Health Insurance vs. Food Insurance

Imagine if grocery shopping worked like health insurance.  Let’s call it “food insurance”.

First of all, you’d better hope that you’re not self-employed or unemployed. You see, way back in World War II the United States created strict wage controls as part of the Stabilization Act of 1942. Since employers still wanted to compete for the best employees–even in wartime–they had to get creative. Instead of offering higher salaries (which was now illegal), they began to offer fringe benefits. The most important of these was healthcare insurance. Let’s pretend that food insurance started in the same way. That would mean that, today, if you get your food insurance through an employer-provided plan you not only get a nice tax advantage on your own premiums, but you can also rely on the employer to pay some of your costs as a matter of traditional expectations. But if you’re self-employed, you not only lose the tax-advantage, but also the ability to get the lower rates that come with buying insurance for bigger groups.

Now let’s imagine what actually shopping for groceries would look like. Theoretically, insurance is about risk management. That’s why you can insure your car against unfortunate accidents, but not against the need for an oil change. This is also one reason why life insurance policies don’t cover suicide: your death has nothing to do with risk management if you choose to die. So health insurance, which covers not only accidents but also routine care and sometimes elective procedures too, is not at all like real insurance. So let’s say food insurance isn’t either. Instead, your food insurance qualifies you to a specified number of visits to your local food provider. If you visit in-network food providers you pay only a small copay, but if you visit out-of-network food providers, you pay a higher copay. (If you have emergency munchies and need fast food, you pay an even higher copay to get prepared meals handed to you at a drive thru.)

The important thing, however, is that you don’t actually pay for your food on a per-item basis. In fact, you don’t even know what it costs. When you walk into your primary foodcare provider, all of the items are there on the shelves, but there are no prices. That’s because the cost of your shopping trip is already covered by your foodcare insurance. It’s the whole reason that you have it. So you would get your shopping cart and go down the aisles, putting as much food as you felt you needed into your cart. To make this example realistic, however, let’s assume that you can’t resell any of the food.

Do you think that people would get more or less food in the food insurance scenario vs. in the real world, where we pay for everything item-by-item?

They’d probably get much more in the food insurance scenario. This idea is called “overutilization“, and it might be one reason that American healthcare costs are so high. It’s a pretty simple idea, however, and I’d be wasting our time if I had created this whole food insurance scenario just to talk about that. The reality, however, is that the problems of food insurance are much, much more severe than just overutilization. After all, since I assumed people can’t resell the food what I would expect is just a large degree of carelessness. No one has any incentive to just clean out the shelves and take everything home.

But let’s look at things from the perspective of the foodcare providers. Folks like Kraft or Heinz who actually create the goods that you can “buy” at a foodcare provider. They know that when you walk into the store you’re not going to see any price tags. So what incentive do they have to compete with each other to offer you the best value? Since you never see prices, you have no idea how to make a value decision. So they have no incentive to compete with each other. Competition, which is the idea that in order to get your dollars suppliers have to offer you the best goods at the best price, goes away. And this means that providers have almost no incentive to be efficient.

In the real world, food production is incredibly competitive. Grocery stores often survive on razor-thin profit margins, and the competition by competing brands can be extremely fierce. All of this causes the providers to keep costs as low as they possibly can while also keeping value as high as they possibly can. If you want some idea of what that looks like in the medical industry, look for medical products and services that people actually pay for. Things like LASIK, for example. From Forbes:

Fifteen years ago, a precursor to LASIK called Radial Keratotomy (RK) cost about $8,000. It was done by a surgeon wielding a knife—hopefully, a well-rested one who didn’t think you looked like his ex-wife. Typically, the surgeon did one eye, sent the patient away for six weeks, then did the other—to decrease risk of infection.

Today, LASIK is done with a computer-guided laser. The entire thing takes 10 minutes, which includes about 60 seconds in aggregate of laser-in-eyeball time. I took a 3 hour nap and woke with perfect vision.

