Economic Solution to a Political Problem: Least-Cost Reimbursement?

If the federal government wants to avoid a visceral backlash when 38 million more people presumably start getting health insurance in 2014, it had better start preparing Americans to pay a bigger share of the costs of their care.  The “affordable” insurance product that will be foisted upon them will not pay for everything.  If the insurance overhaul laws of 2010 are ultimately implemented and enforced as enacted—far short of a sure thing, in my view—the mandated plans will be priced on the assumption that beneficiaries pay 35% of their medical bills.  

Congressional leaders had to reduce mandated insurance’s actuarial ratio (the potion of total expenses paid by insurance) to 65% to make estimated program costs acceptable to the conservative Democrats who controlled the fate of reform.  Consequently, the political price paid for increasing the number of Americans with health insurance was reducing the new plans’ overall level of coverage.  Economic and political realities—not “greedy” insurance companies—simply did not allow creating a program with the generous benefits that insured Americans have come to expect over the past 50 years.  Premiums, copayments, and deductibles will all rise dramatically as the actuarial ratio falls to 65%. 

The trade-off is not necessarily bad social policy, but it is sure to create a political firestorm when voters begin to understand the real implications of “affordable” insurance.  Providers and payers will be caught in the cross fire.  They will have no choice but to eliminate inefficiencies in their own operations as overhaul transfers significant payment responsibility to consumers who won’t have more money to spend on health care.  Health reform’s opponents will have a hey-day fighting to neuter overhaul under these circumstances, but they are unlikely to offer an alternative for improving the flawed economics of American health care. 

I suggest a reform-oriented approach to ease the transfer of financial responsibility to patients who believe insurance should cover just about everything—base insurance reimbursement on the least-expensive intervention that can reasonably be expected to meet a patient’s medical needs.  Then, let the patient pay the difference if s/he wants a more expensive treatment.  For example, research suggests that physical therapy and surgery produce comparable outcomes for treating lower back pain, yet surgery is considerably more expensive.  The “affordable” plan’s benefit for lower back pain would be reasonable costs of physical therapy, but the patient would be free to elect surgery and pay the difference. 

Wouldn’t reimbursement generously pegged to least-cost acceptable care address the concerns of anti-reformers who argue that the 2010 overhaul legislation will restrict choice and impose rationing?  As a medical economist, I think it’s a new idea worth serious consideration because the alternatives—especially opposing reform with no new ideas—are scary.  The possibility of an actuarial ratio of 65% compels creativity, sooner rather than later.  How do you think we should respond?