Excerpted from The Handbook on State Health Care Reform, by John C. Goodman, Michael Bond, Devon M. Herrick, and Pamela Villarreal.
Five recommended principles of health care reform should command widespread support, but as it turns out, that is not the case at present. Following them would greatly enhance the odds of successful health policy reform.
Principle No. 1
No one should be denied basic care because of a lack of ability to pay
A good society does not withhold basic health care from people because they lack the resources to pay for it at the time of delivery.
This does not imply that people have a “right” to free care. If that were the case, everyone would have a perverse incentive to become a “free rider,” wastefully over-consuming care at everyone else’s expense.
Instead, most people should be expected to pay their own way most of the time, without having to forgo basic care if they can’t pay for it at the time of delivery.
Principle No. 2
Health care should be provided in a competitive marketplace
The economic definition of efficiency is this: Whatever is produced should be produced at minimum cost. Some studies lend credence to the idea that one out of every three dollars of health care spending is wasted. This implies that, in principle, the same health care could be provided for just two-thirds the current cost. Alternatively, there could be 50 percent more care for the same amount of money.
In other markets, entrepreneurs spur efficient production by repackaging, repricing, and taking advantage of new products and innovations. Principle No. 2 is not being followed when entrepreneurs are arbitrarily prevented from serving this function, as is currently the case in health care.
Principle No. 3
The appropriate level of insurance depends on the assets to be protected
If Principle No. 1 is followed, people will not need insurance to receive care. Instead, they will need insurance in order to protect their earning power and other assets from unexpected health care costs.
Other forms of insurance serve as a useful guide. The purpose of life insurance is primarily to protect earning capacity against the consequences of premature death. Accordingly, the appropriate level of insurance depends on current assets and expected income.
The purpose of casualty insurance is to protect the value of, say, a home or automobile. The appropriate level of insurance depends on the anticipated risk and the replacement value of the home or car.
Similarly, the purpose of health insurance should be to protect assets against unexpected medical costs.
Principle No. 4
Health insurance should be personal, portable, and renewable
It is a mistake to have a system in which a change of health plans is virtually mandated whenever people change employers. Instead, health insurance should be portable, traveling with the employee from job to job.
Also, it defeats the purpose of insurance if premiums can rise in response to an adverse health event. Life insurers do not get to charge more to the already insured if they get AIDs or cancer. Insurance exists to transfer risk from the individual to a broader pool of people.
The price of that transfer is the periodic premium payment. Once the insurance contract is set, the practice of increasing premiums after an adverse event occurs would be like changing the odds on a horse race after the race is underway.
Accordingly, people should be able to buy health insurance that is renewable at rates that are independent of adverse health events. In most states, this is required under the laws governing individual insurance. However, such insurance is generally unavailable in the small group market.
Notwithstanding all of the above, from time to time people may wish to change their insurance coverage. At that point they should be able to buy real insurance in a real market.
It is to everyone’s advantage to be able to face real prices for risk when making changes in insurance coverage. Otherwise, people who are undercharged will overinsure, and people who are overcharged will underinsure.
Principle No. 5
Private insurance should be at least as attractive as health care provided at taxpayer expense
For many people, the implicit alternative to private insurance is to rely on charity care paid for by others. For those who qualify, Medicaid and SCHIP programs are alternatives to private insurance. Perversely, these alternatives encourage people to forgo private coverage paid from their own pockets in order to take advantage of care provided at taxpayer expense.
Rational public policy would create the opposite incentives. At a minimum, government should be neutral–giving people just as much incentive to be in the private sector as in the public sector.
For more information …
To read the State Health Care Handbook online, see http://www.ncpa.org/email/State_HC_Reform_6-8-07.pdf