One might presume, ignoring the huge value of not having a sleepy surgeon aim a sharp object at your cornea, inflation alone would make LASIK now cost a little over $11,000. (Inflation has averaged 2.4% since 1997.) Except I don’t mind telling you it cost $3,800—less than half the 1997 cost with a much shorter recovery time and lower risk of human error.

That’s what competition gets you, especially in an industry where innovation and technology reign: lower costs for better products. This is what, if we had food insurance, we wouldn’t have. And that changes the picture dramatically. Now instead of just worrying about people taking home a few bananas they might not really be able to eat, you realize that the entire economic machine that is geared towards low costs and high value depends on prices. And, if you’ve got food insurance, there are no prices.

Sound like an exaggeration? NPR covered a really simple research project: have an undergraduate call up a bunch of hospitals and pretend that she was shopping around for her grandmother to have a hip replaced. Say that you can pay the costs out of pocket (so no insurance), and ask what the lowest, everything-included price of a hip replacement would be. The results?

Getting an answer wasn’t easy. Of the top 20 hospitals, only 9, or 45 percent, provided a bundled price that included fees for both the doctors and the facilities.

But that response looks terrific compared with how the other hospitals did. The researchers were able to get a bundled price estimate from only 10, or about 10 percent, of the other 102 hospitals they queried.

So out of 122 hospitals, 19 would actually give a price quote. This is like walking into a foodcare provider and not only are there no prices on the food items, but even if you track down a manager and ask for the price then 90% of the time you won’t get an answer. But of course, this study was conducted by trained researchers. They did a little extra work and tried to find the prices by tracking down the individual doctor groups who worked at the hospital (sort of like giving up on the manager of the foodservice provider and calling Kraft directly). Even based on this approach, however, they could only find prices for about 60% of the hospitals.

But even that actually sounds better than it really is, however, because the price range varied from $11,100 to over $125,000.  Imagine asking how much a single box of mac-n-cheese costs and half the time getting the answer “dunno” and the other half the time getting anything from $0.40 to $4.15.

Now, just because consumers don’t know how much the items cost doesn’t mean that nobody does. Back in food insurance world, the food insurance companies would work out deals with the foodservice providers (the grocery stores) and the foodservice suppliers (the growers and manufactures) to try and get good prices. So there is some competitive pressure, and that’s why we have healthcare at all. If it wasn’t for the secret negotiations between insurance providers and medical suppliers, we’d be stuck using nothing but leeches and prayers.

A lot of folks have a visceral antipathy towards involving markets in the provision of medical goods and services because people need medical goods and services. But people need food, too. The reality is that if your goal is to get the most good food to the most people, there is no better system than the free market. And the free market relies on the price system to spread information throughout the entire economy so that everyone from the producers to the middlemen to the retailers to the customers know the relative values of all the goods and services available. In food insurance world that price system isn’t entirely non-existent, but it is warped and crippled. The result is that, with significantly less competitive pressure, we get inefficient, lower-value results than we could otherwise.

My point is not that we should get rid of healthcare insurance entirely. My point is that there are very specific things that are very wrong with our current system. In order of the food insurance example:

  1. It’s bizarrely and unjustifiably linked to employment by accidental history and a dumb tax code.
  2. It’s not really insurance at all. It’s actually more like a legally-sanctioned version of Sam’s Club or Costco where having a good job with a big employer is the membership ticket.
  3. There is over-utilization and a lack of competitive pressure because the people actually buying the healthcare don’t have any idea what the price is.

These are all things we can fix, and some of the answers are not even that politically far-fetched. One of the simplest is an HSA, or Health Savings Account. Technically, an HSA is basically just a bank account you can funnel money into from your paycheck without it being taxed. Then, you’re only allowed to take the money back out for health expenses. But, in practice, HSAs are usually paired with high-deductible health care plans. A high-deductible plan means that you are responsible for the first few thousand dollars of medical costs every year before your insurance coverage kicks in. (You do get coverage for routine care, however.) So people use the  money from their HSA to pay for their own medical expenses without taking a tax hit. Most importantly, however, it means that people actually have a reason to call and ask about prices. If your doctor says “Hey, you should get an MRI” and you have an HSA, then it makes all the sense in the world to call a few places first and ask “Hey, how much do you charge for an MRI?” Maybe a lot of them will tell you “you’ll find out when you get the bill”, but that will encourage you to go to a place that does give you a price, and that gives you a good price. Hello, competitive pressure!

