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MulliganCare - Time For A Do-Over

Summary

With the death of Repeal and Replace, we may have reached a Churchillian moment in healthcare.

A political consensus exists that sick people should have access to care.

The insurable event in health insurance is getting sick, not getting treatment.

Insurance companies are in the business of managing money, not managing risk.

Universal coverage cannot be insured, but the insurance model may still work as a template.

I offered some thoughts on "saving" the ACA back in January, with updates via the comment thread.  My thinking has evolved (devolved?) since then, and with Repeal and Replace dead and buried, I want to present a more orderly review of the problems and a proposed solution.

Winston Churchill famously observed that you can always count on Americans to do the right thing - after they've tried everything else.  Of course, trying everything else is impossible, but trying everything else we can think of is not, and so here we are.  Now, as John McCain so powerfully stated, the time has come to do the right thing, viz., to legislate like, well, legislators.  The posturing is done, and Congress needs to make some actually edible sausage.

Universal coverage is a given.

I start from the premise that Americans want universal healthcare coverage.  Not everyone believes healthcare should be available to everyone, but I believe that a substantial majority of Americans believe it should be.  Those who believes otherwise are free to do so, and, and there may in fact not be the consensus I see.  This post depends on that consensus; without it, nothing that follows should be undertaken.

Getting sick vs. getting treatment.

America has, for whatever reason, adopted a private insurance model for health insurance.  If only because the infrastructure for delivering care has been built on that architecture, I start by trying to tweak that underlying architecture rather than beginning with a clean slate.

Under our current insurance system, insurers pay for treatments provided to insureds.  In the property-casualty realm, this sort of coverage is called "claims-made" insurance.  Under claims-made insurance, it does not matter when the insured began coverage.  All that matters is that the claim for reimbursement arises after coverage begins.

Claims-made insurance is quite common in the property-casualty business, but almost all claims-made policies have an exclusion for "prior events," the generalized notion of what are called "pre-existing conditions" under healthcare policies. That's why health insurance policies, before Congress mandated portability for large plans (before Obamacare), all contained exclusions for pre-existing conditions.

The "other" type of property-casualty insurance is called "occurrence" insurance.  Under an occurrence policy, the insurer pays the costs associated with "occurrences" during the period of coverage, whether or not coverage continues.  For example, a fire-insurance policy is an occurrence policy.  If your house burns down while you are insured, you can drop you insurance and still file a claim against your prior insurer, because the fire "occurred" while the insurance was in place.

Although I can't be sure, I believe that health insurance has been structured as claims-made insurance because the costs of an illness may arise in a place far removed from where the occurrence (getting sick) took place.  Homes are rebuilt where the home was, or cash is paid based on costs where the home was.  But I can develop a chronic condition in one place and move to another, where the costs of my care are different and my old insurance company has no clout with local providers.  Thus, the insurable event for health insurance is "getting sick," but the logistics of healthcare dictate that the covered event be "getting treatment."  This mismatch lies at the heart of the portability issue regarding pre-existing conditions.  (The problem of adverse selection is wholly distinct from the portability problem, even though both involve pre-existing conditions.)

MulliganCare - my name for the new and improved ACA - would replace claims-made health insurance with occurrence-based insurance.  We've come a long way in healthcare information technology since claims-made health insurance came on the scene.  Hospitals use "Diagnostic-Related Groups" to determine the price of treating a patient.  DRGs are actuarially determined costs associated with a particular illness.  I see no reason that notion cannot be expanded to assign an insurance reserve to each patient's known conditions and make that reserve available to cover the costs of treating that condition forever (or at least until Medicare kicks in).

Once the reserve is established, the only problem is allowing the insured's subsequent insurers to tap it for coverage.  I have no doubt that a clearing-house mechanism for giving a new insurer access to those reserves is within the skill-set of out legislators and lobbyists.  The old insurer wouldn't pay claims, but its reserves would be available to cover costs.  There would be details - there are always details - but I doubt that they would be particularly troublesome.

Money, money, who's got the money?

Insurance companies are financial institutions; they "borrow" premiums from insureds and return them as benefits. Insurers manage risk only as a way to get more money to manage.  Therefore, in the occurrence-base model of MulliganCare, the most important issue may be who manages the reserves for pre-existing conditions.  

One approach is to allow insurers to manage the reserves for their former insureds.  That's dicey, though, because the reserves actually "belong" to the new insurer, which is administering the claims associated with the condition for which the reserve was created.  Alternatively, the former insurer could send the reserve to the new insurer.  But that sounds awfully clunky, especially since movement among insurers would almost certainly result in offsetting payments, and because, to the extent of any net movement, the cash payments might be substantial even if the claims are paid out over time.

