregret.Forexample,manypeoplewillfailtosaveorbuyinsurancewhentheyareyoungandhealthy.Then,later,whentheyhavemedicalproblems,they’llbeintrouble.

Thepriceoffreedomisthatsomepeoplewillfail.Payingthatpriceallowsthemajorityofusthefreedomtochooseourowndestinies.

TheSecond-TierProvidesaSafetyNetThereremainsthequestionofwhathappenstopeoplewhocannotpayfortheirowncareinthefirst-tiermedicalmarketplace.


Howcanwemakesureeveryonegetsatleastsomemedicalcare?We’vejustdescribedthefirst-tierofoursystem.Itiswell-designedforintelligent,educated,responsibleindividualswhoarecompetenttomakesounddecisionsandwhoarefinanciallycapableoftakingcareofthemselves.MostAmericansarelikethisandasystembasedonfree-marketcapitalistprincipleswillworkwellforsuchpeople.MostAmericansdonotneedthegovernmenttotakecareofthem.Theywill,onaverage,makeprettygooddecisionsand,asaresultofmillionsofreasonablygooddecisionseveryday,thefirst-tierfree-marketsystemwilldeliverthemedicalcarethatpeoplewantateconomicallyefficientprices,justasinmanyotherindustries.Buttherearesomepeopleforwhomthefree-marketcapitalistapproachtomedicalcarewillnotwork,andwenowturntothesecond-tier.HealthcareNeedandInabilitytoPayThefundamentalproblemthatanyfederalhealthcareprogrammustaddressisanissueofcharity.Howcanonegroupofpeoplepayforthemedicalexpensesofanothergroupwhocannotaffordtopaythemselves?Webeginbyaskingwhichpeopleneedfinancialhelpandwhichpeoplewillberequiredtoprovidethathelp.Society’sprimaryconcerniswithindividualswhoareelderlyorareotherwiseinpoorhealth,andwhoareunabletoaffordtopayforthemedicalcaretheyneed.Werefertopeoplewithlowerincomesas“poor”.Itisnotalwayspoliticallycorrecttousetheterm“poor”,butweusethiswordanyway.Itmeansthesamethingas“peopleinthelowerincomebrackets”,andismorestraightforward.Inthispaper,wemakenovaluejudgmentsaboutpeopleinthisgroup.Theyaresimplyreferredtoas“poor”sincetheyhavelessmoneythanricherpeopleandthatisthemeaningoftheword“poor”.Wedon’tdifferentiate


between“incomelevels”and“accumulatedassets”,sincepoorpeopledon’thavemuchofeither.Asfortheoppositegroup,theterm“rich”workswell.Thesepeoplehaveboth“highincome”and“highnetworth”.Again,thereisnoneedtodistinguishbetweenincomelevelsandassetlevelsbecausethesearehighlycorrelatedamongtherich.

Discussinghealthcarereformwithouttalkingdirectlyabout“richpeoplehelpingpoorpeoplethroughgovernment-runcharityprograms”isacertainsignthatpolitically-correctthinkingisinterferingwithcommonsense.

Withouttalkingopenlyaboutwhatwearedoing,wecan’thopetofindgoodsolutions.WhatisaGovernmentProvidedSafetyNet?Thesecond-tiersystemisdesignedtohelppeoplewhoarebothunhealthyandpoor.Thisisbecausepeoplewhoarenotsickorelderlyarehealthy,andsotheydon’tneedmedicalcare.Likewise,peoplewhoarenotpoorhavemoneysotheycanaffordtobuymedicalcareinthefree-marketsystemwedescribedearlier.Theydon’tneedthesecond-tiersafetynet.Oursocietyhasdecidedtoprovidesomelevelofmedicalcaretopeoplewhoareunhealthyandpoor,andwedonotquestionthatdecisionhere.Instead,wefocusonthebestmechanismstoachievethisobjective.Ofcoursethereisaspectrumofhealthandwealth,sothefirstquestioniswhereshallwedrawthelineconcerningwhoistobeconsidered“unhealthyandpoor.”Inthespiritofaliberaldemocracy,wefeelthegovernmentshouldnotdrawlinesorsegregatepeopleintoclassessuchas“poor”or“unhealthy.”Instead,themyriadsmallchoicesthatpeoplemakedeterminehowmuchtheyrelyonthefirst-tierfree-marketsystemandhowmuchtheyrelyonthesecond-tiersafetynet.Thechoiceislefttotheindividual.


Societyisdividedintoaspectrum,withself-reliantpeopleneedingnoassistanceononeend,peoplewithserioushealthissuesbeyondtheirabilitytoaffordontheotherend,andafullspectrumofpeopleinbetween.

Ourproposalisforatwo-tieredsystem,withtheonetierforoneendofthespectrumandtheothertierfortheotherend.Thefirsttierfree-marketmedicalmarketplaceservesthemajorityofAmericanswhoarehealthyoratleastnotpoor.Thesecondtiersafetynetprovidesgovernment-fundedmedicalcareforthepeoplefallingattheotherendofthespectrum,whoarebothunhealthyandpoor.

FundingtheSafetyNetWedecidedtoremoveemployersfromthehealthcaresystem,sothefirstquestionis:Whereshallwegetthemoneytopayforthegovernment-fundedsecondtier?Toprovidecarefortheunhealthyandpoor,wemustobviouslytakethemoneyfromtheoppositegroup.Ofcourse,thisisjusttherestofsociety,everyoneelse.Recallthatoneofourinitialfundamentalgoalswastosimplifygovernment.Thesimplestapproachtofundingthesafetynetistotaxeveryone,more-or-lessequally,inordertoprovidecareforthosewhoareunhealthyandpoor,theusersofthesafetynet.Ourproposalistoimposenonewfundingmechanisms.Therewillbenonewtaxprograms,nochangestothefederalincometaxregulations,andnonewbudgetfinancingschemes.Ourproposalissimplytofundthesecond-tiersafetynetoutofthegeneralgovernmentbudget.Anygovernment-fundedsafetynetisgoingtobecostlyandeveryoneisgoingtohavetopayforit.Inthiscase,“everyone”meansthefederalgovernmentasawhole.Thereisnopointinborrowingthemoney,issuingdebt,orhidingthecostasfutureobligations.Thecostofrunningthesecond-tiersystemisacurrentandrealcost.


