A True Free Market Libertarian Approach to Health Insurance/Medical Care

Many people have lamented over Obamacare (even some Democrats). Republicans in a way to counter Obamacare have offered very sparse and generic reforms such as "allow people to buy insurance across states" and "health savings accounts". I divided the post into a few parts: the problem and go on to discuss what causes the problem of high medical prices and then offer some solutions that could be used to reduce the cost of medicine, allow more access, and improve the quality.

The Problem
The reason healthcare is more expensive is because individuals are not directly paying for the services rendered. People have little incentive to shop if the government or an insurance company is paying most of the bill. Between 1960-2009 the percentage of consumers who directly paid for healthcare expenses dropped from 48% to 12%  while the percentage that government paid increased from 24%-48%. The government in this report seems happy that improper Medicare payments are only 10% of the budget. During the same year (2013) Medicaid only made improper payments of $14 billion of improper payments. Why would any one trust the government when it comes to healthcare when the government misappropriated payments from Medicare, Medicaid, and other tax credits that totaled roughly $125 billion.

When you go to Wal-Mart, Amazon, or McDonald's you see a price posted and you can either purchase the item or leave. As University of Chicago professor John Cochrane points out in this excellent essay "the Cheesecake Factory delivers a complex service oriented business product with remarkable quality, efficiency, and cost. Why can't hospitals do the same?"

What Did We Do Before Health Insurance?
Before insurance companies ever existed there were such things as mutual aid societies were individuals essentially form their own insurance company by getting groups of people together and each contributing about $2/day (which was the wage for a day of work). Let's not forget people in the early 20th century worked more hours than people do these days. During the 1920's the value of these societies was $9 billion. Mutual aid societies could limit who was in their group (insurance companies have to take on anyone who applies). What is even more interesting is that the mutual aid societies had a 30% lower mortality rate than the general population!  The government of course didn't approve of this and in 1919 passed the Mobile Law which increased the reserves that mutual aids had to keep, required a doctor to examine all lodge members, and the lodge couldn't extent credit to members. Slowly over time the government increased the regulations which reduced the importance of a voluntary market for health insurance. If me and a couple of friends want to form an insurance pool why should the government stop us?

Health Insurance Problems-Deregulate this market
With Obamacare health insurance companies are subjected to medical loss ratios. This ratio essentially dictates how much health insurance companies can spend on medical care from the premiums they collect. Currently the ratio is 85% which means that if there is $100,000 paid in medical premiums at least $85,000 has to be for medical care. Essentially this rule came about because people believed that insurance companies were greedy (remember insurance companies make less than a 4% profit margin) and that insurance companies will only spend their money on advertising and marketing to try to lure customers in. However, the flaw with a medical loss ratio is requiring a health insurance company to spend 85% of the medical premiums on health care it creates incentives for health insurance companies to overspend since the insurance company is required to spend the money within a one year time frame. This incentive leads health insurance companies to spend more on the latest technology (MRI machines, CT scans, etc.)

Community rating laws are another form of regulation that essentially say that everyone that buys health insurance even though people vary in: age, sex, height, weight, lifestyle. The only thing that health insurance companies can charge different prices for is whether or not a customer is a smoker Community rating laws only exist in health insurance. Car insurance companies can increase your rates if you are younger and more reckless but not health insurance companies. If you look at what insurance at companies are required to cover this also drives up the cost of health insurance. For instance, health insurance plans must cover things (a list of 10 things here)  mental illness, lab tests, preventive and wellness service, maternity care, and many other things. Why can't we customize our health care plan to our own needs? Speaking of that under Obamacare policies have unlimited lifetime limits (meaning there is no maximum dollar amount your policy can cover). Why not allow there to be a market to allow people different amounts of lifetime coverage ranging from $50,000 to a couple million?

Looking at the health insurance market the market itself is not itself competitive. All insurance companies (whether it be health, auto, life) are first regulated at the state level. Usually every state has their own insurance commission. Health insurance companies have to abide by risk based capital requirements which looks at the assets of the insurance company to make sure they have enough of a surplus. Also another thing that state regulators look at are the insurance financial statements to make sure the insurance are financial solvent. On a regular basis state insurance department audit health insurance companies. There are also rules regarding how much health insurance can increase premiums at the state level. I looked up the rules for how to incorporate an insurance company in Texas and realized that it is a long 14 step process. First there is a filing fee of $1,500. Also you need $700,000 of a capital surplus ($1.4 million capital and surplus combined). You also have to make an SEC filing and file GAAP financial statements which take time and are costly. Also the insurance company must have 5 board of directors as well (oh the state of Texas doesn't allow anyone with a felony conviction involving moral turpitude to serve on the board of directors too).

