Illustration by Matthew Hollister

To Fix Health Care, Turn Patients Into Customers

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Jan. 4 (Bloomberg) -- For almost 80 years in the U.S., the left and right have been arguing about health care. To the left, it’s a fundamental right of all citizens, one the government should fund from our collective resources. To the right, while society might want to aid those most in need, health care is best left to the market to maximize innovation, quality and efficiency.

Most of our health policy can be described as a compromise between these two positions. And what compromise has bequeathed us is a mess.

I agree with the left that we need a true cradle-to-grave safety net for every American. But the right is correct that we are unlikely to build a good, affordable system of care unless we leave most of it to market incentives.

Rather than see these two ideas as being in conflict, we need to understand how they can support each other. I’ve argued that the only way to restore normal functioning and incentives in health care is for patients to regain their status as customers. If we could ensure that every American had lifetime protection against the cost of managing a true health catastrophe, it should give us the confidence to rebuild our health-care marketplace.

National Insurance

My answer to those who argue for national health insurance or for a market-based system is to do both. Let’s provide national insurance to everyone but not for everything. Then let’s have individuals use their own health savings accounts to pay for those health-care expenses that aren’t catastrophic -- from routine exams to the management of illness and the infirmities of old age.

Achieving this reform in full would take time, maybe as long as two generations. At the start, many people would have to remain in our existing structures. But the faster we could divert resources that pay for noncatastrophic care into individual health-savings accounts, the quicker the health-care industry would reorganize itself to serve consumer needs -- by competing on price, quality and service.

In thinking about how to design a new system, keep in mind that all Americans today pour an extraordinary amount of income into the health-care system; an entry-level employee at my company can expect to pay $1.9 million over her lifetime, assuming the cost savings anticipated by President Barack Obama’s health-care law are actually achieved. Our current system is designed to hide these real contributions from us, but that doesn’t mean anyone else is truly paying for our care.

Second, while insurance advocates focus on the 70 percent of health-care resources used in any given year by only 10 percent of the population, that also means 30 percent -- or $750 billion -- is used by the other 90 percent. This share alone would be the biggest industry in the U.S. Also the 10 percent of the population that represents the most intense users changes from year to year; unfortunately, most of us are going to wind up in that category at some point in our lives. So the issue isn’t so much whether we are each going to use our health resources (as it is for other forms of insurance), but rather when we are going to need them.

A balanced, sustainable health system that covered everybody while unleashing normal incentives for price, performance, safety and service would include three components: health savings accounts, health loans and true catastrophic-care insurance. Essentially, all the money that now goes into the insurance system and government programs or is spent on out-of-pocket payments would run through individuals’ health savings accounts. These accounts would enable people to accumulate funds on a segregated tax-free basis for a health-related rainy day and to pay normal expenses. And they would use some of it to pay premiums on their catastrophic-care insurance. In instances where people did not have enough money in their account to cover health-care expenses, they could borrow against their future contributions (with a government guarantee, if essential to ensure access).

Basic Transition

Existing government-aid programs would transition from being direct payers of medical services, with all their distortive effects on the provider incentives, to making transfers into individuals’ health accounts. For perspective, consider that the roughly $850 billion that federal and state governments will spend this year on Medicaid and Medicare subsidies could fund an $8,500 annual grant for 100 million Americans -- $34,000 for a family of four each year!

At the center of the plan is national catastrophic-care insurance, which would cover only truly rare, major and unpredictable problems. And while I know many Americans hate mandates, we would need to require that every citizen maintain such a policy every year of his or her life. (I suspect that the most efficient and reliable cradle-to-grave program is single-pool, which probably means it must be at least government-sponsored.)

What would this insurance cover? Let’s go back to that statistic that 70 percent of health-care expenses in any given year is used by only 10 percent of the population. That means about 31 million people use about $1.8 trillion worth of care, or roughly $60,000 per person. Let’s say our ultimate goal is for half of those expenses to be covered by health savings (through the deductible). That means insurance would need to pay for $900 billion a year in catastrophic health-care expenses. That translates to an annual premium of about $3,000 per American (assuming we divide up premiums equally; I would suggest an age-based formula instead that kept rates low for children and young people).

