How to Fix the American Healthcare System: Three Simple Ideas to Improve Upon Dysfunctional Economics

This piece originally appeared as an article in the Fractured Atlas newsletter on October 15, 2004.

Healthcare in America is a broken, dysfunctional mess. 45 million Americans lack health insurance, and the costs of providing it to those who do are rising at a dramatic rate. Patients are often dissatisfied with the quality of care received and doctors are increasingly bitter about skyrocketing malpractice liability. Ambitious headlines aside, there are no easy solutions to these problems. But after three years spent talking to countless artists about their experiences with (and often without) healthcare, I’ve developed some modest notions about how things might at least be nudged in a better direction.

Let Insurance be Insurance and Patients be Customers
When you buy insurance, you’re paying someone to assume the financial risk associated with an unlikely negative event. My car insurance pays the bills if I total my car, and my home insurance compensates me if my house burns down. I don’t expect either of those things to happen, but I’m willing to pay an insurance company (which understandably expects to profit from the transaction) to protect me if they do.

In neither case do I expect my insurance to cover routine maintenance expenses. I pay the mechanic to rotate my tires and I pay the plumber to fix a leaky pipe. Yet for some reason health insurance is supposed to cover the costs of routine preventative care. Most people seek medical care only a handful of times each year, and yet many are unwilling to pay more than a $10 or $20 co-pay for each doctor visit or prescription. They fail to realize that they’re actually paying more than they would without any coverage, albeit indirectly, since in addition to the actual cost of care, they’re paying for the insurance company’s overhead and profit margin, which can approach 50% of total costs.

I need my health insurance to stave off financial ruin in the event that I’m hit by a bus or diagnosed with leukemia. Paying the insurance company to cover my annual checkup or penicillin prescription is wasteful and inefficient. Middle of the road items like maternity are best addressed with Health Savings Accounts and other tax-advantageous consumer-driven vehicles for managing less routine but still predictable healthcare expenses. By letting go of the perceived need for comprehensive coverage and embracing insurance that covers only extraordinary expenses, the total costs of healthcare stand to fall dramatically, and some oversized insurance industry profits will remain in the pockets of consumers and business owners.

A side benefit of this shift would be the establishment of more direct vendor-customer relationships between doctors and patients. When a bunch of middlemen clutter an otherwise simple economic transaction, efficiency deteriorates and quality suffers. Employers, brokers, insurance companies, and provider networks all stand between a doctor and her patient. By seeking to maximize their own profits, they suck money out of the system and drive up the cost of care. Worse, they introduce conflicts of interest, since the doctor isn’t being paid directly by the patient, who is ostensibly her customer. By decreasing interference from self-interested third-parties, patients can save money, doctors’ profits will increase, and the quality of care is bound to improve.

Risk Pooling for Worst-Case Scenarios
The bedrock principal of insurance is that financial risk becomes more manageable and less expensive when pooled among a large population. The less likely a negative event is to occur, the more we collectively stand to benefit from risk pooling. This is one of the only areas where I believe the federal government has an active role to play in the healthcare system. Amid an otherwise unimpressive healthcare platform (though I’m voting for him anyway), John Kerry has cleverly proposed that the federal government provide re-insurance for 75% of catastrophic medical expenses, spreading that worst-case scenario risk among the largest possible pool: the entire country. Under this scenario, insurance companies would have incentives to provide affordable catastrophic coverage to anyone who wanted it, hospitals could comfortably treat the gravest cases knowing they’ll be reimbursed, and these extraordinary costs would be spread relatively painlessly among all tax-payers. It’s a simple concept, but provided it can be executed without a huge bureaucracy, should go a long way towards reducing healthcare costs nationwide.

Coming to Terms with Medical Risk
A managing partner of a New Jersey ob-gyn practice who I spoke to estimates that “a disproportionate amount of the healthcare dollar, maybe 25%, is spent trying to ensure that we don’t miss 1-2% of the diagnoses.” That’s on top of malpractice insurance premiums that are already well into six figures, per doctor, on an annual basis. He further explains, “That’s driven by fear of liability. Medicine is practiced by people on people using machines made by people and nobody’s perfect.”

Clearly patients need to be protected against incompetent doctors who amputate the wrong limb or leave surgical instruments inside the patient after sewing him back up. That means sometimes being able to sue for malpractice. We as a society, however, need to respect the uncomfortable fact that occasional human error is inevitable and doctors are as human as the rest of us. Forcing them to divert huge amounts of resources in pursuit of slightly diminished liability is a serious drain on an already strained system. For the most part, this shift must happen on a cultural level, which makes it impossible to mandate. One possible positive step, though, is to replace juries in malpractice hearings with expert panels, who would be better equipped to assess whether a particular incident resulted from innocent human error or true criminal neglect.