Thursday, May 12, 2005
Fixing the healthcare system
The United States has the best healthcare system on the planet... if
you can afford it. The only way that statement reads even close to
accurate is with that ellipsis.
We spend as a percentage of our economy the largest proportion of our
GDP of any industrialized country on earth. We spend ~17% of our
economy on healthcare each year. Our economy is 11.75 Trillion
dollars. This means we spend 1.997 Trillion dollars each year on
healthcare. The average expenditure of other industrialized nations
is between 11-12%. These other all have socialized medicine. What
could the US economy do with another Trillion dollars?
Our healthcare system causes, among other things, the following
- The 8 trillion dollar liability in Medicaid
- The $1,600/vehicle charge that US automakers incur as a result of
providing healthcare to its employees / former employees
- Is the number 1 cause of bankruptcy in this country.
- Forces 45 million Americans to live without health insurance
Now market fundamentalists (because really, it is its own kind of
religion) claim that we have the most efficient system because we use
the market to allocate resources. It's true that the market is the
best known method to allocate resources. What's not generally
known, however, is that markets only optimize based on what's
incentivized. If corporations provide healthcare, then profits, not
quality healthcare is what matters
So how do we fix it?
Insurance works because as you increase the number of people covered
by a plan, the overall percentage of people that are sick at any
given time falls:
1/N = population risk
Premiums are paid to cover the costs of care for the sick
population. The natural conclusion of this is that the more people
that you have in you system, the lower your risk is. What could be a
larger pool that then entire country?
One of the classic criticisms of socialized medicine is the cost:
Why contain costs if the government is playing for it? How do we use
market forces to contain costs and increase innovation? I propose
The government should pick up 90% of the national average cost of any
given procedure. The remaining 10% individual obligation should be
means-tested against the individual. I also think that we should
derive some method for incenting personal responsibility for
healthcare. Factors include how regularly the individual goes to the
doctor for preventative care, the trend lines for that individual's
overall health / fitness.
Why does this work?
The doctors are incented to keep their prices low because consumers
will move to the lowest cost provider, assuming there's enough of a
differential. Additionally, if doctors are able to keep their costs
below the national average, they are more profitable.
Individuals are incented to stay healthy, to use preventative
medicine, for both personal quality of life, as well as financial
Next up, tackling drug costs...