Private Treatment Accounts

One of the most contentious current political topics is that of healthcare. For thousands of years, the question of healthcare has been basically irrelevant. If you got seriously ill, then you died. It didn’t matter if you were the King of England or an American slave.

Of course, as the King of England, your environmental risks (food, shelter, workload etc…) were healthier – so you’d generally live longer. But that wasn’t driven by healthcare.

People may have thought healthcare was important, but it didn’t really matter.

To put it in perspective, I count the number of times I’d have been dead had I lived 150 years ago – skipping those same environmental factors. For me, the score is two: I’ve had appendicitis and bacterial pneumonia so bad I was coughing blood.

Neither was tremendously problematic or fearsome.


There has been remarkable progress. And so now, healthcare matters.

That progress is broadly the result of two things.

The first is evidence-based medicine. In the late 1800s, somebody did a study and realized that outcomes were no better if you went to a doctor for treatment. That didn’t speak well for doctors. More recent studies have shown the same thing for Medicaid – outcomes are better for people who are totally uninsured rather than on Medicaid.

The second is market-based incentives. Here is an examination of health care innovation since World War II (after which, many countries nationalized care). Of 22 major advances, 17 were first applied in the U.S., 4 occurred in mixed public-private healthcare markets and 1 occurred in a fully nationalized market (the artificial cardiac pacemaker).

Private markets have raised the value and impact of healthcare. In other words, they’ve made it matter.

So we find ourselves at a challenging crossroads. Healthcare matters because healthcare can deliver life. Healthcare protects – and in my reading it is our obligation to protect.

But the reason healthcare protects is because people have been creative – and that creativity has often been assisted by market dynamics.

This problem is a very clear example of the tax, education and life-related challenges we face in so many spheres. Protection can limit advancement and yet we have a duty to protect.

How do you square these demands?

Most analysts see a set pie. You either ration healthcare or you force people to pay for it and thus distribute it unevenly. People on the left will claim that denying healthcare can be denying life. Those on the right claim that nationalizing healthcare will freeze its development while resulting in an inefficient and politicized system in which everybody is capped in their right to life.

And both are right.

So how do you square this puzzle? How do you encourage both further healthcare development (creation) while protecting the ability of all to experience the full potential of their lives?

The Potentialist Party believes healthcare has become so effective that there is a public obligation to provide it.

At the same time, my experience with public, semi-public and private organizations has demonstrated that directives from on-high (whether an insurance company or a government) are nowhere near as effective as market competition in driving innovation and price reduction. In a large bureaucracy, the reward is for the good story and the good excuse and the effective covering of one’s rear-end. In a business, those things – when your customers have choices – lead to the end of the business.

In the U.S.’s prior healthcare world, there were incentives. Invent something with a better outcome and you can charge through the nose. For example, a new Hep-A drug (sofosbuvir) is $80,000 for a course. While its target market tends to be poor, the insurance and/or government have to pay for things that are more effective. Thus, payment is made. If you forced them to charge much less, they might not have developed the drug in the first place – and then nobody would get its benefits.

But not every private market is built this way.

In Australia, the government had a set price it would pay for certain services (e.g. $600 for a particular surgery). It would only really cover a part of the cost. You could also buy private insurance. They might pay $300. But the surgery might be more. So, you’d pay the difference. In many cases, you’d pay the whole sum up front and then go to the insurance and government offices and collect the amounts they’d pay. You had an incentive to shop around. In one case, surgery was $1800. The government paid $600, insurance $300 and the patient paid $900. Because there was competition, the price was lower. That particular surgery cost about $15,000 in the U.S. In another case, there was an individual who was in E.R. isolation for two days. The total bill was about $1,300. He was a foreigner and received no subsidies. But because there is price competition, prices are lower.

The same principle applies in laser eye surgery (where costs tumble with risks) and plastic surgery and dentistry (where outcomes and comfort improve, but costs rise at a much slower pace). In these markets, insurance often doesn’t pay – and so there is price and outcome competition that doesn’t exist in other U.S. markets.

This price competition is attractive. But the fact remains that Australia also rations public healthcare and fights about services and rates and solves things politically that should be solved in the market. While they are very innovative in driving down cost, of those 22 major innovations, none occurred there.

