Possible Insight

If I Were In Charge, Health Care Edition

with 11 comments

I have no desire to be in charge. I’d have to suffer too many fools and forego too much sleep. But I take comfort from knowing that, if I were in charge, I could confidently propose solutions to many of the common problems politicians hem and haw about.  It’s not just that I’m smarter and better trained than most of them, I simply wouldn’t care about getting re-elected.  So the obvious solutions that piss people off would be fine with me.

Unfortunately, health care is not one of these problems.  The solution really isn’t obvious. So I’ve been thinking about it lately.  I’ve got some preliminary ideas that I’d like to share. But be nice. I’m not saying these are the answers. They are just the best out-of-the-box thinking I’ve been able to come up with so far.

There are a couple of interventions I do consider obvious. First, streamline drug discovery. The easiest thing to do is simply dispense with Phase III trials.  Most drugs that fail, fail in Phase II.  But Phase III is by far the most expensive. Now, I would personally think carefully before I used a drug that hadn’t been shown safe and effective in something the equivalent of Phase III trials.  And we should definitely continue to monitor drugs after their approval. But the current system is too much cost for not enough gain. In return for eliminating this cost, we would reduce the term of patent protection and eliminate loopholes that extend such protection.

Second, I would de-regulate primary care. Physician’s assistants and nurse practitioners are perfectly capable of dispensing routine primary care, but today they may only operate under the direct supervision of a doctor. This practice simply perpetuates physician control over primary care. Let’s get rid of it and lower primary care costs. Moreover, I would back a national law that prevented states and cities from passing local laws that restrict low-cost primary clinics such as ones you might find in a Costco or Wal-Mart. The true reason behind such laws is to protect incumbents, which drives up costs. My guess is that de-regulated primary care could provide a basic level of service at around $30/visit.

Now we get to the hard stuff. I hypothesize that insurance-paid primary care is the root of much inefficiency. Obviously, it leads to at least some overconsumption because people don’t bear the cost. But it also messes with primary care professionals’ incentives to differentiate based on quality. They compete on how efficiently and effectively they can work the insurance system rather than how efficiently and effectively they can deliver care (e.g., your bill shows you as being “treated” for hyperlipemia and diabetes because the doctor discussed you slightly elevated cholesterol and glucose test results).

Moreover, insurance doesn’t add any value when you have reasonably small, reasonably predictable expenditures. I think what has happened is that insurance companies use it as a feature to get you to sign up for the rest of the insurance policy. They negotiate below market costs, forcing list prices up for everyone else, leading everyone to want primary care insurance.  Hello collective action problem.  My prescription is to tax insurance companies on any payments they make on behalf of policyholders for primary care. This will make primary care insurance premiums too high for most people.  Good.

I think the above three measures should reduce day-to-day healthcare expenditures and properly align people’s incentives. Now we get to the problem of major medical expenses.

As a libertarian, I would like to reduce government involvement as much as possible. However, in this case, I think there is a fundamental problem that requires government intervention. It’s nearly impossible for doctors as individuals and society as a collective to just let people die who could easily have been saved. I don’t want to argue whether basic health care is a fundamental right. Suffice it to say that enough people act as if that were the case that going against the grain will simply fail. Therefore, I think the government must mandate and fund a very basic level of acute care.

We’ll clear up your infection with generic antibiotics, we’ll set your broken arm, we’ll treat your cancer with generic chemotherapy, we’ll sew up the cut from the bread knife, and we’ll even give you life saving surgery after your car accident.  But you need some absurdly expensive brand-name drugs, sorry.  Have a brain tumor, sorry.  Need a transplant, sorry. I realize that drawing the line will be very hard and open to lobbying.  But I don’t see any way around it.

Hopefully, most people will be able to afford their own major medical insurance with a higher level of care. The problem here comes from specifying what the level of care is. Metaphorically, I want to be able to buy the Ford Fiesta, Toyota Camry, or Mercedez S500 plans.  But it’s unclear at the time you sign up what interventions would fall into which category. Obviously, a dying patient has incredible incentive to assert that any potentially helpful intervention falls under his plan. Conversely, a for-profit company has incredible incentive to assert that any potentially questionable intervention falls outside his plan.  Unfortunatley, the space of interventions that are both potentially helpful and potentially questionable is rather large at our current level of technology.

I have an idea here. Create a legal patient proxy. This is a company that negotiates incredibly detailed contracts with the insurance company on my behalf.  They would have both lawyers and doctors. I’m not sure what these contracts would ultimately look like, but you could imagine a combination of very specific procedures and medicines that would be covered plus some sort of meta-evaluation protocol for determining whether new things would be covered. Something like a list of applicable medical journals and odds-ratio thresholds of effectiveness. The proxy could even renegotiate some of the covered interventions every year. Obviously, a proxy would aggregate many patient contracts with many insurance companies.

