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A Medical Savings is a free market alternative to employer based insurance. The goal of the MS&L is to create a financial tool built around the life cycle of an individual.
The plan has three primary components:
The innovative feature of the MS&L is that the policy holder has a guaranteed loan to bridge the gap between the funds in the MSA and high deductible insurance.
The goal of the MS&L is to create a structure where people pay for the bulk of their care. This will restore the system where people directly negotiate with their doctor for care. Direct negotiations would restore the pricing mechanism that went askew with employer based insurance.
The Medical Savings Account is an idea that has been around for several decades. The basic idea is for employers to deposit the funds that they would pay for an insurance policy into a savings account. People would then be able to pay for the care they receive from that account.
The great advantage of the MSA over employer based insurance is that workers build equity in their MSA. With employer based insurance, one does not have equity in their account. They lose their coverage when employment conditions change.
The problem with this idea is that health expenses never match up perfectly with the funds in savings.
The MSA has not been able to get off the ground as it leaves people with an unacceptable exposure until they build enough funds in the account to cover expenses.
I realized early on that, to get MSAs off the ground, the system would need to be supplemented with a guaranteed loan program that assured people had the resources to cover the gap between their savings and high deductible insurance.
The problem with medical loans is that such loans will have a high default rate. When a person becomes incapacitated by a medical condition, they are unable to pay back the loan.
The tendency of certain medical conditions to incapacitate or severely reduce a person's earning capacity is not as big a set back as it first seems.
Sudden unexpected incapacitating illness is a major concern of all people. People buying into a Medical Savings and Loan are likely to want a program that transfers resources to the unfortunate who suffer sudden, debilitating medical conditions.
The trick is to create a guaranteed loan program that anticipates a high default rate. It is possible to do this by reconsidering the concept of a premium.
The premium is the price people pay for access to money. In most lending situations, the premium comes in the form of interest on a loan. One would have to charge an outrageous interest rate to cover the defaults on medical loans.
Fortunately, there are different ways to charge premiums.
The interest regime has people paying the premium on the back end of the loan. Charging interest on loans to the sick has a negative magnifying effect that participants of an MS&L would want to avoid.
The solution is to charge the premium on the front end of the loan. Imagine a system where a person has $5k in a savings account and a $25k deductible. The holder of this account would need a guaranteed loan of $20k.
The holder of the MS&L account would pay a premium for access to the loan. Their account would actually have two premiums. There would be a premium for the high deductible insurance and a premium for access to the guaranteed loan.
As most people will be paying back their medical loans. The premium for the loan should be substantially lower than the premium for an equal amount of insurance.
As the premiums are paid upfront, it may be possible for the loans to be interest free. Access to an interest free medical loan would be one of the selling points of the MS&L.
It is interesting to explore the premiums from an investor's perspective. It is true that an investor is unlikely to make a loan for medical expenses; However, the loans might create an equity which is of interest to investors.
Imagine an MS&L made $1m in loans with an expected 15% default.
That is a really lousy investment … but the default was paid upfront with premiums.
A wise investor would look beyond the default rate and recognize that the loans created a stream of income where about $850k would come back to the MS&L in the next few years. The market might value such an income stream at $750k.
Some, but all is not lost.
Of course, a Medical Savings and Loan has another prime source to see the medical loans. One could easily devise a system where the savings accounts are the source for the medical loans.
A Medical Savings and Loan that uses the savings accounts as the seed for the loans would realize the losses from defaults on loans directly into the savings accounts.
This looks like a raw deal for participants in the MS&L. The losses, however, are likely to be seen as the premium one must pay for access to the guaranteed loans.
I contend that, in the case of medical loans, people would be happy to pay the premium up front. The very fact that people are willing to pay insurance premiums up front proves that people open to such a program.
Selling people on upfront premiums is easy. The hard part is collecting money from people who have outstanding loans.
The goal of a medical savings and loan is to match the payment of premiums to one's productive capacity. The repayment of a loan cannot simply be a formula based on time. The formula must be matched to the policy holder's income.