Another no brainer is to allow customers to purchase health insurance across state lines. States have their own rules and regulations in regards to what has to be offered inside a health insurance plan. The state is not only in charge of what contained in the plan but also how much the health insurance plan can charge (health insurance companies must get approval before they even offered to consumers-nothing close to a free market!). While we are at it why don't make it easier to start a health insurance company. How many health insurance company IPO's have you heard of in the last 15 years? I actually did find one company called Oscar in this article that is trying to provide a cheaper model for health insurance (the company of course had to get state regulatory approval before it opened up shop-the company was the first new health insurance company to open in New York in more than a decade!). .

FDA Drives Up Drug Cost and Prevents Patients From Accessing Drugs-Limit Their Scope
There are many things that increase the cost of health care. One organization that increases the price of drugs is the FDA. The Tufts Center Study of Drug Development estimates that the cost of developing only one drug has increased from $100 million in 1975 to $1.3 billion (both in 2000 inflated dollars). Avik Roy from Forbes here points out there 90% of the costs associated with a clinical trial is in last phase of the clinical trial-Phase III). Not only did it become more expensive to develop a drug it also took longer (from 1999-2005 the length of the clinical trial time increased by 70%) and the number of patients required to enroll has more than doubled from 1,600 in the late 1970's to 4,200 in the 1990's) but the number of procedures that patients had to receive (blood work, x-ray, etc.) from 1999-2005 increased 59%. Also the chances of a drug getting approve have also been decreasing. The trend of approval of new drugs which can be found here has been on the downtrend since 1996.

When was the last time you  heard of a large drug company going public? No one in their right mind would want to start a large drug business given the burdens of the FDA. The FDA also doesn't factor in that everyone has different biology and if two patients take the same treatment they will have different outcomes. However, in practice what the FDA does if a drug doesn't show a statistically significant benefit in a trial then a company isn't allowed to sell that drug-even though some patients in the trial benefited from the drug. The FDA should only have one phase for drug development (to see if a drug is safe) to reduce the time and cost of developing a drug which would allow more patients access to treatments at a lower price and allow patients/doctors/researchers to see if a drug can benefit people who take it.

Speaking of medical tests what is bizarre is that if you want to get any type of medical test you usually need to have a doctor tell you that you need it. You can't yourself show up to Quest or Labcorp and say you want a blood test. Arizona this year passed a law that allowed patients to get a blood test without the prescription of a doctor. According to this article from Bloomberg companies are now being more open to offer customers testing for different things like cholesterol and thyroid. It is silly and crazy to not allow people to get tests performed on their own bodies! Theranos is a company trying to work on providing patients with access to medical test for affordable prices, however the FDA recently questioned some of the equipment that the company was using.

Government Regulations in Healthcare
According to this article about 51% of healthcare professionals say HIPPA compliance gets in the way of providing care to patients. Healthcare professionals waste about 46 minutes a day using outdated technology due to HIPPA regulations. This is 46 minutes that could be used with patients not filling out paperwork. Doctors very rarely use e-mail/smartphones/computer or other forms of communication to talk to patients due the restrictive nature of HIPPA which requires burdensome rules and requirements in terms of maintaining patient privacy. In a survey 65% of doctors said that secure text messaging could cut discharge time by 50 minutes. Why would doctors have any incentive to e-mail or text a patient when insurance companies pay $0 for that.

Certificate of need laws also restrict access to medical care. If someone wants to bring a medical facility to a city they must get approval from the city and state before they do so. These laws results in fewer hospitals beds, fewer CT scans, and fewer MRI services according to this study. For instance in South Carolina Policy Council reports requires that 20 different medical services and pieces of medical equipment currently require certificate of need laws. Also in South Carolina the government has to approve any new medical services (i.e. expanding the size of a healthcare facility or purchasing medical equipment costing more than $600,000) according to this report.

