An Approach to National Health C

Universal Health Savings Accounts, Federally Voucher-Supplemented from Birth
Strongly Regulated Voluntary Individual Catastrophic Private Health Policies
Mandated Individual Saving for Health Care
Federal Coverage for Natural Disasters, Accidents and Assaults
Yearly Use or Lose Voucher
Basic Minimum Policy (BMP) as Safety Net
Federally-Provided Procedure Cost and Indications Information for Consumers

SUMMARY
This approach is bipartisan, consistent in part with both Democratic and Republican policy, because it results in universal care, but with each each person having a Health Savings Account (HSA) which is substantially supplemented by Federal Government vouchers. Use of such an account will foster a strong market in health care. A candidate for President who advocated such a plan could receive votes from members of both parties who desire results as much as fidelity to historic party positions.

Each person would have an HSA from birth. This HSA would be supplemented each year, from birth to age 21, by $2000. These supplemental vouchers would be fully implemented near the end of a multi-year transition to the new plan. Wage earners would be required to fund their HSA at 5% of wages up to a minimum of $1250/year if possible, and to a maximum of $5000/year, until their HSAs reach $125,000. These savings are the only mandate in the plan.

Employers could earmark a portion of salaries for this purpose, and could also supplement the HSAs of employees' dependents. Non-wage earners (e.g. the self-employed) could make contributions to their HSA accounts if they so desired, but would not be required to do so. Initially the HSA supplements and contributions would be tax exempt as are employer and employee contributions to health insurance currently.

Eventually the HSA contributions would be treated at all times as ordinary income, that is, as income they would not be tax-exempt. At the time of transition it might be useful to change the name of HSAs to Health Funding Accounts, HFAs, since HSAs are so closely identified with tax savings. The HFA would still be needed as a financial receptacle for funds to be spent only on health needs, such as funds from the government or from employer vouchers. Obviously, the transition from the current tax-exempt treatment of medical expenses must be carefully handled.

The HSA could be spent only on medical care, and procedure payments from the HSA could be only at or below the 50th percentile in the region of the provider. Charges higher than the 50th percentile would have to be paid out of pocket (OOP) or by privately purchased insurance. After age 21, at death, remaining funds in the HSA are to be transferred to the owner's estate.

The HSA may be used to pay private health insurance premiums. These policies could be any type, including the "first dollar" or other comprehensive type. Persons would also have the option of purchasing no insurance at all.

It is hoped that at least a substantial segment of the country would use their HSA (or cash) to pay directly for non-catastrophic expenses, in preference to purchasing comprehensive insurance, thus building a large free market for most procedures. This free market should draw providers to the countryside and inner cities to gain a market share of the individual HSAs of patients there who will be able to pay whatever the market will require to provide procedures in such areas, even though they may be economically expensive.

Catastrophic insurance is to be strongly encouraged so that persons will be unlikely to exhaust their HSA.

Catastrophic insurance is also to be strongly regulated to ensure that all persons can purchase it at plan startup. Regulation is also required to ensure that premiums cannot be increased due to health experience, although premiums may be reduced due to health experience and may be increased or decreased due to changes in lifestyle.

Very high deductible insurance should be encouraged to be widely marketed due to the large number of individuals who will have high balances in their HSAs. Purchase in the market of high-cost procedures by individuals with these policies should constrain costs even for many high-cost procedures currently funded mostly by comprehensive insurance.

Similarly, catastrophic insurance policies could also include rebates to patients for selecting less expensive hospitals for elective or emergency surgery, such as a coronary artery bypass, as discussed by James Pendleton. Such rebates can be substantial, reflecting very large savings for the insurance company. Of course these savings can also be reflected in lower premiums and will doubtless lead to rationalization of large differences in hospital charges. Depending on law, the rebates could be taken as cash or be added to the patient's HSA

In addition, consideration should be given to offering catastrophic policies which pay only to the 50th percentile, as noted above for the HSAs. This would be analogous to indemnity insurance (a form of insurance which pays a fixed amount when a condition is diagnosed) and should also constrain costs for high-value procedures. Such catastrophic policies might profitably be subsidized by the Federal government.

Federal catastrophic insurance is to be granted to all for natural disasters, accidents (probably excluding auto accidents) and assaults. Thus, commercial catastrophic health insurance need not cover these risks.

This HSA approach has substantial resistance to fraud. Although the HSA supplemental vouchers are funded by a single payer, the single payer does not control costs. There is very little rationing, all procedures currently accepted as deductible by the IRS, including long-term care, could be purchased using the HSA. Providers may charge any amount. Each person can have costs up to the 50th percentile in the neighborhood of the provider paid with his (In this document "his" and "her" alternate.) HSA, and the induced strong competition should reduce costs. Special procedures are, of course, required for program initiation and transition.

If patients pay with HSA or cash they will not have to switch their primary care doctor or specialists as they often must do now when required to switch PPOs or HMOs.

Parents should be encouraged/required to purchase guaranteed renewable catastrophic insurance for their children at birth, using, if necessary, their child's voucher. Such a policy should, in general, be very inexpensive, and will ensure that the child's HSA retains value past adolescence.

In contrast to catastrophic insurance, since comprehensive insurance undercuts the healthcare market, no regulation, other than against fraud, is suggested. Also, no government subsidy is suggested. This is to discourage purchase of comprehensive insurance. If comprehensive insurance is largely unregulated, and realistically priced, the initial tendency will likely be for the healthy not to purchase it. The resulting adverse selection will drive up the cost of comprehensive insurance leading in turn to fewer purchasers. This need not lead to ill health for the unhealthy because the HSA should enable patients to obtain care up to the catastrophic limit of their catastrophic policy.

Persons may pay providers directly out of pocket (OOP) to avoid spending down their HSA.

Most expenses will be paid via a third-party transaction, probably commonly using a debit card, with a Medical Agent (MA) who holds the HSA account. At the point of purchase a preliminary estimate could be immediately provided as to whether the purchase would count as a medical expense. A record would be automatically kept of likely allowable expenditures below the catastrophic deductible and, so long as the deductible was not nearly exceeded there would be no need to finally determine allowability. Consumer information would be transmitted to the patient after each MA transaction.

From a political point of view, the HSA vouchers could be regarded as a "Democratic" addition to level the “Republican” HSA playing field for the poor. The vouchers extend benefits to the young and to the poor; having an HSA for all helps ensure that a robust market mechanism exists.

For those who exhaust their HSA and all other resources, there is to be a Federal Safety Net, which will be comprised of a Federal Basic Minimum Policy (BMP) which pays only at the 10th percentile. A BMP will cover only those procedures which are covered by 95% of the privately sold health policies in the US. The maximum lifetime expenditure of a BMP will be equal to the 5th percentile of the privately sold health policies in the US. The overall system discussed here is designed so that very few people should require this BMP safety net. (The concept of a basic minimum policy is well established in automobile insurance.)

Preventive care would be encouraged by an additional yearly use or lose Federal voucher for $200.

Eventually both Medicare and Medicaid would be replaced by the combination of the universal HSAs, catastrophic insurance, and the BMP safety net.

Any required new funds would be largely obtained from a progressive consumption tax. However, it is expected that in the steady state that less than the current percent of GDP spent on health care would suffice for this plan because of simpler bookkeeping, because of cost reductions due to competition for the HSA holders' dollar, and because of reductions in demand due to individuals being more thrifty with their "own" money.

The virtues of this approach are that costs would be contained through competition, because, with the risk abatement inherent in the supplemented HSAs many persons would not choose comprehensive insurance and instead would choose only catastrophic insurance. Thus they would mostly obtain medical care under open Fee for Service so that a market could develop at the procedure level. Good health care would be available to the poorest, preventive care would be encouraged, and there would be few waiting lines. Most health funding would no longer come from employers, enhancing US global competitiveness.