The thing about HSAs is that they lessen the tax-code impact (although, unfortunately, by adding rather than reducing complexity), they function more like real insurance, and they start to introduce competitive pressure. They aren’t a perfect solution by any means, but they are a great step in the right direction. Unfortunately, their very existence is threatened by Obamacare which, while it doesn’t eliminate them yet, is poised to do so eventually. This is one concrete example of a legitimate free-market complaint about Obamacare. There are others, of course, but I’ll leave those for another post.

Comments

  1. says

    100% agree. It actually terrifies me that the last few mechanisms keeping the whole system grounded are currently being threatened. It feels like it will soon be illegal to pay in cash or directly negotiate with doctors for services.

  2. LT says

    My sister is married to a military man, and they keep us updated regularly on the state of their health care. I imagine that as we move more in the Obamacare direction, our health care will continue to look more and more like our military health care. Going to the doctor is like going to the DMV. You literally take a number. Everything is compartmentalized. You take a new number for vaccines, another new number for prescriptions, etc., and the wait is hours long. Lots of fun when you have four small children. You don’t get to choose your doctor. You get the next available doctor at the clinic. They have set policies on things like vaccines, and my sis must constantly fight with them to do a vaccination schedule more in line with her comfort level, a relatively simple accommodation in private practices. So personal health care choices and preferences are harder to navigate and more limited. The military moms regularly trade horror stories about major misdiagnoses and the inability to get timely care. Even having a baby is tough — My sis had to travel 500+ miles to a different base and stay in a hotel with three small children for the entire last month of her pregnancy in order to give birth to her most recent child, because her base does not provide labor and delivery.

    At many locations, the military bases cannot handle the volume of patients, so they contract with private clinics. Lots of families prefer this for obvious reasons. What would happen if the private clinics disappeared? Why the overwhelming volume of patients? One reason: families over utilize the clinics and hospitals, as you discuss in this post. Parents regularly confess to each other that they go to the doc for every little sniffle because it is “free” and part of their benefits. A standard appointment must be made a solid month in advance, which doesn’t include much longer wait times for specialists. Of course, everyone is ranked for priority, active military getting highest priority, with four levels total. My sis and her kids are somewhere at the bottom of the priority list as dependent family member.

    I am proud of my brother-in-law and his courageous sacrifices. I truly appreciate our military, and I don’t want to sound overly harsh on their system. I am sure there are some wonderful doctors and truly grateful military patients out there and that these experiences do not reflect everyone’s exact experience. But I fear that this is a taste of our own system to come if we keep heading in the current direction. Lower quality, lower efficiency, higher costs overall, almost non-existent choices, tons of red tape. If we can’t even manage better than this for our military, do we really expect the government to do better for our civilians?

  3. says

    The other half of solving the healthcare boondoggle (that is, besides dramatically reducing the role of insurance in the system) is to lower the barriers to entry into the marketplace. It doesn’t take eight years of training to diagnose the common cold or the flu. My mom could do that quite reliably. She could fairly reliably know when I just needed bed rest and when something more was amiss and i really needed a doctor. We already let nurses do most the grunt work already… Why not train the, to make simple determinations such as when the fancy eight year training is and is not actually necessary?

    We need to allow individuals with less training handle more routine care and diagnosis. That will dramatically reduce the costs of routine care. All we’d have to do is ensure that everyone was well trained in knowing when to bump a patient to a specialist, and when the ailment is 99% likely something routine. Will mistakes and problems happen? No doubt. But they already do.

