How should we design health insurance?

1. Predictable and Affordable Cost of Care

Explanation

Currently, our system is full of confusion. People have no idea what the cost of care is prior to receiving it. Even providers do not always know the reimbursement rates for a given insurance plan, which means that cost estimates require lengthy calls with insurance companies. Insurance companies set rates for in-network providers, and the network designations -- who is in-network versus out-of-network -- are constantly changing. As a result, people can accidentally go out-of-network and receive a surprise bill. Additionally, insurance companies review every single procedure ordered by a provider and often deny coverage after care is received. They go to such lengths because they need a way to determine whether a procedure is medically necessary and included in the plan. This allows them to limit excessive spending at the cost of denying of coverage of necessary procedures and leaving members with surprise bills. Insurance is meant to offer true protection, which means that cost of care needs to be transparent, and coverage should be simple.

Solution

Medisense addresses the principle of predictable and affordable cost of care in four steps.

1. Make prices transparent and accessible to the public
2. Remove out-of-network designations so all providers are in-network
3. Eliminate individual coverage denials
4. Ensure affordability through income-based premiums and out-of-pocket maximums.

The first step is a state-level government mandate that would make all healthcare prices transparent. This would mean that at regular intervals (e.g. annually) every medical provider in the state must report a price for every procedure they offer, and providers may charge higher than the reported price. Providers may be offered a template pre-filled with baseline prices on the lower end with the ability to adjust the prices to their liking. It is important to note that this alone does not ensure that prices are transparent and accessible to the public. Therefore, the second step is to create a public database that is easily searchable and accessible to the public. This database would be integrated into an app, where members could search for care and see a list of providers, their prices, and their quality. Members could be see recommended providers based on their cost-effectivenessc. Quality can be reported through a simple review system, similar to Google Reviews or Zocdoc. In fact, Medisense could allow third-party companies to use its database of prices to build their own price and quality transparency software. Medisense could also leverage provider-level health outcome data to provide data on complication rates and other outcomes. This would allow members to know the cost and quality of their care before receiving it, allowing them to make an informed decision, avoid surprise bills, and shop around for the most cost-effective care.

The second step is to remove out-of-network designations. This would ensure that all providers are in-network, giving members the freedom to choose any provider without worrying about surprise bills. Each provider would be required to accept patients using Medisense, but it is important to note that this does not restrict providers in a meaningful way. Unlike Medicare/Medicaid or most private insurance companies, there are no negotiated rates or mandated prices, and coverage is automatic (more on that below). Together, this eliminates the usual administrative burdens and restrictions associated with a provider being in-network, giving providers the freedom to tailor their practice according to their needs, while greatly increasing patient security.

The third step is to remove individual coverage denials. This means that Medisense leaves it up to the provider to determine what is medically necessary for the member and automatically approves coverage for those procedures. This streamlines the process for providers and creates security for members. A natural question is: How does Medisense limit fraud and excessive spending? Instead of reviewing each individual order, providers may be audited for wasteful spending across several cases (more on this below). This is different from the status quo in two important ways: First, instead of facing costly negotiations of every procedure, providers following sensible medical practices are unlikely to be audited. Second, audited providers are prohibited from passing along audit costs to members, allowing members to remain secure in the cost of their care.

The fourth step is to address affordability by creating income-based subsidies for premiums and allowing members to choose premium levels to meet their needs. The income-based premium subsidies are similar to existing Affordable Care Act subsidies, and it works as follows. Every member above a certain income (perhaps conditional on age) pays the same premium for the same plan. However, as income goes down, subsidies kick in to provide discounts on their premiums. Some states may add in other ways to qualify, but it is crucial to preserve simplicity. Creating a complex web of eligibility criteria would result in members falling through the cracks. Instead, income-based subsides are simple and have been effectively used in other areas (e.g. FAFSA) and are easy to verify through tax records. Another advantage is that income-based subsidies create a simple sliding scale that allows states to tailor how expansive the subsidies are based off available funding. The more affordable premiums are, the more people will choose Medisense over other options, creating an incremental path to universal coverage. The second component of affordability is to provide members with low premium plan options. However, unlike traditional insurance, Medisense does not offer plans with different coverage contracts, which are hard to understand and trade off security for lower premiums. Instead, Medisense plans are all fundamentally the same, but different premium levels affect voucher values used to pay for care (more on this below). Members who want to save money by finding low-cost care can opt to receive lower voucher values and hence pay lower premiums.

