Protocol Insurance Summary

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

Abraham Lincoln

A Nonpartisan Economic, Health and Public Policy Research Foundation

What is Protocol Health Insurance?


It is an alternative model for health insurance that avoids third party payment, procedure driven medicine and promotes patient driven health care. It is a contingent claims contract that pays off in a lump sum rather than a separate fee for each procedure performed by a provider. It makes insurance merely a financing mechanism that provides the patient with a sufficient amount of money when they have become ill and developed a disease which is a covered event. The protocols offer a coherent explanation of the relationship between price, cost and economic value.

Advocates for the free market usually argue for consumer choice and free-market competition in health care, without adequately distinguishing between the usefulness of competition in the insurance market and in the health care market. Empirical evidence indicates that a free market for third party procedure driven insurance cannot achieve social equity and that serious market failures allow insurers to practice risk selection, leaving the most vulnerable people uninsured. Adverse selection among insurance buyers impairs the functions of the insurance market and deters the pooling of health risks widely. Also, the current insurance market’s high transaction costs yield highly inefficient results. In addition high deductible, third party payment procedure driven insurance drives up health care costs. On the other hand, evidence indicates that reliance on market competition for the provision of health care may hold potential for more-efficient and higher-quality care.

Our goal is to design a financing method which will produce efficient, equitable, and effective health care. The financing method chosen is of critical importance because it determines the risk-pooling arrangement and the distribution of the cost burden. It also will decide resource allocation and will choose a payment amount to provide incentives to providers. It should also facilitate a new system where millions of individual patients will pay providers directly.

Protocol health insurance utilizes a separate protocol for each insurable event. The idea is to determine what broadly accepted standards are held by the medical community of what constitutes good health care practice and what defines episodes of that care and the relative value of those episodes. This is not as complicated or difficult to accomplish as is commonly believed. Approximately 90 percent of health care spending is for sicker patients spending $1,000 per year or more. And, about 80 percent of health care spending is traced to patients with largely predictable health care needs and expenses: the chronically ill. We now have an enormous amount of experience data representing the treatment and outcomes of many patients over the past 5 years. Protocols are created based on this data and developed by physicians from each specialty area that can determine the relative value of all of the necessary procedures necessary when a patient exhibits a disease that represents an insurable event. This results in a severity rated list of complexity levels within each protocol for each insurable event. These protocols are reduced to computer software.

The amount of the lump sum payment for each insurable event is a function of or determined by the complexity level and protocol. Each established protocol (a diagnosis or condition representing the primary morbidity) in the software is comprised of several complexity levels.  Each complexity level represents increasing morbidity associated with the insurable event and the presence or absence of any co-morbidity associated with that particular protocol.  Each complexity level is associated with a relative value scale number, which represents the relative value of each level of necessary care. The number of complexity levels may vary and depends on the particular diagnosis). In other words, the sicker the patient, the more money the patient will need to pay his medical bills.  Because health care is primarily a local market  phenomenon, the relative value scale number is then multiplied by a factor λ that floats with known local market-related components to determine the actual dollar amount to be transferred as a lump sum payment  into the patient’s expanded HSA. The payment from the insurance to the patient’s expanded HSA does not dictate what price the provider or doctor charges the patient. The physician is free to charge the patient market price. We just need to get the insurance payment in the neighborhood of fair market value. Using experience data and having physicians determine relative value is the best and most rational way to do this to initiate the system. Once the market has determined fair market value, insurance payments can be adjusted to make sure that the patient has enough money from insurance to pay his bills.  

The utility of Protocol Health Insurance is that it eliminates the high transaction costs of current health insurance. It also obviates risk selection and allows for high risk pools so that all Americans including the most vulnerable will not be excluded.

Under such a model, all insurers in a state or region (across state lines) would cede their cata­strophic claims to the pool, and the cost of the pool would then be funded out of a per-covered-life assessment on all insurers, as well as public and private subsidies and re-insurance and other creative risk spreading arrangements such as underwriting and re-insurance syndicates. In that way, the burden of high-cost cases would be broadly spread evenly among all carriers and insurers, who would have strong economic incentives to manage these cases, and not simply dump them on the taxpayer as part of a cherry picking scheme.

Because Protocol Health Insurance can be used by all insurance companies as well as self insured entities, it levels the playing field, providing for competition in the insurance market, as well as allowing the insured to be individually underwritten but allowing patients to transfer insurance carriers within their risk category. The protocols also provide the patient with a  value per premium dollar ratio that will allow patients transparency in selecting which insurance carrier will give them the most value per premium dollar.

Protocol Health Insurance is a technically efficient health care system that will only deliver care that improves health status and in a way that minimizes the use of society’s resources. Unnecessary care and inefficient modes of delivery would be minimized or eliminated, and health care cost growth would be consistent  with improved quality and effectiveness of care.