Black Jet Theory – Volume 2020-9 – Is the Healthcare System Broken? Part IV – How to Change the Financing of Healthcare Services – Tax Policy, Transparency and Milton Friedman
June 26, 2020 by Marshall Snipes
Several years ago, a friend of mine had surgery. As a result, he received a statement from the insurance company informing him of his share of the cost. He immediately detected an error amounting to several thousand dollars. For months he attempted to resolve the mistake to no avail. Finally, after threat of ruining his credit rating, he simply paid the amount in question. Continuing to fight the system was not worth the stress and frustration he was experiencing. This story repeats many times over on a daily basis in the United States. The reason this example stands out is that my friend was the Chief Financial Officer of the hospital where the surgery was performed. If he couldn’t resolve the issue, how are the rest of us supposed to deal with the system.
Another friend of mine had to take his wife to the hospital for an emergency appendectomy. The hospital was in the network of his existing health insurance plan. She was admitted to the hospital, had the surgery and was released the next day. A few weeks later the bill from the surgeon arrived. The total amount of her share was in excess of $20,000. How could that be? Upon inquiry he was told that the doctor who performed the surgery was not part of the network and therefore the network discount did not apply. And, the copay was higher for out of network providers. This is what the industry calls “surprise billing”. Paying for healthcare services has become too complicated and too expensive.
Before we can fix the problem, we need to understand the underlying cause of the problem. I call the problem the DISCONNECT. Milton Friedman said it best, “nobody spends someone else’s money as wisely or frugally as he spends his own”.[i] Economist Arthur Laffer calls it the “Wedge”.[ii] In 1940 roughly 9%[iii] of the population was covered by health insurance. By 2018 only 9% do not have health insurance.[iv] Since 1940, there has been an explosion of health insurance plans (Medicare, Medicaid, the Affordable Care Act, and commercial insurance), where someone other than the patient is paying most if not all of the cost – the definition of DISCONNECT. How did this happen?
First, during WWII the government froze wages but not “fringe benefits” and allowed a tax deduction by the employer. Thus, the federal government began subsidizing health care to employees and began incenting employers to provide health insurance to its employees. Second, the Medicare and Medicaid laws in the mid-sixties provided health care to a significant percentage of the population not previously covered under a health insurance plan. And third, the Affordable Care Act expanded even further government subsidized health care through the expansion of Medicaid and individual subsidies through the insurance exchanges. All of these events served to further DISCONNECT the consumer of health care resources from the payer. This created unfettered demand, without the checks and balances of the free market – resulting in the DISCONNECT.
Between the buyer (the patient) and the seller (the provider), we have interjected two layers of decision making. First, the employer (the subject of this issue of Black Jet Theory) and second, the insurance company (the subject of next week’s issue of Black Jet Theory) both make decisions that affect the ultimate cost and utilization of healthcare. When the patient suffers no consequences relating to the decision to consume healthcare resources, then utilization (demand) increases. When demand increases, costs accelerate regardless of the “price” of a unit of healthcare resources. Insurance companies, in an effort to offset this increase in demand, raised deductibles but without a clear understanding by the patient of what ultimately their cost would be – thus surprise billings.
A note about Medicare and Medicaid. Medicare and Medicaid have certainly contributed to the DISCONNECT. The federal government in recent years has begun to institute policies that would address some of these cost issues. However, some of their solutions simply shift the cost back to the patient by charging a premium for Medicare Part B, for example. The solutions below relate to any payer: commercial insurance, Medicare, Medicaid or other.
So, what’s the Black Jet[v] solution:
Tax Policy. Common sense would dictate that the goal of any reform should be to remove the employer from the decision-making process, thus eliminating at least in part the DISCONNECT, allow each individual to decide for themselves the health insurance plan they choose, and to transition to a system where the payer (employer, Medicare, Medicaid, etc.) can continue to provide funds to allow the individual to take control of his/her own healthcare. This can easily be accomplished by using the existing infrastructure of Health Savings Accounts (HSA). An HSA is “a type of savings account that lets you set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in a HSA to pay for deductibles, copayments, coinsurance, and some other expenses, you may be able to lower your overall health care costs.”[vi] See Endnote[vii] below for a detail of some of the changes that would need to occur in the current federal tax laws to accomplish this tax policy change.
