Conservative versus Liberal

In order to design a politically feasible and economically efficient medical system that does not require labeled medical records beyond the medical care givers, the first step is to consider alternatives from the perspective of conservative and liberal political philosophies. We need to consider under what politically feasible conditions we can design an efficient medical system which does not create demands for medical information beyond the medical care givers.

First, let us consider the conservative position. Conservatives believe that medical insurance should be based in individual risk, that is cost of medical insurance should reflect all known factors which can predict a variation in costs. This position is consistent with the logic of competitive markets. Initial endowments are taken as given, and the market determines the price based on those initial endowments. In the case of medical insurance the initial endowments are the genetic endowments and past medical history. Conservatives also believe that medical insurance prices should also reflect individual responsibility in terms of lifestyle choices.

Liberals believe that medical insurance should be pooled such that all individuals in a community would pay the same rate. With respect to the young and old the difference in medical expenses is averaged over a lifetime. However, in such an arrangement the healthier than average subsidize the less healthy than average. The social justification for pooling can be formulated as a Rawlsian social decision. Suppose adults had to design a medical system where the individuals did not know the medical expense forecasts prior to designing the medical system. In such a decision framework individuals might well decide to pool the risk. The conservative position differs from the liberal in that conservatives are creating a system where individuals have already been assigned their risk factors. Which approach is preferable is a matter of personal opinion not logic.

In considering individual risk medical insurance the issue is could such a market be based on truthful, voluntary disclosure of medical risk factors including genetic factors The answer is yes. A medical insurance firm could offer a very low rate medical insurance policy to those individuals who would step forward and demonstrate that they had good genes and good medical histories. Individuals could have their genes tested in secret and if they qualified, they could apply for the low rate insurance. Once the very lowest rate insurance had been fully prescribed, medical insurance firms would offer an attractive rate to those individuals who had good genes and few problems in their medical histories. People who are the healthiest in the pool of individuals who do not qualify for the special rates have the greatest incentive to seek the new insurance when the healthiest group of the pool is signaled out for a special rate based on voluntary disclosure of medical and genetic information. Over time the medical insurance market would become fully stratified by previous medical histories and forecasting information such as genes.

It is important to realize that such a market would be both efficient and Pareto optimal, which means that it would be socially desirable from the perspective of market economics. From the conservative position, discrimination in a competitive market would be the case where either firms refused to sell insurance at the rate set by the risk factors. From the perspective of market logic such discrimination is extremely unlikely. Discrimination from a liberal perspective is quite different. If the ideal of a liberal is pooled risk, then any differentiation in price based on risk is discrimination.

Now we need to consider under what conditions can there be medical insurance with no demands for the potential customer medical files. The answer is two extreme cases. First, from a conservative position would be no medical insurance with everyone paying his or her own cost. Without insurance, there is no demand for patient files beyond the immediate medical are givers. The other case is the extreme liberal position where all risks are pooled. An example of this scheme would be a community based rating system. Since insurance firms must accept everyone in the pool and the rates are determined by average risk, they have no demand for the customers medical patient history or genetics.

The demand for patient medical information by firms is dependent on how medicine is financed. It is important to realize that even if there was no medical insurance and each employee paid for all his or her medical expenses out of his or her wage or salary, a firm would have some interest in the medical forecast of employees and prospective employees. For example, if a firm invests in training in its employees, the return on its investment depends on the future health of the employee. The future health of employees being considered for advancement is also of some concern. What we wish to argue is that the current method of finance of medical insurance by self-insuring firms creates an excessive economic interest of such firms in the medical health forecasts of current and prospective employees.

Currently, firms have strong economic incentives to self-insure so that they are not subject to state mandates in what medical procedures must be offered by the firm's medical plan. Medical practitioners lobby state governments so that their service is mandatory in any medical plan covered by state law. Medical plans of self-insured firms are covered by federal law and are not subject to state mandates. In practice this means that the firm can decide for itself what medical procedures will be covered by the firm's plan.

First let us consider the consequences of this method of medical finance from the perspective of an unregulated market so that we can clearly specify the demands for patient medical information by the firm on current and future employees. With complete self-insuring or partial self-insuring and experience based insurance above a cutoff, the medical expenses of the firm are simply another cost which directly affects the bottom line profits. The strongest economic incentive that self-insuring of medical expenses creates on the firm is to hire and retain healthy workers. Firms have incentives to try to change the lifestyles of their workers by prohibiting smoking in the workplace and creating gyms so that the workforce gets more exercise. In an unregulated market firms have powerful incentives to acquire all medical information possible about future workers to select talented healthy workers. Also, firms have powerful incentives to actively retain only those healthy workers.