    • LT says

      Jeff, when I had an HSA in Virginia, I would take my family to the CVS Minute Clinic for things like that. I loved the drugstore clinics, because we could also receive things like vaccinations there. Not only were exams and vaccines significantly cheaper than my primary care doc, but I could shop around for my preferred brand of vaccine since not all vaccines are made the same way. Once urgent care facilities started opening up, like KidMed, we almost never had to go to the ER. I took my kids to those facilities for urgent medical situations (child screaming in pain from an ear infection on a Friday night, etc.) as opposed to real life- and limb-threatening emergencies that warranted the ER. Urgent care facilities are far less expensive than ER’s and require payment and/or proof of insurance up front. I watched an ER go bankrupt when a high population of uninsured folks were using it as their primary care physician. Small, basic clinics and urgent care facilities are at least part of the solution to more affordable and higher quality routine care that you discuss above. And I still went to my beloved PCP for more complex care.

  4. Drew says

    Great read, and I understand the point of your article. Free markets will make healthcare better. But your comparison to the “free market” of the food industry is flawed. I would like to point out that, essentially, everyone who pays taxes IS paying for “food insurance”. Dairy, wheat, corn, etc. are all subsidized by the government, keeping food prices lower for the consumer at the supermarket. Your “free market” isn’t free if the government subsidizes it, right? Your average consumer has no clue what the real cost is for a gallon of milk, but a quick Google search for “dairy cliff” reveals that as recent as 6 months ago, milk prices would have doubled nearly overnight in this “free market”. Not so free if you ask me.

  5. says

    Drew-

    your comparison to the “free market” of the food industry is flawed

    No analogy is perfect, because if an analogy mirrored the subject exactly there would be no point in making it. But in this case, I don’t think you contention actually changes anything in my argument because–while there are government subsidies–the consumer market for food is free in the sense that customers and suppliers engage in a genuine market with robust competition. That aspect of the market operates like a free market.

    The parts that don’t are the decisions of domestic suppliers to produce which foods,the decisions of manufacturers to change their recipes, and of course international competition.

    For me the most evil part about farm subsidies is that international aspect: developing worlds are significantly harmed by agricultural protectionism because they can’t develop their indigenous markets or compete for global market share.

    In addition, however, we’re also just throwing away money on wasteful expenditures (like corn ethanol) and also fueling obesity (through artificially cheap food and possibly through the shift to high fructose corn syrup over sugar, although I’m not 100% convinced on that one), and the impacts of obesity on our nation are truly staggering.

    In short: you’re right that farm subsidies warp the market and are a significant problem. But I don’t think this substantially harms the analogy I was making in the original post, because I was focusing on consumer market rather than the entire sector. (In technical terms, you can just take the government subsidies as an exogenous variable and solve for the consumer market equilibrium without caring whether the price distortion is the result of government intervention or luck or some other factor).

  6. Ray says

    Interesting, I agree that health insurance is bizarre and makes no sense in its current form. But I think two points of the analogy could use expansion:

    1) You don’t get to put as much food as you feel you need into your cart. Regardless of what is available, what you need, or even what a nutritionist, dietician, or doctor says that you must eat, the food that you’re actually allowed to have is dictated by some clerk in an office somewhere who knows absolutely nothing about nutrition or your family’s dietary needs.

    2) You only get that food ‘insurance’, and all of that free food, if you’re already wealthy enough to buy your own food or you own a lot of land on which you could grow your own food. If, on the other hand, you can’t afford food and can’t grow your own, then you don’t get the ‘insurance’ but instead have to pay cash for everything at super-inflated prices due to the bureaucracy and price-fixing of the networks and insurance companies. This helps to prevent you from ever getting wealthy enough to buy land or get insurance.

  7. says

    Ray-

    You don’t get to put as much food as you feel you need into your cart.

    The analogy isn’t perfect, but for a focus on routine health care, most plans do allow you to pretty much get whatever you want. Some plans require you to get a referral before seeing a specialist, but this old-school HMO style is less common these days, and even in an HMO you will more often than not have no gatekeeping.

    Sure, you can’t just stop by for a triple bypass on a whim, and if you tried to visit your PCP every single day that would get weird, but if you have insurance you can generally get whatever care you want.

