What is the best way to pay for health care?

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A Nonpartisan Economic, Health and Public Policy Research Foundation

What is the Best Way to Pay for Health Care?

 

Traditionally health care has been paid for in what we call a fee for procedure, third party payment. That is, the doctor sees the patient and then seeks payment not from the patient but rather a third party, the insurance company. The doctor does this by submitting a claim form to the insurance company with a diagnostic code and a procedure code that has been previously published in a book. These books which were designed by the AMA and cost several hundreds of dollars, must be purchased by each physician annually. One of the reasons we have third party payment is that when it was first initiated, administrative costs were very low. Administrative costs include the cost of claims processing, marketing, underwriting, overhead, and profits. Unfortunately administrative costs have risen over the years but especially overhead costs as health insurance has become more complex and providers and patients alike began to exploit the perverse incentives and moral hazard associated with third party payment procedure driven medicine. This results in additional medical care that the patient demands because he is responding opportunistically to the lowered price of health care covered by insurance in a fee for procedure structure.

There is another way of paying for health care called contingent claims contract. In contingent claims contracts in which there is a lump sum payment to the patient with which to pay all costs associated with a particular insurable event, the administrative costs would include all of the above but also include additional costs for verifying illness, policing against fraud, and writing complex contingency contracts. Traditionally, these costs were thought to exceed the administrative costs associated with third party payment, fee for procedure until recently.

Because the computerized protocols designed by Dr. Lanzalotti are based on real data from the treatment of actual patients with diseases and conditions, and are severity rated, they are applicable to many patients and don’t require unique legal contracts. This means that a financing design utilizing lump sum payment from protocol health insurance would have much lower costs than third party, fee for procedure insurance. These protocols also lower the traditionally higher costs associated with the individual health insurance market as opposed to the group insurance market.

Under protocol insurance the physician does not file a claim form to the insurance company as in third party payment, fee for procedure medicine. The communication between the physician and the insurance company is an electronic signal automatically generated by software from the doctor’s computer to the insurance company computer that does not require the doctor to file a specific claim. This mitigates against fraud by both the patient and doctor but allows the physician to implicitly verify that the patient has the disease that constitutes an insurable event. When a patient sees a doctor or other health care provider, the doctor or health care provider examines the patient and prepares a computerized medical workup which will be used to determine a dollar amount to be paid directly and electronically into the patient’s extended HSA by the insurance carrier. Software that is part of this design evaluates the work-up and determines if there is a new insurable event. If there is, the software determines information about which established “protocol” and “complexity level” the patient’s condition corresponds to. An electronic transfer of this information from the provider’s office computer to the insurance carrier’s computer triggers a “lump sum payment” from the insurance carrier into the patient’s extended HSA.  The lump sum payment provides the patient with enough money to be able to pay for all anticipated expenses (at fair market value) associated with treatment, e.g., doctor bills, hospital bills, pharmaceutical bills, surgery bills, and bills for any other necessary therapy. The lump sum payment made is determined by protocol and complexity level and course of treatment for a given condition. This insurance payment does not require a co-payment or deductible payment from the patient because it is used exclusively for necessary, non-discretionary care not associated with moral hazard.  The patient then accesses this lump sum payment in his extended HSA with a medical debit card  to pay for all health care goods and services required to treat the condition.

By paying the lump sum payment directly into a patient’s expanded HSA account, instead of directly to the patient as cash, several advantages are achieved that move us further to our goal of patient driven market based health care. First of all , it separates the financing entity from the provision entity. It gives more power to the demand side (that is, money follows the patient. By paying the money into the account where it can only be accessed by an electronic debit card with electronic keys, the money can only be spent by the patient for health care or other designated purpose. It also gives the patient control over his entire health care dollar not just a deductible portion used for routine care. By having full control over all of the health care dollar, the patient can use market forces to help lower our very expensive hospital costs, a much more efficient method than our current managed care. According to the RAND Health studies, the patient will be much more careful in spending what he perceives to be his own money instead of the insurance money as a third party payment. The lump sum payment serves as a budget for the doctor and patient to use to pay for all necessary care associated with a particular insurable event. The physician and other providers would be paid for those services that the physician ( as the policy holder’s disease treatment manager and broker ) deems medically necessary for treating each idiosyncratic patient/disease combination. This type of payment does not interfere with the physician's ability to diagnose and treat his patients.

This plan balances the physician’s selling expensive procedures against the patient’s choice to spend money in his asset savings account, for which he may have other uses in the future. Its design provides cost sharing that will not penalize the sick and the poor while favoring the healthier and wealthier. Physicians will compete on how well they can provide the patient with quality care at the lowest price. Since the physician functions more as a broker of services rather than as a prix  fixe  purveyor, it is not necessary for there to be a large number of physicians engaged in a cut-throat competition. Therefore patients would not be at a disadvantage in a rural area in this paradigm. Most physicians would welcome a new system that would provide incentives to practice high quality medicine at the most reasonable price for the patient.

It also prevents third party rationing of care. If a price option chosen by the patient exceeds the lump sum insurance payment, there is additional money in the account derived from the annual  or periodic contributions into the account that represent a premium savings from today’s more much higher priced insurance premium. The patient can use these funds which rolls over from year-to-year and is fully “portable,”  to pay help pay for his selected price option. Every American will have a health plan that they can afford, own and keep.

The unique element of this design is that it creates demand side incentives that balance protection of the patient from unforeseen medical care expenditures with stimulating cost conscious consumer choice. On the supply side the need for third party managed care is eliminated and, with it, all the distortions and cost inflation it has created in the healthcare market.