To a first approximation, the administrative costs of the HSA system should be less than that of a single-payer system since for most procedures there would never be the need to determine if the procedure were medically necessary. This would be required only if the catastrophic limit were exceeded, so there should be considerable savings over most other systems. I expect that costs of keeping track of a patient's voucher, sending consumer information about treatments, estimating percentiles of procedure costs, etc., will be comparatively small and trade off against the diminished need to check for fraud and to set prices. (top)

RISK AVOIDANCE CONSIDERATIONS Some risk-averse individuals will continue to buy comprehensive insurance even though it is not the best value from a financial point of view, and even though they run very little risk of being without care without it.

On the other hand, most people will realize that they are almost fully protected from any health change by the combination of their HSA and their catastrophic insurance; and will feel that they are doing better than those with catastrophic insurance are because in almost every year they will pay far less than those who have comprehensive insurance. I expect that at equilibrium there will be far fewer persons with comprehensive polices than there are currently. (top)

Each person would have an account with the Federal Government, State Government, or Private Institution for his HSA. These paying institutions we will call “Medical Accounting” (MA) institutions. A large list of procedures and prescription and over-the-counter drugs would be authorized to be charged to these accounts. (Perhaps not facelifts, or extensive psychotherapy, but including dental care, glasses, preventive care and long-term care.)

If the patient wanted his bill to be covered by his HSA (he is free to pay the bill directly, OOP), the provider would send a copy of the patient's bill, perhaps simply using the patients HSA debit card, to the MA processing office which would pay from the voucher up to the 50th percentile for the same procedure charged by other providers in the provider's neighborhood. (Note that the provider's neighborhood is not necessarily the same as the patient's neighborhood.) The MA would charge the expense against the HSA (or "use or lose" voucher, see below).

Alternatively, the patient could pay the bill directly and send the receipt to the MA office, which would reimburse him.

Or, a third alternative, it would be possible to have the patient simply withdraw money from the MA, perhaps via "HSA checks" as he needed it to pay cash to the provider. Then, accumulating receipts, the patient would be prepared, if necessary, to justify to the Internal Revenue Service that all withdrawals were spent on medically necessary items.

However, to me, paying with withdrawn cash, seems like an open invitation for individuals who are not wealthy to use the medical funds for food, clothing, entertainment, etc. The IRS is unlikely to scrutinize returns for items that will not increase tax revenues. In addition, people would rather use funds for non-health items when they are well; for example, consider how many use sick leave allotments for regular days off.

Therefore, it seems necessary that most medical expenses paid with the HSA (not OOP payments) pass through an MA for payment. With a debit card type system, this should be minimally restrictive.

Perhaps a suitable compromise would be for the IRS to not require documentation of expenses which passed through an MA; but IRS documentation would be required for expenses which were funded by cash withdrawn from the HSA. This policy should encourage people to use their debit cards, and reports from the MA of high levels of cash withdrawals should provide a flag for fraud to the IRS.

From the positive point of view, the option to use cash withdrawn from the HSA will enable patients to obtain products which are allowable by the IRS but may be denied by the MA because, due to some bureaucratic bungle, it was not on the list of approved medical products. The cash option would also make it possible to obtain privacy, to the extent that documentation would only go to the IRS, and the documentation could be somewhat vague unless precision was needed in an audit.

Once a month the MAs would send statements to the patient showing the costs incurred and the amounts left in his voucher and HSA accounts. Other than paying only up to the 50th percentile, there would be little rationing.

Note that the 50th percentile is not the same as 50% of the typical payment, it is, of course, more likely to be almost equal to the typical payment.

Suppose that the price of an office visit in a neighborhood which contains 1000 doctors is as in the table below:

Number of Doctors	Price of Office Visit $
50	20-30
150	31-40
300	41-60
300	61-70
200	71-100

In this table, assuming that some doctor did charge exactly $60, the 50th percentile, aka the median, would be $60 since 500 doctors charged $60 or less and 500 doctors charged more than $60. The 10th percentile would be between $31 and $40.

To calculate the average price, we would have to know the actual price each doctor charged, but if the prices were uniform in each interval, the average would be ~$58, fairly close to the 50th percentile in this case.

Simply stated, the 50th percentile is a dollar figure at or below what ~50% of providers are charging; similarly, the 10th percentile is a dollar figure at or below what ~10% of providers are charging. The difference between the 50th and 10th percentiles may be quite large, or may be negligible, depending on the distribution of prices among the providers.

To obtain the data required to determine the 50th percentile, once a year each provider, would be required to report to a MA the median price the provider received for each procedure they have provided. Perhaps the list of procedures could be restricted to the 50 procedures most frequently provided. Such "prices paid" data is currently generally unavailable because HMO and PPO organizations regard the data as proprietary. It seems that government intervention will be required to produce such statistical data. Similarly, of course, drug stores would have to report median prices paid by consumers for drugs (perhaps only prescription drugs), opticians for glasses, etc.

As a second approach, instead of being required to provide the median data directly to the government, the government could simply require that each provider post the price they will accept for any procedure they offer. It is thought that posting of such prices would rapidly lead to a narrowing of the price range.

Then either the government, or private consumer organizations could gather these data and make them usefully available to consumers.

For example, it is easy to imagine a web page on which the patient enters her zip code, the procedure desired, a price threshold, and a distance threshold and a map would result showing all providers meeting the criteria.

Note that a patient might choose to travel to a less expensive part of the country, or find an especially low overhead, high-volume provider for an expensive procedure, in order to find a provider who would require a lower deduction from his HSA. Note also that it is in the patient's interest to use providers who charge below the 50th percentile because that will result in a smaller deduction from his voucher or HSA. There is no incentive to seek a provider who will charge exactly the maximum (50th percentile) payment available from the HSA.

In addition to competing on the basis of cost and convenience, as discussed above, providers could also compete on the basis of quality. For example they could cite board certifications, number of procedures provided per year, and quality of outcomes. For superior quality they could ask a higher price.

This sort of competition would represent an improvement over the status quo where competition is mostly on cost and in which providers are denied access to patients unless they promise insurers a low cost. In the status quo situation, providers can only make profits by increasing the numbers of procedures executed, and minimizing, below the contracted cost, the actual cost per procedure. This minimization is likely to lower quality; and there is no immediate penalty for such lowering of quality.

In our suggested approach the provider can charge each patient any amount. For example he might charge poor patients less and rich patients more. Alternatively, the provider might charge more for appointments on the weekend, etc., but the median amount reported to the MA would, by law have to be accurate so that doctors could not raise the 50th percentile by false reporting.

Of course, it would presumably be illegal to, for example, charge different racial groups different prices.

The "neighborhood" (the provider's neighborhood) over which the percentile is calculated will vary according to the procedure. For example, for general practice office visits the neighborhood should be local to the provider, since such trips must be made frequently. For difficult operations, the metropolitan area of the provider could be suitable. For long-term care, a state or multistate region might be suitable. A result of this might be that those few poor city patients in the 10th percentile Basic Minimum Policy (BMP) safety net (see below) would tend to go to less expensive long-term care facilities in the countryside.

Having the MA pay from the HSA only up to the 50th percentile reduces the possibility that some patients would rapidly spend their voucher mostly for the prestige of being attended to by famous doctors or by expensive "society" doctors. In addition, this mitigates the possibility that some doctors might purposely raise their rates to attract such poor customers and thus, indirectly, raise the overall costs of healthcare.

Since at the initiation of the voucher system there would be no persons in the BMP safety net, a fairly free market in procedures should spring up and a full distribution of costs for a fixed procedure should develop. This will provide the statistical foundation for estimating the 50th and 10th (for the safety net, see below) percentile points for individual procedures.

It is sometimes suggested that doctors below the 50th percentile will raise their rates to the 50th percentile since the voucher will pay that amount. This seems unlikely to occur since some patients will want to pay less than the 50th percentile to conserve their HSA and to avoid dropping into the BMP safety net, and will seek out doctors who do charge less. Furthermore, I would expect that groups of doctors would form new organizations to deliver care at lower prices in order to gain market share and make greater profits through greater volume and reduced costs. This also would ensure that costs would not stick at the 50th percentile.

