In their paper titled “Leveraging the Medicaid Expansion,” David Hyman and Charles Silver write,
“We propose that rather than adhering to Medicaid’s traditional structure, where states pay providers at unreasonably low rates for treating beneficiaries, expansion projects should be modeled on Social Security and the Earned Income Tax Credit, both of which distribute money that recipients can spend as they wish.”
“This simple but fundamental design change would ameliorate or eliminate many of the major problems that existing third-party payment arrangements foster,” Hyman and Silver write.
Since that publication, ten states have opted out of Medicaid expansion because they foresaw how uncontrolled Medicaid spending could turn into a state budget nightmare. Giving people cash accounts in Medicaid could end the waste, fraud, and poor outcomes we witness in Medicaid today.
Defined Benefits, Not Costs
State legislatures should have the option to periodically deposit set amounts into recipients’ health savings accounts (HSAs) to be accessed by debit cards. This would change the current “defined benefit plan” structure, with its unpredictable costs, to a defined contribution plan with set costs.
The federal government would match the contributions states put in the accounts, using the reimbursement formula used currently for Medicaid expansion states. Beneficiaries could use the funds to purchase catastrophic health insurance, join comprehensive care organizations, or pay directly for their medical care. Catastrophic coverage plus direct primary care “might be especially attractive to many consumers,” the authors write.
Open-ended defined-benefit coverage that pays for not only catastrophic but almost all medical care services invites people to overuse services because they are disconnected from the costs. This is true of whether private insurance, Medicaid, and Medicare. Third-party payers increase the cost of care through burdensome regulations, pre-authorization rules, benefit denials, and price-setting that skews the value of medical care services.
Cash accounts that people own, incentives to purchase high-quality health care at market-driven prices. Health care spending and inflation would both decline.
Cash accounts are also an anti-poverty measure. Joseph V. Kennedy put it this way in his book Ending Poverty: “Ownership of resources is the path to a decent life free of poverty and dependency: a goal for all Americans.” Cash accounts would give people ownership of their medical care resources.
Positive Incentives
Milton Friedman famously observed, “nobody spends somebody else’s money as carefully as they spend their own.”
People who receive coverage through government plans have no reason to economize or seek the best value. The same can be said for people with private health plans. In fact, high premiums encourage more health care spending, which leads to a cat-and-mouse game between insurance providers and the policyholders, in the form of pre-authorization rules and benefit denials.
Cash accounts incentivize people to economize and seek out the highest value. There would no longer be a need for finicky rules and oversight: people could serve as their own spending regulators. Naturally, health care spending would decline.
Hospitals and providers would no longer have to “cost shift” to cover bottom lines, because a free market would force them to provide service at the best possible price and focus on procedures that provide value.
Price Power
For cash accounts to be truly game-changing, there must be a system of price transparency. Markets cannot function without consumers knowing what a price is and determining whether it is worth it to them.
Several states and President Donald Trump, through his price transparency executive order, are making progress in this regard. Hospitals and other health care entities have been slow to provide this data in a machine-compatible way so app developers can use it to create consumer pricing tools.
People will economize and seek high value only when they are spending their own money. Today, nearly 90 percent of health care spending is done through a third party. If costs rise, third parties will increase premiums or, in the case of the government, borrow more money, take the money from another government service, increase taxes, or all the above.
Corporatization of Medicine
Another requirement for cash accounts to work their magic is the enforcement of corporate practice of medicine laws (CPOM). The HMO Act of 1973 allows corporations to make medical decisions and insure people without proper training and licenses.
Enforceable CPOM laws would restore the primacy of the physician-patient relationship and restore professional medical ethics rules that place patient interests before corporate profits. CPOM laws could be nationalized to prevent corporate entities from practicing medicine or employing physicians, with a professional medical corporation exception.
Unfortunately, the political power of the present medical rent seekers in the United States makes effective CPOM laws a pipe dream.
HSA Freedom
The best hope for restoring a cost-effective medical market in the United States is for Congress to decouple HSAs from high-deductible health plans and allow everyone to have them. Congress should also increase contribution limits and remove some of the spending penalties.
As Friedrich Hayek wrote in his seminal book The Road to Serfdom, “By allowing millions of decision-makers to respond individually to freely determined prices, it allocates resources—labor, capital, and human ingenuity—in a manner that can’t be mimicked by a central plan, however brilliant the central planner.”
Robert Koshnick, M.D. ([email protected]) is a retired family medicine physician from Detroit Lakes, Minnesota; program director for the MN Physician-Patient Alliance (physician-patient.org); and author of the 2022 book Empower-Patient Accounts Empower Patients!