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Could the healthcare bill be good for medical system innovation?

March 23, 2010

While I am not a fan of a public option as it is likely to appear, this is not because I am particularly fond of the current mix of Medicare/aid and private insurance companies, either.  Short version: tax credits for employer-provided insurance unfairly ties people to their jobs.  Third-party payment means that patients demand more care (since it’s free to them), doctors perform too many procedures (because they get paid for each), and insurers have an incentive to make things inefficient (the fewer claims they approve, the less they have to pay.)  An excellent but longer summary is here.

Looking at it that way, there really isn’t that much difference between a government-run single-payer system and the system of private insurers we have right now.  Yes, politicians will be incentivized to spend more on rare but photogenic diseases rather than focus on cost-effectiveness and balancing the budget.  And when cuts will be made, they will be affect the politically weak rather than those best able to bear it.  But in the broad strokes, Uncle Sam and United Healthcare will behave similarly in the marketplace, and the flaws in one will likely be replicated in the other.

Nevertheless, there are many problems with the current system, including escalating costs, reduced patient time, and gross underpayment of primary care.  I see innovative medical practices, such as medical homes (where a primary care physician coordinates care for a complex chronic illness) and retainer medicine (where physicians are paid an annual fee, competing on how healthy their patients stay rather than how many procedures they perform), as a way to address these issues by offering better value and demonstrating superior practice methods.  And the main reason I oppose increased government intervention in healthcare is because such interventions always seem to entrench the current model of employer-provided, low-deductible health insurance, and squelch such innovations.

The recently-passed healthcare bill does indeed follow in this tradition.  In particular:

Limiting Health Flexible Savings Account Contributions.  Limits the amount of contributions to health FSAs to $2,500 per year, indexed by CPI for subsequent years.
Promoting Individual Responsibility. Requires most individuals to obtain acceptable health insurance coverage or pay a penalty.

Health savings accounts are a tax-free way to save and pay your own medical expenses out of pocket, thus providing an alternative to health insurance.  And the penalty for not having “acceptable” health insurance is likely to apply to all sorts of innovative medical systems, including those listed above and, most likely, high-deductible plans – low-cost plans that cover only catastrophic care, and which sidestep lots of the bad incentives of the current insurance setup.  Essentially, if you don’t follow the government-approved business model, you get taxed.

So why do I say that the bill could be good for innovation?  Because as I outlined in my previous post, the bill is likely to lead to significant increases in insurance premiums, with healthy folks opting to take the fine and go without health insurance.  In the meantime, they have to get healthcare somewhere!  While these conditions last – and again, they are unlikely to last for long before another round of intervention comes along – these conditions are perfect for nontraditional practice models to expand and prove their effectiveness.  For these few years, there will be droves of patients looking for alternatives to insurance, and if such practices can effectively expand and gain public goodwill, they will become more politically powerful and be much harder to squelch the next time around.

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