Some anti-monopoly regulation by the government might be necessary to ensure this. Economists should study the expected market development using techniques similar to any which would have predicted the course of prices and changes in business practices under telephone and airline deregulation. (top)

When people use up their voucher, and HSA and most assets, or babies use up 1/2 of their voucher in the first year, they would receive a Basic Minimum Policy (BMP) safety-net system. The basic idea is that the BMP would be awarded for those who are so poor that they would have qualified for welfare and/or Medicaid in the past.

The BMP will have characteristics much like the policies that all other citizens have, but will not be so desirable that citizens will squander their vouchers feeling that they will nonetheless have as good care when they have a BMP. If a citizen has had to ceased paying premiums on an existing policy because of poverty, and begins using a BMP, then the government could guarantee that he be re-offered his original policy when he re-emerges from poverty.

The BMPs' features are determined by a survey of what is purchased on the open market and not by a political process. Thus they are not subject to lobbying by special interests.

The procedures covered by a BMP would be restricted to those offered in 95% of all private health policies in the US. In this sense the procedures offered would be a consensus of those procedures determined by the market to have sufficient value for money. The formulary would include only generic drugs, with, perhaps a very few exceptions for those cases for which there is no plausible generic counterpart. If doctors felt that a non-generic was needed the funds for that would have to come from some form of cost-shifting or charity.

In addition the lifetime maximum benefit would be the value at the 5th percentile of all private policy lifetime maxima in the US. In this sense this maximum benefit would represent a minimum acceptable lifetime maximum benefit.

Should the lifetime maximum be exceeded for someone with a BMP, additional expenses would have to be provided "free". That is, they would be cost-shifted by the providers. The total amount of such cost shifting should, however, be far less than at present.

Finally, the BMP would pay only at the 10th percentile. This would ensure that a provider was available at any location. For example, in a rural area where there is only one provider, all percentiles would be at that one provider's price.

The allowed payment would be at the 10th percentile for the region of the provider. In addition, although only payments at the 10th percentile would be available from the BMP; that level of payment would guarantee that providers who will provide the service at the 10th percentile do exist near the patient. The patient could supplement this payment with other money, if possible, from charity, friends or family, to obtain the services of a more expensive provider.

It would also not be desirable for a person to fall into the safety net because she would likely have to change from her usual doctor (unless that doctor offered to reduce her fees for, e.g. needy long-term patients). It would also be undesirable because patients would likely have to travel longer distances because, of course, only 10% of the doctors perform procedures at the 10th percentile of cost.

The fact that the consensus list of procedures for which the 10th percentile payment is authorized under the BMP will be substantially less than that which could be purchased with voucher-HSAs or cash, ensures that many of the cost control features of the system will be retained and there will be incentive for persons to buy catastrophic insurance. It is likely that this list of safety net procedures will contain many fewer procedures than is available today under Medicare.

Although it is true that the reduced benefits available in the BMP are crucial to the success of the overall plan; and although it is true that this reduction is vulnerable to political attack; every health plan is vulnerable in this way wherever in the plan the reduction in benefits aka rationing is, in fact, embodied.

There is always political pressure to increase benefits. In the HSA system, the weak points are clearly isolated in the value of the voucher increments and in the procedures available in the BMP safety net. The BMP procedure restrictions are, unfortunately, easy to attack because they are so visible. However, because very few people should fall into the safety net, and, because of the clear rationale for the restriction and selection of procedures, they may also be relatively easy to defend.

Licensing of providers should ensure that the 10th percentile providers meet minimum standards and thus have low costs principally because of such reasons as low overhead, efficiencies, and large volume. It is to be expected that many moderate quality low cost providers would emerge in order to take advantage of high volume, much as Walmart replaced many moderate quality small retailers. There is no reason to think that the 10th percentile providers would necessarily be degrading to patronize; licensing should maintain overall quality. The offices may be spare and simply furnished and in low-rent areas. The doctors may have set up procedures whereby less completely trained personnel perform preliminary screening; or they may make extensive use of computer diagnosis, etc. (top)

The MA should also include with the report of the bill to the patient the median local, state, and national charges for the procedures used by the patient that month, broken down as to whether the provider had various quality characteristics such as board certification, to help the patient decide if his doctor's charges are reasonable. To further assist in this decision there could also be enclosed a pamphlet describing the indications for this procedure, some of details of the procedure, and perhaps some outcomes results for the procedure, if available.

This consumer information should also be available generally on the web, in libraries, etc. to enable consumers to select doctors, hospitals, and procedures in advance of any illness.

Because patients would more often be spending their own money under this plan they will question their doctors more closely about the relative efficacy of inexpensive and expensive procedures. When the doctors confess, as they must in many cases, that it is not clear which is best, the patient will likely choose the less expensive procedure, and may in many cases, exert pressure for further studies of effectiveness. It is generally agreed that such studies are relatively underfunded.

The pamphlets sent to the patient could also be available to consumers upon request so that the consumer could evaluate the doctor's approach before treatment. It might also be required that comprehensive plans provide their patients with this information after every procedure so that they could evaluate at the end of each year whether they had obtained their money's worth from the insurance and whether the comprehensive plan is providing indicated levels of care for the fixed price.

The MA need not be a large bureaucracy; it should be similar in scale to the Medicare or Canadian bureaucracies which are often said to be small and efficient. In fact, it should be smaller than those organizations, since it has no mandate to control costs, and a far smaller mandate to restrict funding of some procedures. (top)

A political virtue of this funding approach is that if Congress wanted to steadily increase or decrease the share of government tax resources devoted to medical care, they could do so by increasing or decreasing the value of the yearly voucher for those under 21, without facing the politically more difficult task of choosing between procedures or beneficiaries.

The expectation is that a person would look for bargains and would not squander his HSA because he would want to conserve it for some later need, and because, at death, after age 21 the HSA would pass to his estate. Early (2004) experience with MSA and HSA group insurance indicates that the desire to conserve the voucher also encourages and preventive care and good health habits. The search for bargains would encourage competition and thus control costs.

It is often argued that patients cannot look for bargains when they are extremely sick, when most of the money is spent, and so that regular market forces cannot apply to medical need. However, the patient may survey advertised prices of doctors and hospitals, weigh those against quality and choose in advance where he should be sent in the event of an emergency.

In addition, any insurance bought on the open market may be less expensive if the insurer can specify cost-efficient doctors and hospitals to be used if possible. The prospective patient may also execute a living will or the equivalent to specify the degree to which heroic measures should be used for several conditions.

Insurance policies could also include rebates to patients for selecting less expensive hospitals for elective or emergency surgery, such as a coronary artery bypass, as discussed by James Pendleton. Such rebates can be substantial, reflecting very large savings for the insurance company. Of course these savings can also be reflected in lower premiums and will doubtless lead to rationalization of large differences in hospital charges. Depending on law, the rebates could be taken as cash or be added to the patient's HSA. (top)

Also, each person would be given a "use or lose" voucher allotment, say $200, each year (stagger using birthdays to avoid an end-of-the year rush.) This also would encourage preventive medicine. This would ideally be spent on dental and eye checkups, and on such other procedures as blood pressure measurements and pap smears.

Many useful medications are non-prescription, such as aspirin and Prilosec, and these too should be covered by the use-or-lose voucher (as well as by HSAs). It would also be useful if exercise club fees were covered.

