The Future of Health Care: Aligning Incentives

All over the country, people (on both the left and the right) are trying to figure out how we are going to solve the problem of health care.  The choices run the gamut from free market solutions to full government take-over of the funding and running of the health system.  What is often forgotten in the debate is discovering what the problem really is.

Currently, you do not directly pay for your health care (unless you happen to be uninsured and pay full price for your care).  A vast majority of Americans have their care paid for them through a third party entity such as Medicare, Medicaid or private insurance.  Aside from the issues coming from of someone else controlling your medical decisions, this situation creates very perverse incentives in the health care market.

You see, you are no longer the customer in the health care transaction in the current system.  Someone else is paying.  They get to be the one who gets catered to and have their needs (not yours) attended to. [Yes, I do realize that ultimately you are paying in the case of private insurance, but circumstances over the past two decades or so have made it so that the private health insurance market has simply become a parrot of the government funded portion of the sector.]  Often times this means that health care is rationed, not by your choices on what you want and what you can afford, but by a (for all you care) nameless and faceless bureaucrat who is looking out for the interests of the entity he works for.  You see, the incentives in the system aren’t necessarily to make you better or get you the care you want at a price you are willing to pay.

How do we fix this?  We realign the incentives.

The introduction of the Health Savings Account (when coupled with a qualifying High Deductible Health Plan) was the first step in this process, or at least it should have been.  As originally designed, the HSA takes the decision making power out of the third party’s hands and places it back in the hands of the consumer (under the advisement of the health care professional).  It was also intended that the HSA would cut out the insurance company in all but the most necessary of functions – actually acting as insurance instead of claims processing.  The insurance company’s role was to underwrite the risks of having health care costs higher than the deductible while leaving anything under the deductible to the discression of the consumer.  [Obviously, the insurane company would still play part in tracking the costs to determine when their liability kicked in.]

Instead, the HSA has been somewhat gutted.  This has been done by both those in policy making positions (by requiring that health insurance companies go through a process of certifying that funds qualify as expenditures under IRS rules – something that is actually done at the register already at time of service when the HSA debit card is used) andy by health insurance executives (who seek to maintain their revenue streams by adding in many of the features of regular insurance that should have been eliminated like office copays).  What that has done is limited the effectiveness of the HSA as a tool in changing the health care landscape.  Instead of triming out all of the wasteful steps of the current process, the current stakeholders have found a way to reinsert the waste to their benefit.

The HSA (restored to its original intent) is just one example of how to realign the incentives in the health care industry.  Another way is to offer discounts or penalites for certain actions.

The City of Kennesaw, Georgia is doing just that.  They are implementing a system where employees who take steps to better their health (lose weight and stop smoking) will avoid a penalty of increased out of pocket on their health insurance.

If Mayor-Council passes the recommendation by the benefits committee, which is composed of city employees, smokers who choose not to participate in the city’s wellness program will pay an additional $25 per pay period. High risk employees not participating in the program will pay an additional $50 per pay period. The city’s 233 employees are paid every two weeks, and 125 are attending wellness programs offered by the city.

Kennesaw dropped traditional health insurance coverage about four years ago. It went with a self-funded model in which premiums go toward paying claims and establishing a catastrophic health care fund from which large expenses are paid.

The City, under advisement of a council of employees, found a way to realign incentives so that individuals bear the cost of their decisions.  When a system does that, an individual now sees not just a physical benefit but a monetary benefit to positive actions.  The consumer is empowered to either make the choice to better their life in the program or pay the additional premium.  It’s their choice.  They control the outcome.

Only by finding other ways to realign the incentives in the current system will we be able to truly effect health care reform.  Universal health care does not do this.  It would merely replace the current set of bureaucrats with a new set of bureaucrats.  Not exactly the change we deserve.