Though David Goldhill’s vision of an ideal health care system is far off, it sheds light on important misunderstandings about the current health insurance-based system in the United States.

Question: How do you suggest we reform healthcare?

David Goldhill: I think what I’m talking about is something that will take a generation to do. And I need to start there is that, if we are looking for a healthcare fix for something as complex, with the previous choices that we’ve made in healthcare that’s going to have a fundamental impact on our system, it’s hopeless. Too many of us depend on the current forms of financing, have spent our whole live participating in it for an instantaneous change, and frankly, the whole healthcare industry, which is almost a fifth of our economy has been set up with the existing system. So, the first thing you need is a generation[s] commitment. It’s taken roughly 50 years to create this mess. You’re not going to solve it in twelve. You’re really going to have to be committed to fundamental change over time. That’s a very hard thing for our, or frankly, any political system to do, other than accidentally. We did it accidentally with Medicare and Medicaid and company-funded insurance to do it intentionally is much harder. But that’s number one. It’s just a realistic sense of what it is going to take.

Beyond that, I think there are really three important elements. Number one, I believe, and I think many Americans do, that there really does need to be a true cradle-to-grave safety net for all Americans for catastrophic health, which is, really, the initial starting point of many of these debates and in some cases, over a hundred years ago in the developed world. We still don’t have that. And I think we’ll be up to near $2.5 trillion of spending next year. The number one question we need to ask ourselves is; how on earth do we spend $2.5 trillion on healthcare a year and not have a true safety net for health catastrophes for all Americans? That’s number one. And to me, what that’s about is catastrophic insurance. It actually is an insurable good, unlike so much of what isn’t insured in healthcare. And I start there and there needs to be a national pool because we can't get into the situation we see now where we have private insurers competing for profit growth in part on how successful they are on underwriting out the worst cases. You can't just let the public pay for the worst cases, is actually an extraordinarily inflationary approach to creating an insurance pool. But we need a national pool.

Beyond that though, we have to look at funding non-catastrophic care which does include late life care because it’s planable. Right? Unlike most insurance events, it's something that we can plan during our life and that we do fund during our life. But also a lot of disease management issues, and frankly, a lot of routine care in the ways we fund other things in our economy. How do we do that? We do that out of income, out of savings, out of credit against future savings. And so what I would like to see over time is a shift in the enormous resources that we currently pay to support the insurance system back to consumers to allow them both to fund their current medical expenses and to save for future ones.

It has a couple of benefits. Benefit number one, is it returns us to our role as consumers. We have to start with one, I think now, indisputable fact which is our 50-year reliance on employers, on insurers, on governments to control costs, have failed. All right? We will hear endless details on how we can do it better and this new regulation will finally do it. But if you followed the last 50 years of healthcare, we’ve tried a lot of different things that Medicare, Medicaid, and private insurance, and that theory that big will exercise leverage, and leverage will keep prices down – if 50 years of the past experience hasn’t taught us that doesn’t work, then I guess we’ll need more years, but I and at least many others, believe that at some point you say, okay, this doesn’t work what will? Well, the one thing we really haven’t tried is to do what works everywhere else, which is to have a mass of disaggregated thinking consumers pushing prices, forcing quality, forcing accountability. That’s number one. And I do want to come back to criticisms to that approach because I think there are some important criticisms to that approach. But that is where I start.

The second is, we have to avoid the "use it or lose it" approached financing healthcare. And reliance on insurance and on government programs mean that every dollar that we put into the system is going to be spent on healthcare. If you think about an individuals own life, you save money for rainy days, but if it doesn't rain you may not have bought an umbrella. The healthcare system doesn't quite work that way, right? A lot of the money that we take from people to pay for insurance premiums, Medicare tax, Medicare premiums down the road, is in case you need it. But the very fact it's there mean it will be spent on healthcare. Now, from an individual's perspective, that may seem irrelevant, from a society's perspective it's a real problem because at, coming up on it very soon our 20% of GDP, the dollars for spending on healthcare are things we can't spend the other good things in life. And you may be aware, in my article, I talk about how we don't even know if we're making the expenditures that are best for our health; we just know we're making expenditures that provide the most healthcare. Those are different things. Nobody can guess the question, would we, as a society, be better off all giving ourselves another week vacation, or spending another $150 billion in healthcare. They're almost treated differently, but they're not different of course.

We are at a point in our health where over 50% of annual deaths come from conditions or causes that have more to do with lifestyle. This is of course heart disease, diabetes, accident, suicide, and homicide, than they have to do with healthcare. We've done a great job in healthcare to get to that point but being at that point – if we’re interested in improving our health we don't know that these investments are better made in healthcare are in all the other aspects of health whether it's recreation, or environment, or new nutrition, or what have you that are being crowded out by society's decision to fund healthcare in a use it or lose it way. So this is less important for the individual perhaps, and more important for us as a society.