Overall, these set of solutions fill in a large gap in our status quo. They increase predictability and affordability, and, at the same time, increase choice for members and autonomy for providers.

2. Cost-effectiveness, Medical-Necessity, and Doctor-Patient Autonomy

Explanation

The point of insurance is that members pay regular premiums so that if they need medical care, they are financially protected. But how do we determine what is medically necessary? For example, it is generally agreed upon that braces are not medically necessary therefore insurance will not pay for it. However, outside of a few clear cases, it becomes murky. Currently, insurance companies and Medicare/Medicaid follow a similar process. They individually review reimbursement requests to see if it aligns with the plan contract. The issue with this is two-fold. First, plan contracts are extremely difficult to understand. No member can be expected to memorize each of their coverage policies for treatments of every condition. Second, even if these coverage contracts were understood, the on-the-ground treatment plans are always evolving and are unique to each patient. National guidelines are not necessarily a good basis for coverage decisions because they are slow-to-change and are a result of bottom-up experimentation. Thus, insurance companies end up reviewing coverage decisions on a case-by-case basis, which leads to sometimes arbitrary or outdated decisions. In short, insurance companies determine what is medically necessary, even though only the doctor and patient are best informed on the specifics of the case. It is no surprise that these coverage denials create great anger, whether from insurance companies here in the US or from government panels in places like the UK.

On the other hand, if an insurance company decided to respect every treatment or procedure prescribed by a doctor, providers would have no financial incentive to keep costs in check. In fact, since providers are paid on a fee per service basis, they would be financially incentivized to charge as much as possible to insurance companies. Providers may limit orders out of concern for the welfare of the patient, but one would expect more wasteful spending overall. Some government programs have tried to change the fee for service model by replacing it with a lump-sum transfer per patient, with incentives for good health outcomes. However, this can create other issues. For example, it is quite difficult for the government to know how much value the provider created. Members who go to providers who cater to the sickest patients may have worse health outcomes than members who go to other providers, but that is because the former members started off sicker. Rewarding the latter providers more would create perverse incentives. The basic idea is that it is challenging for policymakers or insurance companies to know enough about each patient walking through the door.

The final component asks how do we incentivize members to find cost-effective care, given that a treatment is medically necessary. Currently, incentives are not aligned for members to seek out cost-effective options while remaining financially protected. For example, copays (members pay a flat fee for each in-network provider) encourage members to find the highest quality care, but not the most cost-effective. Co-insurance (members pay a fixed percentage of the cost of care) is better but only weakly incentivizes finding cost-effective care. For example, with a 10% co-insurance rate, every $100 increase in the true price of care corresponds to only a $10 increase in the cost for members. Price and quality transparency mentioned in the previous section are necessary, but we need to rethink how to cover the cost of care.

We need a system where we respect doctor-patient autonomy and financial security, while also incentivizing cost-effective care.

Solution

The first component of the solution is determining what procedures are medically necessary for a given patient, and here Medisense defers to individual providers. Each person is unique, and each doctor has their own treatment strategy. This doctor-patient autonomy helps providers find better ways to help patients. Thus, Medisense does not deny individual coverage decisions. However, Medisense reserves the right to audit providers for wasteful spending. Medisense flags providers associated with medically unjustifiable costs across patients. This triggers a wasteful spending audit, in which Medisense determines whether the orders from the provider were medically unjustifiable. It is important to note the terminology -- medically unjustifiable. This term presents a greater bar for Medisense to cross than medical necessity, allowing providers room to experiment around national guidelines. If Medisense finds unjustifiable spending, providers must pay back the cost of care plus a penalty to offset the costs of the audit, and they are prohibited from recouping these costs from the patient. Providers can appeal the decision, which would go to the courts. One key distinction between wasteful spending audits and individual case reviews is the frequency of interaction between providers and Medisense. Most providers engaged in sensible spending are unlikely to ever receive an audit, which greatly reduces administrative burden for both providers and Medisense. Yet Medisense is able to deter excessive spending, which keeps costs down for everyone. Another key distinction is that by automatically covering procedures, Medisense improves member security and speeds up the process of receiving care.

