Saturday, February 4, 2012

A cumulative deductible

I've been reluctant to publish a formula for the Medical Savings and Loan because there are many different ways to implement the program. You can also examine the program from different perspectives.

This post examines the program from the perspective of the insurance deductible. Be sure to read the conclusion.

The goal of the Medical Savings and Loan was to create a structure in which people were directly responsible for the bulk of their lifetime medical expenses. Insurance would only kick in if a person had extraordinary lifetime expenses.

Standard insurance attempts to control costs using yearly deductibles and co-payments. If your policy had a thousand dollar deductible, you would be expected to pay the first $1000 of expenses each year. With the co-payment, you have to pay twenty bucks or so each time you visit a doctor.

These devices create perverse incentives without achieving any health benefits. For example, if your deductible was $1000, you might put off visiting a doctor for a year because you are under the deductible. The co-payment is a bad idea because it induces people to try to combine two medical visits into one.

The deductible does not cut costs. Once a person hits the deductible, they behave like a kid locked in a candy store for the night and eat everything in sight.

In the HSA model, people have a high yearly deductible (say $5000). The company would give people a thousand dollars or so extra to put into a savings account.

The large gap between savings and the high deductible magnifies the perverse incentives. When people cross the magic deductible line, they dramatically increase consumption.

The high yearly deductibles are extremely problematic for people with chronic conditions. By definition, a person with a chronic condition has high expenses every year. If your chronic back problem means you spend $4000 a year on therapy you will be left paying all of it under the standard HSA model.

A Cumulative Deductible

My idea for improving the HSA Model was to create a system with a very large cumulative deductible that spanned multiple years.

Imagine that you had $2K a year deposited into an account each year, and you had a $30K deductible over a 10 year period. In the ten years period, you would get $20K deposited into an account, but wouldn't get any money from your insurance company until you had over $30K.

You now have a system where a large number of people could self fund their care. This would help restore the doctor/patient relation and help restore the pricing mechanism in health care.

A Life Time Deductible

If you look at the lifetime health care expenses, you will find the expenses are distributed in some variation of a bell curve. I do not know the exact numbers. However it is likely we would find something like the average American has $200,000 in lifetime medical expenses and that 75% of people have less than $300,000.

One can extend the concept of a cumulative deductible to a full human life. In this case, we would want to create an insurance product with a lifetime deductible of $300,000 (with a corresponding amount going into the savings accounts).

An Income Based Deductible

One thing I discovered while working in insurance is that rich people spend more money on their health than poor people.

I see nothing wrong with a world where the rich CEO goes to the best doctors and working stiffs, such as myself, seek care in working class clinics.

I see a big problem, however, when these people are in the same insurance pool.

Since executives are prone to seek out expensive care, they have a much higher claims experience than the poor.

Continuing the discussion of deductibles, I've concluded that the deductible should be based on a person's disposable income, and not some fixed dollar amount.

A person who makes $500,000 a year should have a higher deductible than a minimum wage clerk making $16,000 a year. Even a thousand dollar deductible puts health care out of reach of the working poor.

But annual income varies. As a contractor, I find my income varies wildly between the years.

The ideal system would compare lifetime income to life time health expenses.

If you made a graph of lifetime income to lifetime health expenses, you would find most people are spending something like 15% of their income on health expenses. Let's say 90% of people spend less than 20% of their income on health care.

Looking at a model that compared lifetime expenses to lifetime income, one might conclude that the ideal system would have a lifetime deductible of 20% of income. Such a system would have most people negotiating care with their doctors and would restore the pricing mechanism.

If your lifetime income was $1,000,000; your lifetime deductible should be around $200,000. If it was $2,000,000, it should be around $500,000. If you made $10,000,000 you should foot the bill for the first two million dollars of your health care expenses.

Deductibles Are a Negative Space

In this article I discussed healthcare from the perspective of the deductible. I started by realizing that a yearly deductible creates perverse incentives which induce people to put off care when they are below the deductible and over-consume when they cross the deductible.

Creating a cumulative deduction reduces the problem.

If you create a cumulative deduction, why not go all they way and create a system that compares one's full lifetime income to lifetime expenses?

A system that looked at people as whole entities would likely have a lifetime deductible of $200,000 to $300,000 per person. The rich would have lifetime deductibles in the millions.

In such a system, the bulk of health care would come in the form of direct contracts between doctors and patients. In this case, healthcare policy becomes a matter of developing a system to help people negotiate and maintain records related to their care.

The Medical Savings and Loan is a system for funding healthcare that has an extremely high lifetime deductible that is based on one's lifetime income. The average American might be expected to pay the first $300,000 in care. In this system, most people would self fund their care. As such, the focus of the program is the mechanism for self-funding care and not the system to supplement the care.

In a world where people are used to discussing healthcare in terms of deductibles and co-payments, I would tell people that the MS&L is a system with a lifetime deductible based on one's lifetime earnings. The average American would be expected to pay the first $300,000 in care. The rich would need to pay the first million or so in care. The program uses a system of savings accounts and loans to help accomplish this goal. Of course, once people are in the Medical Savings and Loan, there will be little actual talk about deductibles and co-payments. People will be more involved in a conversation about making the most of the resources they have available for their care.

No comments:

Post a Comment