Theonlyrationalapproachistofunditinthepresent,notthroughanymulti-yearschemes.Somepeopleproposevariousfundingmechanisms,suchas“getemployerstopay,”or“gettheyoungpeopletopay,”or“gettherichtopay.”Medical-relatedtaxstructuresorcomplexgovernmentfundingprogramsdistorttheoperationofafreemarketeconomy.Regardlessofhowcreativeandwell-meaningthesefundingideasmaybe,theymustbeavoided.Ourproposalgetsthemoneyfromeveryoneequallytopayforthemedicalcareofthepeoplewhoarethebeneficiariesofthesecond-tiersafetynetsystem.

Bytakingthemoneystraightfromthegeneralfund,theplanisbeingpaidfor,intheend,bytaxingeveryAmerican.

Ofcourse,thismeansthatpoorpeoplewillalsobecontributingandpayingforthesafetynettosomeextent.However,sincetheyarepoor,theircontributionswillbesmallorzero,accordingtotheirlevelsofincome.Therichwillpayformorethantheyget,andthepoorwillgetmorethantheypayfor.Peoplewhoarericherwillnaturallycontributemore,sincetheytypicallypaymoreintaxes.Thisseemsappropriateforanygovernmentmandatedcharityprogram.Ourproposaleffectivelytaxestherichtopayforthemedicalcareofthepoor,asweintend.Alsonotethat,bytakingmoneyfromthegovernment’sgeneralfund,themoneyisultimatelycomingfromthepeoplewhopaytaxes.Themoneyiscomingfromtheemployedandthewealthypeople,whowearemorehealthyonaverage.So,roughlyspeaking,wearerequiringhealthypeopletosubsidizetheelderlyandunhealthypopulation.Concerninganyproposalforacomprehensivesafetynet,somepeoplewillimmediatelysay,“Thisisgoingtobeexpensive!”Thisisobviouslytrue.Providingsubsidizedmedicalcaretomillionsofpeopleis,byitsnature,veryexpensive,andthereisnowayaroundthishardfact.Butkeepinmindthatoureconomyisalreadyspendingahugeamountofmoneyprovidingsubsidizedorfreemedicalcare—thoughoneprogramoranother—totensofmillionsofpeople.


Sothisproposalonlyimpactsthenationaleconomyorgovernmentbudgetonlyifweincreaseordecreasetheamountofmedicalcarebeingprovidedtothepeoplewhoneedassistance.Wearenotproposingamajorincreaseordecreaseintheamountofoverallassistancebeingprovidedbythegovernment.WhatAboutaTaxonMedicalCare?Somehaveproposedthatthegovernmentimposeataxonallprivatemedicalexpendituresandusethefundsraisedtopayforsubsidizedcareforthepoor.Thisisabadideaforthefollowingreasons:(1) Thisiseffectivelyasalestaxandwouldrequireanew,largefederal

bureaucracytoadminister.(2) Thepresenceofamedicaltaxwilldistortfreemarketdecisions.Asevery

economistknows,ataxonanybehaviorwilldiscouragethatbehavior.Wedonotwanttodiscouragepeoplefrombuyingmedicalcareinthefirst-tierprivatemedicalmarketplace.

(3) Mostimportantly,suchamedicaltaxwouldrequireonesegmentofthe

populationtosubsidizeanothersegmentbutitwouldaskthewronggroupofpeopletopay.Thistaxwouldforcenon-poorpeoplewithmedicalproblemstosubsidizepoorpeoplewithmedicalproblems.Obviously,tosubsidizethemedicalcareforpoorunhealthypeople,wemustmakesomeonepay.Butaskingotherunhealthypeopletopayiswrong.Topayforthemedicalcareoftheunhealthyandpoorpeople,thegovernmentneedstocollectthefundsfromallotherpeople,asourplanproposes.

Thisideaisrejected.


SubsidizedMedicalCare–CoreIssuesTherearereallythreeseparatepolicyquestions:1. Howmuchmoneyshallsocietyprovidetosubsidizemedicalcarefortheelderly,unhealthypeoplewhocannotthemselvesaffordit?

2. Howshallwegetthemoneytopayforthis?3. Howshallweprovidecareforthisgroup?

Thefirstquestion—howmuchtospend—isaquestionwhichsocietyasawholemustfindaconsensuson.Thesecondquestion—howtofundit—isaquestionweanswerhere:Themoneyforthesecond-tiersystemshallbetakenoutoftheoverallfederalbudget.Thereisalargerdiscussionabouttheoverallsizeofgovernmentandhowweshouldpayforourgovernment.Thereareexactlythreemechanismsforfundinganygovernment:• Taxation• Debt• Monetarygrowth,i.e.,printingmoney

Anygovernmentisalwaysfundedthroughsomecombinationofthese,andtherearereallynoalternatives.Theproperproportionoftheseisamacroeconomicquestionandisextremelyimportant,butitisnotrelevanttoadiscussionofhealthcare.Wewillnotsayanythingmoreaboutthisissuehere.Thethirdquestion—howwecanprovidemedicalcarefortheelderlyorunhealthysegmentwhocannotaffordprivatecare—iswhatweturntonext.