    You only get that food ‘insurance’, and all of that free food, if you’re already wealthy enough to buy your own food

    I’m not sure what this is in reference to. About 84% of Americans have health insurance, so it’s clearly not reserved for the wealthy. In addition, you’ll actually find that if you don’t have insurance you can negotiate directly with your provider. Most people don’t realize that because bartering is not something that Americans do on a daily basis, and especially not with professionals. The idea of bargaining doesn’t come naturally, but the fact is that if you incur $10,000 in medical costs without insurance:
    A – They would much rather get $5,000 back than nothing
    B – They know they would only get $5,000 back if you were insured anyway.
    So you just have to negotiate the price down, and (in most cases) you can easily get 40% or more off the sticker. But you have to ask.

    Last comment, and this is a really important one, arguing for more free-market health care reforms (and implicitly against Obamacare or single-payer health insurance) shouldn’t be confused with defending the status quo.

    One major point of this piece is to show that the status quo is messed up and show some alternative ideas for control as opposed to more centralization.

    • Ray says

      Thanks for the response. Good point about the bargaining. It certainly does work. As you point out, it’s hard to bargain when no one knows what the market rates are. It’s also hard to bargain when your life, or that of a family member, is on the line.

      84% means that 1 out of every 6 people still don’t have any health insurance. Among young adults just getting started, it’s worse – more than 1 in 4 have none during a time of their lives when even a fully-recoverable medical event can basically knock them down financially at the starting line and have a lifelong economic impact. 1 in 4 means, by mathematical average, 1 out of every 2 couples/new families – half – could include one of those people.

      Going back to the 84% number, if you deduct the >30% that are on government insurance, only a little over half the population have sufficient private insurance. With the current system and rates, about half the country can’t afford sufficient private health insurance.

      So the status quo is indeed very messed up. Transparent pricing and competition would of course help bring the prices down. Eliminating the overhead, waste, and corruption of the insurance companies and networks would too. Whether it would bring them down enough, and what to do about those who still couldn’t afford it, are tough questions.

      To me, it’s a little scary to think that half the country can’t afford health care. If you were to hypothetically mix it up and say that’s one person out of every couple, then every single family in the country (and half the single people) would be affected. Of course, it’s not mixed that way in reality, but they’re certainly not a minority. That’s one big challenge we have to overcome vs. centralization.

  8. Daniel says

    I’m a little scared to engage here because I’ve learned to fear the cudgle of not being able to keep up in an argument with the guru here, but there were a couple of things I wanted to bring up here.

    1. Food Stamps – I don’t really think this is a refutation of your point as much as an aspect of it that I think you are ignoring a little bit. If people thought that the people proposing “free market solutions” would also be championing the subsidizing of said healthcare for those who will have trouble affording then I think we’d have more common ground, but forgive me for not trusting the same people who want to cut food stamps to come up with a fair system for the distribution of healthcare. And the govn’t interfence of food stamps on the back end and massive subsidies for the front end don’t seem to have ruined food distribution in this country. I’m with you that people should have options and I should be able to take more responsibility for my healthcare, but I think that there is value to large health management-esq companies to be out there and that for the moment the only way I have access to such care is through my job.

    2. The HMO food nightmare – ok, I’m not in favor of this system of food distribution, but lets say that my employer DID in fact provide me with food insurance, what might that actually look like? There would probably only be a couple stores I could “shop” at, and they may not be the stores that are across the street from my house, but my FoodMO would probably have a couple stores nearby and they would probably provide most of the services that most of the people that work for Penske want. And instead of wandering around the store wondering why the peanut butter isn’t in the condiments Isle I’d be picking up a months worth ingrediants for all the asian food I wanted to make this month. I bet my employer would even set a limit at the amount of food I could get from fast food providers who ask for a premium and its also likely that since my employer has to provide my health insurance he’d be putting incentives on me buying fresh fruits and produce. I’d have trouble if I wanted to get just cumin or just curry paste or even if I just ran out of my monthly allotment of flour. And you are right, if I’m joe blow who runs his own business I’d have trouble getting access to this system, so we might need to set up state exchanges to allow everyone access to the food system and require people to participate so that they don’t just randomly show up to the grocery store starving and walk out with a years worth of food and never pay the bill. But I’m not sure this place is really a dysopian wasteland, think about all the new and inventive products that would come out when Kraft lost the patten on mac and cheese. NOW A TOTALLY DIFFERENT PRODUCT BECAUSE WE ADDED RANCH! You’re damn right I’d pay a higher copay for the ACME brand food bundle if it had more and better varities of foods with ranch…

