How to make health care more affordable: Part 2


Last month, I wrote about how free market health reforms are needed so that health care consumers (patients) have greater incentive to be conscious of and control their health care costs. In this post, I want to discuss free market reforms to improve the incentives for health care suppliers (doctors, hospitals, etc.) to do the same.

Today, health care providers are paid, primarily through the health insurance system, on a “fee-for-service” basis. In other words, insurance companies or the government pay doctors for every procedure they perform – every consultation, every exam, every surgery, etc. But this means that the easiest way for health care providers to make enough money to stay in business is to make health care more expensive by providing more services.

Certainly, doctors and hospitals can try to weed out wasteful, unnecessary costs, but when one mistake in this cost-cutting exercise can lead to an expensive malpractice suit, performing more procedures to get more revenue becomes the easiest and safest way to go financially. Combine that with a lack of consumer incentive to be seriously cost-conscious (because the insurance company foots most of the bill), and you have a recipe for a seemingly endless cost spiral.

Fortunately, there have been market developments in recent years that hold promise for changing this costly system and bringing health care costs under control. One such development is a movement among basic health care providers (primary care/family medicine and basic outpatient services) toward no-insurance health care, where consumers pay doctors or clinics directly and at an established, flat rate regardless of the health care services they receive.

One example of this entrepreneurial health care model is After Hours Medical (AHM), which has six clinics across the Wasatch Front. While AHM will accept insurance, they primarily advertise a “membership program” where $49/month per person ($245/month max for a family) plus $5 per visit gets patients all of their basic health care needs, including treatment of minor injuries/illnesses, X-rays, lab tests, and even management of chronic diseases like diabetes. AHM also offers a version of this membership program as an employer health care benefit at a reduced rate of $30/month per person ($100/month for a family).

A second example is Personal Family Physicians (PFP) in Holladay. Rather than working with insurance, PFP charges a flat yearly fee based on how many family members will be included ($1,800 for the first family member, $1,500 for the second, $1,200 for the third, and $1,000 for any others). PFP sets no limits on the number of office visits allowed and provides similar services as AHM, minus X-rays.

[pullquote]This new model changes the incentives for basic health care providers.[/pullquote]As a new way of doing business, neither of these examples is perfect … but then again, neither is the current insurance-based, fee-for-services system. What this model does, however, is change the incentives for basic health care providers.

Since neither AHM nor PFP will necessarily get more revenue for providing more services, they have a real incentive to make sure the health care they are providing is necessary. The act of performing more health care procedures changes from a revenue generator under a fee-for-service business model to a cost generator, which is what it is in reality. In order to stay in business, AHM and PFP will be forced to invest serious efforts into holding down health care costs in addition to managing their source of revenue. They will certainly have to be much more cost-conscious than a health clinic that brings in more revenue every time it performs another health care procedure.

Further, if this kind of flat-fee model were to spread it would have ripple effects that would encourage lower health care costs in other ways. For instance, the more medical providers sought to lower the costs of their services without jeopardizing quality, the more pressure it would put on medical equipment producers and pharmaceutical companies to do the same. Those companies that found ways to accomplish this feat would be rewarded with more business as the free market would drive health care providers to the low-cost, high-quality equipment/drug producers.

A second side benefit could be lower insurance costs. For example, if a broad swath of Utah’s population had no-insurance-required memberships at clinics like AHM and PFP, they would not need insurance coverage for these basic health care services. Health insurance could actually become genuine insurance – financial assistance to pay for significant, unexpected and emergency health care costs – rather than a “pay for everything” system.

What about low-income people in government health programs like Medicaid and S-CHIP? Would they be thrown to the wolves? No. These programs could be adapted to help pay the flat monthly or yearly fees of their enrollees as well as provide financial assistance in purchasing the private insurance needed for non-basic health care services.

Fortunately, AHM and PFP are not isolated examples of this move toward free market provision of health care services. In fact, a national organization exists – called the Society for Innovative Medical Practice Design – to help entrepreneurial health care practices get established and grow. The biggest potential hurdle to this nascent free market movement is government regulation and obstruction.

Public policy should encourage, or at least stay out of the way of, such innovation in Utah’s health care market. Utah law should allow insurance policies to cater to those self-reliant families and individuals who choose to finance their own basic health care services.

The AHM/PFP model is not a silver bullet for bringing down health care costs – that problem will take years of policy reform and free-market innovation to solve. However, the history of both the United States and Utah has shown that when free market principles drive public policy, the cost of goods and services go down and their quality goes up. If the government can keep itself from getting in the way, the free market can find true solutions to Utah’s (and the nation’s) health care cost problem.