A new approach to Reform

"The principles of Jefferson are the axiom of a free society"

Abraham Lincoln


A Nonpartisan Economic, Health and Public Policy Research Foundation

Rethinking Health Care Insurance Design -
A New Approach to Healthcare Reform

America’s healthcare system is broken. The United States spends 16% of its national income on healthcare, around twice the rich-country average, equivalent to $6,280 for every American each year. It is the only rich country in which all Americans do not have guaranteed access to health coverage; some 46 million Americans have no insurance coverage. There are appalling inefficiencies; by some measures 30% of health spending is wasted. There is no rational healthcare market to match buyers and sellers; it is plagued by distorted incentives and information failures. Functional markets require transfer of money and information, and equal power distribution among all market participants. Both government and the insurance industry have failed to control costs and prices by causing distortions in the market. Under the current system of insurance with its third party rationing and price controls, universal access will necessitate an even larger bureaucracy which will require such a large share of financial resources to pay for transaction/administration costs that an insufficient amount will be left for benefit payment.

A new design approach is necessary to fix the system. Otherwise, it is certain that corporate balance sheets and federal and state budgets face near-certain disaster in coming decades.

John A. Lanzalotti, M.D. a physician cross-trained in health care economics, policy and health care law, and long-term consultant on healthcare issues, has designed a new and innovative approach that addresses all the imperfections in the current system. His plan, called the American Health Plan, has four elements: a new form of individual health insurance, which he calls protocol insurance that eliminates today’s micro-management and inflated transaction costs; replaces today’s perverse incentives with proper incentives for everyone in the market place and establishes checks and balances that will transform our dysfunctional market into a functional and fair market; an asset savings account, which is an expanded version of the president’s health savings account designed to give all patients equal purchasing power in health care; high risk pools with innovative underwriting and re-insurance to provide access to those with pre-existing conditions or are considered uninsurable, at an affordable price; and a redefined role for the medical doctor and elimination of the current third party fee for procedure payment system. His design reduces costs and prices by eliminating twenty-two of the twenty-three cost drivers responsible for inflating premium prices way beyond wage increases. This plan eliminates the multiplicity of health plan claim requirements and the bureaucracy necessary to pay those claims.

Today’s health plan is transformed into bifurcated coverage that is owned by the patient in a tax free account that is personal , portable and affordable for all Americans. There is protocol insurance which covers all necessary health care needs when expensive insurable events occur and funded by the premium difference, a "self insurance" which remains in the asset account after the insurance premium is paid used to cover initial diagnostic visits to the doctor, discretionary care and routine healthcare.

Protocol insurance is a form of global payment insurance applicable to serious or expensive illnesses. By using experiential data from the insurance industry, input from all the medical specialties and actuarial data, a breakout of specific illnesses by type and severity is established. These protocols are standardized and accessed by software available to doctors on tablet personal computers. These, in turn, communicate automatically over a wireless connection with the insurance carrier when a new covered insurable event occurs. Full payment is made directly to the patient’s asset savings account. This payment is based on a medical workup by the physician not a claim form for individual procedures. Discretionary medical care is not covered by this protocol insurance.

The pretax asset savings account, which pays for this discretionary medical care as well as premiums for the portable protocol insurance, is funded by defined contributions from employers, Medicaid and Medicare, individual contributions, and refundable tax credits pr vouchers (in the case of lower income individuals). All heath care goods and services are paid by the patient directly from this account.

The role of the physician is critical; he serves as a medical manager for the patient, functioning as a broker and provider of services so that the patient can demand the best care at the lowest possible price. This obviates the need for the third party payer, insurance network designs, provider networks and administrative oversight. 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 use in the future. Its design provides cost sharing that will not penalize the sick and the poor while favoring the healthier and wealthier, as the president’s Health Savings Account design may very well do in the current paradigm. It also prevents third party rationing of care.

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.

The American Health Plan will dramatically improve quality, efficiency and consumer satisfaction. Perhaps it is time to experiment with this new design.