How to Fix the Health Care Problem

I'm a nobody, and people do not ask nobodies like me how to fix national crises. But suppose they did, what would I say?

Repealing ObamaCare (and Obama), as good and useful as it would be, would not solve the problem the foolish but well-meaning citizens of this great nation elected our present President-trainee to solve.

Health Insurance Is the Problem, Not the Solution.

So how can we get to a place where so-called "health insurance" is not the driving force in health care?

First we must take a hard look at what that place looks like.

There are two components to "health insurance." They must be separated if we are going to get a handle on this.

One is that people generally cannot plan ahead for predictable big expenses. Car insurance is paid on an annual premium, but it's a big chunk, so they all offer (at extra cost) a monthly payment plan, twelve equal payments that add up to somewhat more than the annual premium. It's the cost of money, plus the extra paperwork of processing the payments. I also pay my property tax in one big chunk; most people pay it in equal monthly segments as part of their mortgage. My electric company offers a rate equalizer plan, where they average out over the year the ups and downs of winter heating and summer cooling against fall and spring. You still make a monthly payment, but it's a predictable constant. They wouldn't offer the plan if people didn't like it.

Most health care is routine and relatively predictable. Kids will fall down and break something. Women need their checkups. When you get older, things start to fail. Almost everybody my age I know takes a handful of pills every day. These cost money, and the doctor who prescribed them also needs to be paid. Most people will need to equalize these payments, because they lack the self-discipline to save up and pay for the costs as they occur. We can do this, but it's not "insurance," just payment equalization. Just as the electric company recalculates the monthly payment every year to reflect the previous year's actual usage, a health-care payment equalization plan can explicitly recalculate the monthly payments based on actual usage. And they must tell their customers what they are doing and why. It's not insurance, just payment equalization. If people use less medical services, they pay less, just as they pay less on their monthly electric bill if they heat their home with firewood instead of electricity. There is no free lunch, people merely spread out their payments for the services actually used.

Car insurance and home-owner's insurance are different. It is the nature of "insurance" that it insures people against a relatively rare catastrophe by spreading the cost of that event over all the people at risk. It only works because the event does not happen at all to most people, but the calamity is bad enough that people are willing to make a small annual (or monthly) payment in the expectation of recovery if it should happen. The insurance company pays out one car repair for every hundred or so drivers who paid in but did not need repair, or one house rebuild for a thousand homes that did not burn down. There are medical catastrophes, like automobile accidents (already paid out of car insurance), or cancer or heart transplants -- oh wait, everybody gets old and dies of some major catastrophe or another. So we are not talking about spreading the risk of a rare event over large numbers of people at risk but who will never suffer that event; everybody will eventually have that big expense near the end of their life. This is not an insurance issue at all, but another payment equalization. The problem is that nobody plans for the future. There are no heart attacks, no cancer, no adult-onset diabetes in the past year to equalize payments for; those all happen at the end. Are we going to force everybody to pay all their life for the big expenses that will only happen at the end? Nobody forces me to pay a bigger electric bill in the spring and fall in anticipation of my higher electric usage in winter, I make my own plans. I make my own health care plans, too.

But my prudence is indistinguishable from another person's folly. Everybody under 30 considers themselves immortal, no health care plans for old age needed. I did too, but I'm willing to live with the consequences of my choices, now that I'm old enough to see them coming. Everybody else, it seems, wants somebody else to pay for those big expenses they did not plan for.

There is no solution to this dilemma that ordinary greedy people will be happy with.

Either you must shift the burden of end-life health care onto younger people spread out over time, like Social Security was supposed to do for living expenses, or you must tell old people "Tough!" Older people vote, so no politician will turn off their spigot. That's why we have MediCare. Unfortunately, because it's "insurance" and not payment equalization, people are motivated to get all they can out of their "free" health care.

The Solution

Eliminate health "insurance" and replace it with explicit payment equalization plans. Start with MediCare. Replace it with a required tax-free medical savings account, the minimum payment perhaps 3% something like today's MediCare tax, but when you get old and need these medical services, you have the money to pay for it. And when it's gone, you are out of luck, unless you choose to buy actual insurance over and above the compulsory savings. Prudent people might elect to buy that, the way they buy whole-life insurance today. It's not a particularly good bargain, but it would pay for the heart transplant. A better deal would be to let people pay more than the required minimum -- as much as they want, still tax-free -- into their medical savings. If they don't use it all, it becomes part of their estate, either taxable as ordinary income to their heirs, or tax-free into their medical savings. The extra can be used for medical costs at any time. It's their own money, and they can spend it or not. That will drive medical costs back down to something reasonable. We might even let them take it back out (and pay taxes on it) after a certain age or in case of disability, they way IRAs work today, but without all the onerous minimum and maximum payment restrictions. The government will get their income taxes on everything not used for medical services -- and even the portion used for health care gets taxed to the physicians. Everybody wins, except the bureaucrats.

