In the last post I discussed the real reason that doctor and hospital bills are so high – very few people are paying for care, at least at the doctor’s office or the ER, and yet insurance and government subsidies are keeping demand for services high and disconnecting the users of healthcare from the cost. So how do we change things to make healthcare affordable for all and to stop wasting so much money each year on unnecessary services and tests?
The answer is to get most people to start paying for their healthcare, and doing so out-of-pocket rather than through insurance. The first step in obtaining this aim is to change the perception that people have about paying for healthcare. Currently, many people think it is just fine to not pay for the healthcare they receive even though they would not take any other kind of handout. Most people make plenty of money to pay for most services, if the prices were what they would be if most people were paying, but spend their money on all sorts of things instead of putting any money away for healthcare. You probably wouldn’t get an expensive data package on your phone to watch videos on YouTube if it meant you couldn’t afford to eat, yet millions of people who don’t save anything for healthcare buy those data packages.
Part of the reason for this, as discussed in the last post, is that the prices of services are so high because few people are paying. Someone who is not saving any money who sees a $800 bill for an x-ray says “I can’t pay that” and feels perfectly justified in not paying because the price seems so unreasonable. If x-rays were only $25, as they would be if everyone who used the x-ray machine were paying their part, it would not be an issue. The way to get there is to get people to put money away for healthcare before they blow it on other things so that they will have the money to pay the bills when needed. The first idea for making healthcare affordable is therefore:
1) Raise taxes by 4% on everyone, but then make the first 4% of income contributed to a Health Savings Account a fully refundable tax credit.
In a tax credit, for each dollar spent taxes are reduced by an equal amount. Fully refundable means that if your tax refund exceeds the taxes paid, you get a check from the government for the difference. This means that people who put away at least 4% of their income for healthcare in an HSA would not see their taxes raised. This would encourage a lot of people to do so since they would be thinking, correctly, that they would be losing the money to taxes if they did not put it away for healthcare. Note that in order to open an HSA, you need to have a healthcare plan with a relatively high deductible, which means you’d be paying a lot of the initial costs out-of-pocket (or out of your HSA) instead of using insurance, which would cause consumers to be more price-conscience. Note also that because the tax credit is refundable, people on low incomes would receive some money to help them put money in their HSA.
The second issue is that people who do have something big happen to them don’t have insurance, and therefore they are not able to pay the bills. Often they don’t have insurance since they think, correctly, that the cost of the insurance is not equal to the benefit they are likely to receive if they don’t go to the doctor very often. They instinctively calculate how likely they are to have a major event occur versus how much the insurance costs and realize that the high cost is not justified because of the low chance they will use the insurance. They simply decide to accept the risk. After all, if you are paying $10,000 per year for family insurance, which is the case currently because health insurance is mostly prepaid healthcare, you could pay out-of-pocket for a significant operation every four years or so for the cost of the premiums. This does not make any economic sense.
It is very unlikely that a male between the ages of 18 and 40 will need to go to the doctor for anything other than an office visit a year. This keeps them from getting the insurance they do need in case something like an accident occurs. Such a plan would be very affordable, particularly for young people who would rarely file a claim, if they could get plans that only cover the unlikely, big medical event. For example, if the average claim is $100,000, and the likelihood of having an event is 1 in 100, the cost per year should be about $1,000. This is far less than the $10,000 per year premiums that plans for young people require. The second idea is therefore:
Raise taxes by 4% on everyone, but then make the cost of a high deductible insurance policy that would pay everything above some high limit, like $20,000, a refundable tax credit.
The other necessity for making sure most everyone is able to pay for their own healthcare is to get people to buy a high deductible insurance policy, formerly known as “major medical.” A claim against this policy would seldom be made by most people, but probably half of people would have a high cost health issue like a major surgery, accident, or illness that required a long hospital stay at some point in their lifetime. You would want this policy to cover nothing below a low amount, say $15,000 to $20,000, but then cover everything above those amounts.
If most people were regularly contributing 4% of their income to their HSAs, they’d enough cash waiting to cover the deductible when something big did happen after only a few years. After that they would be saving up money in their HSAs for when they were older and actually used more care. Again, by having a refundable tax credit, most people would choose to get the insurance since they’d be sending in the money for taxes anyway if they didn’t. Those in low-income brackets would also get money from the government to help them pay for the insurance plan because the tax credit is refundable.
The third thing that makes costs high is that most insurance companies, including the government in Medicare and Medicaid, have specially negotiated rates. These rates can be less than the cost incurred by the hospital or doctor in some cases. This causes costs to be shifted to those without insurance. It also causes doctors to choose the less than optimal course of care because the payment from the insurance company is better for some procedures than others. Worse still, because most doctor’s offices don’t even know what the pre-negotiated rates are, it is very difficult to find out what the prices for services are. This makes it difficult for consumers to shop for the best prices. The third idea is therefore to:
Make it illegal for insurance companies to negotiate special prices for pools of individuals.
Doctors offices and hospitals could still have special deals to bring in customers and perhaps shift procedures from busy days to light ones (e.g., half-priced shots on Tuesdays between 2 and 4), but everyone would be on equal footing when it comes to paying for services. If everyone were paying equally and no one needed to pay more because others were paying less, the cost would no longer be excessive. The ability to shop for the best rates, which would be incentivized by having the HSAs, would also be easier if one could find out what the true cost of a service was.
We can bring the cost of medical care down. The secret is to get people paying for the care they use so others aren’t left holding the bag.
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Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.