Medicare Prime (MP) is my proposal for a health insurance system that would avoid many of the problems created by our current one. One of its proposed features is the classification of healthcare providers into two camps: in-network and out-of-network. The benefits of this bifurcation of providers deserve further explanation.
As explained in a previous post, providers charge patients the same amount of money for the same type of service regardless of the type of insurance they have or their income level. Only after the bill has been calculated are these charges discounted according to the patient’s insurance status. Public insurers, such as Medicare and Medicaid, get the largest discounts (61% and 67% on averagea, respectively), while private insurers receive only a 42% discount on averagea. Uninsured patients officially get no discount at all, but often default on their obligations through personal bankruptcy and effectively get a 47% discount on averagea.
Under MP, in-network providers would be paid the Medicare rate for services rendered to patients that have surpassed their MP deductibles. In exchange, these providers agree not to charge patients any additional money for services paid by MP. In other words, they will not be allowed to balance bill patients who have satisfied their deductible.
Out-of-network providers, however, are a different matter. They will not be a party to any contract with the government and therefore will be free to balance bill their patients. Given this lack of a quid pro quo, one might believe that MP should not pay anything for services from out-of-network providers. But I would disagree with this sentiment. There are several good reasons that out-of-network providers should be paid a partial Medicare payment despite their freedom to balance bill patients.
The Case for a Two-Tier Healthcare System
Creation of a two-tier healthcare system might seem contrary to egalitarian ideals, but such a system effectively already exists in the US and there are several reasons why this makes economic sense. To see how this might be correct, we need to consider the uniqueness of the American healthcare system.
But first, a joke.
Two balloonists become lost while sailing through a wind-swept fog. Seeing a pedestrian below they call out, “where are we?”. The man below yells back, “you’re in a balloon”. One balloonist says to the other, “he must be a mathematical economist”. “How can you tell?” asks the other. To which the first balloonist replies, “his answer was perfectly accurate and completely irrelevant”.
“What does this joke have to do with our healthcare system?” you might wonder. One of the advantages of being a masked vigilante is the freedom to insult whole professions with impunity, even my own. It’s the new year and I haven’t insulted anybody in quite a while.
But the main point is to highlight a fact frequently cited by politicians and economists: the US spends much more money per capita on healthcare than any other country while suffering a high death rate. While mathematically correct, the insinuation that this is somehow a negative feature of our healthcare system is more a product of subjective perspective than some careful objective analysis. Like the pedestrian’s answer, it is perfectly accurate and completely irrelevant.
Public health is the science of protecting and improving the health of people and their communities. Its perspective is exclusively global as opposed to individual. So, when considering whether to approve payment for a new cancer drug, for example, a typical public health expert would compare the number of lives saved for each dollar spent to that of other cancer drugs and even treatments for other diseases.
Suppose the new cancer drug saves one year of life for every hundred thousand dollars spent. Is that too much to spend? The answer to that question depends more on one’s perspective than it does on the drug’s relative cost and effectiveness. Anti-biotics, for instance, are very effective fighting deadly infections and very cheap. They might save 1,000 life-years for every hundred thousand dollars spent. From a global perspective, it makes no sense to spend additional money on the new cancer drug as long as spending that same additional money on anti-biotics saves more life-years.
In economic terms, we would say that any expenditure on the new cancer drug is past its point of diminishing marginal returns. From a global perspective, expenditure on the new cancer drug would cost more lives than it saved. This is why denial of coverage for expensive drugs by single-payer healthcare systems is quite common. Since these systems rely exclusively on public money, they take an exclusively global perspective, the same perspective taken by most public health experts.
If you ever completed a high-school course on American literature, you should be well-acquainted with the characteristic that practically defines the American psyche, individualism. It should come as no surprise then that the US rejects the global perspective of public health more than any other wealthy country.
From an individual perspective, that hundred-thousand-dollar expenditure on the new cancer drug makes perfect sense. If you have that much money to spend or more likely, that much insurance coverage, you would spend it without hesitation. The fact that you could save more lives if you would only sacrifice yours is not persuasive to most Americans.
Suppose you were a beneficent ruler with absolute power. If an advisor proposed a policy that would cost two lives for every three lives it saved, would you implement it? If you took a global perspective and you valued all human lives equally, you probably would. How could you not accept a policy that lowered the death rate by 33%? That would be a great policy — unless you are one of the people sacrificed. Then it wouldn’t be so appealing.
So, from a global perspective the fact that the US spends more money per capita on healthcare than any other country, while suffering one of the highest death rates is clearly a bad result. But from an individual perspective, it is indicative of the ability of many Americans to marshal vast resources to fight deadly diseases. The fact that we could save more lives while spending less money if we didn’t care exactly whose lives we saved is irrelevant.
Single-payer systems don’t allow different levels of healthcare intensity. It’s one-size-fits-all. There are not enough resources, i.e. doctors, hospitals, drugs, etc., to treat everyone at the same high-intensity level that many Americans can afford today. Any politician or economist who implies otherwise is either misinformed or lying.
The two-tier system of MP would provide a minimally-acceptable intensity of healthcare for those receiving taxpayer-financed health insurance while allowing those households that can afford it to purchase more intensive healthcare with their own money.
The Case for MP Payments to Out-of-Network Providers
To fully appreciate why out-of-network providers should be paid a partial MP payment, think back to why the ACA exchange market was created. The all-or-nothing nature of public insurance in the US forces private insurance premiums upward to cover the capital costs of treating publicly insured patients. Before the ACA, these high premiums did not discriminate between wealthy households and households that almost qualified for Medicaid. The elevated premiums were especially bad for people with pre-existing medical conditions.
The ACA tackles this problem by subsidizing the private insurance premiums of middle-income households. As we illustrated in our last post, subsidizing premiums in this way forces the equilibrium premium upward, partially off-setting the benefits of the subsidies and even making the situation worse for households with incomes greater than 400% of the FPL.
The ACA also restricts private insurers’ ability to charge higher premiums to people with pre-existing conditions and mandates that all citizens obtain health insurance. In the political debates that preceded its passage, the individual mandate was advertised as a fair quid pro quo for the premium restrictions imposed on insurers. That justification wasn’t false, but it wasn’t the main reason for the mandate either. The main reason was to stabilize the health insurance market. Without it, a shock to the system, in the form of an economic recession for example, would lead to its collapse.
MP would use a different tack to benefit middle-income households. Although the deductibles for middle-income households would not be zero, they would be much smaller than the deductibles for high-income households. When the patient uses an in-network provider, she and her private insurer would need to only cover the MP deductible. That would be a clear benefit to both the patient and her private insurer, if she had one.
But even when the patient uses an out-of-network provider, she would still benefit because a partial MP payment to the provider would lower her and her private insurer’s liability. Lower liability for the private insurer would lead to lower premiums for the patient.
For services provided by in-network providers, there would be a quid pro quo between MP and those same providers: full Medicare payments in exchange for no balance billing. For services provided by out-of-network providers, the quid pro quo would be between MP and private insurers: partial Medicare payments in exchange for not charging higher premiums to people with pre-existing medical conditions.
Unlike the ACA, under MP there would be no need for an individual mandate. As the primary insurer, MP protects both patient and private insurer. Rather than setup an inherently unstable health insurance market (like the ACA), MP would stabilize it.
In my next post, I’ll discuss how much MP would cost relative to our current system.