In considering solutions, we could look at having the government pay 90% of the median cost for an individual procedure. This is kind of like Medicare. Except Medicare doesn’t allow you to charge extra. The idea here is that you could charge extra, but anything extra would come out of the patient’s pocket. This would drive down costs and increase financial innovation. The difficulty is in the details. In particular, the coding. With Medicare, you code different procedures. There are a few resulting problems. First, you end up being overwhelmed by codes and bureaucratic nightmares. Second, fraud is as simple as adding a few unnecessary or marginal services to the bill. The customer doesn’t pay, so they don’t really care. This same sort of fraud is also widespread in Australia – which relies on a procedure code-based system. Third, those procedures become roadblocks to change and sources of political war. Adding or changing compensation for codes can be a nightmare. Fourth, pricing isn’t so easy when you have vast differences between healthcare marketplaces. Fifth, procedure coding reduces innovation. You can make money by doing a blood draw more cheaply, but not by putting together a package of services that serves the patient better and more cheaply. And finally, codes can undermine the profit motive. If a procedure is $10,000 and somebody can do it for $1,000 – they’ll clean up for a year. But then the price gets shoved down (being based on cost) and their profit – the money they justifiably make for having created a better way of doing things – disappears.

There is a better alternative.

There should be public support of life-saving healthcare for everyone. This sort of protection is key to the creation of a Potentialist society. This is not like paying for food for everyone (although we should for some people). Food is a predictable need – a regular driver to life’s potential. But life-threatening healthcare hits suddenly. In the Bible, the widow and the orphan are supported because they suffered an unexpected life-changing event which totally undermines them financially. Healthcare falls into the same bucket.

However, not all healthcare falls into this bucket. Routine checkups, medications for conditions normally addressable by lifestyle changes, cosmetic operations, and even disability repairs all fall into different buckets. The public obligation is to save lives, but other healthcare needs should have different levels of public support. For example, I met a man on a plane who blew out his knee at work. He was probably in his mid-30s. He was a factory worker. Knee surgeries (covered by company-insurance) didn’t help. He needs a knee replacement. The doctor told him he should get one when he’s older – e.g. when Medicare will pay for it. In the meantime, he’ll be on disability for 30 years. 30 years in which he will be unable to live his potential. It seems to me that public support is also appropriate in these situations. However, you wouldn’t spend $1 million to repair his knee if he’s only going to create $500,000 of future value. In that case, you are wasting others potential to support a little bit of his. His creativity ends up not being real because so much consumption was required to make it happen. So public support would be capped at a fraction of the expected future value of the person’s work. If they do $30,000 in value-creation/year and have 30 years remaining then you can easily justify having the public pay tens of thousands of dollars for a knee replacement.

With all this public spending, how do you incentivize the private market to both improve outcomes and cut costs?

The answer is simple. Create codes – not for procedures, but for conditions. Somebody comes in with a suspected heart attack and then get a code attached to the condition. The patient then gets an immediately created health account with 90% of the prior 5 years’ median cost for treating that condition (adjusted for location etc…).  Compensation could also be adjusted for compound conditions (e.g. obesity and heart attack) based on national modeling of associated costs. Some diagnoses and payment periods would be short (e.g. ‘suspected heart attack’) and some are long (‘prostate cancer.’) In order not to impose on the delivery of care, diagnoses would be able to be backdated.

The patient can then spend those funds (and their own, if they wish to spend more).

And if they spend less, they keep the difference. 



If the condition is more complex than expected, then they or the healthcare provider can file for a reclassification.

If the condition is self-imposed (e.g. a drug overdose or reckless driving), then the payment ratio would be reduced. It might, of course, get reduced after the fact once a legal inquiry has been made with payment collected from the patient, not the healthcare provider. And if the condition is not life-threatening, but productivity-threatening, then the lower of 90% of the median cost or the individuals’ expected future production would be used to determine public support for a repair. This sort of approach to compensation has some precedent.

With this approach, there are many fewer codes. Furthermore, payments aren’t for procedure. Most importantly, the patient takes control of their healthcare. They have enough money for just below-average care (which might result in less convenience, ward-based beds etc…). But they also have enough money for superb healthcare if their provider is innovative about cost (rather than just a provider of cheap services). A prime example of this would be India’s Dr. Devi Shetty who inspired this very short story. This inspires smarter spending by the people who are actually spending. It inspires competition for both outcomes and prices among providers. It gives providers a profit motive.

Within this model – everybody would have this sort of insurance. Insurance companies or charities could provide augmented policies and services (like providing a boost to enable people to enjoy more pleasant healthcare like private rooms), but aside from standard commercial laws and financial insurance provisions, they’d be unregulated.

The result – greater quality healthcare at a continually reduced price.

For more details, see the Private Treatment Account FAQ.