Currently, many preventive procedures are covered free by catastrophic policies which accompany HSAs. This "routine" care should be covered out-of-pocket so that prices are controlled by the market. If these preventive procedures are covered by insurance, their costs are likely to be high. The "use or lose" voucher strongly encourages preventive care, but keeps it in the market. (top)

The HSA system should change the motivational structure in which doctors resist para-professional personnel for fear that they will displace the doctors. Instead, some doctors will likely head organizations trying to lower costs in order to gain market share. It has been suggest that it may be necessary to modify anti-trust laws to make it possible to create such organizations. It is worth remarking that it is only because the HSA system as a whole encourages competition and builds a market that the possibility exists of pegging a payment at the 50th or 10th percentile. (top)

It may be that in rural or inner-urban areas where there are only a few providers the 10th percentile may be the same as the 90th percentile. In this case, the only restraint on cost would be the restricted list of procedures in the BMP safety net and the fear of doctors that if they raise their prices too much that competitive doctors will move to their neighborhood or that patients will travel to the city for care.

Looking at this from another point of view, there should be sufficient HSA wealth available in rural or inner-urban areas that prices can rise to a level such that doctors will be interested in practicing in rural areas. Thus, various artificial government inducements to practice in rural areas should no longer be necessary. (top)

Upon completion of the transition to the voucher approach, there would be no more persons in Medicaid. As vouchers were exhausted for some individuals, the equivalent of Medicaid would reappear as the BMP safety net program; however, the BMP safety net would be less generous in terms of procedures covered, than Medicaid is today. However, in the old tradition of medicine, doctors could donate services for uncovered procedures or for uncovered costs above the 10th percentile to those in the safety net. This is a tradition not often seen today where the government is expected to pay all bills if private insurance does not. (top)

Private comprehensive insurance could be purchased with the HSA. It is clear that persons do like comprehensive insurance, as evidenced by their purchase of Medigap insurance to supplement Medicare even when a large portion of their premiums is used for administrative expenses. However, this interest in comprehensive insurance should be reduced in the HSA system. Since the HSA should be sufficient to meet expenses not covered by catastrophic insurance, the patient does not have to worry about not being covered for the catastrophic insurance deductible, as he has currently to worry about not being covered by the gaps in Medicare. Thus, one would expect a lesser expenditure by individuals on comprehensive insurance, and greater expenditures on catastrophic insurance.

Private insurance could offer comprehensive policies which would pay to a level above the 50th percentile. It is not clear to me what the net effect would be on cost control of such policies.

The administrative costs of private catastrophic insurance should not be as great as for medigap insurance since catastrophic insurance is seldom used. The administrative costs should be more similar to auto liability or homeowners insurance. (top)

The costs of private insurance purchased with the HSA would not be controlled. Those who were cautious and/or middle-class might purchase comprehensive insurance, especially insurance for their child, with their own OOP/HSA funds. Insurance might be purchased in anticipation of the birth of a child, in order to conserve the child's voucher. The child's voucher itself could be used to purchase insurance and would become available for insurance three months before the expected birth. Obviously insurance companies would give lower rates to children whose mother had prenatal care and who did not smoke or drink. For catastrophic insurance (see below) the rates would, in effect, be set for the child's entire life.

Genetic illnesses which were not predictable would obviously be covered as classic insurance. Genetic defects which could be predicted or detected might raise insurance rates and use up more of a child's voucher. It would be up to the parents to decide whether or not to have a child which it was known would be born with a genetic disease; they would have to keep in mind that the child might soon fall into the safety net and that the parents might feel impelled to spend their own resources.

The fact that the voucher would become available three months before birth will be controversial. However, allowing this is desirable from a health policy point of view because it maximizes the size of the catastrophic policy pool by making underwriting possible before some pre-existing conditions are apparent. Also, the earlier underwriting begins, the earlier the cost implications will become apparent to parents and hence the earlier they will adopt healthy life styles.

The HSA could be used to purchase renewable insurance only for one year at a time. This restriction is in order to ensure that the government is not eventually required to pay off for bankrupt health insurance companies who have offered, for large up-front voucher payments, expensive long-term plans on which they could not deliver. (top)

The principal reform required of the private insurance industry would be that once it had contracted with an individual for catastrophic ($10,000 or greater) health insurance it could not cancel the policy or raise the rates in response to the health experience of the individual. It could also not shift individuals, who have good health experience after enrollment, to a new group, or cancel the entire group, as is common practice today. This requirement is imposed because this "skimming" behavior would leave the remaining sick in a group with high charges, which could be used to justify higher rates without reference to the health record of individuals in the group.

Companies would be allowed to reduce rates based on good health experience in order to prevent other companies from skimming off those customers. These premiums could be subsequently returned up to, but not above, the initial values based on the customer's subsequent poor health experience. The initial premiums would of course have to be calculated to allow the company this flexibility. All rates could be adjusted, of course, for inflation.

In addition, as technology produces new, valuable, procedures, and as old procedures become outmoded, there may have to be adjustments in premiums. For example, the advent of new, very expensive procedures would have to take into account the policy-holders current health, otherwise there would be adverse selection by those who had the covered illness.

Herring and Pauly (2004) have shown that such renewable health policies are viable, (Incentive-Compatible Guaranteed Renewable Health Insurance, NBER Working Paper W9888, ). Regulators should require that such policies be made available to consumers.

Consumers should be offered various packages of benefits to include or not experimental and alternative procedures. Naturally, if such procedures are included, premiums would have to increase.

A problem with lifetime policies is how to handle new, expensive beneficial procedures. I suggest that the insurance policies be written to support a basket of procedures proportional to premiums. Should a new procedure be very expensive so that the price of a basket of procedures which includes it is excessive, the insured party could be given a one-time option of increasing her premium to cover that procedure. (The option cannot remain indefinitely open, since then the insured party would not choose the option until her risk of needing the procedure increased.) Since these procedures often replace previous procedures there may not be a net increase in price generally speaking, and there would usually be no need to ask for an increase in premiums.

In deciding initially whether to ensure or not, and what rates to charge, the company could impose most life-style and pre-existing conditions restrictions. (Note that premiums for pre-existing conditions are subsidized by the government at program start-up, see HSA INITIATION below.)

Note that the fact that the voucher is the same for all persons, and that insurance companies may use lifestyle in setting premiums, removes the dangerous tendency of having governments police the lifestyles of citizens in order to prevent tax dollars from being "squandered" on those with "sinful" or unhealthy behavior.

Insurance companies could increase rates for most life-style changes, and for normal changes in life. For example if a person began to smoke or to fly a private plane, rates could be changed. In addition, rates could be changed as a function of age; although initially more expensive policies would doubtless be offered in which rates would not increase with age. Companies could offer catastrophic coverage that would remain in effect for only so long as participants participated in a wellness program. Depending on politics a few life-style changes, for example entering a risky public service job, might or might not be disallowed in law as justification for setting rates.

Premiums might be reduced for various forms of preventive examinations. These might not have proved profitable for insurance companies in the past, since patients often had moved on to another company by the time the fruits of the exams would be due. However, in the present situation, where people may keep a single policy for most of their life, these examinations may pay off: the patient may pay premiums for a longer period of healthful life, dying after only one medical incident.

Should a person fail to obtain a catastrophic policy, or obtain one but fail to keep it in force; and should they, subsequently be unable to find catastrophic insurance below a threshold price, determined by the insurance industry, then they would fall into a regulated high-risk insurance pool, similar to the high-risk pool presently operating in automotive insurance. Should they be unable to afford these high-risk premiums, then they would fall into the safety net.

The catastrophic limit should not be allowed to grow too large, perhaps not over 1/4 of the funds in the HSA; ~$30,000. Should the limit become larger, then those persons who develop a chronic illness might exhaust their funds in a few consecutive years of paying the limit. In this case they may have to use the safety net, thus drawing on public tax funding. As noted elsewhere, it is important that the number of citizens in the safety net be minimized.

Of course it is desirable that the catastrophic limit be high for at least some individuals in order that even expensive procedures feel the market pressure of customers who are spending their own money.

To protect against falling into the safety net due to chronic conditions, insurance might be offered that completely covered a chronic condition after several successive years in which the patient had exceeded a high out-of-pocket limit to which that chronic condition had significantly contributed.

