• *Catastrophic Care*: Chapter 11 (which shocked me)

    Chapter 11 of  Catastrophic Care shocked me. Really. I could not believe what I was reading. Two passages will serve to make my point.

    The first is about TruCat, the mandated, massively catastrophic insurance product. Goldhill conjures it as a non-profit, but its structure and methods of operation would obviously be established by Congress. To me, it sounds a lot like catastrophic-only (very high deductible) Medicare that makes episode-based, reference-priced payments to integrated service providers under a global budget.

    Already you can feel the rules and regulations, can’t you? I bet they’d stack tens of thousands of pages high before TruCat paid a single claim. It doesn’t matter how simple it all sounds in a rough overview. This would be the equivalent of a massive, government run program forced on the American people. That may not be a bad thing! But let’s call it what it is.

    This really surprised me. I did not expect Goldhill to advocate for such a thing. Not after spending at least half the book excoriating Medicare for its massive, misguided, top-down, ham-handed takeover of the health care system. Here are a few details about TruCat to give you a flavor:

    To find treatment, Becky and her primary physician check the TruCat Corp.’s beneficiary website and enter her diagnosis. She finds that TruCat Corp. will pay a fixed $100,000 treatment benefit (subject to her deductible) to cover her particular stage of cancer. Becky also enters her zip code and finds that five provider groups near her home will accept the benefit as payment for full treatment. Under TruCat Corp.’s rules, all five must accept Becky as a patient at that price if she chooses them.

    Each year, the trustees of TruCat Corp. are responsible for matching the total payouts under TruCat policies with the total premiums paid in. On a regular basis, TruCat Corp. updates its diagnosis-benefit schedule to reflect trends in diagnosis and treatment. It will pay benefits only to those providers who can fully treat a disease and who will charge no more than the TruCat benefit. […]

    Let’s add another feature to TruCat Crop.’s structure to control costs: premiums will increase each year by no more than inflation.

    Since TruCat is a very high deductible, catastrophic product, it won’t control the entirety of health spending. However, if one believes that today’s Medicare exerts too large an influence on the system, warping it toward the program’s perverse incentives, how can one argue TruCat would not do the same? After all, it would cover everyone, not just the elderly and disabled. And, how will it set all those prices? You can’t dismiss administrative price setting and then not explain how the monopoly TruCat does something else. There’s no market here. This is central planning.

    Turning to what happens in the deductible range of health spending, before TruCat would kick in, Goldhill reminds us that if one’s Health Account ran dry, one could get a loan.

    Health Loans would be payable only from Health Accounts, not from personal funds. So the availability of these loans allows for the smoothing out of uneven expenditures on care, without affecting a borrower’s other choices and priorities. The loans are another reason we need a Health Account contribution mandate; the required contribution allows for the Health Account itself to be collateral for a loan.

    Of course, some share of society’s subsidy of care for the less well off, or the very ill, will take the form of loan forgiveness. Any American with a loan balance in excess of, say, ten years of expected payback can write the balance down to that amount. And any American who dies with a health loan balance greater than his Health Account balance could have the excess loan forgiven.

    This sounds like an endless bowl of soup. Why would I stop eating? My total debt is capped at 10 years of expected payback, but if I die before I pay it all back, the residual is forgiven. Meanwhile, what I am permitted to pay back is segregated from the rest of my personal funds. My nest egg can’t be touched. That may sound good to lots of people. But it doesn’t sound like an arrangement that is going to motivate me to make any hard choices. I’ll use all the health care I want and keep my mansion too! With no pesky insurer in the middle to tell me no (not that they do that very much for most of us), how will spending go down and efficiency up?

    Please tell me where I have misunderstood. I did not intend to be so hard on Goldhill, and this is not in any way personal. I commend him, and anyone, for attempting to take on as big and challenging a task as remaking the entire health system from scratch and publicly. I would not attempt it myself. I am merely trying to understand how one could possibly find so much fault with the current system (about which I largely agree with Goldhill) and then offer something that can’t possibly do much better. What am I missing? Perhaps the author will explain in the comments to this post.

    Chapter 11 is the final numbered one. The book includes an Afterward, which I will read, but I may not blog about it. The rest of my posts about the book are here.