The concept is to move the health insurance purchase decision from the employer to the employee, require each individual to participate in the cost of their healthcare service consumption and to allow the employer or the government in the case of Medicare, Medicaid, etc. to continue to fund a significant amount of the cost. This would force the insurance market to move from employer-based plans to individual plans. Options to remain in traditional Medicare and Medicaid would be necessary.
Simplicity and Transparency. Elimination of the complicated billing system currently being used and replaced with a simple transparent system will allow the patient to better understand his/her cost. We spend an astounding 34% of all healthcare cost incurred to deal with all of the complications of our current system.[viii] Collection efforts alone account for 15-20% of healthcare costs.[ix] The more a consumer understands about the cost of the underlying services to be performed, when combined with exposure to alternative treatment plans, the more informed decisions the consumer will make. This will require a sea change in how physicians interact with their patients. Providers will have to standardize their charges and the current system of negotiating a different price with each insurance company will be exposed. Insurance companies will have to disclose the price per procedure with each provider. Just this week the federal government upheld the Trump administration’s requirement for full disclosure. This will allow the patient to pick a plan based not only on the available network but on the underlying cost he/she will have to pay under the co-pay rules. This is Black Jet common sense.
Tax policy, and the lack of simplicity and transparency have contributed to the increase in healthcare cost. If we hold accountable the consumer of healthcare resources for their decisions, if we allow for taxpayers to deduct their medical expenses, if we broaden the use of Health Savings Accounts to eliminate the employer from the decision-making process, and if we simplify the decision-making and billing processes to include transparency and simplicity, then healthcare cost can be controlled.
In the next issue of Black Jet Theory, we will look closely at where the risk lies and how to reorganize health insurance to align the patients and providers interest to lower cost.
Don’t take my word for it, think for yourself. If you would like to subscribe to Black Jet Theory, please email your request to [email protected]
[i] “Medical Analysis by Milton Friedman” Forbes June 19, 2009. www.forbes.com/2009/06/18/milton-friedman-medical-insurance-opinion-columnists-health-care.html. “How to Cure Health Care” by Milton Friedman. The Public Interest Winter 2001.
[ii] “The Prognosis for National Health Insurance” by Dr. Arthur Laffer, Donna Arduin and Dr. Wayne Winegarden. August 2009 by the Texas Public Policy Foundation. www.lafferhealthcarereport.org. Definition of the Wedge – “an economic separation of effort from reward, of consumers (patients) from producers (healthcare providers), caused by government policies”.
[iii] “An Introductin to the HealthCare Crisis in America: How Did We Get Here? By Stephanie Kelton September 2007
[iv] “Breaking A 10-Year Streak, The Number of Uninsured Americans Rises” by Phil Galewitz September 10, 2019. The Kaiser Health News. https://khn.org/news/number-of-americans-without-insurance-rises-in-2018/ and the U.S. Census Bureau.
[v] The Black Jet Theory is “the notion that most of what currently happens, when viewed through the filter of common sense and critical thinking, leads to a different conclusion, than the widespread view of current thinking by those who control the dissemination and content of information (academia, the media, politicians and other “experts”)”. “Black Jet – Volume 2020-1, May 1, 2020 by Marshall Snipes.
[vi] “Health Savings Account (HSA) https://www.healthcare.gov/glossary/health-savings-account-hsa/
[vii][vii] The changes to the federal tax law to accomplish the reforms necessary to lower cost are: (1) eliminating the tax deduction for employer-based insurance plans and adding a deduction for employer contributions to an Employee’s Health Savings Account. Correspondingly, there would be no adverse tax consequence to the employee, This will allow the patient to purchase their health insurance plan with funds provided by the employer, based on what best fits their needs, (2) allowing an unlimited deduction for individuals for all medical expenses not paid for by the Health Savings Account, (3) expanding eligible healthcare expenses to include health insurance premiums, and expenses associated with the Integrated Delivery Model described in previous issues of Black Jet Theory, (4) eliminating the eligibility provisions related to high deductible plans and, (5) eliminating deductibles from all health plans requiring only co-pays from the employee. This results in giving control of one’s healthcare plan to the patient. These are simple changes with enormous consequences.
[viii] “The U.S. spends $2,500 Per Person on Health Care Administrative Costs. Canada Spends $550. Here’s Why.” By Abigail Abrams. Time Magazine January 6, 2020. https://time.com/5759972/health-care-administrative-costs/.
[ix] “Political Malpractice How the Politicians Made a Mess of Health Reform” by Stanley F. Hupfeld. 2012.