TheMoralHazardofGovernmentProgramsBeforegoingon,weallneedtoacknowledgeandacceptthatthereisaso-called“moralhazard”ofprovidingagovernment-fundedsafetynet—whetherforhealthcareoranyotherformofwelfare.Whatdoes“moralhazard”mean?Themoregovernmentpromisestotakecareofpeople—forexample,withahealthcaresafetynetorwithincomeassistance—themorepeoplewillrelyonthegovernmentandnotbothertotakecareofthemselves.By-and-large,peopletendtomakerationaldecisionsintheirownself-interest.Ifthegovernmentguaranteesexcellenthealthcareforallpeople,thenonlyafoolwouldsaveorpurchaseinsuranceforamedicalemergencyinthefuture.Inthesameway,themoremoneygovernmentprovidestopoorpeopleinanyformofwelfare,thelessincentivethereistowork.Wemaynotlikethisunpleasantreality,butthisishowhumansbehave.Wemustacknowledgethemoralhazardinvolvedhere.

Themoreassistancethatourgovernmentprovides,themoreAmericawillbecomeacountrywherepeopledependonthegovernmenttotakecareofthem,andrelinquishcontroloftheirdestiniestobureaucratsandpoliticians.

Manypeoplearesufferinghorriblyandneedhelprightnow.Unfortunately,beingkindertodaywillresultinproblemsinfutureyears.Overtime,peoplewillworklessvigorouslyandnotbothertoplanorsave.Asaresult,oureconomywillfailtothrive,andouraveragestandardoflivingwillfall.Ontheotherhand,beingtoughtoday,lettingpeoplefailandsuffer,willleadtoastronger,moreresponsiblesocietyinthedistantfuture.Findingaproperbalance,amiddlepathwaybetweencrueltyandshortsightedness,isachallengesocietymustfaceconsciously.


ResourceswillAlwaysbeLimitedAndthereisanotherreality:Oursocietysimplycannotaffordaperfectsafetynetthatprovidesfirstclassmedicalcareforeveryone,evenifwechoosetoignorethemoralhazardaltogether.Therewillneverbeenoughmoneyforcharity.Manypeoplecontracthorriblediseasesandterminalmedicalconditions,whichcannotbecurednomatterhowmuchwespend.Andofcourse,noamountofmoneyisenoughtokeeppeoplealiveforever.Aseachofusfacestheinevitabledeclineofourhealthinoldage,thedemandformedicalcareoftenbecomesinfinite,andwillalwaysoutrunwhateverresourceswecanthrowatit.Instead,oursocietycanonlyafford,atbest,asafetynetthatprovideslimitedmedicalcareforafractionofthepopulation.Thelargerthesafetynet,themorepeoplewillturnoverresponsibilitytothegovernment.Thesmallerthesafetynet,themoreafree-market,privatesystemwilloperate,puttingpressureonpeopletotakecareofthemselves.Wemuststrikeabalancebetweenhavingnosafetynetatall,andhavingagovernmentthatguaranteesexcellentmedicalcareforeveryone.Thefirstiscruel,butthesecondisimpossible.PersonalResponsibility:ExpectedandRespectedOurproposalistoplacefullresponsibilityonthemajorityofcitizenstosaveandplanfortheirfuturemedicalcosts.RequiringpeopletotakeresponsibilityfortheownoutcomesistheAmericanway.Ofcourse,noteveryonewillactresponsibly,howeveryoumightdefine“responsible”.Buttheconstantpressureoneachofustotakecareofourselvesmust,overtime,resultinasocietyofmostlyresponsiblepeople.ThisisthefutureAmericawewant:asocietyofindependent,self-reliantindividuals.


ManyPeopleRequireGovernmentAssistanceToday,themajorityofpeoplecanaffordtopayfortheirownmedicalcare.Inotherwords,theendofthewealthspectrumprovidingmedicalcharityislargerthantheendofthespectrumreceivingmedicalcharity.MostAmericansarenotpoor.Ofcoursemanypeoplewillmakepoordecisionswhenyoungandfailtosaveforthemedicalcoststhatoccurattheendoflife.Andunfortunately,somepeoplearebornwithgenetically-causedhealthproblems.Andsomepeoplewillunexpectedlycontractrandomorrarediseasesorencounterunexpectedinsultstotheirhealth.

Forthegroupofpeoplewhocannotaffordtopurchaseadequatemedicalcareinthefirst-tierprivatemedicalmarketplace,thegovernmentmustprovidefortheirmedicalcare.

Thequestionis:Howcanthegovernmentmosteffectivelyprovidethatmedicalcare?TheFederalGovernmentDoesNotNeedInsuranceConcerningthesecond-tier,ourfirstproposalistoeliminateanyandallparticipationbyinsurancecompanies.Thegovernmentislargeanddoesnotitselfrequireinsurance,sothereissimplynoinsurancefunctionrequiredhere.Peoplehavemedicalneedsandthegovernmentneedstoprovidemedicalcareforthem,onewayoranother.Butinthesecond-tiersystem,thereisnoneedorfunctionfortheparticipationofinsurancecompanies,whichcanonlyactascorporatemiddlemen,strivingtomakeaprofitontheenormousamountsofmoneythatwillbeinvolved.ThemandateofObamacarethatforceseveryonetohavehealthinsuranceisessentiallytryingtoforcepeopleandinsurancecompaniestointeractintransactionsthataredesignedandcontrolledbybureaucraticfiat,inoppositiontothebasicprinciplesoffree-marketeconomics.Theresultisasystemthatrefusestofunction.


