Within the health care debate that has taken place during the past year, “death panels” and health care rationing were both pegged by some as distinct possibilities and dismissed by others as ridiculous fantasies. Yesterday, Michael Tanner at the CATO Institute wrote that the concept of death panels may come to fruition, considering that the new director of Medicare and Medicaid is a fan of the United Kingdom’s National Institute for Clinical Excellence (NICE), a government agency that has been accused of rationing health care.
Like all things, health care is a finite resource. As such, it is always rationed in some way. The important issue to determine is who — or what — is doing the rationing, and what criteria is used. After all, people ration in their daily lives when they choose how much of their paychecks to spend on groceries, clothes, or movie tickets. When individuals ration, they decide between individual trade-offs. The difference is not the mechanism, but the actor.
The price system is arguably the most efficient method to allocate resources. As Nobel laureate economist F.A. Hayek articulated in “The Use of Knowledge in Society,” the price system contains information for both the seller and buyer. With health care, however, true costs are largely veiled by what can be termed a “health care wedge” — a separation of consumers from knowledge of costs. A patient may face a decision of whether to seek treatment in the form of high-cost, high-intensity care or low-cost, low-intensity care (or no care, as the case may be) but lacks real price information to make an informed decision about whether the expected outcome will be worth the cost. This lack of information makes the high-cost, high-intensity care more appealing in situations where it might not otherwise be chosen. Because of the skewed incentive structure that this creates in the current health insurance market, costs will continue to rise. This leads some to believe that it is necessary for the government to establish new ways of rationing care, which ignores the real problem: the separation of consumer and cost of treatment. By finding a way to mitigate that health care wedge, the decisions about when and why to ration can be returned to individuals and their physicians.
How can this be done? Nearly two decades ago, Show-Me Institute scholar Susan Feigenbaum suggested a different mechanism for health insurance: indemnity insurance. She likened the process to automobile insurance. When an illness is diagnosed, the insurance company would follow a process that is similar to when an automobile claim is made. The company would assess the medical issue and write a check for the probable cost. The customer would then be able to choose how to spend that money.
This system would create an incentive to shop around. Less intensive — and less costly — treatments become would more appealing, because thriftiness is rewarded. Some people would choose to use the entire amount for intensive health care. Others, especially those with terminal illnesses, might opt for minimal hospice or palliative care and set aside the remainder in a trust fund for a child or grandchild. Depending on how this type of plan were implemented, certain caveats could be included, like specifying a minimum level of required care, or precluding autonomy in making medical choices for those deemed too sick to make a sound decision. Those issues aside, indemnity insurance would place the decision in the hands of the individual.
The important thing is that this mechanism would introduce competition into one of the more expensive areas of health care, end-of-life care. Competition is necessary to bring down health care costs in the long term. Indemnity care is not the only possible solution, but it is one that must be considered, alongside other market-based solutions like health savings accounts. Missourians would benefit with an opportunity to choose from a variety of market-based health care options.
