What might an upper-quadrant healthcare system look like?

I am about to describe a model for a new American healthcare system that straddles Quadrant II and Quadrant I, and that incorporates the six principles I have just discussed. This model healthcare system comprises three tiers. One major tier incorporating open healthcare rationing (the middle tier) is sandwiched between two smaller tiers of self-funded healthcare. A broad outline of this model follows. I discuss this model in much greater detail in Fixing American Healthcare.

Tier 1 consists of a modified HSA plan. Under this plan, each individual has his or her own HSA, into which they deposit money each year. This money can be spent only on healthcare . The first $2,000 per year of each adult's healthcare expenses ($1,000 for each child under 18) comes out of the HSA. Once the yearly threshold is spent, any additional healthcare needed is subject to Tier 2 coverage.

For households whose annual income is above a certain upper threshold, the money that is required to be deposited each year into each individual's HSA ($2,000 for each adult, $1,000 for each child) is non-taxable, similar to an Individual Retirement Account (IRA). For households whose income falls below a certain lower threshold, these funds would be directly deposited into individual HSAs by the federal government. For households whose income falls between the lower and upper income thresholds, a sliding scale could be used to determine how much tax-deductible money they must contribute, and how much the federal government will contribute annually toward the individual HSAs. In this manner, every person will have a fully-funded HSA regardless of income.

Any money in the HSA that is not spent on healthcare during course of the year remains in the HSA and earns tax-free interest. The money that accumulates in this fund is the property of the individual owner-the government has no claim on it and cannot tax it. Funds that accumulate over the years, which could become quite sizeable, can be treated in two ways. They can be either rolled over into an IRA when an individual reaches seventy or they can be used at any time to buy Tier 3 healthcare.

Tier 2 is a Universal Basic Health Plan (UBHP) that covers everybody in the U.S. who has a Social Security number. It kicks in after the $2,000 deductible ($1,000 for children), paid out of the HSA (Tier 1), is used up for the year. The UBHP provides healthcare coverage under a system of open rationing. (The next chapter considers what that system of open rationing might look like and how we might go about designing it.) In broad outline, all medical services that achieve a target level of cost-effectiveness are covered. In the example used in Figure 2, the UBHP covers all healthcare services that can be provided for up to $50,000 per quality-adjusted life-year (QALY).  Services that consume more than $50,000 per QALY are not covered.

This arrangement gives the biomedical industry more than one approach to developing medical products and services to be covered under the UBHP. Namely, they can work to improve the effectiveness of their products or to reduce the cost of providing their products or, preferably, to do both. This system of rationing gives them a clear cost-effectiveness target. If they meet it, their reward is predictable.

Both Tier 1 and Tier 2 are universal plans. Everyone will participate in these two tiers.
Tier 3 is optional. Individuals may choose to purchase for themselves any health services that fall outside the cost-effectiveness range covered by the UBHP. Also, individuals may choose from an array of insurance plans to cover healthcare services that are not sufficiently cost-effective to be included in the UBHP. In Figure 2, two optional plans are shown. One covers medical services that can be provided for $50,000-$70,000 per QALY, and the other covers medical services up to $90,000 per QALY. Tier 3 healthcare can be purchased either out of pocket or from excess funds in one's HSA.

Justification

Scores of objections to this model have no doubt popped into your mind already. I do not take offense. I am certain that any proposal for a new healthcare system will generate objections. Besides, my intent is not to present a finished healthcare plan in its entirety, like Moses producing a complete system of laws from the mountaintop. Rather, my intent is merely to demonstrate that it is possible to imagine a system that resides in the upper quadrants of the healthcare landscape and that meets the six principles required for an acceptable American healthcare system. I am certain there are many variations on my proposal and even entirely different models that might be far better than this one.

I will not try to justify this model here. I do provide a detailed justification for this model in my book, but here I'm mainly trying to demonstrate that it is possible to imagine at least one model healthcare system that adheres to the six principles outlined earlier.

The elephant in the room, however, is that this model (like any truly honest model for an American healthcare system) requires us to ration healthcare.  This model, however and apparently uniquely, asks us to agree to ration healthcare openly, and then to figure out how to do it.

Any truly honest and equitable American healthcare system, of course, will require the same of us. Therefore we ought to consider how such a thing - to develop a system for open rationing that is compatible with American principles - might be accomplished.

Next: How to ration healthcare the American way