Establishing effective controls and procedures is more feasible than one might expect, because the federal government already has enormous lists of procedures and services with approved prices for each. Such lists are now the basis for payments to doctors and other providers of services to patients on Medicare and Medicaid. Other providers include pharmacies, ambulances, prosthetic manufacturers, and vendors.

As always, the best way to control prices is via free enterprise. However, there are some difficulties with medical goods and services, because consumers (patients) often do not know what they will require, and pricing is so complicated that it must be simplified to permit meaningful competition. Moreover, services are often provided on an emergency basis, and the patient typically has no choice of providers. Natural governance addresses these issues.

As a first step, each provider would have to decide whether to participate in the federal program or to opt out. Those that elect to opt out are free to charge whatever they wish, and their relationship with patients would be whatever the parties agree. Federal, state, or local government can still establish and enforce standards of care and sanitation but cannot affect pricing. Each provider would have the right to opt out at its sole discretion.

Providers that elect to participate, which will probably be most or almost all providers, will be subject to these guidelines:

1. Providers may charge what they wish, but each unit price must be a stated percentage of the price approved by the federal government for that service. The percentage must be (a) prominently disclosed and (b) reported to the government. Initially, most providers will likely charge 100 percent of the federal price, because that is what they are paid now for Medicare patients. At present, most providers seem satisfied with that payment schedule. Participating providers are now required to accept the specified government payment and can only charge the deductible to the patient or gap insurance company. Under natural governance, that limitation would be removed. Providers in wealthy areas, those who have more patients than they are willing to service, or those whom the public perceives as more desirable than others for any reason might charge more than 100 percent. Those who wish to attract more patients could charge less than 100 percent. Whatever the percentage, it would be freely elected by the provider, subject to reasonable advance notice and required time periods between rate changes. The same percentage would apply to all consumers; medical insurance companies, large employers, other organizations, or buyers’ co-ops would not be free to negotiate special pricing. Prices offered by each provider would be available to all on an equal basis, including to non-citizens.
2. For all citizens of any age, the federal government would pay a stated percentage of its approved rate for various services to each provider based on auditable billing submitted by the provider. The democratic process and market forces should determine the amount, but as an example, natural governance proposes paying 60 percent of the first $50,000 incurred each year and 90 percent of all over without limit. The payment would not be affected by the pricing percentage charged by the provider, be it lower or higher than 100 percent, except that it would never be more than a stated percentage of the provider charge, say 90 percent. By way of example, assume an approved charge of $100 and a federal share of 60 percent of the approved charge, subject to a maximum of 90 percent of the provider charge. Providers charging 125 percent of the approved charge (or $125) would receive $60 from the government; they would look to a combination of the patient, the employer, any state and local funding, public charities, and any medical insurer for the remaining $65. Providers charging 100 percent of the federal approved rate would receive the same $60 from the government and would look to others for the remaining $40. Providers charging 50 percent of the government rate ($50) would receive $45 from the government (90 percent of $50) and look to others for $5. The federal payments would apply regardless of whether the patient had medical insurance or employer coverage.
3. The approved federal rates should be reevaluated periodically, and the adjustment procedure would take the prevailing provider charges into consideration. If, for any procedure, the prevailing charges were less than 100 percent, the allowable charge would decrease; conversely, if the prevailing rates were over 100 percent, the charge would increase. Providers would be allowed to modify their percentage charges to apply to the new rates. At present, providers almost universally submit enormous bills and then accept whatever Medicare or the respective insurers allow. If the rates are too low, patients may have a hard time obtaining quality care because providers will lack incentive to excel. If rates are too high, they will stay that way, because there is no incentive for a provider to charge less than the government or insurers will pay.
4. Although the number of medical line item prices is enormous, each provider would normally only provide a much smaller number of line items. After providers get used to the system, it is probable that the majority in some fields would charge more than 100 percent, and those in others would charge less. Over time, the approved charges would accurately reflect the prices charged by a preponderance of providers.
