While there is much debate over what to do about healthcare in the United States, few disagree that the system has to change. Since 1990, the annual cost of medical care has skyrocketed from $665 billion to almost $2 trillion.
To pay for this, healthcare premiums are rising sharply. According to the Fall 2005 issue of Strategy+Business,1 a family of four could be paying $25,000 a year by 2010. Ominously, the single leading cause of bankruptcy in this country is already unpaid medical bills. And the rapidly aging Baby Boomers are only going to put more pressure on the system.
But there is reason for optimism. A growing number of employers and individuals are taking advantage of an initiative that promises to revolutionize the way healthcare is delivered in the United States — and to lower its cost.
We’ll explore that initiative, but first a little background is in order.
Insurance, including public programs like Medicare, can have a paradoxical effect. It can encourage wasteful behavior. The 2004 Economic Report of the President2 uses this example: Suppose you could insure your clothing so that you’d pay only a 20 percent co-payment for all of your clothing purchases.
After your premium, you’d experience an 80 percent discount on all your clothes — so like most people, you’d naturally buy more clothing, and choose clothes of better quality. The insurance company, naturally, would then have to charge a higher premium to cover the remaining 80 percent.
Eventually, the premiums for such insurance would become so expensive that they’d cease to be cost-effective. This example illustrates why economists say health insurance becomes “inefficient” under certain circumstances.
It also points to the larger problem known as “moral hazard.” The concept of moral hazard has been around a long time, but was first tied to health insurance in 1968 by economist Mark Pauly. It refers to the idea that people will make healthcare decisions differently, depending on whether or not they’re insured — and, under certain circumstances, they’ll overuse it.
That’s what we’re seeing today on a national scale. And, as expected, this results...