Itseemsthatwhatisreallyhappeningisthatourgovernmentistryingtoout-sourcethejobofmanagingmedicalcaretoafewlargehealthcarecorporations.Obamacarehasmanagedtocreateasysteminwhichlargecorporations—ratherthandoctors,patients,oreventhegovernment—aremakingmedicaldecisions.Profit-orientedcompanieshavegottenintothebusinessofbeingpaidtoprovidemedicalcare;theirincomestreamsareforcedandoftenneitherdoctornorpatientisahappyparticipant.Thegovernmentisfuriouslymakingmyriadpolicydecisionsaboutwhichmedicalproceduresaretoperformedinwhichsituations.Ithinkweallrecognizethatthisisadysfunctional,expensive,inflexible,andinefficientsystem.Thestraightforwardrealityisthatthegovernmentneedstoprovidemedicalcaretothepeoplewhowouldnototherwisebeabletoaffordit.GovernmentMustProvideMedicalCareOurproposalissimplythatthegovernmentshouldprovidethemedicalcaredirectly,andcutouttheinsurancecompanies.Thereisnothinginherentlywrongwithgovernment-runclinicsandhospitals,aslongasweallunderstandanygovernmentrunoperationwillbesomewhatinefficientandwillnottendtosparkasmuchinnovationasoccursinthefreemarket.Theywillnothavethesameleveloffundingasthefirst-tierfacilities.Theymayattimesbecrowded,thelevelofcarewillnotalwaysbefirst-class,andsomemedicalproceduresmaynotbeavailableatall.


SeparatingtheTwoTiersThecruxofourproposalisthatwehaveatwo-tiersystem,andthetiersarecompletelyisolatedfromeachother.Thefirst-tierisaprivatefree-marketsystemprovidingmedicalcareforthemajorityofcitizens.Thesecond-tierisasystemofgovernment-runhospitals,clinics,andotherprogramsprovidingasafetynetbyprovidingandpayingforallmedicalcostsdirectly.

First-Tier: Free-Market,PrivateMedicalMarketplace Efficiency,Innovation,CompetitionSecond-Tier: Government-RunClinics SafetyNet,FreeToAll,BasicLevelCare

Aslongasthereisfree-marketmedicalcareoutsidethegovernment-operatedclinicsandhospitals,innovationandefficiencywillflourishintheprivatesector.Withawell-functioning,privatesectormedicalsystem,operatingundercapitalistprinciples,therecanbenodoubtthatthebestmedicalcareintheworldwillbeavailabletosomepeople,andhigh-quality,reasonably-pricedcarewillbeavailabletothemajorityofAmericans.Thecareprovidedforfreeinthegovernment-runsecond-tiersystemwillobviouslynotbeasgoodasthefirst-tiercare,butitwillbefreeandavailabletoanyonewhowantstouseit.Itisimportanttokeepthegovernmentcompletelyoutofthefree-sectormedicalindustry,allowingcapitalismandthefree-markettofosterasmuchefficiencyandinnovationaspossible.Meanwhile,thegovernment-runsystemwillprovidecareforthepoor,theelderlywithoutadequatesavings,andthosefewwhoarestruckwithunexpected,disastrous,anduninsuredmedicalconditions.Theymaynotgetfirst-classcare,buttheywillgetsomething.


GovernmentProgramsTendtoGrowUncontrollablyInordertokeepthegovernment-runmedicalsystemfromoverrunningtheprivatesector,wemusthaveamechanismtodiscouragethegovernment-runsystemfromgrowingeverlarger.Governmentprogramsalwaystendtogrowandwemustdesignafoolproofwaytopreventthesecond-tiersystemfromballooningtoever-largerproportions.ANovelSolution:The25%LimitToachievethis,wemandatethatthegovernment-runsectormustalwaysremainat25%ofthenation’soverallmedicalexpenditures.Inotherwords,thesecond-tiersystemwillprovide25%ofallmedicalcareinthecountry,asmeasuredbyoverallmoneyspent.Conversely,theremaining75%ofallmedicalcarewillbeprovidedthroughtheprivatefree-marketfirst-tiersystem,paidfordirectlybythepatients.Thisnationalhealth-careprogramwillprovidegovernment-runclinicsandhospitals,aswellassubsidizedmedicalcareprovidedthroughprivatesub-contractors,andreimbursementprograms.Thefractionweproposewillallowacapitalist-driven,free-market,privatesectortoflourishwhile,atthesametime,providingagovernment-run,public,andfreemedicalsystemtocareforthatfractionofthepopulationwhichwouldotherwisesufferfromalackofmedicalcare.Theactualbudgetofthesecond-tiersystemwillbedeterminedquarterlybygovernmenteconomistswhostatisticallymeasureandestimatetheamountofmoneyspentinthefirst-tierfree-marketsystem.Thisisanadaptivefundingsystem:Astheeconomyimprovesorthepopulationgrows,peoplewillnaturallyspendmoreonmedicalcareinthefirst-tiermarketplace.Thesecond-tiergovernment-runsystemwillautomaticallygrowatthesamerate.Nopoliticaldebateorconsensusisrequiredtodeterminethesizeofthesecond-tiersystem.


AHugeNewGovernmentBureaucracy?Manypeopledon’ttrustthegovernmenttorunanycomplexactivityefficientlyoreffectively,andIamone.AndI’maskingyoutoimagineagovernment-runsystemofpublicclinicsandhospitalsproviding25%ofthenation’smedicalcare!We’retalkingaboutthegovernmenttryingtomanagehundredsofhospitals,employingthousandsofdoctors,andoverseeingthemedicalcareofmillionsofpeople.Howcouldthiseverbeimplemented?Orimplementedinareasonabletimewithoutvastbureaucraticconfusion?Isn’tthisarecipeforagovernmentaldisasterofepicproportions?Imaginethepotentialforgovernmentbungling,mismanagement,andbureaucraticwaste!ARadicalProposal:County-LevelManagementThesolutionisremarkablysimple.

Thenationalhealthcaresafetynetwillbeimplementedatthecountylevel,notthefederallevel.

Thisisaverydecentralizedapproachtogovernment.Thefederalgovernmentwillsendallthemoneyforthesecond-tiersystemstraighttotheindividualcountiesandthecountieswillprovidethesecond-tiermedicalcareatthelocallevel.Here’showitwillwork.