The current social policy concerning self-insuring firms is that they are to pool medical risk. Except in special cases that must be justified, firms can not demand physical examinations from prospective employees. However, since self-insuring firms pay the medical bills they can acquire extensive medical information concerning current employees.

The public policy the firms should pool medical risk is being enforced through an interpretation of the physical disabilities act. Such an approach is never likely to be cost-effective. First, the incentives for firms to seek healthy employees is dependent on the cost of testing equipment, the probability of being caught, and the magnitude of the sentence. Over time the cost of genetic testing equipment is likely to fall and testing is likely to become automatic. This would greatly increase the incentives of firms to secretly test potential employees. Trying to prevent such activities through the use of the Disabilities Act would be expensive and ineffective. Almost all individuals have some type of genetic disorder, therefore there is no real criterion for establishing discrimination. As firms generally interview many individuals for openings proving discrimination will be difficult and costly. Finally most individuals will not wish to reveal their genetic disorders publicly in order to claim discrimination.

We shall now suggest two alternatives which would greatly decrease self-insuring firms interest in the medical records of employees and potential employees. The fundamental concern is to separate medical decisions from employment, retention, and promotion decisions. As long as medical expenses directly impact the bottom line, a self-insuring firm will have a strong economic interest in the medical files of employees and potential employees. Rather than try to limit the firm's ability to inquire into the medical histories of potential employees a better alternative would be to remove the firms economic interest in the medical expenses of its employees.

Medical insurance paid by firms in the United States is of recent origin namely World War II when firms used fringe benefits to attract employees under wage and price controls. Self-insuring firms has become very popular with firms because they are not subject to mandates for medical service under state laws. If firms paid workers the average expected medical fringe benefit as either wages or salary, the firm could cease to provide medical benefits. Each worker would be responsible for finding his or her own medical insurance through the increased compensation. Such an approach would greatly reduce the firm's interest in the medical forecast of its employees. Nevertheless, such an approach is not likely to achieve political consensus. While such an approach might appeal to conservatives, it is not likely to appeal to liberals who want to hold firms responsible for providing medical insurance.

An alternative approach which might appeal in part to both liberals and conservatives is to combine medical savings accounts with pooled catastrophe medical insurance. With medical savings accounts the contribution of the firm is fixed and the employee pays for his medical procedures himself or herself. The firm has no access to the employee's medical record. Thus for the medical savings part of the finance of medical procedures the firm has very limited interest in the medical forecast of potential or current employees. Medical savings account appeal to conservatives.

The catastrophe medical insurance policy requires a large pool to greatly reduce the firms interest in potential and current employee medical forecasts. With a large pool the medical costs of an individual will have at most a very small impact on the average medical costs of the pool, thus firms will not have strong incentives to seek and retain healthy employees. To make this approach palatable to firms the pools would have to be organized such that the pools could set the mandates for the catastrophe medical insurance not subject to state mandates. This would be an extension of the current policy. What would be different is that to obtain large pools, firms would have to organize on an industry basis or regional basis to obtain large pools in which an employee at a particular firm does not affect the insurance rates for the firm.

Catastrophe medical insurance would appeal to liberals. Moreover, conservatives and liberals might be able to reach a compromise because the subsidies of the two approaches tend to cancel each other out. Medical savings accounts provide the healthy with much greater benefits than the unhealthy. In large pooled catastrophe medical insurance the healthy are subsidizing the less healthy. Combining the two provides liberals and conservatives much room to compromise. First, the level of expenses to be covered by medical savings account and the cutoff for the catastrophe plan determine the subsidies between the healthy and not so healthy. Another compromise is how much of the medical savings account is to be financed by firms. Second, the catastrophe plan could have different rates based on age, sex, and lifestyle. Finally, the types of pools whether community, industry wide or other organization would have to be agreed upon.

With the catastrophe plan to eliminate either firms or the insurance firms from access to medical records the covered procedures, tests, and medicines would have to be spelled out upfront much as is the case in the Oregon Medicaid plan. The rationing of medical services would be an explicit part of the medical decision support system as a set of rules. The firms or medical insurance companies would not have discretion on a case by case basis. They would have no right to view patient medical records. Once a year the medical service providers could be audited to ensure that they were following the rules.