Medical S&L

Earlier this week, President Obama invited anyone to toss in their ideas about health care reform. Well, he actually gave a qualified invitation. Obama invited opinions from anyone, so long as they are not part of the status quo. That means Obama does not welcome opinions from any business currently working to provide health care services.

As I have no money invested in health care, nor do I have any special knowledge of the system, I feel that I am duly qualified to voice opinions, according to Obama's formula.

So, here goes:

Personally, I think most of the dissatisfaction with health care arises from the insurance companies, HMOs and government bureaucracies that sit between the patient and doctor. The solution is to create a system where patients are directly buying health care from doctors.

As such, I have been a strong advocate of using medical savings accounts as the primary funding mechanism for health care. Insurance should only be involved in catastrophic care or major health problems.

Charitable organizations or the state should handle care for the indigent.

Medical savings accounts are a great idea. Unfortunately, our health needs will never fall perfectly inline with our investments.

To make MSAs work, one would need to supplement it with a system of medical loans.

The great challenge of medical loans is that there would be a high default rate on the loans. The interest on the loans would not be sufficient to cover the loans. An onerously high interest rate would make the loans untenable.

To make the loans work, one would have to change their thinking about loans. Traditional thinking about loans is that loans must always return a profit for a lender. That means they must charge interest rates high enough to cover defaults and provide a decent profit.

Medical loans are likely to have a high default rate. If you lend money for a tooth removal and the person dies in the dentist chair, then the loan will go into default.

To make the loan system work, there would need to be financial instruments that seeds the loans.

One could seed a system of medical loans by charging a premium to holders of MSAs.

So my ideal insurance program would have multiple layers: The primary layers would be the money in the MSA coupled with a high deductible insurance. For sake of argument, let's say the deductible is an even $50k. The MSA holder would then pay a premium that guarantees a low interest loan for the deductible.

If the MSA holder has a sudden moderate health crisis, they would exhaust their MSA and automatically take out a loan. On recovery, the MSA holder would start paying off the loan when they go back to work. Once back at work, the patient would start making payments on the loan.

To avoid the problem of people being denied care in this repayment stage, one would work out a schedule where half of their payment would to toward paying off the loan. The other half would go into the MSA for future medical expenses. The patient, of course, would be able to take out an additional loan. To keep people from being completely bowled over by health expenses, the Medical Savings and Loan might limit repayment of the loan to x percent of a person's income.

A Medical Savings and Loan system would create a paradigm where the first $50K of care was handled by a direct price negotiation between the patient and doctor. This would force cost cutting discipline onto the system.

For MSAs to become a reality, the system would need a loan component. I had been hesitant to promote the loan component in the past because a system of medical loans would involve a complete rethinking about loans. I was scared about the ramifications that rethinking loans would have on the mortgage business. As soon as we break the expectation that all loans should be repaid in full, our society would start having crisises in the housing and other industries as people took on excessive risk expecting to externalize the cost of the risk when things went south.

Well, my worst fears came true. We are now in a situation where lenders must accept a high default rate on all loans; so, perhaps we are ready to discuss the necessity of having to seed loans to make a lending process work.

BTW, even though I am a pariah, when Obama said he would listen to any idea except those from the status quo, I suspect he meant that he would listen only to ideas that came from the left. A medical savings and loan might be interesting fodder for a scifi novel.