ImplementationDetailsEveryquarter,anappointedeconomistwithinthefederalgovernmentwillestimatethesizeofthefirst-tiermarketplace,usingstandardeconometricanalysisandestimationtechniques.Thisestimatewilldeterminethetotalbudgetforthesecond-tiersystem,basedonthe25%ratio.Then,second,thistotalbudgetnumberwillbeconvertedintoa“percapita”figure.Then,third,theappointedeconomistwilllookatthepopulationofeachandeverycountyintheU.S.andmailachecktoeachcountyinanamountthatisproportionaltothatcounty’spopulation.Fromthenon,thecountiestakeoveranddeliverthemedicalcaretotheircitizens.Result:NoNewFederalBureaucracyNotethatthiswillentailalmostnonewbureaucracyatthefederallevel.Thefederalgovernmentwillmakenomedicalpolicydecisions,suchaswhichconditionsarecovered,whoistoreceivecare,orhowourlimitedresourcesaretobeallocated.Everydaytherearemillionsofsuchdecisionsthatmustbemade.Thefederalgovernmentsimplycannotmakeallthesedecisionswellanditisbesttopushthesedecisionsdowntowardthepeopleinvolved.Wewouldbewisetoavoidlettingthefederalgovernmentmakeanymedicalpolicydecisions,oratleastkeepsuchcontroversialdecision-makingcompletelyseparatedfromfundingissuesandthehealthcaresystemdiscussedhere.Ourproposalmakesitimpossibleforthefederalgovernmenttoimplementmedicalpolicydirectlythroughtheircontrolofyourprivatemedicaldecisions.Controversialtopics(suchasabortionorbirthcontrol)mustbedealtwithseparately,outsideofhealthcarefunding,outsideofourproposals.Perhaps


cigarettesshouldbetaxedtodiscouragesmoking,butthatisaseparateissue,notaddressedhere.Existingprogramsanddepartmentsthathavehealthormedicalimpactsarenotaffectedbyourproposals.Forexample,theFoodandDrugAdministrationwillcontinuetoregulatepharmaceuticals,theNationalInstitutesofHealthwillcontinuetofundresearch,andsoon.County-RunHealthClinicsandHospitalsEachcountywillreceiveitshealthcaremoneyfromthefederalgovernmentwiththedirectiontoprovidemedicalcaretoitspoorestresidents,inwhicheverwayseachcountydeterminesarebest.Themoneycomesfromthefederalgovernmentwithnofurtherconditionsattached,allowingeachcountyfullfreedominimplementingitspublichealthcaresystem.Differentcountieswilldelivermedicalcareindifferentways.Somecountieswilldoabetterjobthanothers.Somecountieswilldiscoverwaysthatworkanditcanbeassumedthat,overtime,goodpracticesinonecountywillbeadoptedinothercounties.Howwillacountyimplementsecond-tiermedicalcare?AlargecountylikeManhattanwillhavealargeallocation,allowingittooperateanumberofpublicly-runhospitalsandclinics.Theirpublichealthcaresystemwillbecomplexandtheresultofmuchpoliticalactivity.Amedium-sizedcountymightchoosetoopenasmallclinicorevenpurchaseanolderhospitalfacility.Asmallcountymightchoosetocontractwithcertaindoctorstoprovidepubliccareorcontractwithanexistingclinictoprovidepubliccare.Theymightcontractwithaprivatecontractortoprovidehospitalservicesortheymightsimplyreimburseaprivatehospitalforbedsonanas-neededbasis.Asparselypopulatedcountymighthavesuchasmallallocationthattheychoosetojustgiveitdirectlytoalocaldoctorwiththeinstructionthatheorsheistodecidehowtoallocatethefunds.Theyaretotreat,tothebestoftheirability,anyoneunabletopayhisorherownmedicalbills.


County-LevelOptions: • Operatefree,walk-inclinics • Out-sourceallcare(e.g.,toKaiser) • CreateahealthcaresystemOther,innovativeapproacheswillbetried.

Somecountiesmaychoosetocreatenewprograms,enrollpotentialpatientsinthem,andissueIDcardstoallresidents,documentingandapprovingeachtreatmentinadvance.Othercountiesmaysimplychoosetotreatanyonewhowandersintotheirclinicswithoutanypaperworkatall.Somecountiesmaychoosetoown,operate,andmanagetheirownmedicalfacilities,whileothercountiesmaychoosetosubcontractalltheirmedicalcareobligationstoprivate-sectorcorporations(perhapslikeKaiser),whichthenmanagetheclinicsandhospitals.Eachcountywillindependentlydetermineouthowtoallocateitsscarcepublichealthcareresourcesamongthepeoplewhoneed—butcannotafford—medicalcare.Somecountiesmayevenchoosetotaxtheirresidentstoaugmentthefederaldollarsinordertoprovideevengreatercarefortheirpoorresidents.LocalDecision-MakingThebottomlineisthatalldecision-makingwillbecomelocal.Decisionsaboutwhatmedicalcareisprovidedwillnolongerbemadebythefederalgovernment,butlocally,closertotheactualpatients,theircommunities,andtheircaregivers.Manydifferentapproacheswillbetried,somewithmoresuccessandsomewithlesssuccess.Overtime,countieswilllearnhowbesttoprovidepublicmedicalcaretotheirpopulations.


