New Design

The new design of medical finance must accomplish several objectives simultaneously:

1. Create no demands for identifiable patient medical information beyond the immediate medical care givers.

2. Promote economic efficiency in the delivery of medical services.

3. Be based on a compromise that Conservatives and Liberals might accept.

While there are possibly many political feasible alternatives which meet these criterion, given space limitations we shall focus on one. The proposed compromise combines medical savings accounts with pooled catastrophe medical insurance. In this section we need to define the proposed system with its many variations, show under what conditions there are no demands for patient medical information beyond the medical care givers, and how the design promotes economic efficiency in the delivery of medical services.

Let us first consider the conservative potion of the medical system, the medical savings account. This concept allows individuals to set aside a specified sum of money which can be used to pay for medical services. Firms could as a fringe benefit provide any fraction of the specified amount. The amount which is not spent on medical services is saved. Variations in the concept allow individuals to spend accumulated sums for special purposes such as the education of children or buying a house.

It is important to understand certain properties of the medical savings account. First it is impossible to have a choice between medical savings account and pooled medical insurance. The healthy will choose the medical savings account and the cost of the pool will rise. The almost healthy will then choose the medical savings account. The choose between these two alternatives, creates incentives for the healthiest members of the pool to leave the pool, thus driving up the costs.

A medical savings account greatly decreases the employers economics interest in employee and prospective employee medical records. The costs to the firm is fixed at the chosen percent financed as a fringe benefit. Also since the employee pays his or her own medical expenses, the firm has no input into the decision and therefore has no interest in examining the employee medical record to make medical rationing decisions. To reduce medical cost, the firm might decrease the percent of the medical savings account financed as a fringe benefit, but the firm under the medical savings account does not increase profits by actively seeking and retaining healthy employees. Under the medical savings account, the firms residual economic interest in seeking and retaining healthy employees is limited by the fact that individuals frequently change jobs.

The medical savings account promotes economic efficiency in medical services through individual responsibility. First, individuals bear the full cost of unhealthy lifestyles such as smoking. Second, individuals have a strong interest in the cost of medical procedures. With patients carefully examining their bills, it would be more difficult for medical providers to pass through the costs of indigent care or expensive equipment. Conservatives assume that individuals will select among medical alternatives on the basis of cost benefits. Liberals assume that most individuals are not sufficiently informed to make wise choices. For example, individuals might not understand the benefits of preventative health care. Under medical savings accounts, there is a need to educate the public about medical care. Many private organizations, such as Consumer Union and possible medical schools with their wellness letters, would offer CD-Roms and other media material to assist households in their choices.

The organization of catastrophe medical insurance requires care to meet the design criteria. Under the current self-insuring provisions, each firm acts as an independent insurance agent. If a firm partially self-insures the firm acts as an independent insurance company for the part that the firm ensures. If catastrophe medical insurance is handled in the same fashion as current self-insured medical insurance, the firm has a very strong economic incentive to hire and retain healthy workers in order to reduce the catastrophe medical insurance bill. To eliminate this economic concern from firms, the pools for catastrophe medical insurance must contain a large number of firms with average rates and no experience rating for each firm. With a large pool the cost to each firm is the pool average cost and as a unhealthy individual will have only a very small impact of the average cost, each firm does not have an overriding economic interest in the medical health of current and prospective employees.

To make such a program attractive to firms the pools would need to power to establish the medical benefits program subject to Federal but not state law. This is because medical service groups lobby state government to mandate their service as a part of any state authorized medical insurance plan. As was the case in medical savings accounts, the percent of the catastrophe medical insurance covered by fringe benefits could be left to firms or determined by the Federal government. From the perspective of social policy it is more desirable that the catastrophe medical insurance be covered as a fringe benefit than the medical savings accounts.

For pooled catastrophe medical insurance to succeed there can only be limited options for individuals. Individuals might be offered a menu of medical services at varying prices. Because of information asymmetries, the less healthy would opt for the more expensive plans increasing the average costs.

In order to eliminate the demand for patient medical files beyond the medical care givers under the catastrophe medical insurance plan, major changes in current procedures are required. The plan would mandate what tests, medicines and procedures were covered. This information would be clearly specified to the plan recipients perhaps through the firms intranet, to the medical service providers through their medical decision support system. In choosing between alternative jobs, individuals would have an interest in what was covered. With this information system the pooled medical finance service would not have the option of discretion in rationing medical service. The rationing provisions are rules which must be clearly defined upfront. Therefore, the pooled medical group paying the bills has no interest in seeing individual patient medical records to make discretionary decisions because this is not allowed. The medical pool would have the right to audit the medical service providers at fixed intervals to ensure that they are following the rules.

The provision for economic efficiency in the pooled catastrophe medical insurance is in the competition between medical service providers to obtain contracts. The large pools have the resources to carefully analyze the alternatives to determine which is most cost-effective. Currently however, self-insuring firms appear more interested in obtain the low cost provider rather than the best for the money. If the provisions of the catastrophe medical plan are made clear to the recipients, the pools will be under considerable pressure to provide quality care.