It’s time to rethink health insurance

As the acute problems of the Affordable Care Act become increasingly apparent, it also has become clear that we need new ways of ensuring access to healthcare for all Americans. We should begin with an examination of health insurance.

Insurance is about protecting against risk. In the health arena, the risk at issue is of large and unexpected medical expenses. The proper role of health insurance should be to finance necessary and expensive medical services without the patient incurring devastating financial consequences.

Over the last decade, however, Americans have come to expect their health insurance to subsidize the consumption of all medical care. Rather than simply protecting against financial catastrophe, insurance has become a pass-through mechanism to pay for every type of medical service, including routine ones.

This shift in expectation has meant that health insurance stands out as entirely different from all other types of insurance. Ask yourself: Would you use automobile insurance to buy gasoline? Would you use homeowner insurance to finance painting your house?

This wrongheaded view has played an important role in contributing to rapidly rising healthcare costs. Patients with insurance do not perceive themselves as paying for the cost of routine services, nor do their physicians and other healthcare providers. The natural result has been a more-is-better approach, with patients and doctors embracing costly healthcare services that are often of little value to the patient. Given healthcare’s crucial role in well-being, it is important to assist individuals who can’t afford even routine medical expenses, but it shouldn’t be done through hidden insurance subsidies.

The entire concept of health insurance must be reconsidered. One attractive option for insuring those in need would be to expand the use of high-deductible health plans in combination with health savings accounts. This approach provides a cost-effective vehicle for insuring against catastrophic medical expenses while simultaneously helping individuals defray the costs of routine medical care.

Such coverage protects individuals from losing a lifetime of assets and from the devastating consequence of financial bankruptcy due to unpaid hospital and associated medical bills, a contributor to financial stress for millions of Americans every year. Such coverage means less-costly insurance policies, since they cover only major expenses and thereby reduce the bureaucracy and expense of smaller claims. And, with high deductibles, the hidden prices of medical care become far more visible, a necessity for containing costs. Price transparency coupled with greater availability of accurate information on health outcomes and provider quality are essential if patients are to choose healthcare services based on value.

Combining high-deductible insurance with health savings accounts provides a way to help individuals defray the costs of necessary, but routine, medical expenses. Such savings accounts allow individuals to set aside money tax-free to purchase immediate or future medical care.

Health savings accounts in combination with high-deductible insurance plans could also provide an excellent method for modernizing Medicaid. States could deposit Medicaid funds into individual healthcare accounts owned by low-income recipients. The funds could then be used to purchase routine care and to buy high-deductible health plans. They could also be used to defray deductible costs. Any funds left over at the end of each year would accumulate to help defray medical expenses in future years.

Health savings accounts have grown rapidly in the last 10 years, and for good reason. They should now be made available to Medicare recipients as well. This growth could be enhanced — and the growth in healthcare costs slowed — if the accounts were made available to the poor and the elderly.

Another change Americans should embrace is an increase in the supply of healthcare providers. The Affordable Care Act tries to control costs, in considerable part, by wage and price controls. We know from decades of experience that this approach leads to less of whatever you try to control and reduces overall quality. We need more, not less.

To modernize the delivery of primary care and increase access to it, reforms must facilitate a wider availability of clinics staffed by nurse practitioners and physician assistants working in collaboration with physicians. Where they exist, such private-sector clinics provide healthcare at lower cost, especially for routine and preventive care such as flu shots, blood pressure monitoring and standard tests. The use of such clinics increased tenfold between 2007 and 2009, according to a Rand Corp. study, and it is continuing to grow at 15% annually. Meanwhile, major hospitals are beginning to partner with them. Pharmacies and health centers in retail stores — potential neighborhood health centers — should be expanded and transformed into clinics with broader capabilities.

Another necessary reform is to increase competition among insurance companies. Currently, insurance can’t be sold across state boundaries. That system sets up archaic barriers to competition and choice.

Medical care and the research associated with it have changed the world, not only by transforming previously incurable diseases to treatable ones but by enabling safer and more effective care for millions of Americans. But to fully realize the extraordinary promise of medical science, we must change the way we use and finance healthcare services. Insurance is key to protecting individuals and families from the risk of financial devastation and to ensuring access to major medical care. Public financing of the routine and fully anticipated health needs of chronically ill and low-income people is important, but insurance isn’t the proper vehicle for accomplishing that.

The first essential step in reforming the health system is to recognize what insurance is and what it is not. Coupling that important understanding with a vital modernization of the healthcare delivery system is an essential first step toward a greatly improved healthcare system.

The authors are senior fellows at Stanford University’s Hoover Institution. George P. Shultz was formerly secretary of Labor, State and Treasury, and director of the U.S. Office of Management and Budget. John Cogan was deputy director of the U.S. Office of Management and Budget. Scott W. Atlas is a physician.