It might be desirable to encourage insurance companies to offer plans which only pay up to the 50th percentile, or to offer other forms of indemnity insurance, so as to minimize upward pressure of insurance on expensive procedures.

Note that private catastrophic insurance need not cover natural disasters, accidents, and assaults; since these are to be covered by a Federal policy; see section "Natural disasters, Accidents, Assaults". Of course, there might be some gaps in the Federal coverage which could be covered.

The above regulation must apply for catastrophic insurance. For comprehensive insurance, it should not be necessary for regulation to be so severe since the HSA provides a substantial self-insurance, so that comprehensive insurance is much less needed and the insurance companies can, therefore, be given a more open field for marketing.

In addition, from the system point of view, it is desirable that the maximum number of persons buys health care one procedure at a time, that is, without comprehensive insurance, so that a true market at the procedure level is created. Thus, the government should not encourage or subsidize comprehensive insurance.

Note that this differs from many reform proposals which restrict market competition to the level of competing comprehensive insurance policies.

States could retain the right to make the laws concerning insurance. The states would have to regulate to ensure that the policies offered, in particular the initial premiums, were actuarially sound if renewed so that the government did not have to pick up the tab for companies which over-promised. (top)

HMOs would continue to exist, but like other forms of insurance and fee for service, their premiums would not be tax exempt after the transition period. Therefore, HMO's and similar organizations may lose market share.

On the other hand, there would be nothing to keep an association of doctors from advertising that they will give discounts to patients who are referred within the group or who spend a prescribed amount within the group. The group of doctors could also ensure that other doctors in the group whose patients regularly had bad outcomes did not continue to practice within the group.

These arrangements could result in many of the same favorable outcomes for patients as in historical HMOs. Since HMOs were initiated voluntarily before cost became the overriding consideration it is today, it is plausible that HMOs will continue to be offered. However, it is likely that, when everyone has their own HSA, HMOs will not be the dominant mode of health care delivery as was once predicted. The concepts of government specified capitation and risk adjustment would become largely irrelevant. (top)

Since rich people will be able to pay above the 50th percentile and are less likely to run out of HSA and OOP money, they and their children will still usually have better medical care if they are seriously ill. But this program will ensure that everyone who does not encounter more than one major medical disaster, and among most prudent persons, everyone who does have more than one major medical disaster, will have nearly equal access to excellent health care for most of their lives. Although rich people will likely always have an advantage over the poor; at least in this system there is a greatly reduced health care advantage resulting from being rich early in life. (top)

The best doctor's incomes would probably increase since they would be free to raise their rates over those currently paid by insurance companies, Medicare, and Medicaid. Patients would presumably seek these doctors out because of their reputation; but the income of the average doctor may decline due to competition. (top)

A patient could always pay the doctor OOP and not draw down her HSA if she wanted to, perhaps for privacy or to save the voucher for her old age.

Since any patient could choose to pay directly, and many would, this approach to medical care, as contrasted to a plan in which care was obtainable only through interaction with the government, as in Canada, could not significantly aid in detecting illegal immigrants. On the other hand, illegal immigrants would have no access to HSA supplements or to vouchers and would, presumably, have free care only in an emergency as, in principle, at present.

Resident aliens would initially receive vouchers equal to 1/4 that of a citizen of the same age and be required to build their HSA, if employed, as are citizens. After 10 years residence the voucher would increase to that of a citizen. (top)

The universal HSA supplements have the advantage over refundable tax credits for low wage earners that they do not comprise a disincentive to earn more money. They also do not increase the numbers of individuals who pay no taxes and hence feel little personal investment in sound government.

Wage earners will be required to place about 5% of wages (but not of other income) resulting in between $1250 and $5000 per year in a HSA account. That is, the HSA is mandatory. However, the degree of government coercion seems to me to be less than in the mandatory Medicare payments together with the mandatory taxes needed to support Medicaid. Taxes of this latter sort would be substantially replaced under the HSA approach.

The contributions from wages would be mandatory until the total contributions plus return on investment in the account reached $125,000 (inflation adjusted, of course). Once this amount is achieved, the account would no longer need to be supplemented from income, although, if desired by the patient, it may be later supplemented if negative investment returns or withdrawals result in the account dropping below $125,000. Should investment returns result in the HSA account being valued over $125,000, the excess is distributed to the owner.

An HSA account can be kept directly with the government or in a private institution. If in a private institution, the money may be transferred only at the patient's request and only to another HSA account, or to the patient's estate after death. An exception might be made for the money to be spent after age 75 for a mortgage or for rent for the patient's principal residence. However, such possibilities should be closely examined since, should they exhaust the HSA, they could result in the general tax-supported government safety net being required to provide for medical or long-term care.

A principal purpose of the HSA, and a reason for making HSAs mandatory for wage earners, is to minimize the number of persons who fall into the safety net, thus minimizing the safety net's additional burden on the taxpayers. Before safety net expenses are made, as is currently the case for Medicaid, the patient will have to certify that his HSA account and other personal resources are exhausted.

Also, the HSA is mandatory because it is desired that the voucher and HSA, together with strongly regulated catastrophic insurance, as much as possible replace comprehensive insurance, whether private, Medicare or Medicaid with a market-based system at the personal level.

If the HSA is mandatory, as recommended here, employers will be naturally inclined to award any health benefit to their employees in the form of direct contributions to the HSA. If the HSA were voluntary, then many employers might instead continue to offer comprehensive insurance because that is what most employees and employers are used to and because, at present, it is the paradigm for high quality employer-provided health care.

Of course employers may legally continue to offer comprehensive insurance even if the HSA is mandatory. However, the employee and employer would then have to coordinate the voucher, HSA, and the comprehensive insurance. The complications would lead most employees to favor having the employer contribute directly to the employee’s HSA. Since most comprehensive insurance programs also cover dependents, one would expect that if the employer shifted to funding HSAs that they would also fund dependents' HSAs.

Employers may choose not to explicitly make a contribution to the HSA, instead asking their employees to choose how much of their salary to contribute to their HSA. In either case, however, employers will still have to pay enough salary to entice employees to work for them. To the extent that the lifetime voucher supplements the HSA, to that extent the employer will be more competitive in global markets.

It is important that comprehensive insurance not dominate employees’ health plans. If it did, then the health market would be suppressed at the personal level, because third party payments would continue to distort the market. If many employers, especially employers of the middle and upper-middle classes, offered comprehensive insurance; then that paradigm would be seen to be standard and desirable. So advocates for the poor would continue to argue that the poor also should have comprehensive insurance. If, on the other hand, the middle-class receives HSA-support from their employers; then the Federal government will be urged to give the same benefit to the poor; replacing Medicaid and Medicare and enhancing the market.

Also, the middle-class are the individuals who seek out the lowest prices and thus make the market. They also will make the best use of the information returned from the HSA trustees to those who use the voucher and HSA to pay bills, thus enhancing market efficiency. (This information feedback is a feature of the current approach.)

Because we do not want persons to fall into the safety net, it should be required that the HSA be invested conservatively. Perhaps only in CDs, or a well-balanced account of CDs, bonds, and index funds.

The self-employed would not be required to fund HSAs from their non-wage income in order that they may use their limited funds, possibly for a new business, as they see fit. Most of these individuals are unlikely to end up in the safety net, and, in addition, there are relatively few of them compared to wage earners.

The fact that all wage-earners would be required to contribute to an HSA will reduce the "free-rider" problem even without requiring that health insurance be purchased.

Other individuals who do not draw wages, e.g. children and non-working spouses, would be permitted to contribute $5000/year to an HSA account. They would not be required to do so. Funds to enable these contributions might constitute the "family health benefit" awarded by employers to employees. (top)

Current HSAs are tax exempt. This is necessary in order that they may compete with other employer-granted health care, Medicare and Medicaid which are tax exempt.

However, the tax exemption for health care distorts and complicates the market. Therefore, I have specified in this system that the voucher and HSA are not tax exempt.

