My preferred approach for reforming health insurance…

I don’t think that the question of whether the health care system should be reformed is particularly controversial; what is controversial is the manner in which health care reform ought to be structured and implemented.  I have always thought that the system could be much better designed, and that if you were going to do design such a system from scratch, you definitely would not want to tie the provision of health insurance to employment. This is the problem with “path dependence”; the institutional arrangements depend critically upon the starting point.  I think that it is fairly well known that in the case of the United States, the seminal event in tying the provision of health insurance to employment was the imposition of wage-price controls at the end of World War II.  Also, as Whole Foods CEO John Mackey recently pointed out, health care reform is not just health insurance reform. We also need tort reform so that the corrosive influence of the trial bar on the practice of medicine can be mitigated, and liberalization of health insurance markets so that there is a national (rather than the current “balkanized” state-by-state) market for health insurance.  While the latter reform would require some changes in insurance regulation, I think it would have the salutory effect of introducing much more competition into the health insurance market.

I personally favor a market-oriented reform along the lines described by Mr. Mackey. This would involve the expansion of Health Savings Accounts (HSA’s) coupled with high deductible insurance coverage.  Since we are concerned about controlling costs, it seems obvious that there ought to be more of an emphasis placed upon first party as opposed to third party payment, particularly for low severity, high frequency claims.  By exposing consumers more to the financial consequences of their health care consumption decisions, Health Savings Accounts have the potential to “bend the cost curve” by creating incentives for better decision-making by consumers and greater innovation and competition by health care providers. Efficiently priced excess of loss insurance coverage that is layered on top of the HSA’s protects consumers from catastrophic loss, and also further reinforces incentives for competition and innovation in the financing and provision of health care services.  To Mr. Mackey’s plan, I would also add assigned risk/joint underwriting association (JUA) mechanisms in order to address the problems of the uninsured and pre-existing conditions.  These types of mechanisms are widely and effectively used in property-casualty insurance markets (e.g., auto insurance, workers compensation, etc.) for the purpose of providing coverage to individuals and firms who are otherwise “uninsurable” in the voluntary markets.

As I have already noted, such reforms would also create even more opportunities for innovation in the financing of health care.  For example, University of Chicago Professor John Cochrane has proposed a particularly compelling idea about insurers offering long-term health insurance contracts in which future insurability is guaranteed, regardless of the manner in which one’s morbidity risk changes throughout the term of the insurance contract. This is conceptually similar to so-called level term contracts offered in the term life insurance market already, and it seems like an obvious innovation in a free market.  However, this kind of innovation is not possible as long as we continue to tie the provision of health insurance to employer groups.  Group policies are typically contracted for on a 12 month basis, and level term health insurance contracts are inherently less feasible with groups than for individuals.

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