High Deductible

If insurance is to pay half of these catastrophic costs, that suggests the deductible would average $30,000 -- obviously very high by today’s standards (but less so when you consider that the average insured household contributes well over $20,000 per year into our current system, even before considering deductibles and co-pays). It would make sense for this to rise with age, too, starting at $10,000 for younger people and capping somewhere around $50,000 for older people. Because all Americans would be eligible for health loans, no one would ever be unable to pay the deductible; rising deductibles would merely reflect the longer period of time that people would have had to accumulate health savings.

Of course, few could afford such high deductibles right off the bat, so the effective cost of high deductibles would need to be phased in. To do this, let’s divide the population into three age groups. The oldest one, including everyone age 55 and older, would see no real change in the way they contribute to the system and the benefits they take out. From a senior’s perspective, for example, Medicare would continue doing exactly what it does now. Behind the scenes, though, Medicare would pay the beneficiaries’ high-deductible insurance premiums and high deductibles, and would receive any claim money.

At the other end of the spectrum -- let’s say all people 35 and younger -- individuals would be required to put some percentage of their pretax income into their health savings accounts. (The amount would probably be at least 15 percent.) They would pay their own deductibles, but they would also be entitled to health loans -- advances on their future contributions. This group, in other words, would be fully enrolled in the new system.

The middle group -- people age 36 to 54 -- would transition gradually, though they would immediately have high-deductible insurance, and would be required to make annual contributions to health savings accounts. Because they would no longer be paying high premiums for their existing insurance, they would soon accumulate some savings. And once they reached the age of Medicare eligibility, they would be expected to use their savings to bear an increasing share of their health-care expenses. Medicare would cover less of their deductibles than it would for today’s seniors.

In essence, this transition would entail phasing out regular insurance and gradually phasing in truly catastrophic insurance by raising deductibles annually until they reached the desired levels. Concurrently, most people would have enough time to accumulate some of their savings -- from avoiding today’s high premiums (and Medicare taxes) -- in health-account balances for that rainy day.

Finding Savings

But where would the savings come from? We may contribute $2.5 trillion to our health-care system each year, but we also spend all of it -- every year. Yet there’s so much money in the system that even small reductions can produce massive savings. A 2011 study by the RAND Corporation found that people with high-deductible health-insurance plans spend roughly 15 percent a year less than average on health care, even when the plan’s deductible is as low as $1,000. So let’s think of saving 15 percent on just the 30 percent accounted for by the less intense users in our new system. That’s roughly $115 billion in annual savings. The direct administrative costs of our insurance-dominated system exceed $1,000 per household per year, with a like amount borne indirectly. If we avoid only half of that in our new system, we could add $150 billion to annual savings. For perspective, it’s estimated that Singapore’s individual health accounts today have enough assets to pay for 10 hospitalizations per citizen.

This plan would reverse decades of health-care financial engineering that has distorted spending decisions and unleashed incentives for excess care, uncontrolled prices, erratic safety and nonexistent service. The new system would recognize that there isn’t a single service called “health care,” but rather a complex range of services that are inefficiently funded through a single channel. Catastrophic care should be funded by insurance; normal expenses out of income; and major, but expected, services through savings or loans.

No health-care funding system can be perfect, but compare this approach with our existing crumbling system. Importantly, the new mechanism would not only provide a true universal safety net, but put people in charge of their own health spending. This change would be transformative, not because we would be such brilliant consumers, but because the industry would restructure to chase our dollars. The more of our health resources we could move away from our distortive health-insurance system and toward our own spending, the more we would reform the industry’s fundamental incentives. And the resulting savings -- from competition over price, efficiency, quality and service -- could itself lead to a much faster transition than anticipated here. As health savings accumulated, and the industry transformed itself to chase customers, Americans would be in a much better position -- and a sustainable one -- to benefit from the coming of more personalized medicine, which holds out so much promise for our future.

(David Goldhill is the president and chief executive officer of the cable TV network GSN. This is the last in a series of three excerpts from his new book, “Catastrophic Care: How American Health Care Killed My Father -- and How We Can Fix It,” to be published Jan. 8 by Alfred A. Knopf. The opinions expressed are his own. Read Part 1 and Part 2.)

To contact the writer of this article: David Goldhill at

To contact the editor responsible for this article: Mary Duenwald at