The second component of the solution is incentivizing cost-effective care once medical necessity is determined. Medisense eliminates the complex mess of copays, co-insurances, and deductibles and replaces it with a streamlined voucher-based payment system to encourage members to find cost-effective care. The way it works is as follows. Medisense takes all the pricing data for each treatment procedure submitted by providers and computes the local average price of a procedure over the last few years (e.g. $100 for routine bloodwork). Once a procedure or referral is ordered by the doctor, members automatically unlock a voucher valued at a certain percentage of this local average price. This voucher value depends on the plan that a member selected. For example, the default voucher may be valued at 80% of local average price. This means that a member would receive $80 to spend on routine bloodwork. This voucher is not presented to the provider, instead Medisense pays the provider the full amount ($100) and then later follows up with the member. If they have a referral, it unlocks their voucher, and the member owes Medisense the cost of care minus the voucher value ($100 - $80 = $20). Thus, if they seek care more expensive than the voucher value, they pay the difference. Conversely, if they seek care less expensive than the voucher value, they receive a majority of the difference credited to a flexible-spending account (more details below). Thus, members have an incentive to find cost-effective care, while also remaining financially secure. As mentioned above, members can choose to pay more or less in premiums for a plan with a higher or lower voucher values. For example, members who prefer to receive greater reimbursements can opt to increase their voucher percent to 100% or 120% of local average costs by paying higher premiums. Instead, members who tend to seek low-cost care may choose to save money on premiums by reducing their voucher value. In total, a voucher-based system introduces a simple way to align incentives for members to seek out cost-effective care, while also providing freedom and security in their coverage. Over time, this drives down costs for everyone.

3. Lowerings Costs through Competition and Reduced Administrative Burden

Explanation

The United States spends more, on a per-person basis, on healthcare than any other peer country, despite the fact that our health outcomes on average are worse (see status quo page for more info). One alternative to price transparency, vouchers, and competition could be to just mandate that all providers accept a centrally determined price for a procedure. This is how Medicare-for-all policies would work, and this would most likely help lower prices and reduce administrative burdens from the status quo. However, there are two issues. First, in general, central authorities (including large insurance companies) are not good at finding the right price. There are lots of variations in prices due to quality, geography, and other factors. Setting a single price would disincentivize high-quality providers, who may choose to leave the system, driving overall quality down. There could also be other issues related to wait times or patient refusal that come from supply and demand mismatches. Second, heavy-handed approaches, even if well-designed, pose a political problem. Providers are going to resist attempts by the government to force their hand, especially if this creates other issues. Medisense is designed to bring much-needed change into healthcare while remaining politically feasible.

It is important to note that what will most effectively drive down costs is competition between medical providers, who can innovate on the care provided. Competition between providers supports cost-effective providers and weeds out inefficient, low-quality providers. In contrast, focusing on competition between insurance companies -- like the Affordable Care Act promoted -- does not directly drive down costs and has the potential to increase administrative burdens. Another source of inefficiency are the administrative burdens faced by providers in negotiating with insurance companies on network designations and coverage as well as establishing payment collection methods. Hence, promoting provider-level competition and finding ways to eliminate administrative burdens should be the focus of our solution.

Solution

As mentioned in earlier sections, Medisense mandates price transparency for every procedure from every provider in a state and integrates this information, along with quality, to allow members to compare the price and quality between providers. Furthermore, Medisense aligns member incentives to seek out cost-effective care through a voucher payment system that shares the costs and savings of care relative to the local average price. At this point it should be clear, if implemented well, these policies would unlock competitive forces in driving down costs. Let us consider how to properly implement these policies in greater detail.