So what I'm seeking to do is I'm seeking to say, rather than look for a magic bullet single way to finance health care, which I think comes out of that early misconception I talked about that healthcare is sort of a lump, emergency, need it, we know what it is, pay for it. That’s not true anymore. It’s much more complex than that. We need to match the way we finance healthcare to how we use it. To what it is. There are emergencies that are catastrophic. Not all of us will have them. It is completely appropriate for insurance to finance them. Insurance is actually the most efficient way to finance them. Insurance is the least efficient, most costly, most distorted way of financing everything else. And so we need other ways to finance everything else.

Question: What are the criticisms of consumer-centric care?

David Goldhill: The first one is just a financial one. Just people saying, "I can't afford it."  I have enough trouble affording nondeductible. And they're right. The key to this is that generational shift that I talked about. Every year we need to reduce a bit our reliance on insurance and take some of the resources we use to pay those premiums and get them to consumers. We need to gradually over her a 20 year period, increased the deductible on insurance policies from what they are now to general catastrophic. What that will do is it will move more healthcare resources to individuals enabling them to finance their care. Now, the only good news about spending $2.5 trillion dollars on health care is that all of us, and I mean all of us, are spending an incredible amount of money on care. We may not be aware of it. We may think somebody else is paying for it, that's an illusion.

You know one of the things that I looked at in my article was, to hire a 23 year old today and he spends his entire career with my company and he has a spouse and a couple of kids in a few years, he retires at 65, and he lives until 80, what would the amount of money that goes into the system for the 23-year-old? Start him at an entry-level salary, $30,000 a year, which is roughly 60% of the average household income in our country, and have him grow – have his income grow 3% over the course of his life and he gets up to a salary of a little over $100,000 by the time he retires. And I made an assumption which hasn't been shrewd for 50 years which is, let's say the growth of all healthcare is only equal to the growth of income, of course, it's been running one or two points above income. The amazing thing is that the 23-year-old is looking at $1.7 million being spent on his or her behalf to fund his household to have medical care over their lives. That's everything. It's their own share of health insurance, their out-of-pocket, their Medicare premiums when they’re seniors, the stuff that they actually see. But it's also stuff they don't see, their employer paid on their behalf, their Medicare tax came out, and what's interesting is I realized later that I understated it because I didn't include the amount of general tax revenues that is subsidizing our healthcare, which is another big bite. But let's forget that for a moment. I think if you said that the average 23-year-old, you want to participate in this insurance system or do you want $1 million over your life to spend on your own care and if you don't spend it on your own care, you can put it away. The only thing them and ask you to do some going to insist that you buy catastrophic insurance. I don't think there's any question with the average 23-year-old is going to say. Now, say an average 23-year-old may not be smart enough to make that decision in the long term but let's look at the impact on everybody in this country of a healthcare system that costs the average employer who pays insurance 12 grand a year per employee. Twelve grand. So if you're earning the average income in this country, $50,000, your employer is paying $62,000, so forget about Social Security tax and Medicare tax for a moment, for the privilege of employing you and you're getting only 50 grand. That is an extraordinarily aggressive tax. The interesting thing is transferred that 12 grand to the average family they could buy catastrophic care for the whole family and have a significant amount of money left over for their health savings account every year.

So, you have to be willing to do both. You have to be willing to reduce the coverage of insurance, but transfer those resources to individuals. And if you’re not willing to do both, and people would be afraid that you are, of course you can’t have a consumer-driven system.

But the second concern I think a lot of people have is consumers aren’t wise enough, or smart enough, or capable of driving pricing and quality in our healthcare system. And I think, as a lot of fundamental reforms have to deal with, that seems to be comparing a proposed new approach with something that doesn't exist today. Consumers make all the decisions on their healthcare today. Not the negative ones. But you can't treat somebody without them choosing the treatment, without their agreeing to the treatment. I'm not proposing rid of doctors. I'm not saying let's take the professionals who advise you now out of the system and you design your own treatment and find someone to do it. What I'm saying is, right now we have a system where doctors advise, patients make the ultimate decisions subject to insurance company veto. I am removing the insurance company from that equation but I don't think that most consumers would say, “Well, that puts me in a terrible position, I rely on my insurance company to help me through my life's healthcare decisions."

