Wednesday, February 22, 2012

Restoring the Pricing Mechanism

(This post was written in response to Drawbacks of Catastrophic Health by Craig J. Casey)

Health care is the allocation of resources to the care of one's health. Resources include time, material and knowledge.

The pricing mechanism helps with the allocation of resources.

Third party-payer healthcare (insurance and socialism) break the pricing mechanism. This is bad because it adversely affects the allocation of resources in health care which adversely affects health.

To restore the pricing mechanism, reform must accomplish two things.

First, reform needs to get people to think of their current health issue in terms of their whole life. If spending a little effort today saves a big problem later; one should spend the little effort now.

The second, and really big trick, is to create a structure in which the patient sees the current negotiation as being the part of the bill that comes from their pocket.

The Medical Savings and Loan attempts to revive the ideal that people who can self-fund their care should self-fund their care. Most people can self-fund their care. Such people are expected to pay out of their savings. If their savings are short, they have easy access to loans that they are expected to repay.

People who understand that they are responsible for their entire health bill are likely to approach each health care expense as a negotiation.

When people have extraordinary expenses, my program actually does something sneaky. The program either writes off old loans or gives the patients a block grant for care.

If a person has had bad health experience, but has done a good job using resources, the Medical Savings and Loan will subsidize current care by either writing off old debts or giving a block grant. In this way, the patinet will be negotiating new expenses with their own money.

The ideal is that the money is always flowing from the patient to the doctor, and that the patient views the money for the current bill coming from their pocket.

Notable Exceptions

There is an exception to every rule. The first exception to the rule comes in the case when a person is unconscious or otherwise incapable of negotiating prices in which case a third party must step in to negotiate prices.

Likewise, charitable care is an exception. In true charitable care, the charity is providing health care with its own resources. A charity seeks to accomplish as much good as possible with its resources.


  1. Yes and no, when writing off old debts, the money is not always flowing from the patient to the doctor.

    I realized from your article that MDs would have to agree to the MS&L plan since in the current economic environment, widespread use of these accounts would result in write offs.

    The Doctor of Today is not like 20 years ago. How would we make sure MS&Ls do not go the way of S&Ls? Less savings and more (bad) loaning?

  2. You are correct to be worried about debt.

    I created this program by reverse-enginnering an insurance pool.

    Imagine that each person had a spreadsheet showing payments into the pool and all of the money taken out with the transfers of payment recognized as debt and write offs.

    That's what I am aiming for.

    If this happened, people would start recognizing that our third party payment system created the exact same set of problems as uncontrolled lending.

    As for the savings and loan fiasco. That was the result of fractional reserve lending. I haven't started the discussion of the source of the loans. The program doesn't use fractional lending. The money for the loans is either from a loan reserves purchased by the policyholders, or from charitable foundations.

    In my current plan, there is more than one organization involved in the loans and grants. Yep, when these groups are tapped out, they can no longer make loans or give grants.

    People own the equity in their savings accounts. If all the lending groups belly up, people would still have their savings.

    In contrast, when insruance companies belly up, the people dependent on the company fall into a state of total crisis.

    As for the MDs, the payments are cash payments from costumers (not credit). The write-offs are all done internally in the loan reserve or at the foundation that made the loan. Doctors might engage in medical lending thru their own foundation.

    The Medical Savings and Loan is really just a demand for open and honest accounting.

    Our third party payment system is rife with unacknowledged wealth transfers, cost shifting and open fraud.

    The MS&L starts with this third party payment system. It demands that all of the internal transfers be openly acknowledged as formal loans and write-offs.

    I confess, my hope is that, as people start engaging in honest accounting, they will start challenging all the hidden transfers that dominate the third party payment system.

  3. What about calling is a modified health savings account? Easier to grasp.

    The hidden transfers are often the medical billing codes that are purposely arcane.

    My experience, when insurance companies belly up, the people dependent on the company do not fall into a state of total crisis, another insurer eager for their accounts takes them over with supervision from the state.

  4. I chose the name "Medical Savings and Loan" back in the 1980s when people spoke of MSAs--not HSAs. I'd be more than happy to change the name of the program.

    I think there is advantage in distancing the discussion from the HSA/HDP of the 2003 MMA. Afterall, MMA was a massive expansion of entitlement spending with the HSA tacked on to buy libertarian votes.

    What I want is a discussion that builds the financing of health care, from the ground up, around the individual.

    I realize that any practical program would be created by modifying existing programs.

    The reason I want a ground up discussion is to create a clear distinction between individual and group-funded care.

    With this distinction in place, people would be better able to implement free market oriented health care reform.

    If I can ever get a group together to build on this idea, I would leave it to the group to choose the name. There are many interested names. Something simple like "Individually Financed Care," "Structured Health Savings," "Full Life Care."

    I really like the name of "Health Care Advocate."

    As for the collapse of insurance companies, I worked with a state auditor who showed me cases of a poorly designed insurance policy bringing down the companies that bought them.

    Yes, competitors are eager to step in and take over for failed insurance companies. They ask a high mark up. If a company has poor financing or a dip in cash flow, the transition can be terminal.

    The complex insurance obligations caused by the derivatives were at the heart of the financial collapse of 2008.