My best stab at a solution is a clearing house "reinsurer" to which each insurance company would be obligated for an amount based on reserves associated with former patients.  The clearinghouse would hold notes rather than dollars, but the participating companies would be required to discharge those notes by cash payments at a rate actuarially necessary to service claims against the reserves represented by the notes.

For example, John develops Type II diabetes at age 45 while insured by Company A.  John moves to Company B at age 46.  Company A deposits in the clearinghouse a note equal to the actuarially determined total cost of treating John's diabetes until age 65. The note is paid off at the actuarially determined rate at which costs for John's treatment are expected to be paid by his subsequent insurer.  Meanwhile, the subsequent insurer's actual bills for John's treatment are paid to the clearinghouse.  

The clearinghouse does not solve the problem of adverse selection.  But once we decide that everyone is going to be covered, there is no reason to force people to buy insurance at all.  The government should pay for health insurance by making direct payments to insurers, including clearinghouse credits to cover the pre-existing conditions of first-time insureds.  The clearinghouse will require subsidies for first-time insureds, and those subsidies should be funded out of general revenues.  People who buy health insurance should get a tax credit for relieving the government of the burden of covering conditions that develop after their insurance begins. 

Once we decide that everyone is going to have access to good health care at a price they can afford, rationing by price becomes impossible, as all of the risk is transferred to the community at large. I'd say "taxpayers," but I don't want to get into the arcane issues of Modern Monetary Theory regarding whether taxes actually "pay for" things or just remove money from the economy so that the government's paying for things doesn't destroy the currency.  One way or the other, universal healthcare commits human and physical resources to providing care irrespective of the recipient's contribution of resources to the economy.  

The only reason anyone ever has to buy anything, as opposed to just asking for it, is to ration that thing by price.  Once we decide that something is not to be rationed by price, the government might as well buy it for us.  That's why SCOTUS rightly determined that the Obamacare mandate was a "tax." Those forced to "buy" insurance weren't really "buying" anything.  They were paying a tax that was applied to subsidize the provision of it to everyone, including themselves.  The mandate just cuts out the IRS middleman.  Trouble is, the tax wasn't well thought out.  I think a credit for buying insurance would be better than a penalty for not buying it.

The insurance model still works.

Saying that no one should be required to "buy" insurance is not the same thing as saying that the insurance model is inappropriate for providing healthcare.  Insurance, whether we pay for it or not, creates moral hazard, the tendency of people who have insurance to incur more losses than they would if they were not insured.  Moral hazard attaches whether the insulation from loss is bought for money or received gratis.  So, any device that insurance companies may have developed to reduce moral hazard will be useful whether or not the insurance is bought or free.  

The standard brakes on the moral hazard arising from health insurance are co-pays and deductibles.  Medicare has them, and Medicare provides universal coverage. (We'll leave the complexities of Part B out of it.)  The point is that even if coverage is given for free, benefits should be subject to co-pays and deductibles.  The insurance model has those co-pays and deductibles.

Private insurance also deals with the problem of managing reserves.  If the private insurance companies didn't stay in business to manage health insurance reserves, including those occurrence-based reserves describe above, who would manage the money?  Do we really want to just dump it in Treasuries?  Do we want a Federal bureaucracy deciding who gets the investments?  

Admittedly, the problem is not insurmountable: Federal employees have privately invested retirement accounts.  But these accounts are invested in index funds, which, arguably remove these dollars from the auction market for capital.  Adding a gazillion more dollars to index funds doesn't seem to me as good an idea as allowing insurance companies to make the investments they think best.  (I'm assuming reserves are part of the arrangement.  The "clearinghouse" could instead just be a series of taxes and credits, with all benefits delivered by Uncle Sam on a pay-as-you-go basis.  Somehow, that seems a political non-starter.)

Finallty, the infrastructure is already up and running.  Insurance companies, with their political constituencies, including lots of employees, exist, their investment departments invest and their claims departments process claims (one hopes).  The state regulators are in place.  Whether there should be a public option - Medicare for all - can be left to future pols to work out.  If the private marketplace backed up by the pre-existing clearinghouse proves unsatisfactory to the public, Medicare for all will present itself as an obvious solution.  As the old Peace Corps ad said, the object is not to convince the people to build the well; the object is to convince the people that building the well was their own idea.  

And so, ...

MulliganCare in a nutshell:

  • Free health insurance provided by private carriers and paid for by the government, through refundable tax credits
  • A pre-existing conditions clearinghouse reinsurer, paid for by the insurer on the risk when the condition was incurred, or by the government in the case of first-time insureds
  • Private insurance company management of health insurance reserves
  • Private insurance company claims handling

Comments are welcome, but let me repeat that this post assumes that universal coverage is a societal goal.  I am not here to argue that point, although I can't stop others from doing so.  Also, I have said nothing about controlling the cost of care.  That is an important issue, but it's not a structural one.  MulliganCare is compatible with all sorts of cost-control measures.  But those ideas are for another discussion.