There is another thing that I think again comes out of the island nature of healthcare. Very few of us are true active comparative shoppers in everything we buy. We all benefit from the existence of Wal-Mart, whether we shopped there or have never in our lives compare the price of toothpaste. What happens in a consumer driven economy isn't that every consumer after getting hit by the bus close to the Internet and calls up emergency surgeons to see who to hire and what price, what happens is, you benefit from the fact that the entire structure of providers is altered to attract consumers as opposed to serving insurers and governments. That's the dynamic I'm trying to capture in a consumer-centric approach, that dynamic of providers who answer to us, patient-consumers, and not to intermediaries. And if you spend time in the hospital watching it should be treated, not for a second can you forget that that patient isn't a customer of the hospital. You can't forget it. You see it in the care and in almost every element of the care. And if you've been in the rest of our economy and bought anything in the rest of the economy, you know that’s true and no where else. And that’s a crucial thing.

Question: Are there discussions in Congress about reforms similar to your proposal?

David Goldhill: Well, that’s an excellent question. I’m not sure there are many. I think some of the objectives that we’ve talked about today are things that people are increasingly aware and may matter in resolving this sort of trap that we are in of ever reducing access, every lower quality, and ever higher prices. I think one of them is there is an awareness that a lack of competition and a lack of price transparency makes it difficult for consumers to exercise any of the disciplinary force they do in most other industries. There’s been a movement in some states, certainly, for greater price transparency. Unfortunately, it’s not true price transparency. It’s list price, and of course, hospitals don’t charge those prices for anything. So, it’s been fairly meaningless but it is an understanding of the right direction.

One of the interesting things that’s occurring, and we’ve seen it occur in other government programs as well, is that there is the beginnings of something of a shadow economy in healthcare for people who are outside the system. For many of those who either don’t have access to health insurance, or can’t afford health insurance, there is increasingly a cash and credit based economy around healthcare services. There are parts of this country you can drive around and see services advertised on billboards on a cash only basis. You obviously see some of these clinics that have opened in Wal-Marts and CVS’s that get at one of the things that you would expect to see in a more consumer oriented system, which is real value services for some of the less complex, more easy to replicate treatment possibilities such as many in primary care.

But I think we have to be candid about the walls around the political process now. The reality is most Americans are happy with their health insurance. And I think some polls say it’s 55% or 60%, and probably a percentage of those who have health insurance, it may be even higher. And as long at that is the case, we’re not going to expect any politician to propose fundamental reform. They can’t. There are enormous interest groups that exist in the provision of healthcare who would be opposed to anything that affects the status quo negatively for them, and obviously anything that had real discipline on price would negatively affect the status quo for these interest groups. No politician is going to buck that for a public that believes it’s got a good deal. At 55% or 60% approval, you can’t go at the fundamental of the system.

Question: Why are so many people happy with a flawed system?

David Goldhill: You know, one of the things that I mentioned in my article, and one of the reasons I spend a lot of time on numbers, is that I think this is actually an illusion. I think much of healthcare policy has been about perpetuating this illusion that somebody else is magically paying for your care. One of these that I talk about is because very common among my fellow liberals is to say, well, if we eliminated advertising, or we eliminated the profit motive, the only things I mentioned in my articles is if you confiscated the profits of every single American company, forget about the drug companies, and the hospital companies, and the device manufacturers, just take every profit, every dollar of profit in the American economy, you’d pay for something like four or five months of our healthcare. At $2.5 trillion, we’re not there yet, we’ll be there next year, I think the number this year is likely to be between somewhere between 2.3 or 2.4, but at $2.5 trillion, the only people who can pay for healthcare, is all of us. And we’re paying for it in enormous amounts. Right? You hear people talk all the time, and one of the reasons I have so few friends left is one of the things I do at dinner parties is [when] people  mention the Healthcare Bill, I break it down. What do you think the costs of that are? But, you’ll see a $5,000 bill for something that probably had $500 or $600 of marginal cost, and you’ll recognize just how extraordinary the inflation is, but you’ll also recognize that what your friend was worried about was the $300 or $400 they had to pay against it. And the difference in that is costing us all a fortune. The moment at which everybody says, it’s kind of like having a credit card. I can go out and buy a $2,000 plasma television, not pay for it at that moment, and tell myself, hey, this plasma TV cost me nothing, it’s the damn credit card bill that is costing me a fortune. That’s what we’ve done in healthcare.

And unfortunately, we have divided the funding amongst so many different places, right? Ourselves, our employer in many cases, various targeted taxes, the government, general revenues, that people don’t sit there and say, “Wow, the average middle class family is probably looking at 20% or 30% of their income, somebody somewhere taking out and paying for healthcare.” That’s extraordinarily aggressive. And I think if there is awareness of that, or when there’s awareness of that, and it may take more time, and more spending, and more frayed safety net, and frankly, more people suffering and being hurt for us to get the realization that there is no free ride in healthcare. It is costing us all a fortune. And we’re all being hurt by the lack of discipline in the system. I think only then you’ll look at the true fundamental reform being politically possible. For politicians to take the enormous risk of saying to some of the interest groups in healthcare, “I’m sorry, but the pie isn’t going to get bigger.”

Recorded on: September 11, 2009