TheQualityofFreeMedicalCareWemustallrealizethatthesecond-tiersystemwillbesecondclassinthemedicalcareitdelivers,andwemakenoattempttodisguisethisfact.Theremaybelongwaitingtimesatthecountyclinics;doctorsmayberushed;someprocedureswillnotbeavailable;sometreatmentsmaynotbeaseffective.Themedicalcareprovidedbythesecond-tiersystemis,withoutanyqualification,agovernment-fundedandgovernment-runcharityandweacknowledgethatitcannotbeequalinqualitytothemedicalcareprovidedbythefirst-tierprivatemedicalmarketplace.First-classcareisavailableforthosewhocanaffordit,butsocietysimplycannotaffordtopayforfirst-classcareforthepoor.Ourproposalssimplyrecognizethesetruisms.Basically,ourprogramgivescountiesafixedbudgetandtheydowithitwhattheycan.HowManyPeopleWillGetFreeCare?Thehopeisthatcountieswillprovidegoodcare,butthequalityofcaredependsonhowmanypeopleaskforfreecare.Iflotsofpeoplewantfreecare,thecounty’slimitedbudgetforsecond-tiercarewillbestretchedthin.Sonext,let’stakealookatthataspectofourplan.Whenindividualshavemedicalproblems,theywillhaveachoice.Theycancontractwithadoctorinthefirst-tierfree-marketsystemortheycanwalkintoacountyclinicandgetthecareforfreeinthesecond-tier.Peoplewillbefreetomakethischoice.Thegovernmentdoesnothavetoscreenpeopleorlabelsomeaspoorandothersasnot-poor.Infact,there’snothinginourproposaltopreventarichpersonfromtakingadvantageofthefreesystem.Generally,thefree-marketcarewillbesuperior,sothemajorityofthenot-poorpeoplecanbeexpectedtoturntothefree-marketsystem.


Peoplewill,throughcountlesssmalldecisions,determinehowmanypeoplethesecond-tiersystemwillserve.Ifmorepeopleoptforthecountyclinic,waittimeswillincreaseandthefreeservicewilldeclineinquality.Thereisnothinginourplanthatfixeshowmanypeoplegotothefreeclinics.Asmoreandmorepeopleshowuptogetfreemedicalcare,thequalityofcarewilldeclineuntilanequilibriumisreached.

SafetyNetUtilization:ExamplesToseehowoursafetynetprogrammightworkinpractice,let’sworkthroughsomedifferentscenarios.Thetotalbudgetofthesecond-tiersystemis25%.So,forevery$25beingspentinthesecond-tier,therewillbe$75spentinthefirst-tier.Inotherwords,thesecond-tierwillhave⅓ asmuchmoneyasthefirst-tiersystemhas.Example#1:Asourfirstexample,supposethat25%ofallAmericansopttogettheirmedicalcareforfreethroughthesecond-tiersystem,whiletheremaining75%gotothefree-marketprivatesystem.Forexample,consider4patients,eachwiththeexactsamemedicalproblem.Soonepersongoestothesecond-tiersystemandtheother3gotothefirst-tiermedicalmarketplace.Thecountyclinichas$25tospendontheonepatientwhilethefirst-tierspends$75on3patients.Inthisscenario,theamountofmoneyspentoneachpatient’scareisequal.With¼ofAmericansoptingforsecondtiermedicalcare,wewouldexpectthequalityofcaretobeaboutthesameasforfirst-tiermedicalcare.Butwhywouldanypersonpayforprivatecarewhentheycangetroughlythesamelevelofcareforfree.Thissituationisnotastableequilibrium.

Morethan25%ofpeoplecanbeexpectedtoseekcarethroughthesecond-tiersystem.


Wecannotknowexactlywhatfractionofpeoplewilloptforfreecareatthecountyclinics,butitwillexceed25%.Example#2Inournextexample,let’snextsupposethattherateis50%ofthepopulation.So,halfofAmericansusethesecond-tierandhalfusethefirst-tier.Witha50-50split,forevery1personusingthefirst-tierprivatesystem,wehaveexactly1personusingthesecond-tiergovernmentsystem.Recallthatforevery$100inavailablemoney,wehave$25inthesecond-tiersystemand$75inthefirst-tiersystem.Sothepersongettingfreecarewillhave$25beingspentontheircare,whiletheotherpersonwhoisgoingtothefirst-tiermarketplacewillhave$75beingspentontheircare.Assuminganiceevensplitof50-50,withhalfthepopulationusingthefreecounty-basedcareandtheotherhalfpayingforprivatemedicalcareinthefree-marketfirst-tiersystem,theresultisthat,fortheexactsamemedicalprocedure,second-tierpatientswillhaveonly⅓asmuchmoneyspentdeliveringtheircareasthesamepatientwiththesamemedicalissueinthefirst-tierwouldhavetopayforthatprocedure.Tolookatitanotherway,ifapatientinthefirsttierpaysXforsomeparticularbitofmedicalcare,anotherpersoncouldgetthesamebitofcareinthesecondtier.Yes,theywouldgetthatcareforfreeand,yes,thegovernmentwouldpayforthecare,buttherewouldonlybe⅓asmuchmoneyspentondeliveringthatcare.Sowitha50-50splitofthepopulationbetweenthetiers,thedifferenceinthequalityofthecarewouldberoughly3-to-1,atleastasmeasuredbythenumberofdollarsspent.Furthermore,wecanassumethefree-marketsystemwillbemoreefficientthanthegovernmentrunsystem,sotheactualdifferenceincarewillevenbealittlemorethanthis.Example#3Nowimagineanextremesituationinwhichonly1in10peopleoptstopurchasemedicalcareintheprivatemarketplace,so90%ofpeopleoptforfreecare.


Inthisscenario,consideraprocedurecosting$75inthefreemarket.Inthesecond-tier,thereisonly$25inavailablefundsforthisprocedure,andthishastobedividedupbetween9people!Thisworksouttoonly$2.77perperson.Sotoprovidethisbitofcare,thereisabout27timesasmuchmoneyinthefirst-tierasthesecond-tier.Withthismanypeopleoptingforfreecare,thequalityofcareinthesecond-tiersystemwillbeverypoorindeed,sincetherewillbesolittlemoneyforsomanypatients.Sincethisexampleassumesthat90%ofallpeopleareoptingforfreecare,itmustbethecasethatmanyofthesepeoplewillbeinhigherincomebrackets,andsomeinveryhighbrackets.Peoplewithhighincomeswillsurelyabandonthesecond-tiersystemandreturntotheprivatemarketplacetopurchasetheirmedicalcaredirectly,sincetheywillgetsomuchbettercarethere.

