GOVERNMENT HEALTH SUPPLY COMPLETELY THROUGH THE MARKET Julian L. Simon The Republicans hope to cut the costs of Medicare and to move toward a free market. But their scheme - including managed care and vouchers - still consists of devices to compel firms to perform some activities while prohibiting others. And it leaves intact the price controls in traditional Medicare. The voucher scheme does not solve the problem of high-need high-cost patients. Either the government must require that HMO's accept all comers at the standard price, or the HMO's will turn away the high-need patients. And if compelled to take these patients, the HMOs will dodge meeting their needs to discourage them from remaining, or avoid them by not locating where many of them live. So the high-need patients will still be thrown back on the old Medicare option with its price controls, which works against the Republicans' intentions. The only way to keep HMO's from rejecting the high-cost "lemons" is the true market method of making the lemons worthwhile by auctioning them off to the lowest-bidding supplier. Let the HMOs freely take whom they wish. Then any patient who cannot find an accepting and acceptable HMO will enter the pool of patients that are bid for by health-care organizations. This is how the auction would operate: 1. Prepare a list of people (or households) who meet the Congress-stipulated criteria. The preparation of such a list of insurees would be a necessary part of any program to provide health insurance to these people, so the plan suggested here requires no extra costs or activities in this regard. Nothing more might be required than recording data for those people who apply, as with most government transfer programs. 2. Obtain a medical history for each person. The Medical Information Bureau already has information obtained from insurance companies' physicals in a data bank that covers a huge proportion of the U. S. population. 3. Publicly inform all health insurers and qualified health providers - especially those in each local area, but not limited to them - that there will be an auction of the contracts for each of these people considered separately. Announce also that the medical records of all insurees (suitably protected for privacy) are available for inspection by all potential insurers. **Auctions could take place at regular intervals as pools of HMO refusees accumulate.** 4. All potential bidders assemble in the auction hall or attend electronically at a distance. One-by-one the contracts for insurees are auctioned off. "How much am I bid for contract 10345 [who happens to be an AIDS patient] for the year 1995?" Insuror Able says "$75,000". Insuror Baker says "I'll bid $70,000". Insuror Charlie bids $68,000 and no one bids lower, so Charlie gets this contract. And the auctioneer then moves on to contract 10346. Computer technology will be helpful though not indispensable in implementing the process. ** The number of contracts at auction in a given market area - only the high-need persons - is not likely to be so large as to be cumbersome.* The terms of the contract may be anything that the Congress legislates. The auction scheme could easily accommodate a provision for the insuree opting for various types of deductibles in combination with medical savings accounts. The issue under discussion here is simply the appropriate purchase-and-payment scheme for whatever the Congress decides to supply to any particular individuals. Every insuree gets covered, because there is some price at which every insuree would be profitable for some company. **The prices for high-need patients will be high, of course, if their needs are to be met. But by removing these people from the HMOs' standard package deal, the HMOs' prices would be correspondingly reduced.** A major virtue of this system that it requires absolutely no changes in any other part of the health-care system. (This does not imply that no changes elsewhere are needed, but only that they need not be undertaken for this purpose if they would not be worthwhile for their own sakes.) Another benefit is that government activity is limited to doing what the federal government does best - writing checks. No bureaucratic allocation of resources is involved, hence eliminating potential chicanery and corruption. [It is important that assessing the costs of this system are straightforward - the sum of the checks that the government writes. One cannot evaluate the full costs - direct and indirect - of any other system with anywhere near this much surety. (The costs of organizational changes are especially hard to assess.) And it would probably be fairly easy to reckon the savings of this system through decreased use of inappropriate health care servers, e. g. emergency rooms at hospitals for routine diseases. [This plan can be applied not only to Medicare but to any other persons for whom the government provides health care, including Medicaid and government employees, servicepeople, and any others. The scheme should appeal to many parts of the political spectrum, in part because of the recent success of auctions of the electronic franchises. And the scheme has the undeniable advantage of simplicity. [The ease of reckoning the costs stands in marked contrast with all other plans, actual or proposed. [An auction system is the only means of resolving an otherwise-unresolvable struggle: The providers aim to avoid treating patients who are money-losers by not insuring specific high-cost patients and not serving areas where high-cost groups live; the legislators try to compel the providers from doing just that with criminal and other sanctions. The auction system prevents providers from running away from high-risk and low- income patients by making it worth their while to *voluntarily* stay and provide. Though lawyers and legislators may not be accustomed to think this way, voluntary self-interested action has much in its favor in comparison to creating new crimes and new enforcement patrols to compel suppliers to do what they do not want to do because it is unprofitable. The key difference between the vision that underlies an auction plan and that which underlies the "reform" schemes that have recently been widely discussed is the issue of experience rating. "Insurers may tailor their packages to attract the healthy risks and avoid the sick ones", writes David Cutler, a Harvard economist. Most reformers therefore plan to bundle an entire community or other group in such manner that the supplier must take responsibility for all persons. They then must include devices with sanctions that compel suppliers not to leave the undesirables uncovered. The auction scheme turns the problem around and encourages suppliers to pick the cherries, while giving them incentives to pick the lemons as well. It works on the principle that at some price even the rottenest fruit is worth picking. And by so doing it avoids the outcome of block sales that, no matter how cleverly designed, there will be incentive for suppliers to dodge some patients, requiring the criminalizing of certain activities. That is, cherry picking through the auction scheme is a solution rather than a problem. [In brief, the operative question is: How best to supply the care to the people for whom the government pays suppliers to cover? This scheme differs from most current "reform" thinking *including voucher plans -* in its approach to the persons who are least desirable to suppliers. At the heart of the difference is the issue of experience rating and "cherry picking". The auction scheme encourages suppliers to pick the cherries, while giving them incentives to pick the other fruits, too. Cherry picking through the auction scheme is the solution rather than the problem. Is this the unrealistic fantasy of a free-market zealot? That's what they said starting in 1966 when I proposed an auction plan for handling the overbooking problem of airlines. But a week after the volunteer system was installed in 1978, it was apparent that all the objections critics said made the scheme "impossible" had failed to appear. And the scheme has operated without a single glitch since then, to the benefit of all. So it might be with an auction of health care for individuals government seeks to cover. Julian L. Simon teaches business administration at the University of Maryland. 301-951-0922, fax 301-951-8468, 110 Primrose St., Chevy Chase, Md. page 1 /article4 healths2/September 21, 1995