Free Rider Free Rider and the Market Based Healthcare Solution

I received an interesting comment to my last post for which I would like to provide more than a brief reply.  The health care free rider problem is when an individual does not have any health insurance and uses healthcare services they can’t pay for.  The costs of these services must be written off by the healthcare provider who must in turn charge higher costs to patients with insurance to cover their losses.  One major example of these costs is that uninsured individuals go to the emergency room with an “emergency” that really isn’t serious but they know they will get treated for free.

Much has been made about the fact that such costs push up the cost of insurance to those with coverage and its absolutely true.  However, the total amount of healthcare spending would not go down if all people had insurance.  Someone still has to pay for the new insurance that pays the service providers.  In fact when we insure more people the total amount of healthcare spending may actually increase.  All the newly insured individuals could demand services they previously would have gone without because they would not have been willing to shoulder the costs themselves.  And therein lies the major problem with health insurance as we know it today.

When individuals are separated from the cost of the choices they make they are not in a position to make educated choices.  Medical technology is advancing in sophistication at an ever expanding rate, but the costs of the new technology is growing exponentially.  While a suggestion of ice and rest might have sufficied for an upper ankle sprain twenty years ago, today such an event requires a 3D MRI followed by multiple followup visits.  Of course the result is pretty much the same - the body is wonderful healing machine.  Since the unfortunate athlete is separated from the thousands of dollars of expenses he just ran up he will continue to return to the doctor who is happy to collect for each visit.

Another point the commenter makes is the uproar over so called “death panels.”  Here I have to find some agreement with him but perhaps for different reasons.  Their is a clause in the healthcare law highly suggests that doctors have discussions with their patients about end of life decisions.  Furthermore there are new medical review panels to determine the efficacy of treatments.  As outlined above, individuals are currently separated from cost of the healthcare choices they make.  There are cancer treatments on the market that cost tens of thousands of dollars a month and might extend someones life expectancy a few months.  Should the public fisc bear the burden of such expenses?  Or do such expenses actually represent a resource misallocation?  Could the funds so used be redirected to extend the overall populations life quality and expectancy?  These are some of the questions we must address however difficult.

Today we have an insurance model that I would call the dirty patchwork model.  Most working age adults and families receive their health insurance through their employer.  Many lower income individuals are eligible for Medicaid and those over 65 are covered by Medicare.  Those on the left have proposed that the only way to get healthcare spending under control is a single payer model.  In a single payer model the government becomes everyones health insurer.  Its a giant version of Medicaid/Medicare.  However, this solution still insulates the health care consumer from the cost of their health care decisions and can only address out of control costs by medical panels and resource rationing.

I propose the individual market model.  In this model, everyone is responsible for purchasing their own insurance.  When you are negotiating with an employer for a job or a raise, one part of the negotiation would be for the employer to contribute a certain amount to a "Medical Benefit Account."  Each individual would then take their MBA funds and go into a market place to choose an insurance policy that best fits their needs.  If the policy they purchase costs less than the MBA contribution, the remaining funds would stay in the account and could be used to fund out of pocket health care costs or roll over to the next year.  Carriers would be required to cover everyone and at the beginning of each year you could change your policy.  Medicaid and Medicare recipients would get similar contributions to an MBA account from the government.  MBA funds could also be used to purchase other forms of insurance such a life, disability, vision, and dental.  Individuals could accumulate MBA funds over the course of their life that would help cover end of life expenses or they could choose to use some of their MBA funds to purchase long term care insurance.  Any MBA funds left over at the end of life could be willed to another's MBA account whether it be child, grandchild, or sibling.

Employers would love to be able to use this model.  First off it would help provide employers with some cost certainty.  Secondly it would eliminate certain disparities that currently exist.  For example if you have a married employee with a family one spouse or the other would choose to be covered by their employers health insurance.  The "unlucky" employer who has to cover the whole family runs up expenses while the other spouses employer has no expense.  In the MBA model families would combine their MBA funds to insurance for the family.

When every individual is exposed to the cost of their insurance they are likely to make better use decisions.  Do I really need that $2,000 MRI, or is my upper ankle sprain likely to heal itself?  Millions of Americans being exposed to the true costs of what they consume is the only way to drive down long term health care costs.  The ability to change carriers will create a completive marketplace that will offer policies that individuals desire.  Lets create a true marketplace where each person can get the health care coverage and services they want and need.  Let's liberate the healthcare market.