Medisense relies heavily on the local average price in its voucher system. By tying voucher values to the local average price, it is assuming that individual providers do not have the ability to game the system. This would be the case when there are strong competitive forces incentivizing providers to lower cost and increase quality. However, this competitive dynamic may not immediately occur when the policy is first introduced. Thus, it is important for Medisense to pair competition with additional strategies to effectively keep costs -- and hence premiums -- down. These are most important when Medisense is first launched and can be slowly phased out as competition increases.

There are three strategies that Medisense can employ. The first is a massive educational campaign that offers the exact heuristics that Medisense wants providers to have. For example, at the beginning, Medisense should calculate the lowest feasible price for each procedure and provide a pre-filled pricing template with these baseline prices. Medisense can alert providers when setting a price too high and can emphasize the consequences of such a decision (e.g. loss of large numbers of patients, inability to change prices until the following period). Education can help speed up how fast providers discover their own ideal, competitive price. The second method to keep prices competitive is to identify situations with insufficient competition and seek alternative pricing mechanisms. For example, consider a small town with a single hospital. In this situation, price-setting freedom is not subject to competitive forces, and relying on local average prices could allow the hospital to game the system. One alternative mechanism is to adjust the local average price to some combination of local average price and state-level average price. That way, voucher values are tied more to the true price discovered through competitive forces and less to the market power of the given provider. Another mechanism would be a more active regulatory role in setting prices in provider deserts. As long as there are not many such deserts, Medisense can stay true to its light-handed approach. A longer-term approach would be to use its own data to study competition and recommend policies to boost competition. The third method for Medisense to make sure these local average costs are not inflated, especially at the beginning, is to directly act as a low-cost provider. Medisense could establish a set of hospitals and clinics offering revenue-neutral care. That is, Medisense would not make or lose any money with these providers. However, by adding a low-cost anchor, Medisense pulls down the local average price to which it ties its vouchers.

The second component of reducing costs is to reduce administrative burdens. As mentioned in an earlier section, Medisense does this by removing out-of-network designations. Medisense also eliminates individual coverage denials, which further reduces administrative burdens on providers. Finally, Medisense's price disclosure and payment system means that providers and members are immediately aware of the cost of any given procedure. This reduces the time and effort required to discover the cost of a given procedure. These three reforms drastically reduce the need for administrative staff interacting with Medisense, and instead allows providers to focus on providing care. Furthermore, Medisense eliminates the need for providers to collect on unpaid bills by directly and automatically paying providers for the full cost of care provided. Individual member responsibility for the cost of care will be collected directly by Medisense. This greatly streamlines payment predictability and further reduces costs of providers. It also has the added benefit of circumventing collection agencies, some of which are known to harass patients.

One thing to note is that since Medisense is not eliminating existing insurance companies, it may take time to see the cost reductions associated with Medisense. For a provider who accepts most insurances, adding Medisense would not not greatly reduce administrative burdens, since they still need to interact with other insurance companies. Over time as more patients use Medisense and as providers choose to work exclusively with Medisense, administrative costs will decrease. However, it is crucial for a bold policy like Medisense to display its benefits quickly, so speeding up the transition towards Medisense is important (more on this in section 5)

4. De-linking Healthcare and Employment and Promoting Long-term Health

Explanation

The link between healthcare and employment creates many issues. Most Americans get health insurance through their employer, who negotiates and subsidizes health insurance plans. The US federal tax code gives tax advantages for this, and there are several laws requiring all employers to offer insurance. Tying insurance to employers means that job loss comes with healthcare disruption, which is especially difficult for those who develop chronic illnesses that prevent them from working. Additionally, since workers face frequent plan changes over the course of their career, insurance companies have no incentive to promote long-term health because their members are unlikely to stay with them in the long-term. The link between employers and healthcare also creates an uneven playing field for small businesses, who do not have the resources to negotiate with big insurers to attract workers. Moreover, since leaving your job to start a company also means losing coverage for your family, this further discourages entrepreneurship. Removing the link between employment and healthcare could greatly improve the economy through increased business dynamism, but those changes would likely need to come at the federal level with changes to US laws and the federal tax code. Many of these concerns do not enter the policy debate at the national level, but luckily there are solutions available at the state-level.

