David Goldhill's Dream for Universal, Consumer-Driven Health Care

In the September 2009 issue of the Atlantic, David Goldhill rocked the health-care world with his compelling account of how bureaucratic American health care killed his father. Now, Goldhill is back with a new book expanding on the topic, published by Knopf, entitled Catastrophic Care: How American Health Care Killed My Father—And How We Can Fix It. What follows is a lightly edited excerpt from the book, in which Goldhill, a life-long Democrat, discusses what a market-oriented universal health-care system might look like.

(Also, on Thursday, January 24, in New York City, Goldhill will be speaking at a luncheon hosted by the Manhattan Institute, where I am a senior fellow. If you’re in the area and would like to attend, please contact Debbie Ezzard at 646-839-3374 or dezzard@manhattan-institute.org.)

What we spend today on health care

Americans will spend roughly $8,500 per person on health care this year. Of course, this money will enter the system from a variety of sources: insurance premiums, out-of-pocket payments, taxes, Medicare premiums, even charitable contributions. Let’s wish all that away for a moment and say instead we go to Becky, a twenty-six-year-old who’s worked in my company’s marketing department for three years, and offer to give her newborn daughter $8,500 a year for life to spend on health care. What system would she set up for Becky Jr.?

Obviously, if Becky Jr. is like most of us, she’ll need much less than $8,500 in health care in almost all the years of her life. So the first thing Becky wants to confirm is that Junior’s annual health grant can carry over, that the amount she doesn’t use this year can be used in future years. Some type of Health Account must be a foundation of this system.

With a Health Account, Becky now thinks about health care differently. She no longer thinks of Junior having $8,500 a year but rather $680,000 over her expected eighty-year life. This is crucially important. Mainstream health policy experts think insurance is necessary to fund health care because, in any given year, the overwhelming amount of health expenses are concentrated among a small share of the population. That small high-use group would not be able to afford its massive health care expenses during that year.

Managing spikes in health care consumption

But these experts confuse the risk of a person suffering a major illness with the risk of suffering a major illness in a given year. Because all of us are likely to have large health needs at some point in our lives, we will all spend a few years in that high-spending group. This isn’t a risk at all; unfortunately it’s a certainty. The risk relates to our suffering our inevitable major illness in any given year, but insurance is an incredibly costly, inefficient, and distortive way merely to move funds among years.

Becky can see this immediately. She wants to make sure Junior has access to the $680,000 when she needs it, and she knows she has a guaranteed $8,500 annual health grant. So she knows if Junior’s Health Account is ever too small to cover a major medical expense, her best bet is to borrow the money, with the future grant serving as collateral. A Health Loan is a low-cost way to transfer money from a future health grant to the present.

So with the annual grant, the Health Account, and the Health Loan capacity, Becky Jr. now has access to $680,000 in health funds to be used anytime over her life—whenever it’s her turn to need major medical care. Remember, this dream proposal is per person. So when Junior gets married and has her two kids, her family has a total of $34,000 a year in health grants. For probably 95 percent of Americans, this simple system would provide for all their conceivable health needs over their lifetimes. Without any insurance. And for almost everyone, just the money we’re spending today will create a huge surplus.

Becky hopes her daughter will spend relatively little of her health grant every year. She knows that some of this depends on good luck, but she will raise Junior to be careful about her health and a thoughtful consumer of health services. Becky understands that even trusted medical professionals are in the business of selling tests and procedures, so she’s naturally skeptical when care is suggested. She has friends who don’t take care of themselves, have every test and procedure offered, and are spendthrifts when it comes to health care. She understands that their profligacy explains why the annual grant is so high; as a result, she believes that at some point in Junior’s life she should be able to use at least some of the large accumulation of money in her Health Account for other purposes. Or at least be allowed to leave the unused balance to a loved one in her will.

True catastrophic insurance

But what if Junior is one of the unlucky ones; what if she develops a health problem, or a series of problems, that will cost more than $680,000 over her lifetime to treat? Becky will want to insure Junior against this risk. So we will need to introduce some kind of health insurance into even this, our dream scenario. Here Becky has two goals. First, she wants to protect Junior against truly catastrophic health circumstances. Second, she wants to spend as little of Junior’s money on premiums as possible, preserving as much as she can in her Health Account.

In other words, Becky wants health insurance that covers as little as possible. She understands that health insurance is high cost (even under the new Affordable Care Act rule, only 80 cents of each premium dollar will be spent on care). Junior gets to spend all one hundred cents of every health grant dollar she doesn’t spend on premiums on care. So Becky wants insurance that covers only any care Junior might need that is not covered by her lifetime health grants. As perverse as it seems to our current way of thinking, Becky wants insurance with as high a deductible as possible so that Junior’s premiums—and therefore her losses to the costly administration of insurance—are as small as possible.

Now let’s design that insurance policy. Say that for 95 percent of the country, the $680,000 lifetime grant will more than adequately cover their health needs. But for the unfortunate 5 percent, the average need is much higher, requiring, let’s say, a total of $2.58 million in lifetime care (in other words, roughly an additional $2 million). Assuming insurance administrative and profit costs are 20 percent, the premium for Junior for protection against being one of the high-cost 5 percent should be about $120,000 over the course of her life—or $1,500 a year. And the lifetime deductible (because in a system where money can be moved through loans from one year to another, lifetime deductible is all that matters) will be $500,000.

(Obviously, all of these numbers are simplified for the purposes of illustration. But let’s do the math. If 5 percent of the population needs an extra $2 million in lifetime care, then spreading that care over 100 percent of the population will cost $100,000 per person. Adding 20 percent in insurance administrative costs makes the premiums $120,000. So what does Becky have now? She has $680,000 in health grants, of which $120,000 goes to her insurance premium, leaving $560,000 to spend on her own care.)

In the real world Mainland, this type of insurance would be called catastrophic insurance because it insures against a risk that is very remote. On the health care Island, the term "catastrophic insurance" has been hijacked to mean (slightly) high-deductible insurance. On the Mainland, no one with real catastrophic insurance expects to ever make a claim against the policy. On the Island, everybody with a catastrophic insurance policy expects to make a claim most years. So let’s call this new type of health policy True Catastrophic Insurance (TrueCat).

Consumer-driven cradle-to-grave universal coverage

All of the elements of Becky’s health care system are effective from cradle to grave. Junior is born with a Health Grant, a Health Account, and a TrueCat policy. If she’s unfortunate enough to be born with a very serious illness, she can claim against TruCat from her first day. There are no milestones that alter Junior’s status in Becky’s dream health system; reaching adulthood, switching jobs, or becoming a senior citizen are all irrelevant. Chances are that Junior’s first years of life—well into middle age—are likely to involve low health expenses and a growing accumulation of funds in her Health Account. After middle age, her health expenses are likely to increase, gradually diminishing the balance built over the previous years. Junior almost certainly will turn sixty-five with several hundred thousand dollars in her Health Account—far more than is spent on beneficiaries even by today’s undisciplined Medicare program.

So what do we have? Becky’s daughter enjoys a health system that uses exactly as much money as is used today. It is straightforward, with no variation for age, work status, health status, or anything else. It has cradle-to-grave coverage. And it involves very low administrative costs, as insurance is held to a minimum and simplicity substitutes for the administrative complexity of modern health care finance.

This piece originally appeared in Forbes

This piece originally appeared in Forbes