5. The portion of medical costs not paid by the federal government would be paid by a combination of (a) patients’ own funds from UBI or any other sources, (b) personally obtained medical insurance with no portion of its premiums paid by the federal government, (c) public charities, (d) any available state or local funding, and (e) amounts paid by those employers that elect to provide coverage, either directly or through group coverage. Individual hardship cases should be the responsibility of state and local governments, with no participation by the federal government. Providers (except in the case of life and death emergencies) could either require payment at time of service or could extend credit, at their discretion. This system would facilitate the rebirth of a traditional doctor–patient relationship, with many doctors extending soft credit or partial forgiveness to the needy and possibly even accepting payment in kind. The government payment would soften the impact of fee forgiveness or deferral. The system would also ease the burden on emergency rooms, which currently cannot turn any emergency case away or require payment at time of service and thus experience enormous quantities of bad debts. Passing these debt costs to others creates a whole different set of problems. With natural governance, emergency rooms would at least get the government share of the payment.
6. The medical insurance industry would be regulated to ensure financial responsibility, as is now the case, and to verify compliance with its own insurance contracts. However, companies would be free to set whatever prices they wish, varying rates with sex, age, and expected medical expenses. Competition, not government mandates, would control prices. Insurance payments for claims would generally be a function of the treatment or other service rather than the price the provider charges. In other words, medical insurance would become more like classic insurance, where the insurer assesses the statistical risk, adds an amount for overhead and profit, and sets rates accordingly. If it charges too much, its sales volume suffers; if too little, it loses money through excessive claims. The direct payments made by the federal government would lower the cost, because insurance would only cover the gap between federal payments and cost. The federal heavy lifting would also lessen the need to vary rates to reflect individual risk, though it would not eliminate it. In most cases, unlike the current ACA environment, people would have an incentive to purchase coverage while they are healthy, because if their health deteriorates, insurance would likely be more expensive or even unavailable. With traditional insurance, one cannot buy a policy after one’s home catches fire. Likewise, with health insurance, a person would not be able to purchase coverage for cancer treatment after the illness was diagnosed. This would reduce or eliminate the adverse selection aspect of the ACA, which is given as the justification for forcing healthy people to buy insurance they do not want.¹ As a selling point, policies could address the right of the insured to remain covered if expensive new needs arise. Presumably, insurance claim payments would be less than the total excess cost over the federal direct payment, which would give the insured an incentive to minimize costs, but that would be entirely left to the discretion of the insurer. Notably, medical insurance companies should not be free to negotiate preferential rates with providers, but they would be perfectly free to help their policyholders find the most effective approach to treatment and the most economical selection of providers. In fact, they would be encouraged to do so, and that service would be a valuable selling point for the insurer’s sales department. The patients would have the right to select their treatment approach and to choose their own providers, but deviating from the insurer’s recommendation would, in most cases, not result in increasing (or reducing) the company’s payment obligation. This, however, should be resolved between the parties rather than being the subject of government regulation.
7. Controlling pharmaceutical prices is a real conundrum, and for most part is beyond the purview of natural governance. Prices must be high enough to give companies an incentive to develop new products. If a product saves lives, its value—at least to a patient—is infinite; however, that does not justify an infinite price. It is reasonable and proper for pharmaceutical companies, like other corporations, to seek to earn a profit. However, some price limitations must apply. As a partial solution, natural governance would require that pharmaceutical firms not charge domestic purchasers higher prices than those they charge to others. As an example, the Canadian government sets prices for pharmaceuticals. Those prices are far above the direct cost of production but often less than the price the drug company would establish, given the need to recover its cost of development plus a share of the development costs for products that never got approved but nevertheless incurred costs, plus profit. Pharmaceuticals regularly sell to Canadians at Canadian government prices, which are lower than the prices charged to U.S. purchasers. If the company seeks, reasonably, to achieve a certain revenue objective, it must charge a higher price to domestic purchasers than would otherwise be the case. A common requirement that one purchaser not pay a higher price than another is known as a Most Favored Customer clause. The federal government could quite reasonably establish such a clause for any sales to purchasers receiving any government payment, which in the medical industry would be just about everyone.

¹ For more discussion on adverse selection, see the following section, Analysis of the ACA.