The ideal would be to create a payment mechanism set a percentage of one's income. If you take out a loan, the MS&L would have a formula to garnish your income at a set rate until the loan gets repaid.
There is one problem that needs to be avoided: When a person is in the red, they no longer have any resources to pay for additional medical expenses. In this regards, I would create a tiered repayment system. Imagine that I had a $10k loan for medical expenses. I get back on my feet and start paying $1k a month back into the system. Rather than having all of that money go to repaying the loan, a tiered system might put a quarter of that money into repaying the loan. The rest would go into the savings account and into the premium to assure access to future loans.
This would insure that I have the resources available to pay for any additional medical expenses. A MS&L might see a situation where a person has a savings account, an outstanding loan and additional accounts.
This type of stuff happens in regular bank accounts.
The goal of the MS&L is to help people fund their medical expenses as they come along. The system should be designed to avoid completely exhausting one's savings before getting the loan, insurance or other help from third parties.
The Medical Savings and Loan should be designed from the get-go to interface with third parties such as employers, health foundations, families, friends, or even the government.
Such third parties can help take a bite out of health care expenses or might give incentives to help direct health spending. For example, an employer has a stake in a healthy workforce and might be interested in funding an annual check up. A foundation or research center might offer programs that subsidize certain tests or immunizations.
Family, coworkers and friends are often happy to contribute the fruits of their health to those in need within their community.
Many will leave this world with a positive balance in their accounts; so one might develop provisions that allow people to donate these resources to others within the system.
There are very few people who exit this world lamenting that they did not have more illnesses so as to use more of their insurance benefits. There are very few people who exit an airplane lamenting that the flight insurance they bought before takeoff didn't pay off in the form of a crash landing.
People are not unhappy with the fact that insurance transfers some wealth from the healthy to those with debilitating conditions. Those fortunate to avoid catastrophe are generally thankful of those fortune. Those that suffer calamity are often appreciative of aid.
A well design medical savings and loan would create a structure where most people pay for their entire care from their personal resources. However, people also want protection in case of catastrophe.
Now, the MS&L looks differently at catastrophic insurance. Standard insurance does its actuarially analysis on a year to year basis. A policy holder will have a deductible which resets each year.
Medical catastrophe usually isn't confined for a year. Often a condition will take for multiple years. An amputee doesn't magically sprout a new foot on October 1st to match the insurance company's fiscal year.
The goal of the Medical Savings and Loan is to create a financial structure which looks at health care through the whole life of the individual policy holder. The model for catastrophic care would need something more than a simple per year deductible. It might look at expenses over consecutive years and take into consideration affects of medical conditions on earning power.
The biggest challenge in free market health reform is handling people with pre-existing conditions.
A pre-existing condition is a huge liability that a person has hanging over their head.
There is not really a free market cure for unfunded liabilities. Most people with pre-existing conditions are already an unfunded liability to someone … somewhere. Groups that are burdened with these liabilities are likely willing to pay into the Medical Savings and Loan to subsidize accounts.
For example, a common complaint is that people with no insurance show up at emergency rooms for primary care (or for medical conditions that occurred because a person did not get primary care).
Rather than having the emergency room foot the bill, the emergency room could have a deal with a local MS&L where the patient set up an account, and takes out a loan for services rendered. On the patient's recovery, the MS&L is likely to get some of the money back.
For this service, of course, the emergency room would pay a premium into the MS&L. This premium is likely to be less than they would pay if they bore the whole bill.
A Medical Savings and Loan is in a slightly better position to handle medical problems among the uninsured than hospitals or traditional insurance companies as they come equipped with a repayment mechanism.
The goal of the Medical Savings and Loan is to create a financial structure that will help people with their health care needs at the various stages of their life.
The combination of loans and savings accounts creates a structure where people will have the resource to handle whatever health challenges life throws at them.
As the majority of people in the program will be paying back the loans taken out, the Medical Savings and Loan reduces cost by removing the third party claims adjuster and allowing direct negotiations between doctor and patient.
Perhaps the greatest benefit of the program is that Medical Savings and Loan restores the notion that a person is the owner of their own body and their own health.
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