Here’s the cool part. There’s an infinite regress problem here, right?  So we’ve got a watcher, but who watches the watcher. Enter the incentive. A patient would pay the proxy both a fee and a cut of any payouts. This arrangement would ensure the proxy negotiates really hard on the patients’ behalf. Now there’s a real market for a couple of sharp lawyers and doctors to get together and set one of these babies up.

The government could support this effort by giving such proxies some sort of legal status. Perhaps even creating an administrative court for rapidly settling contract disputes between insurance companies and patient proxies.

So this is what I’ve got so far.  Any thoughts?


Written by Kevin

April 13, 2009 at 11:30 pm

Posted in Economics, Health

Tagged with ,

11 Responses

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  1. minor typo:

    dispensing routing primary care => dispensing routine primary care

    Craig Fratrik

    April 14, 2009 at 9:40 am

  2. Regarding your first suggestion, I would generalize this to figuring out how to fix the clinical trials system for all interventions, not just drug discovery. Assuming that the problem looks like a nail will assure nothing but more expensive and baroque hammers.

    Patient proxy: I admittedly don’t understand this one well enough, but it seems to me that this is a slippery slope where we need to simplify lest more lives are lost due to bureaucracy and incentives for non-patient actors to game the system while the patient suffers. I can handle more complexity in the tax code because the collateral damage of inefficiency isn’t so bad, esp when compared with the potential advantage.


    April 14, 2009 at 3:10 pm

  3. On generalizing, sure. My apologies for the misplaced concreteness.

    On the patient proxy, I agree it would be _nice_ to eliminate non-patient actors. But I don’t think it’s possible. Perhaps I didn’t make my reasoning clear:

    (1) Major medical coverage is a classic case where insurance can spread out the risk of low-probability, high-cost events.

    (2) However, there’s so much complexity and uncertainty with regards to the potential interventions that might apply in a particular future circumstance, that it’s hard to clearly define what an insurance policy covers and what it does not.

    (3) Currently, there is an asymmetric power relationship in making this determination. Insurance companies have all the medical and legal expertise. Therefore, individuals can not have much confidence that their specific desires will be successfully encoded in the insurance contract.

    (4) Therefore, everyone uses the default that any procedure that is not clearly experimental or explicitly excepted is covered.

    (5) Therefore, people pay for too much insurance and consume too many interventions.

    (6) If patients had their own medical and legal experts, they could negotiate much better contracts.

    (7) You need to amortize the cost of these medical and legal experts across a lot of individuals and give them incentives to work diligently on patients’ behalf.

    Thus the patient proxy.

    If you don’t think (1) through (5) are a significant challenge, I’d like to know why. If you have a better solution that doesn’t require an additional intermediary, I’d love to hear it.


    April 14, 2009 at 6:42 pm

  4. @Kevin, I do think 1-5 are significant challenges. I just suspect that 6 exacerbates the problem. I can see a whole new industry created that (eventually) perverts the incentives even further.


    April 15, 2009 at 6:29 pm

  5. With regards to major medical insurance, I don’t think we have perverse incentives now. I think we have an asymmetric power relationship. I’d like to hear which incentives are currently perverse in this area of health insurance. And _adverse_ incentives of two parties are not perverse in and of themselves.

    I agree that there are other perverse incentives (e.g., in primary care), but I think it’s a serious mistake to conflate the different problems.

    I assert that you are simply applying an “intermediation = bad” heuristic with no structural analysis. I agree with this heuristic in general, but as I’ve tried to show with some analysis, we have a special case here: a party to a potential contract can’t possibly have the expertise necessary to construct a contract that fully represents his interest.

    When you make an angel investment, you consult an attorney, right? But this is a layer of intermediation between you and the founders. How is this any different, fundamentally.


    April 15, 2009 at 7:22 pm

  6. […] a thoughtful proposal for the problem of major medical care costs risk mitigation.  You should read that here before reading my proposal […]

  7. […] I’ve advocated before, eliminating Phase III trials (in favor of some sort of probationary approval) and reducing the […]

  8. […] be optimistic and assume two points of cost savings: having a very large group and following my recommendation of not using insurance for primary care.  Let’s put the optimistic annual premium estimate […]

  9. […] I’ve advocated before, eliminating Phase III trials (in favor of some sort of probationary approval) and reducing the […]

  10. […] be optimistic and assume two points of cost savings: having a very large group and following my recommendation of not using insurance for primary care.  Let’s put the optimistic annual premium estimate […]

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