Clearlythefreesecond-tiersystemwillbeusedbyfewerthan90%ofthepopulation,probablymuchfewer.Certainlytheutilizationratewillbehigherthan25%anditseemsreasonabletoassumethatitwillbelessthan50%.

ASelf-AdjustingEquilibriumBetweenNumberServedandQualityofCareWecannotknowexactlywhatfractionofthepopulationwouldoptforfreecareandwhatfractionwouldopttopayforprivatecare.Thiswouldbedeterminedbymanycountlesssmalldecisionsmadebyindividuals.Perhapsthenumberofpeopleoptingforfreecarewouldgoevenhigherthan50%.Butatsomepoint,thiswouldbeself-limiting.Asmoreandmorepeopleoptforfreecare,theavailablefundsinthesecond-tier—onaper-personbasis—willfall.Asaresult,thequalityofthefreecaremustnecessarilydecline.

Ourproposalissimpleandself-adjusting.Asmorepeopleoptforfreecare,thequalityofthefreecarewilldecline,duetothefactthatthebudgetofthesecond-tierfreecareisfixedbythe25%rule.


Atsomepoint,thequalityofthefreecarewilldeclinetothepointwhereanaturalbalancewillbefound,withsomefractionofpeopleoptingtopayfortheirownmedicalcare.Theywilldothisinordertoobtainsuperiormedicalcare.Peopleinthemiddleoftheincomespectrumarealwaysfreetomovebetweenthetiers,usingthefreesystemforsomemedicalneedsandtheprivatesystemforothermedicalneeds.Inourscheme,thereisnothingthatdefinesapersonas“poor”excepttheirownchoicestoutilizethefreesystem.Wefeelthatitisimportantthatanyhealthcarereformavoidscreatingfixedclassesofpeopleorplacingcertaingroupsofpeopleintorigorouslycontrolledcategories,sincesuchideasruntheriskofcreatingclass-based,entrenchedinterestgroupsandintroducingclassdivisionsintooursociety.PeopleareIncentivizedtoTakeResponsibilityforTheirHealthcareAmostimportantfeatureofourproposalisthatitincentivizesAmericanstopayfortheownmedicalcareinordertoreceiveabetterlevelofcare.Ifwewanttostopourgovernmentfrommakingourmedicaldecisions,wehavetogettoaplacewheremostpeopleareinthehabitofpayingfortheirownmedicalcare.Ofcoursethiswilltaketime,butasoursociety’swealthincreases,andmoreandmorepeoplebegintotakeresponsibilityforpayingfortheirownmedicalcare,moreandmorewillbespentinthefree-marketsector.Asaresult,thequalityofthemedicalcarewedelivertoourpoorestcitizenswillalsoriseovertime.Thisisthegoal;thisistheplacewe’dliketogetto,withthemajorityofAmericanstakingcareoftheirownmedicalcareinaprivatefree-marketmedicalmarketplace,whilegovernment-fundedfreecareisavailabletothosepeopleunabletoprovidefortheirownmedicalcare.Withbettercarebeingprovidedbythefree-marketsystem,peoplewillnaturally,overtimebegintotakeresponsibilityfortheirmedicalcare,bysavingforfuturemedicalneedsandbypurchasinginsuranceagainstunexpectedmedicalcalamities.Andwithahealthyfree-marketinmedicalcare,efficiencyandinnovationcanbeexpectedtoflourish.


TheCostofFreeCare:NoAttempttoHideItApublicly-fundedfreemedicalsystemsoundslikeaveryexpensiveburdenonourgovernmentandonthetaxpayerswhomusteventuallypaythebills.And,yes,ofcourseitis.Italreadyis:Currently,thecostsofMedicare,Medicaid,subsidiestohealthinsurers,andvariousotherprogramsposealoomingfinancialcatastrophe.Providingahealthcaresafetynetforpeoplewhocannotpayforitthemselves,isnecessarilyexpensive.Thereisnofreelunch,andmedicalcaretodaycanbeverycostly.Wearenotdenyingthisreality,butweareneithermakingitbetternorworse.Itwillcostalotofmoneytosubsidizethemedicalcareofthepoorestcitizens,underthisproposaloranyother.Whatwerejectistheideaofhidingthecostsorforcingthecoststobebornbyunwillingparties.Mandatingthatpeoplebuyhealthinsuranceagainsttheirwillcanonlyleadtofinancialinefficiencyonahugescale.Mandatingthatemployersorinsurersprovidecertaincoverageinterfereswiththefree-marketanditisamistakeforgovernmenttotrytocontrolanindustrythatwillfunctionmoreefficientlyifleftalone.Webelievethewayforwardistocompletelyseparateandisolateafree-marketmedicalsectorfromagovernment-fundedmedicalsafetynet.Then,thegovernmentsimplyneedstopaythebillforthesecond-tiersafetynet.Nohidingthecost.Noshiftingthecostaroundtootherentities.Noshiftingthecostintofuturebudgets.Second-tiermedicalcaredeliveredtodaymustalwaysbetreatedasacurrentexpenseofthegovernment,withthecostbornebywhoeverpaysforthegovernmentasawhole,namelythetaxpayingcitizens.


PhasingInOurProposalsThenextbigquestionis:Howdowegettherefromhere?Weproposetophaseinthesecond-tierfundinganddoitfast,overaperiodofjustacoupleofyears.Thefirstyearwillbefundedat5%.Thesecondyearwillbefundedat20%.Andafterthat,thesystemwillbefullyfundedatthe25%level.Hereisthethinking:Duringthefirstyear,thecountiesgetalittlemoneytogettheirsystemssetupandrunning.Inthesecondyear,patientswillstartarriving.Wecanassumethesystemswillberockyandtherewillbemanyproblems.Fundingatthistimewillbealmostfull,butnotquite.Finally,afterthat,thefundinglevelwillincreasealittlemore.Thisfinalincrementisintendedtobeusedtofixandsmoothoverinitialproblemsandstartupissues.