The government has created an arcane code system that determines how doctors charge. This system is called CPT codes. Nearly every medical procedure that can be performed has some code associated with it. The government is up to CPT coding version ICD-10 which features more than 14,000 codes "prices". The American Medical Association (AMA) is for CPT coding (of course they collect a fee every time a CPT code is used).  This surgeon explained the problems with CPT coding here. The problem is that doctors have to figure what a bureaucrat wants instead of using common sense and simply just charging a cash price. Is it a bad thing to get doctors to determine what value they provide and charge for it instead of using a bureaucratic table to see how much they can collect from a code? I am all for turning doctors into business people. Why don't we ever see hospitals have commercials for patients to have there next back surgery for only $599? CPT codes should be abolished as they are just another form of price controls and central planning.

Speaking of restrictions why have historically there are fewer medical schools now than in the early 1900's? As I mentioned in this post  in 1903 there were 154 medical schools. As I write this there are 141 accredited medical schools in the country. The knowledge of medical data has greatly expanded in the past few decades.Why don't we have more medical schools given that the population has greatly expanded?

Some Solutions
Doctors have gotten tired of dealing with insurance companies and the establishment of medicine and have decided that they will stop taking insurance altogether and deal with patient directly (what is known as direct primary care or concerning medicine). About 6,000 doctors (from 2014) contract directly with patients. Currently about 7% of doctors are currently using direct primary care and about 13% plan to transition to it. Patients still retain their insurance in case they have to be hospitalized or have something serious like cancer (which is the concept of insurance). The average membership fee is $135/month which provides 24/7 care and lets patients e-mail, call, even text their doctor. According to the this New York Times article doctors typically spend 8 minutes with a patient. patients get 30, 60, or even 90 minutes with a doctor for a more comprehensive review of their health situation. Not only are these type of practices popping up in major cities but also in cities like Waco, Texas (less than 130,000).

People these days can look up the quality of a doctor in a matter of seconds through Yelp, RateMDs. HealthGrades, Vitals and many more sites to assess whether a doctor is providing quality or not. If we take this one step further to a true free market a company called Medibid allows patients to bid on their medical care. The Surgery Center of Oklahoma offers its cash prices online. Why don't we ever see advertisements for the cash price of a hip replacement?

Making profit in medicine is not a bad thing. As I pointed out in this blog post Dr. Devi Shetty in India not only has an actual business in medicine were there are cash paying customers who pay and he is still to provide medical care to lower income individuals while also turning a profit (pre-tax profit margin is around 8%. In 2015 the company made a profit of $2 million. Also Dr. Shetty performs double the number of surgeries as the Cleveland Clinic and has a lower mortality rate of 1.4% vs. 1.9% for the United States). The company performs an average of 150 surgeries per day  It is important to note Dr. Shetty figures out what supplies are necessary to perform surgery and he closely examines the cost of everything to see if it makes sense, His company Narayana in India recently filed with the Indian version of the SEC trying to raise $100 million. In 2015 the company served more than 2 million people. We have to understand that profit in medicine is not a bad thing. If a doctor can improve our quality of life, make us feel better, and help us enjoy our time on this earth they should be compensated. Why we can't have hundreds of these set up in America?

Conclusion
It is no coincidence that as the percentage of people paying for their medical expenses out of pocket has decreased while the cost of medicine has increased. What we need to do is return to a system were anyone can create a mutual aid group or their own insurance pool without being subject to the regulations of insurance companies (this would actually increase coverage and reduce premiums). Speaking of regulations repealing the laws and rules surrounding insurance companies and create more companies which would reduce the premiums and increase quality. Also reducing the number of phases for a drug trial from 3 to 1 (safety should just be evaluated) drug approved would reduce the cost to develop a drug (which drug companies would pass on to consumers) and also give consumers years earlier which is crucial when some people have life threatening/chronic illnesses. Abolishing CPT codes and allowing patients to negotiate prices for medical services would put downward pressure on prices and doctors would be forced to think about how much their services are worth. Repealing medical loss ratios rules would also not force insurance companies to blow through the premiums they receive in a year and give insurance companies incentives to hold on to their premiums for longer than one year. Restricting certificate of need laws would also allow more  Also severely reducing HIPPA rules could perhaps get us in 21st century medicine (it is bizarre that my doctors still have to fax things!). Massive deregulation in one of the most regulated industries would greatly free up the medical industry to innovate while providing people with more access to health insurance and health care at much more affordable prices.