Solution

The first way Medisense ensures continuity of coverage is by mandating that all employers in the state offer Medisense as one of their coverage options. This means that workers switching jobs can always keep their coverage with Medisense if they would like. This law could be strengthened by requiring employers to subsidize Medisense premiums to the same degree that they subsidize other plan premiums. This would put Medisense on an equal playing field with other offered insurance plans, while preserving choice for the worker and being revenue-neutral to the firm. However, Medisense does not negotiate rates with firms since all premiums and plans are simply based on income and desired voucher values. This means there is no cost to the employer in offering Medisense as an option. Indeed, this policy would level the playing field for small businesses and startups by allowing them to choose the same insurer and plans as large firms. Finally, since Medisense subsidizes premiums based on income, job loss would result in lower premiums and need not mean disruption of healthcare.

It is important for any insurance to start with a critical mass of members to function well. With too few members, an insurance program may run the risk of not having sufficient funds. Additionally, as mentioned previously, there are greater forces driving down premiums and administrative burdens the more individuals who join Medisense. If Medisense does not start with enough members, it may never be able to enter the virtuous cycle of lowering costs and attracting more members. Thus, Medisense will require state-level government agencies as well as public schools and colleges to exclusively offer Medisense as their health insurance option. This creates a foundation of stable usership for Medisense. Furthermore, Medisense could create tools and sign-on incentives for small businesses to easily offer coverage to their employees. Additional sign-on incentives to become the exclusive option at notable large employers may help to attract attention and boost membership. These sign-on incentives should disappear over time once Medisense enters the virtuous cycle.

Since members can choose to stay with Medisense without disruption for long periods of time, Medisense will naturally have an incentive to retain members and promote long-term health. This is because any incentive or intervention that decreases the probability of illness in the future, directly lowers costs for Medisense. This natural alignment of incentives is missing in our current health insurance system. It is important to emphasize that Medisense not only has incentives aligned to offer evidence-based preventative care, but it also has a financial incentive to discover innovative cost-effective preventative treatments. Over time this drives down costs for everyone -- reducing premiums and improving long-term health.

Some examples of ways that Medisense can promote healthy behavior and preventative care is through the associated flexible spending account (FSA). As mentioned in section 2, this account is credited when Medisense shares cost-savings with members for seeking low-cost care. The money in the FSA can be spent on wide class of health-tangent goods and services (e.g. massage therapy, Apple Watch). Medisense can additionally directly offer vouchers to subsidize purchases that they believe promote long-term health, such as stress-reduction courses, gym memberships, etc. Finally, Medisense can reward certain healthy behaviors by offering prizes conditional on recorded health outcomes. These prizes can be in the form of credits to the flexible spending account. All of these, in the long-run, are paid for by lower healthcare expenditures.

5. Politically Feasible at the State-Level

Explanation

Most health insurance proposals are focused on the federal level, where we are rarely able to muster the political momentum for meaningful reform. One immediate question that comes to mind is why states like New York and California fail to implement universal healthcare policies when their voters seem to support these policies at the federal level? These states are larger than many European countries who have such policies. The key constraints that states face are that they cannot change federal policies (as mentioned in section 4) and that it is difficult to raise funds at the state-level. Proposals like Medicare-for-all are extremely expensive at the state-level, and voters are naturally risk-averse. However, this has led to an abundance of band-aid solutions. These band-aid solutions occur at the federal level due to political issues and at the state-level due to funding issues and federal dependence. This country needs an organ transplant, and, instead, we receive dozens of flimsy bandages peeling at the edges.

Medisense aims to change that. It is a proposal designed to be effective and transform our system for the better, while also remaining politically feasible at the state-level. This means it must be cost-effective, it must generate a lot of winners, and it must limit the number of losers. Lastly, Medisense is designed in a way such that policymakers can tailor it to the political realities of each state, while keeping the core reforms alive. As voters become familiar with Medisense and its benefits, they may choose to invest more in it and consider making it universal.