Until all aspects of medical care expenses can be placed on the same tax footing as expenses for such items as food and housing, it will be necessary that the voucher and HSA be tax exempt. A possible path for evolution to this condition is given in the Transition section, above.

Note that dropping the tax-deductibility of medical expenses could be compensated by a reduction of some other tax. (top)

The 50th and 10th percentile need a small buffer so that unreasonable decisions are not made. For example, if the 50th percentile were interpreted as "50th percentile plus $5.00" then small purchases of aspirin would not generate complicated paperwork because the purchase was made at a convenience store where prices were a bit high.

Similarly, why require a patient to pay $4.75 OOP when the hospital was striving to meet the 50th percentile on a $50,000 procedure, but failed due to unanticipated causes. (top)

Sources of funding for government provided health care (in this case yearly vouchers till age 21, safety net BMP, use or lose voucher, and catastrophic coverage for natural disasters, accidents, and assaults) are theoretically independent of how the care is delivered. I would favor canceling all Medicare and other taxes now going to medical care, and substituting a progressive Federal consumption tax in the form of a tax on income not invested. (the "USA" or "Unlimited Savings Allowance" tax, supported in 1996 by Nunn and Domenici) See also Maya MacGuineas article "Radical Tax Reform" in the January-February 2004 issue of Atlantic. (top)

Union health benefits might be transformed by guaranteeing maximum HSA contributions plus generous catastrophic coverage. Note that these benefits would no longer be tax free to the employee after tax , although they would still be counted as a business expense.

Taxes will also depend on how much insurance and procedures that individuals purchase OOP or with their HSA, as contrasted with using the tax-funded part of the HSA. These numbers would have to be estimated initially by surveys. Whatever the answer, it would presumably decline as HSA accounts built up. Many employees might prefer to take most health care benefits in the form of HSA contributions. This might be especially true since, after the transition period, any employer-supplied premium would be taxed as income anyway, just as employer-supplied funds earmarked for an HSA would be.

Note that, since the voucher supplements are paid from general taxes, it makes health care funding more progressive. Current funding is regressive, compared to the income tax, because employer funding of health care is basically an equal tax, or head tax, out of the income of each employee. Of course the overall proposed HSA system is less progressive than a single-payer system would be.

The amount of money needed in the tax-funded voucher fund would also depend on the degree of competition in the medical market, and the corresponding price reductions which would ensue. (top)

Possibly, there could be squandering of voucher enhanced HSAs if patients believed that the government would later improve the safety net, or reduce the yearly voucher value. If so, the patients might decide to get as much care, or engage in fraud in collusion with doctors, in order to skim off payments as soon as possible; such behavior is currently observed in Medicaid, Medicare, and private insurance.

Such behavior would seem to be less likely in the HSA plan where patients are spending their own money.

Children are born with a right to a $2000 yearly voucher supplement through age 21. This is a major advantage to a voucher approach: children get off go a good start in life with, e.g. well baby clinics, and good dental, aural, and vision care. Note that $2000 is much less than the $6000 spent yearly per capita in the US on health care in 2005, and also much less than the ~$10,000/yearly spent per capita for a child in the US on education.

Employers will likely respond to the government's funding of childrens' HSAs by ceasing to provide extra salary, either directly or through dependent health care insurance, or for depositing in dependent's HSAs for those employees with children. By the same token, employers will be less inclined to be prejudiced against hiring individuals with children in hopes of saving the company money.

The children's parents would naturally administer the voucher; say until the children are 15. Since children will not necessarily know when their voucher is being depleted they might be defrauded by their parents, so the investment and dispersal of their accounts should be closely watched by the MA, perhaps by requiring a second opinion for long-term drug prescriptions or any expensive procedure for children. However, it should be mentioned that, from the taxpayer's point of view, there is less likely to be a societal fraud problem under the voucher system than under Medicaid or private insurance coverage of the child.

Parents, of course, may choose to fund their child's HSA out of pocket. Should the child's HSA reach the cap, a future employer would have to choose how to make up for the fact that this employee will not be rewarded by a benefit which contributes to an HSA. The employee could simply be offered a higher salary, for example. This could be standard for employees who reach the HSA cap. These are all options for the parents and companies; the government should not regulate these options.

Children's' and spouses' HSA may be funded each year by the same maximum as workers; however, this is not required. Companies which fund family policies could arrange that the difference between their single-person payment and family payments go to the HSAs of the children and spouse. (top)

When the program is initiated, a person currently alive should receive a pro-rated voucher enhancement equal to the voucher he would have accumulated to date under the proposed program less expected expenses. Some older persons who have not saved will be less well off than young people will be when they are old in the future because the young will have saved for medical expenses through their mandatory HSAs. On the other hand, those less than 10 years from Medicare eligibility may choose to remain in Medicare, see below, so they at least need be no worse off than if the HSA program had never been initiated.

For insurance startup, see "Startup Coverage of Pre-Existing Conditions" below. (top)

Current Medicare recipients, and those within 10 years of receiving Medicare, will be allowed to remain in the Medicare system. Since they are old, the costs will not last many decades, and many in Medicare might, nonetheless, opt for the new system, especially since many doctors would likely prefer the new system. However, seeing the light at the end of the tunnel, doctors might not be as susceptible to refusing to treat Medicare and Medicaid patients as some are at this time. When this cohort of Medicare patients dies, Medicare as a program would cease. Payments for Medicare would be for the 50th percentile costs for each procedure.

The list of allowed Medicare procedures would be the same as at present, and presumably not be as extensive as the list of procedures which could be paid for by the HSA. For example, Medicare at present does not cover long-term nursing home care.

When the remaining Medicare patients require nursing home care they will follow the path which current Medicare patients must follow; exhaust their personal resources before becoming eligible for Medicaid. Of course, Medicaid as such will no longer exist; persons in Medicaid will actually drop then into the Oregon-like safety net plan. Persons could convert from Medicare to the new system at any time; however, any funds they had received from Medicare in the interim would be subtracted from their voucher at the time of conversion. This would occur in order to avoid having people convert from Medicare just as they require long-term nursing home care (which Medicare does not cover) but to which their voucher may be applied. (top)

At the beginning of the program, those with no insurance could, for one year after initiation of their voucher, purchase catastrophic insurance with no exclusions for pre-existing conditions from any insurance company. The government would reimburse the insurance company for the extra premiums for those persons with any pre-existing conditions.

Those currently ill who are covered by insurance would continue to have any known pre-existing conditions covered by their existing source of insurance at current rates at start-up of the voucher program. The government would subsidize the premiums for any new conditions discovered in the first year. These individuals could also switch to another insurance company in the first year as if they had had no insurance.

Once this one start-up year is past, insurance companies would have no obligation to sell new catastrophic policies covering pre-existing conditions although they would be required to renew existing ones. This would ensure that every person would have the opportunity to start out the new system covered for catastrophic expenses for every illness, even pre-existing ones. They will not have to exhaust their voucher immediately to care for a chronic pre-existing condition. (top)

In theory, the above policies should not result in a great increase in total medical expenses since most known illness is currently covered by Medicare, Medicaid or private insurance. In practice, it might result in a substantial increase since insurance companies would likely offer pre-enrollment diagnostic programs for their existing customers to discover pre-existing conditions so that they will be covered by the government. When found, treatment for these conditions would begin, whereas before they would not have been treated. Since the net result is improved health, it is a matter of judgment whether government should disallow extensive diagnostic programs for the insurance companies at the beginning of the program in order to save tax dollars. My inclination would be to allow the diagnostics. If severe illness can be delayed, the average yearly cost of health care will be reduced so that there are more premiums/illness so that yearly premiums can be reduced. There would likely be a rush to get care right away because of the many procedures that many poor people will need. Prices may go up during the first few years. Healthy people, for the most part young or well-off people, will put off procedures that they do not really need, until prices decline again.

