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Commentary: A Modest Proposal for Controlling Healthcare Costs

By Jim Koepke, for HealthLeaders Media  
   May 13, 2011

Americans are concerned about how the federal government can keep paying the crushing cost of healthcare for people who cannot afford medical insurance. While the government has long taken on the burden of paying medical providers for providing healthcare to the uninsured, it is now accepted that the country cannot continue down the path of funding healthcare entitlements unless major changes are made in the system.

Those of us who have worked on both sides of the aisle -- for private industry and also for government -- tend to agree that the former is more efficient and cost conscious. Why not then, remove the government, as much as possible, from the healthcare process and use free market principles to control costs?

The government should put the entire healthcare entitlement system out to bid so that private firms with a record of competence and success can take over the system and manage it.

The Request for Bid, simply put, would be: The United States has "X" dollars budgeted for healthcare costs in 2012. Private companies that can provide administration of the healthcare system to the uninsured for "X" dollars are asked to bid.

The administrative costs incurred by the private firm as well as the payments to providers come out of the "X" dollars. This means the bidders will need to be creative, efficient, and well-managed in order to pay healthcare expenses as well as their own costs. Here is their real incentive: if the private firms fulfill the obligations for less than "X" dollars, they get to keep the difference. If costs exceed the bid amount, the private firm is responsible for paying the difference. This is not much different than the risk a private insurer takes when agreeing to insure a large company.

A large undertaking such as this means financial risks, so a long-term contract -- three to five years -- must be awarded so that private firms can be assured of some measure of stability for their financial model:

  1. The government will be able to decrease the number of employees responsible for the existing healthcare system, a major cost savings.
  2. Healthcare costs will be stable and predictable for the term of the contract. The bid awarded will specify exactly how much will be paid to the private contractor.
  3. Uninsured persons will receive a "reasonable" level of care.

What "reasonable" means is that the level of care offered by the government to the uninsured will more closely resemble the level of care offered to those who are insured (usually this means persons who are employed). Specifically, their coverage will be based on cost.

For example, a bid may specify that the private contractor intends to use cost savers such as; prior authorizations, co-pays, limits on the frequency of some types of care, limited coverage for ER visits, and so on as cost-drivers dictate. The uninsured will have a system that offers similar restrictions to what many people insured by the private sector have.

The most controversial part of the bid proposal is how much money "X" dollars would represent. Fiscal conservatives might want to use a comparatively low number such as the amount designated in the federal government Health and Human Services 2004 budget. Others may be concerned that the level of care would be diminished by too low of a number and may want to freeze the 2010 budget number for five years.

The budget number chosen will necessarily be the result of negotiation, meaning a middle ground number, which is a good thing. What is important is the fact that this model will work regardless of the budget amount that is used. Likewise, this model will work in the existing environment, but will also work if the country continues down the healthcare reform path articulated in the Affordable Care Act.

Example: The Federal government determines that it can afford $100 in healthcare entitlements in each of the next five years. It puts the healthcare system out to bid – just like any private firm would put its employee healthcare plan out to bid. In this example, the ABC Insurance Company offers to administer healthcare for the uninsured. ABC's plan consists of a major medical plan, office visits and preventive healthcare visits requiring prior authorizations, co-pays, limited number of visits, etc. They state they can do this for the $100 that has been budgeted. They have a proven record of providing quality insurance coverage to large companies and their benefit plan is superior to what other bidders offered.

ABC is awarded the bid. At the end of year one their administrative costs plus their expenditures for the uninsured amount to $98. The $2 difference is theirs to do with as they please. If, at the end of year one, ABC had expenditures of $101, they would be responsible for the $1 difference and would not receive further reimbursement from the federal government to cover the shortfall.

Meanwhile, attrition would decrease the number of employees in the Department of Health and Human Services as fewer staff would be needed in the healthcare entitlement area, a major current cost savings in salaries and benefits and a major cost savings in future pension obligations.

Jim Koepke is a former administrator of Hennepin County Mental Health Center in Minneapolis. He may be reached at Jim_Koepke@yahoo.com.

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