A New Paradigm for Medical Insurance

Our medical system is heading towards a meltdown. The symptoms are easily apparent; we have devolved into two loosely connected systems, each of which performs poorly. In one, people pay a large amount of money every month so that if things go wrong, they can take advantage of free or heavily subsidized medical care. In the other, people incur no costs until something goes wrong, in which case they must navigate a system that largely caters to the first set of people, racking up huge bills in the meanwhile.

A large part of the problem is with our insurance structure. Medical insurance, in its ideal form, guarantees any amount of treatment. This means that patients are encouraged to consume all the resources they can, and medical companies are encouraged to overcharge. Insurance carriers, in turn, are encouraged to sharply circumscribe the coverage they actually give in response to the foregoing; the end result is our present situation, in which medical premiums are exploding more that 10% or even 20% per year, even as the insurance actually covers less and less.

Attempts have been made to inject some market economics into the system. The most serious such attempt, the Health Savings Account, amounts to a weird hybrid between being insured and not insured: you must foot the bill up to a given deductible, usually $2400 and up (though you can do so with tax-free money), but larger bills are covered as with a typical insurance plan.

Meanwhile, the present system is heavily weighted in favor of conventional medicine and treatments; experimental treatments are rarely covered, as are most physical therapies such as Hellerwork, chiropractic care, or even exercising at a gym (a crucial step for most rehabilitation programs), which can sometimes be more effective than conventional medicine at a fraction of the cost. Worse, psychological care is almost never covered. If you are mentally ill, good luck to you, because chances are you will never get insurance coverage.

Furthermore, more and more doctors are refusing to accept medical insurance of any kind. The excessive paperwork, sharply decreasing payouts, and circumscribed treatment options are making insurance not worth the trouble for doctors to deal with.

Why are things this way?

If you get into a car accident, does your insurance company guarantee your repairs or give you a new vehicle? No; a dollar figure is arrived at for the damage, money is paid out, and you use that money as you see fit.

If you have disability insurance, does the insurance company guarantee that you will never miss work? No; a dollar figure is arrived at for the value of the missed work, money is paid out, and you use that money as you see fit.

Similar examples can be found all over the insurance industry.

Why not with medical care?

What if there were a new class of medical insurance that instead of guaranteeing treatment, placed a dollar value on each type of injury or illness? Patients would receive cash payments based on the value of their condition, once it has been confirmed by a medical diagnosis; they would then spend that money however they wanted, with the expectation that they will seek as much medical care as they see the need for.

There will be no need for doctors to worry about dealing with the insurance companies (except to verify the medical condition); moreover, by coming up with standard retail prices, they will be better able to serve those without insurance. And of course, this will introduce price competition between doctors and drug companies, since no one will be held captive to a preapproved list of doctors and treatments as those with insurance are today. Price competition will benefit everyone: those with insurance, those without it, government, and the insurance companies. (The exceptions, of course, are those marginal medical care providers who cannot compete. But, such is commerce.)

Moreover, patients who can find cheaper treatments will benefit, since they will be able to pocket the difference. This will be a boon to the "alternative" medicines that actually have beneficial effects, since they are ususlly much cheaper than the conventional alternatives. (That this will also lead to an explosion of snake-oil salesmen is unavoidable.) And it will provide a strong incentive for patients to take a clear look at how much a given medical treatment actually benefits them, compared to other goods they could spend the money on.

What about the time lag between when a condition occurs and when money is disbursed by the insurance company? One of the services that an insurance company should provide is a line of credit, usable only at medical facilities, which would be drawn upon with the expectation that the eventual payout will cover it. For example, if I broke my arm, I would go to the hospital, whip out my Medical Credit Card, and charge the cost of treatment at prime interest rate or thereabouts. Then, two or three weeks later, the insurance company will approve the payout, apply it to my credit balance, and send me the rest. Medical offices need never worry about insurance accounts-payable again.

Conventional medical care does a poor job of compensating for lost work. Disability insurance is an imperfect substitute, since it does not account for decreases in productivity caused by "manageable" medical conditions. But in a system of cash payouts, one could choose to increase the insurance premiums in exchange for a correspondingly higher payout when a medical condition arises. In effect, individuals can ensure some compensation for lost work due to injury or illness.

In the ideal scenario, such a system would rapidly drive down medical costs, force more scrutiny on the effectiveness of medical procedures, and improve the lot of those without medical insurance. It would also help to plug our government deficits, since medical care is a vast portion of government's expenses. And a few adventurous individuals could find cheaper cures, and then use their payouts to buy homes or start businesses. Insurance companies themselves would benefit as well, since managing client accounts will become much simpler.

In the dystopian scenario, however, this could lead to people chasing dubious medicine so that they could pocket the cash. Medical fraud would also be possible for a vaster segment of the population, beyond the few medical companies that practice it today.

More seriously, people will run the risk of having the payout money run out before they get better. But this danger is mitigated because conventional insurance will still be available, and one could conceivably purchase such insurance with the payout money, or simply purchase an annuity.

Cash-payout medical insurance has the potential to completely reform our medical system. It is time someone tried it.

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