    • Does that mean if people in the last (and generally most health-care expensive) year of life can opt for whatever $100K drug that will extend their life a few weeks without worrying about the impact on their heirs?
      Yep, that will sure control costs.

    • The incentive for not spending all of the Health Account is that at some point the excess in the Account can be used for non-health care purposes, like buying a new car. Unlike today’s health insurance, which has more holes than Blackburn Lancashire, TruCat is intended to fill in the holes in case of a serious injury or chronic illness; with today’s health insurance, a chronic illness guarantees the person will die with no assets. I promised no more comments on Goldhill’s hypothetical health care system, but I couldn’t help myself. What I do like about his system is that it’s designed with the responsible, middle class person in mind. Maybe that person doesn’t exist, or maybe if she does exist, she is satisfied with the current health insurance system (as modified by ACA), or maybe
      Goldhill has a fertile imagination and should return to show business.

      • “at some point the excess in the Account can be used for non-health care purposes”

        Do you know where this is specified in the book or elsewhere? How would it work? What rules would govern it? And how does it constrain health spending given how loan paybacks work?

        Seriously, if I wanted to spend uncontrollably, this is a very good system for helping me do it. I must be missing something.

        • Goldhill offhandedly mentions it but doesn’t have any rules or regulations around it.

          • Thanks. This is all too vague for my tastes. I think the book was a good vehicle for a rant. As justified as that may be, it’s not a satisfying conclusion.

          • I have not read the material, but, he may be relating it to the current rules surrounding Health Savings Accounts – where you can use the money for any purpose, subject to income taxation where used for non-medical purposes, and subject to an added 20% (10% prior to PPACA) excise tax if used for non-medical purposes prior to age 65.

      • If Goldhill’s system actually generated system-wide savings (not to be confused with savings in health accounts), there would be political pressure to reduce the amount of required contributions so that they more closely matched expected lifetime medical expenses. So the average person would have no excess at death that could be passed on to survivors to be used for any purpose. And this would further diminish the incentive to shop carefully.

    • I realize adding this is probably beyond the scope of a blog post, but it’s worth wondering how the heck the financial aspect would work. Goldhill implies that loans would be made compulsory and that they would be secured by future wages. That’s all well and good, but what happens if someone already in the red requires another loan (for whatever reason)?

      How do they resolve the order of payments? If it’s in order that the loans were made, then clearly later loaners are at risk of never seeing any money at all. If some other scheme, then you dilute the original loaner. Either way, loaners are taking on substantial risk. Our financial system being what it is, someone will take it on, but then again that implies societal financial risk (with the government ultimately backstopping them?).

      • When you add the risk premium, is it really any lower than what insurers’ rake off today?

      • I think contributions to the Health Account would be more like payroll taxes that come out of the person’s wages before any other creditors can reach the person’s wages; hence, future contributions to the Account are like a guaranteed annuity, which is how Goldhill envisions using future contributions as collateral for a loan in the event of extraordinary health care expenses (but expenses falling below the threshold for the TruCat). Goldhill also refers to third party sources for contributions to the Account, such as employers and public sources (for those with low incomes or seniors). What happens if the person dies. Or becomes disabled. Or becomes irresponsible. TruCat might cover death and disability, but what about irresponsibility?

        • Right, but it’s the collateral process that may develop into a problem. Not sure if I explained this clearly, so here’s another attempt.

          The system basically “works” if you have one loan — you just pay off the collateral. But if you’re already gotten a loan, but need to get another one (for whatever reason — which will invariably get into fraught issues, but a subject for another time), what happens? Presumably the loan is compelled from someplace, otherwise you have a barbarously cruel system.

          OK, so how does the second loanee get paid off? Keep in mind that Goldhill says loans will get forgiven if they exceed ten years’ expected contributions. (Do these get written off, or bailed out?) But let’s assume the loan goes through. Does the first loaner get paid off first? If so, then the second loaner runs the risk of never getting paid off and losing everything once debts are forgiven at death. If there’s some sort of split payment situation, the first loaner is diluted (and that raises the risk to someone making an initial loan, driving up interest rates.)

          Anyway, the system of finance may ultimately end up working, but it seems likely to have so much confusion, details, and oddness — probably barely less, if at all, than status quo.