Sick people, especially including poor sick people, will use up more of their voucher to finally get the care that they need. It is better for the society that they pay more in the early rush in order to regain health, cutting down their lifetime voucher, than that they remain sick and unproductive.

Costs may not rise as much as might be expected since doctors may strive for efficiency in order to increase market share. Even poor people may try to conserve their vouchers by seeking low-cost providers. In addition, over the longer term, the supply of doctors may increase. (top)

There have been Medicaid frauds with patients, in collusion with doctors, falsely claiming diseases which require unnecessary procedures which can be reimbursed. This behavior would be less, not more, likely if there were a fixed personal voucher or an HSA because someone's HSA, probably the false patient's, must be reduced, and that person, when notified of the loss, will not want her voucher reduced.

In frauds, under the current Medicare, Medicaid and private insurance approaches, only the government or a faceless insurance company loses money. This will not be the case under the HSA approach.Rewards of increased health care voucher limits could be given to persons whose information about unauthorized charges to their account resulted in convictions. Despite the above remarks, a common reaction to the voucher approach is to believe that it will be vulnerable to fraud.

Logically however, the voucher approach is no more vulnerable than any current plan, including company supplied health plans, not to mention Medicaid and Medicare. The current penalties of trial and jail terms should be sufficient to deter fraud which is even less in the person's interest than before.

As a result of Medicaid and Medicare fraud the government has instituted draconian criminal laws against fraud which have occasionally resulted in honest doctors going to jail for what were basically clerical errors. Guarding against such errors further increases the administrative costs of health care, and makes it less likely that a medical career will be attractive to individuals who are capable of being excellent doctors. Hence the HSA approach, by undercutting most approaches to fraud, should further reduce costs, improve the skills of those becoming doctors, and prevent the criminalization of medicine.Since the HSA are tax-advantaged initially, there is the possibility that the patient will use the money for non-medical uses. This might be especially likely for wealthy individuals who can self-insure and hence are happy to use the voucher and HSA as just another investment whose proceeds can be spent for non-medical uses. (This possibility is another drawback to having any medical funds tax-advantaged.)

Fraud of this type must be forestalled, since otherwise the entire concept of consumer-owned health care dollars may be discredited. In order for it not to be discredited, expenditures must be easy for the IRS to check. For this reason, it is important that most HSA purchases be mediated through a debit card. These purchases will be easy to verify and hence, any not purchased with such a debit card will immediately draw attention. (top)

There will be privacy problems; the government could have a complete record of a person's medical history. However, this is already the case in principle for people on Medicare, and with respect to states for Medicaid. Perhaps this problem could be alleviated by requiring federal records over, say, 5 years old to be discarded. The total fraction of the voucher remaining would, naturally, have to be retained in the files. A person could still assure privacy by paying personally for care. As has always been the case, the actual doctors who provided care would still have records, assuming that that met with the patient's approval. (top)

Much of a person's voucher might still be used in the last year of his life, an unproductive use from some taxpayer's points of view. However, in many cases much of the voucher will have been used creating a productive life. If those persons subsequently drop into the Oregon-like safety net with its reduced list of approved procedures, the net expenditure of tax dollars on that person's life may well have been reduced even though for most of what will probably have been a longer and happier life.

Since after age 75 having a comfortable place to live may reasonably be characterized as medically desirable, and may forestall having to enter a nursing home and more surely falling into the safety net due to high nursing home expenses, it seems reasonable that the HSA funds could be spent for rent or mortgage after age 75.

Visiting nurses and nursing home care should also be approved procedures under the HSA. This will encourage people not to squander their voucher while they are young. Long-term care available under the BMP safety net will be at the 10th percentile and, as discussed above, could result in the requirement to move to the country in order to find inexpensive enough care.

No portion of the HSA would revert to the patient's estate if he died before age 21. Instead, the remaining part of the HSA donated by the state would revert to the state. This is, in part, to ensure that parents take good care of their children, and in part because persons under age 21 have not usually acquired responsibilities for which they need to care. (top)

To minimize the number of heartbreaking medical cases, catastrophic insurance providing payments up to the 50th percentile should be federally funded for accidents and natural disasters, also known as "Acts of God" as normally defined by insurance companies. This would cover, for example, the next $1,000,000 after the first $10,000 for injuries sustained in fires, floods, tornadoes, earthquakes, etc. Auto accidents would not be covered since they are already well-handled by the insurance industry. The first $10,000 could, of course, be covered by the HSA. Victims of assaults would receive comprehensive insurance, which also would pay at the 50th percentile, because relatively full restitution to such victims seems appropriate. Police and firefighters could be covered in this way. So long as the concept of accidents is not extended to genetic "accidents" or the "accident" of catching tuberculosis or AIDS, the total cost of such insurance should be relatively small.

Presumably, emergency life-saving procedures with a good prognosis would be included under the BMP safety net list of procedures, so that a criminal, injured during a commission of a crime and convicted of that crime, would be covered at the 10th percentile for those procedures after her voucher had been exhausted. The fact that the criminal might exhaust her voucher if injured in a crime and convicted of that crime (so that the injury could not be classified as an assault) should act as a further deterrent to crime.

Private catastrophic insurance or BMP would obviously not have to cover the same risks as covered by the Federal policy. top)

If health care vouchers are a good idea it does not necessarily mean that vouchers for schools is a good idea since there is no "community" question in health care. However, it is apparent that a very similar set of vouchers could be created for education. The fact that most of the education money would be spent while a person was young and less qualified to make his own decisions, would be another difference between education and health care. (top)

For political reasons, some existing expensive procedures, such as organ transplants, would probably have to be grandfathered in to the list of rationed safety net procedures either for those alive today or for those with symptoms today, even if they are not in the BMP.

However, in the future, if persons could not pay with HSA or catastrophic insurance that they have purchased, or from other private funds, it seems plausible that procedures for these diseases should be like all others. They either are or are not in the BMP. (top))

This HSA approach has many of the universal features of the Canadian system, with the additional cost-containing feature that costs are set by competition and not by doctor/hospital/government boards who have various conflicts of interest; and that patients are not indifferent to cost. This should result in better cost containment than in Canada and thus in more medical care delivered.

However the exact cost savings likely cannot be accurately estimated because, as far as is known, there are no examples and no experiments in which a truly free market in health care has operated in an industrial society. The RAND Studies were in markets where there was no incentive for the providers to lower costs, and most of the market in the regions of the experiment was controlled by contracts between large entities. Analysis of plausible cost savings is an object of the highest priority and should be attempted by professional economists. (top)

TRADEOFFS

Unfortunately, by comparison to the Canadian system, the voucher approach does have the defect that a disastrously ill person who can be cured by a very expensive procedure not covered by the BMP but who for some reason has not purchased catastrophic insurance will be worse off. This is the price society must pay for the system's other benefits as compared to the Canadian system. From another point of view, the corresponding tax dollars go to good health for a large number of other individuals.

It may be objected that this approach to National Health Care is not sensitive to the needs of those who become very ill. However, those who become very ill will in fact still receive more tax dollars than the average citizen does. This is because, after they exhaust their voucher, they continue to draw tax dollars from the BMP.

In addition, the citizen who enjoys good health until her death, or who buys insurance and therefore does not exhaust her voucher, never receives the full value of her voucher.

The voucher approach has the political defect that it exhibits the rationing inherent in every system up front and puts a specific dollar amount on the voucher value. This amount is not as mean-spirited as it seems, however since it is less than the total that society would expend on someone who exhausted her voucher and who then used the BMP safety net.