Year1: 5% OrganizationandplanningatthecountylevelYear2: 20% BegintheimplementationYear3: 25% Completesystemupandrunning

Simultaneously,wephaseoutMedicare,Medicaidandothergovernmentprograms.Duringthesecondyear,allpatientswhosemedicalcareiscurrentlypaidforbythegovernmentwillbetransferredtothesecond-tiersystem.WemusthonorpreviouscommitmentsmadetoolderAmericans.Asignificantreorganizationofthenation’shealthcaresystem,suchastheoneproposedhere,willbedisruptive.Medicaremustbephasedoutslowly,withessentiallynochangeforolderandretiredpeople.Thesepeoplehavebeenpromisedhealthcareintheirretirementyearsanditisnowtoolateforthemtosavetopayfortheirowncare.People10or20yearsawayfromretirementwillgodirectlyintosecond-tiercareuponretirement.Ofcourse,anymoneytheyhavemanagedtosaveintheirlastyears


ofemploymentcanbeusedtoaugmentthesecond-tiercareprovidedbythegovernment.Youngpeopleareinstructedtoplanandbeginsavingfortheirfuturemedicalcare.However,weprohibitanygovernmentincentivestoforcethemtosave.WhoLoses?WhoWillFightTheseProposals?Inanysweepingproposallikethis,therearelosers.HealthPolicymakersManypeoplehavestrongbeliefsabouthowthemedicalindustryshouldfunctiondifferently.Forexample,theymaythinkthatthereshouldbeagreateremphasisonpreventiveexams,orondietarychanges,oronnewtechnology,oroncaringfortheelderly,oronnaturopathicremedies,oronanyofathousanddifferentthings.Ourproposalsallownoroomforanyoneinthefederalgovernmenttoimposesucharbitrarymedicalmandatesoncitizens.Allmedicaldecisionsarelefteithertoindividualcitizensandtheirdoctorsintheprivatesector,ortolocalcountygovernmentswhichprovideabasic,minimumlevelofmedicalcareandwhichmay,throughthis,implementparticularhealthcarepolicies.MedicalAdministratorsSomedoctorswillappreciatethattheynolongerhavetodealwithinsurancecompanyrulesandarefreetomakemedicaldecisionswithoutcorporateoversight.Butotherdoctorswillbemoanthenecessityofhavingtodealdirectlywithpatients,ofallowingthepatientstoparticipateinmedicaldecisions,andofhavingtodealwithbillingpatientsdirectlyandalltheproblemsassociatedwithbillcollectionfromanelderlyorsickclientele.MalpracticeLawyersOurlawswillreducemalpracticeawardsand,ideally,eliminatethisindustry.InsuranceCompaniesThehealthinsuranceindustrymayobjecttoourproposals.Havingagovernmentmandate(suchasObamacare)thatrequirespeopletobuyaproductiscertainlyagoodthingfortheindustryprovidingtheproduct.Butwithourproposals,insurancebecomesentirelyfree-market,andnooneisforcedtodobusinesswithaninsurancecompany.


Themulti-waymedicaldecisionsthatbenefitedthehealthinsurancecompaniessomuchinthepast,areentirelyeliminated.Theabilityoftheinsurancecompaniestogetbetweenthepatientandhisorhermedicalcare(bycontractingwithemployersandwithmedicalproviders)willbeeliminated.Theresultwillbethatinsurancecompaniesmustswitchtheirfocustosatisfyingpatientsinordertosurvive.Howtheydothisisuptothem,butthepatientswillbenefitfromthiscompetition.Companiesneverlikeincreasedcompetition,sotheremaybepush-backfrominsurancecompanies.GovernmentBureaucratsandPoliticiansFinallygovernmentbureaucratswillalsobeunhappysincethereisalmostnoroleforthefederalgovernmenthere.Theredistributionfromthefederalbudgettothecounties—whilehugeindollaramounts—caneasilybehandledbyasmallofficewithadozencompetentworkers,whoissueroutinequarterlycheckstothecounties.Noreportsarerequired.Nooversightisrequired.Nopolicydecisionsarerequired.Nostudiesarerequired.WhyAdoptTheseProposals?Overall,wethinkthewinnersinthelong-termwillbeus,theconsumersofhealthcare,thepatients.Wethinkthat—overtime—thefirst-tierfree-marketsystemwillencouragemostofustotakemoreresponsibilityforourselvesandourownmedicalcare.WebelievethatthisisconsistentwithAmericanprinciplesofindependence,self-determination,andindividualresponsibility.Wealsobelievethatafree-marketsystemwilldeliverbettermedicalcaremoreefficientlythananygovernmentprogramcaneverdo.Intheend,thiswillbegoodfortheoverallhealthofallAmericans.Ifyoufeeltheseproposalsarepromisingorthispresentationcontainsusefulideas,thenplease:Forwardittootherswhoareinterestedinhealthcarepolicyreform.


AbouttheAuthorHarryH.PorterisaprofessorofComputerSciencewhosemainresearchareasaretechnicalandunrelatedtopublicpolicy.However,hehasalongstandinginterestineconomictheoryandpublicpolicy.Heisalsoanengineerbytemperamentanddrawntoreal-worldproblemswithmutuallyexclusiveconstraintsandworkingwithcomplexsystemsforwhichnooptimalsolutionexists.ReformingandimprovingAmerica’shealthcaresystemisjustthesortseeminglyinsurmountablechallengethatisworthyofdeeperconsideration.

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