    • This sounds an awful lot like Singapore’s Medisave/Medishield/Medifund system but with a ton of completely unnecessary hoops to jump through for the poor and sick. If HSA+catastrophic coverage is the model we want to go with, why not just copy their model verbatim?

    • Making catastrophic care payments distinct from other payments is a good idea.
      There needs to be 2 separate risk pools, and 2 separate funding sources.
      Milliman, a well respected actuarial firm, worked out that significant price breaks occur at $25,000 – 60% discount off of traditional premiums, and $50,000 – 80% discount.
      With our patrented design, the gap is filled with paid-up benefits, which can be used only for medical expenses.
      In additiuon, if the insured cancels his ;olicy, there is no cash surrender value.
      This providres more in reserves, and translates into higher paid-up benefits.
      If one has accumulated paid-up benefits, say, of $50,000, and experiences a claim of over $50,000, for an additional $15 per month, he can have a new paid-up monthly benefits, as he had originally, with no further payments other than for catastrophic coverage.
      Don Levit
      don levit

    • I love the sentences where Goldhill states that:

      a. the managers of True Cat must match total fund outflows with total premium income.

      b. True Cat will only work with providers who accept its fee schedule.

      Of course the real Medicare has failed miserably to do this. The real Medicare turns to general tax revenues the very minute that payments exceed premiums, even in Part A where this is not supposed to happen.

      Goldhill’s plan design could be carried by Germans or the Swiss or maybe the French and the Canadians. I would not be unhappy if Americans did it also, but I am not brimming with confidence that they will.

      Another flaw of the Goldhill plan (and he is not alone) is that he takes health care prices for granted. He talks about a $100,000 deductible in a way that takes for granted the probability of many thousands of claims in excess of $100,000.

      My preference would be to publish every single $100,000+ claim in the newspaper, of course deleting the name of the patient.

      Then we would see where the price gouging really exists in large claims.

      The price gouger is very rarely the doctor. I have heard of $90,000 surgery claims where the surgeon got $800.

      The drug and device companies and some hospitals are long overdue to be exposed. I would sooner outlaw $100,000 claims than seek to insure them.

      Bob Hertz, The Health Care Crusade

    • This may help:
      The Lifetime Distribution of Health Care Costs

      The average member of the birth cohort will spend $316,579 in 2000 dollars over the course of his or her life. Of this total, 45.1 percent will be devoted to facility services (hospitalization, 32.8 percent, and nursing home stays, 12.3 percent), followed by professional (26.6 percent), drug (16.3 percent), dental (9.9 percent), and vision/hearing (2.1 percent) services. Total lifetime expenditure is 34 percent higher for females ($361,192) than males ($268,679) (Table 2).

      If I am reading it right, it shows that the average lifetime spending is below the $500k that Goldhill allocates. That means that most people would never reach into the covered region. Therefore most would leave some of their allocation to their children as spendable cash. This is a reason to save but fairly weak. That is why I prefer my plan much better because it is simpler and has stringer motivation to save.

      Here is a rough outline of my plan:

      The state would provide insurance to all Americans but the annual deductible would be equal to the family’s trailing year adjusted income minus the poverty line income (say $25,000 for a family of 4) + $300. So a family of 4 with a trailing year adjusted income of $30,000 would have a deductible of $5,300. A family of 4 with a trailing year adjusted income of $80,000 would have a deductible of $55,300. Middle class and rich people could fill the gap with private supplemental insurance but this should be full taxed. This would encourage the middle class and rich, who are generally capable people, to demand prices from medical providers and might force down costs. They could opt to pay for most health-care out of pocket while the poor often less capable would be protected.
      It is not a perfect plan but it might help.

    • I like your plan design a lot, Floccina.

      The challenge would be to fund it.

      At least two thirds of the expenses in any health insurance plan take place in the minority of cases over $5,000.

      Let’s assume your plan focuses on under age 65 workers only and leaves Medicare and Medicaid as is.

      The amount spent on the under-65’s is about $t trillion a year.

      So your catastrophic plan would still need 2/3 of $1 trilliion a year, or
      $660 billiion.

      That is a 10% income or payroll tax. Tough sell, I think!