The problem is one of degree; the society should provide the seriously ill citizen more than average funding, but should society allow that citizen to seriously compromise the health care available to the poor or average citizen by placing a tremendously disproportionate drain on tax dollars taken from all? (top)

DISABLED INDIVIDUALS

This approach has the benefit that if the vouchers are used to purchase lifetime renewable insurance at birth, as all can do with their vouchers, then if a person becomes disabled they will be covered. Moreover, for those who are disabled at start-up, the extra-cost premiums to cover the pre-existing conditions are subsidized by the federal government. (top)

RESEARCH AND TEACHING HOSPITALS

Research and teaching hospitals would no longer be able to subsidize research and teaching by overcharging paying customers through their insurers. Direct subsidies of these institutions by government would be required. It might be possible for these institutions to charge extra (perhaps above the 50th percentile) to their paying customers due to their high quality of care, thus minimizing the subsidies required. The institutions would, of course, be free to reduce their fees to those persons with illnesses which would be useful for teaching or research. top)

DOLLAR VALUE OF VOUCHER

The HSA voucher supplement of $2000/year through age 21 is thought by some to be too small. It has been tentatively selected for the following reasons. The cost for family insurance is about $12000/year. This would come to about $3000/year per person. Such insurance is for the people, children and working adults, who the voucher plan is designed to cover. For 40 years that comes to $120,000/person. Since costs should come down with this plan $42,000 should be more than sufficient to carry the typical person well into his working life where he has begun to build up his voucher via the HSA.

In principle, the individual will have had a healthy life to provide for old age through the HSA which will support maintaining their catastrophic insurance; otherwise, there is the safety net.

$42,000 is comparable to the taxes spent per capita for a life's public education; to protect that investment it seems reasonable to spend a comparable amount. It should be enough to ensure that almost every person can be launched into a healthy working life.

If the voucher is too high people will not conserve or perhaps will not even buy catastrophic insurance. Prices will be lower with competition, so current prices may not be a reliable guide; more will be bought with this voucher than would be possible currently. To the extent that we are protecting a public education investment, we want healthy working people, not necessarily healthy retired people; so we want at least enough money to carry people up to a healthy retirement but we may save as a society on funding health care after retirement. (top)

Cafeteria plans are often proposed in which the citizen has the right each year during an "open period" to choose between several health care insurance options. A recent (2007) such plan is that suggested by Senator Ron Wyden of Oregon. A feature of this plan is that an HSA + catastrophic health care policy option may be offered. This plan must, however, be "actuarially equivalent" to the more standard plans which are to be much like a standard PPO policy.

Wyden's plan performs the useful purposes of removing insurance from the domain of the employer, and of placing health care on the same tax status as other goods and services.

Industry is finding that the HSA option typically offers care at less expense for their employees. Hence it is likely that those choosing the HSA option will accumulate the marginal "actuarially equivalent" money in their HSA. Unfortunately, rational employees will also likely put off expensive procedures until they have switched to a more comprehensive policy during the annual open season. Then, after they have undergone the expensive procedure, they will switch back to the HSA plan in the next open season. This will likely result in an instability or death spiral in which most citizens end up in the HSA option.

The instability might be reduced if citizens were allowed to switch back into an HSA policy only if they had stayed in a PPO policy for several years.

Wyden's plan might be regarded as a first step toward the plan advocated here if it were modified to require, not just allow, an HSA option to be offered. Many citizens would take up HSAs, and likely a substantial market would emerge at the procedure level. Many of those who initially chose standard PPO packages would, over time, see benefits to themselves of the HSA option.

One of the principal benefits of the voucher approach is the resistance of HSA holders to fraud. There may be a tendency for poor individuals to be encouraged by criminals to select comprehensive insurance options so that they may receive a share of the fraudulent proceeds.

Once a substantial number of citizens had HSAs the transition to the plan outlined in the rest of this document could be initiated.

President Bush has offered in early 2007 a change in tax policy under which "families with health insurance will not pay income or payroll taxes on the first $15,000 in compensation, and singles will not pay income or payroll taxes on the first $7500. At the same time, health insurance would be considered taxable income. This is a change for those who now have health insurance through their jobs." Should this change in tax policy go through, it should ease the way for further changes toward the sort of plan advocated here. No longer would all the complexities involved in easing out of the current system of tax preferences for health care exist. HSAs then could easily simply become the "Health Funding Accounts" (HFAs), discussed briefly elsewhere in this document, that function simply as a receptacle for government and other funds which can be spent only on health care.

Governor Schwarzenegger has proposed (January, 2007) a universal health care program for California. His program does not seem to offer an HSA-type option for individuals. If it did so, then his program could serve as a state-experimental step toward the national approach outlined here. (top)

The HSA legislation passed by Congress in 2003 provides a useful starting point for transitioning into this voucher-enhanced HSA system. The HSA insurer supplies, typically, a high-deductible policy, a bank account for tax-deductible deposits and investment and for making health payments. The payments might ideally be made by a debit card.

1. Publish guidelines for private insurance providers, for lifetime from birth, catastrophic insurance such as that outlined in sections above, as a product for voluntary purchase. Design Basic Minimum Policy (BMP) as discussed in sections above.

2. Set standards for a system to provide relevant cost and indications consumer information as an individual's HSA is drawn upon as discussed in sections above.

3. Implement the change in tax policy suggested by President Bush. In addition, impose a cap on the maximum value that can be held in an HSA of $100-200K.

5. Make HSAs mandatory for all wage-earning employees, (and voluntary for others). Require funding by at least 5% of wages as discussed in sections above.

6. Extend $2000/year HSA funding to some other ages under 21. Gradually expand as tax and budget policy allows.

7. Grant Federal catastrophic insurance to all for natural disasters, non-auto accidents, and assaults.

8. Replace most Medicaid by Individual Basic Minimum Policies. Continue Medicaid long-term-care for those currently in program and for others for a few years.

9. Offer to replace Medicare for those who currently are covered, and for those soon to be covered, by Individual Life-time Policies with insurance companies reimbursed for initial underwriting risk by Federal Government. Individuals are to be granted a yearly voucher to pay premiums.

Note that once tax preferences have been eliminated for health care, and considering that insurance is not absolutely required, the HSA becomes simply an account which is restricted in its use to health care and which may be augmented up to the cap by government vouchers, wage deductions, and by contributions from the owner or any other person.

PHILOSOPHICAL CONSIDERATIONS

Children born severely ill and and poor and who, for some reason, were not signed up for catastrophic insurance will soon fall into the safety net where, presumably, many beneficial procedures will not be available. The question here is how much tax money should be diverted from keeping many people healthy to keeping a single person healthy? It is perhaps easy to justify spending four times as much tax on one person as on another over the course of their life. This might be the spread in the voucher plan between tax dollars spent on a healthy rich person who needs fewer tax dollars and a chronically ill poor person who needs more. But can one justify spending 10 or 100 times as many tax dollars on one person as compared to another when one considers that every person must die eventually and thus almost everyone will eventually need substantial care and have a fair claim to her share of tax dollars? That is, should some receive a vastly higher share of tax dollars than others when it is clear that, in the course of a complete life, overall need is more nearly equal than contemplation of individual cases might indicate at a single moment in time?

To prepare for medical care in retirement people are still free to continue their catastrophic insurance if they have saved enough, possibly with the aid of the HSA, to afford the policy they bought long ago. We leave some responsibility for people to care for themselves in old age. Insurance can allow for medical disasters requiring far more than the HSA limit if people will buy it. It is thought that for a large percentage of people the HSA limit is more than enough for a lifetime; most people do not have the very expensive operations nor spend much time in a nursing home.

The HSA is not transferable because it seems that allowing transferability would place too great a moral burden on individuals to gamble that they would not need health care and give the HSA away. Also, then the donor may fall into the safety net and the total cost to society will be greater. Of course, one is free to give any other money one may have. In the case of parents, for example, they may mortgage their house and take out loans if they are willing to sacrifice for their children's health care to this degree. This option might not be available in the systems of some countries where all expenses are required to be paid by the state in the name of equality.

Such a problem exists today in the US in the case of kidney dialysis, where it is difficult to use personal funds to obtain the higher level of dialysis which provided in Europe and Japan and which is known to increase life expectancy over that which is available under the US dialysis practices funded by Medicaid. (top)