Solution

Medisense would be a (mostly) self-funded quasi-public agency at the state-level providing an opt-in health insurance plan for all individuals in the state. Just like private insurance companies, it collects premiums which pay for the reimbursements it provides. However, unlike private insurance companies, Medisense is motivated not by profit but by achieving its mandate: to bring transparency, security, affordability, and simplicity into healthcare.

There are two key pieces of the Medisense proposal that would require additional funding: initial seed funding to get started and income-based subsidies. The initial seed funding would be required to get Medisense off the ground. As mentioned above, it is critical for a bold policy like this to get a strong start to enter a virtuous cycle where Medisense effectively reforms healthcare and builds trust and support. A shaky start could imperil a policy, even if the policy is well-designed. Thus, the state legislature would need to endow Medisense with sufficient funding to create a state-of-the-art pricing database and technology integration, so it can offer members a seamless experience when shopping for care. It also would need funding to launch an education campaign to inform members and providers on how to navigate this new framework, along with announcing early sign-on promotions. Finally, it would need funding to create an enforcement infrastructure. The second funding requirement would be for the income-based premium subsidies. Fortunately, existing funding from Affordable Care Act subsidies, Medicaid, CHIP, and other patch-work state-level initiatives can be re-routed towards Medisense. For example, local governments such as New York City spend billions subsidizing community hospitals, which could be re-routed to instead insure vulnerable populations through Medisense. While it may take some legislation and coordination between local and state governments to make this re-routing possible, it could significantly streamline the healthcare safety net without requiring extra taxpayer funding. Some states might go further and raise taxes to further subsidize premiums, which would help bring more people into Medisense. States could have a sliding scale based off their political ability and desire to raise taxes, but some level of initial subsidy would be recommended.

Medisense generates a lot of winners. Its bold reforms improve and simplify care for the public, making the public an obvious beneficiary. However, a key distinction between Medisense and other policy proposals is the focus on medical providers. By reducing administrative burdens, streamlining payments, and respecting doctor-patient autonomy, Medisense goes a long way to bring benefits to providers, even as it lowers costs for members. Physicians often cite significant burnout and stressors from dealing with insurance companies, and Medisense allows them to refocus their efforts on patient care. By bringing medical providers on board, Medisense greatly increases its political feasibility. Another constituency that would benefit would be employers, especially small businesses and startups, who would no longer need to negotiate with powerful insurance companies to bring benefits to their employees. Large employers may also benefit from lower costs for high quality coverage.

Medisense also limits antagonism through light-handed regulation. Any bold reform will require some new laws and mandates, but Medisense preserves choice for individuals, firms, and medical providers. Additionally, the burden to follow the mandates is low -- for medical providers, it is simply submitting a list of prices, and for firms, it is offering Medisense as an option to employees. This makes Medisense much more politically feasible than more heavy-handed approaches. It is important that we do not focus on light-handed regulation exclusively. Indeed, many of our band-aid solutions originate from a fear of being too heavy-handed. Instead, we must maximize the effectiveness of the reform while minimizing the regulatory burden needed to achieve it.

The final advantage of the approach by Medisense is that the entire policy involves only a handful of new laws and mandates. The legislation to establish Medisense and unlock the core benefits is compact and portable to different contexts.

• Mandate price disclosure for all procedures and providers
• Mandate that providers accept patients using Medisense
• Mandate that all employers offer Medisense
• Mandate that state agencies and public schools use Medisense
• Empower Medisense to enforce mandates above, conduct wasteful spending audits, and operate as an insurance that: collects premiums, pays providers, collects payments from and shares savings with members through the voucher-based payment system, and establishes the flexible spending account

These core tenets are required to effectively reform the healthcare landscape in any state. The rest of the details can be determined by the Medisense agency itself -- the benefit of a quasi-public agency is that it can adapt to find the best way to implement its mandate. Some other components mentioned can vary from state to state based on the preferences of voters and the political realities on the ground. These include: how much to regulate price of care in provider deserts, how much to subsidize premiums for low-income individuals and other vulnerable groups, and how expansive to make the Medisense-as-exclusive-insurer mandates. In total, this ensures that Medisense is a politically feasible, state-level policy to effectively reform our healthcare landscape by increasing transparency, security, affordability, and simplicity.