From Business Week Online July 16, 2009

Vouching for Quality Health Care

A better way to reform the system is to hand out vouchers that defray the cost of insurance and let holders form pools that advocate for better rates and coverage

By Greg Blonder

As an entrepreneur, CEO, and venture capitalist, I've experienced virtually all the headaches our health insurance system can bring. For instance, a chief engineer left a company backed by my venture firm so he could work at a larger company; alas, the bare-bones (and barely affordable) insurance plan at our portfolio company didn't cover his child's illness. Or consider our encounter with rates that varied by as much as 100% in a year because one employee had expensive back surgery and we couldn't spread the apparent risk over our tiny base of co-workers. Then there are the hours of wasted time filling out unintelligible claims forms to pay for unexpected tests and procedures of unpredictable expense.

It's hard to contribute to the national recovery when you are so distracted. I know I would never invest in a company as badly run as our health-care system.

Meanwhile, Washington is mired in arguments, real and imagined, over "public options," "health-care rationing," and "socialized medicine." These debates drone on despite the fact that we're already living with a successful public option in Medicare/Medicaid, or that "choice" is an illusion when your employer rotates insurance providers every year in order to save money—and suddenly you can no longer visit your family pediatrician because he is no longer in the plan¹.

The Right Medicine

So what approach would balance a moral imperative for universal health care with an ethical respect for people's freedom to choose and control their own expenses? Without a practical solution, capable of responding to the next century's health-care challenges, our economic engine is likely to catch a persistent cough—or worse.

I believe a voucher system is the right medicine. Of course, vouchers are often suggested as a panacea for everything from improving school performance to reducing big government. Sometimes the unspoken intent behind them is to roll back advances in racial integration.

But in this case, vouchers can serve a progressive public goal. In this proposal, all citizens—every man, woman, and child—would receive a yearly health-care voucher from the government. The voucher would have to be used to pay for insurance. The value of each would start at $1,000 in 2010 and rise to $3,000 by 2020, giving the system time to adjust. True, this wouldn't cover all the costs of many insurance plans today, but the hope is that average aggregate costs of coverage—currently about $5,000-$7,000 a person per year in the U.S.—would diminish over the next decade. And that a multitude of existing, scattered government health programs would fold into this initiative³.

Make Vouchers Assignable

The plan would include rich and poor alike, without exception. And don't worry. The rich will pay out more in taxes than they are granted back in vouchers. But why conflate tax policy and health care? No need to isolate some citizens from the process in such a way that they no longer have an interest in its success⁴.

I also advocate making the vouchers assignable, letting individuals use them to defray the costs of an existing plan partly paid for by an employer. People also might create their own group plans to lower costs and spread risks. For example, a dozen businesses might pool small employee bases to match large-company economics, optionally kicking in matching funds against the yearly voucher².

Alternatively, members of a church, mosque, synagogue, or other group could pool vouchers for themselves while helping other possibly disenfranchised members of the community. A family with special needs could partner with others across the country, to ensure their group plan has terms that cover a particular malady. Or a group of doctors could accept patient vouchers in exchange for a prix fixe care plan, reducing worry and improving preventative care.

No Need for New Bureaucracy

Of course, these vouchers come with attached strings designed to encourage cost savings and care quality. When an insurance company accepts the voucher, it agrees that its policies meet certain minimum standards of care, transparency in billing, administration, and efficiency and effectiveness in health-care delivery. Longer term, a combination of market competition, negotiations by newly empowered groups, and sensible standards will drive out costs⁵.

The "public option" is to simply open Medicare to all age groups. There's no need to add complexity by creating a new bureaucracy. I wouldn't be surprised if many of the elderly prefer a community-based health insurance program over Medicare, and leave the system. Nor would I be surprised if private insurers vigorously compete to offer Medicare supplement plans, or to "catch" those people who don't make an insurance decision on their own.

As Einstein once remarked, one should make everything as simple as possible, but no simpler. The American health-care system is a complex and often foreboding landscape. It will never be simple, but it can be simpler. A voucher system brings coherence and clarity to the environment, allowing a multitude of coordinated health-care solutions to thrive, driving innovation, and lowering costs. And then we can finally get on with the business of developing a healthy economy.

Greg Blonder is a venture capitalist who relies on a mixture of Macs, PCs, and Web apps to make it through the day.

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¹ One often compares the US private health care system to "socialized Europe", claiming patients abandons choice and suffer long waiting periods in exchange for universal care. But in reality, sixteen hours a day, and all weekend long, the US enjoys the socialized medicine of the emergency room. But if everyone had insurance, much of the emergency room traffic would disappear, more clinics would open, costs would drop, and the excellent doctors and nurses of the ER could focus on critical care instead of scrapes and the flu.

² Some businesses will choose to drop their current employee health plan to save money- but this not a bad thing. It's inefficient and wasteful for a small company to administer a sub-par health insurance plan- the country and the employee are better off if they take their universal voucher (perhaps along with a company subsidy) and buy into a larger, individualize group plan. Also, dropping employee health care is effectively a small business tax cut, which might help stimulate re-employment. Plus you don't lose your insurance when you lose your job. But other companies will choose to offer their health plan as a recruiting tool- its their choice, not their statutory duty.

In addition, some businesses and organizations have moral objections to indirectly endorsing certain medical proceedures by their choice of insurance policies. Notably birth control and abortion (among others). Since they cannot (nor should not in a democratic free society) prevent their employees from paying for birth control directly out of their salary check, vouchers break the moral conundrum by converting the affirmative selection of an insurance policy with employer mandated coverage limitations, to an indirect salary benefit controlled by the employee.

³Others have made similar suggestions- see this Brookings Paper which led to the Wyden-Bennett bill. In September 2009 Senator Wyden offered "Free Choice", a modest voucher ammendment to the emerging health bill. My proposal (which dates back to the original Clinton healthcare initiatives) differs in a few key respects, but those differences are minor compared to the alternatives fighting healthcare reform. Out of frustration with the current process, I'm adding my voice to support any similar voucher plan.

⁴ It’s an enormous error in thinking to pay for the health plan with a tax cut rather than a direct, universal voucher. Not everyone (perhaps less than a third of all citizens, and particularly not the poor) file or pay taxes. So a second, redundant system must be put in place to reach this population, in any case. Moreover, a tax cut is a delayed, passive incentive. Imagine your dog pees on the carpet and a year late you rap it on the nose! Plus, income-based credits adds complexity to the 1040, which is hardly an incentive. From a behavioral economics perspective, giving everyone a voucher enrolls them emotionally in the success of the new system. It encourages the press, blogs, and water cooler conversations at work to help guide and inform their decision. And it makes the number and size of vouchers predictable, simplifying insurance companies and health care providers plans for the following year.

⁵ Additionally, if the majority of Americans only supplement their vouchers with a small amount of discretionary dollars, then the system will readjust to match expenses to revenue at this lower lever ($3500 vs $6500 today). When the economy crashed after Sept. 15th, less cash in consumer's pockets drove deep discounts at retailers and restaurants- without the need for government price regulation. Note $3500 is about the average Canada spends per person today, delivering (arguably) equivalent health care to a greater percentage of the population.