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I went to a fascinating lunchtime discussion at the International Policy Network yesterday. The guest of honour was Grace-Marie Turner (left), the president of the Galen Institute in DC and an expert in free-market healthcare reform. She gave a fascinating talk about the problems facing US healthcare, and the approach President-elect Obama is likely to take to reform.

One of the interesting things about the healthcare debate in the US is that they actually have so many different systems operating at once: there are health savings accounts, private insurance, managed care, government ‘insurance’ (Medicare), and even single-payer systems (healthcare for veterans and native Americans). And then there is Medicaid (publicly-funded healthcare for the poor), which operates differently in every state. Such multiplicity may make the system difficult for outsiders to understand, but it also means that there is enormous scope for both experimentation and the analysis of different policies.

One state in particular seems to be taking an innovative – and potentially very significant  – approach. Indiana Governor Mitch Daniels has essentially turned Medicaid into a high-deductible insurance plan for those earning less than 200 percent of the Federal Poverty Level. Participants get fully subsidized and comprehensive healthcare, but must pay for the first $1100 of annual treatment themselves. The plan requires individuals to make mandatory monthly contributions (topped up by the state if necessary) to a health savings account, which can then be used to pay directly for these expenses.

The great thing about this system is that ensures everyone has access to healthcare while also confining ‘insurance’ to its proper place – protecting people against big-ticket expenses. Extending third-party payment to minor treatments (as most health systems, public or private do) is actually a major driver of cost inflation in healthcare, since it imposes significant administrative costs, gives both the doctor and the patient an incentive to maximise costs, and blunts incentives to stay healthy. Getting patients to pay directly solves these problems.

It is fairly easy to see how such a system could be translated into the UK as a major NHS reform, which could have significant benefits for patients, doctors and taxpayers.