Hard cases make bad law, but there will be medical hard cases, people born with congenital disabilities, poor people who don't pay in as much as their poor life-style choices cost them in medical services. Maybe we can have some kind of "compassion tax" that works like disability does today. That will lead to the usual kinds of abuses (as we see in disability payments today), but it might be better than leaving them to charity. Or it might not be better. Locally administered charity has the advantage that the people offering services are spending their own money and resources, so they tend to be more insightful about who gets charity and who does not. We should make funding such charities desirable, perhaps even with super-tax credits.

Any contribution to anybody's medical savings should be tax-free. Employers can contribute to their employees' accounts without penalty, which increases their employees' retirement income if they don't need it for health care. It replaces the spiraling insurance costs of today with something the managers (the people themselves) are motivated to conserve. You can also give (tax-free) medical charity to anybody, which they can use at their own discression. That means the providers will be motivated to offer their services at competitive prices. Providers and private fund administrators must be regulated to the extent that they are required to tell the truth about their services and the costs, but that should be sufficient to allow the market to work. Everybody gets richer -- except for the present corrupt politicians profiting from government mismanagement.

We can do this, but we need to get the people who think government solutions are better out of the picture. That seems less than likely.


Assuming that the destination plan is workable, how do we get there from the present mess? Besides repealing ObamaCare.

We need to start with education. People must be told in no uncertain terms that "There Ain't No Such Thing As A Free Lunch" (TANSTAAFL). We need to stop blaming the rich people for the problems of the poor (except for oppression and dishonesty), and encourage the poor to get their education and work hard so they too can become rich. And make it possible for them to do so. Stop the government monopoly on education by letting people choose their education suppliers without economic penalty, the same as I think they should be allowed to choose their medical suppliers.

Social Security is already designed to pay out what people paid in, we just need to enforce it. It was designed (and paid for) to help the people not wise (and rich) enough to fund their own retirement, and we can enforce that by cutting off the wealthy. They don't need it. Stop capping their payments in, because for them it's a tax, not an entitlement. If they are rich enough to hit the present cap, they won't feel the pain. For the rest of the people, make the payments out reflect their actual life expectancy and actual payments in. Some people will get less money than they do now, but they can live with it.

With these simple corrections, Social Security can become a good model for MediCare. What people paid in is a measure of (and limit to) what they get out. Enforce it, and cut off the wealthy, except for their (tax-free) voluntary payments. We can do that now.

Eventually -- perhaps immediately -- we should let people at any time switch their Social Security and MediCare contributions over to private (but regulated) administrators if they wish. The government can continue to pay out from what they took in, and the private administrators can begin paying out from what they have taken in. There will be a tax hit while we recover from all the government embezzlement of past Social Security payments, but that's a one-time cost. Thereafter the whole business becomes self-supporting.

We can safely ignore health insurance companies. If they want to offer a competitive product, some people -- especially business owners -- will buy it. The government should not be compelling such foolish transactions. When people take control of their own health care, they will discover that it's cheaper than anything the insurance companies can offer. Like the drug companies, they should be required to say so. Employers will start contributing directly to their employees' medical savings accounts (if we make that untaxed) and everybody wins. The insurance companies will just re-invent themselves as medical savings administrators. Everybody wins.

Finally, but hopefully early in implementation, we need to start making charity work. The present President-trainee is hostile to charity, but that's only because he and his party are accustomed to Big-Government corruption ("waste, fraud, abuse" is their term), which government administrators profit from. Throw the bums out. Then give people a tax credit for donations to service charities, those doing things that the government does today. That will reduce tax revenue, but it will also reduce the taxpayer costs to perform those services even more. The result will be a net reduction in the Federal deficit. We could even give a super-credit (credit greater than the actual cash donation) for such donations and still come out ahead.

We can do this, but we need to educate people concerning its advantages, so they will want to throw the present bums out and make it work. Right now everybody thinks they can get on the free health care train. The bridge is out, but they don't know it. Nobody in Washington knows it, not even the Tea-Party Republicans. They need to be educated or replaced.

Health Insurance Is the Problem, Not the Solution.

Tom Pittman
First draft: 2011 October 29


How to Fix the Health Care Problem (you are here)
Essay "Health Insurance Is the Problem, Not the Solution"
Blog post, hospital administrator admits "I'm responsible"
My letter to President Obama
A Physician's perspective
A better solution, without raising taxes

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