    2.5 Are there similar benefits to me getting my health insurance from someone who has an incentive to cut costs? Everyone at my work has participated in a wellness program that my work started which gives me “money” to go to the doctor once a year and have our values checked (I’m sorry sir, you still believe in gay marriage, you have no values). I’m aware there is no free lunch, the free money they are giving me is part of the $7000ish a year they’d be paying me extra for healthcare if they weren’t giving me insurance, and they want to pay for fewer surprise visits to the grocery store. But I’m an idiot about these things when I’m educated about them and have doctors who surround me, I’m not sure where my diesel mechanic subordinate who thinks jesus cares about his diabetes would be if he had to figure out which isle the chemo-therapy was on.

    SO, yes, I’d love prices on everything, and I hope we can work on having more open ended understandings about these things, but the real villan here is that there are cures to all the diseases that there werent 50 years ago and so the price has gone up. And Xrays don’t cost what they did when Lasik came around either, my dentist gives them out for about $350, but when my father in law takes 300 images of the heart in three dimensions in one minute THAT S^#@T IS EXPENSIVE and its awesome, and it saves lives.

    and I don’t know how to pay for it

  9. says

    Hey, Daniel. You only used like, three divisions in your reply, but you covered a lot more points! I’ll try to address a few, and I hope you’ll agree that no cudgel was used. :-)

    Food Stamps

    As someone who’s lived on food stamps before, let me tell you that my family has never eaten better. They are very generous, and it was exceedingly awkward for me to get invited over to a friend (also on food stamps) be routinely served filet mignon and other high-end meats. I know that sounds like an urban legend, but I’m speaking from personal experience. While we’re at it: free medicaid for the kids was really nice.

    Here’s the thing, though. To get that free stuff (and it was a lot of free stuff) required my wife to do a lot of paperwork. It was time-consuming, complex, and dehumanizing. The gov’t officials were routinely rude and unprofessional, and we had friends go through many fairly traumatic experiences, like being yelled at in public about how they must be too stupid to understand birth control ’cause of the number of kids they had.

    Where I’m going with the prior paragraph is this: I don’t think “poor” means what most people think it means. We think of poor and we think of people who make less than a certain amount per year, but that could cover anything from someone voluntarily living in the woods (I have a friend who does that) to someone in grad school to someone who is illiterate and can’t get a job.

    Now, how is that illiterate person going to handle the gauntlet of paperwork, phone calls, in-person interviews, tax records, etc. required to get the free stuff? They’re not. How is someone with a serious mental illness going to be able to handle these things? They’re not. The welfare system, as designed, is fairly easy for intelligent people to abuse and fairly incapable of helping those who really need it: those with mental illness. Or, if you want to phrase it another way, those with very, very low human capital.

    Which brings me to this:

    forgive me for not trusting the same people who want to cut food stamps to come up with a fair system for the distribution of healthcare

    I have two reactions. The first is that it’s not a great idea to see everything as red team vs. blue team. Look at Obama and the NSA. Can we agree both parties suck when it comes to civil liberties? So maybe the partisan divide isn’t the best.

    But then there’s something deeper in your statement, the idea of designing a system that is fair. The free market has done more to lift human beings out of poverty than any other program, system, invention, crusade, whatever in human history. But it wasn’t an invention. It’s not a program. It wasn’t planned. By asking who should design the system you’re already begging the much more significant question: should we have “system” at all?

    At a minimum, it’s a question we ought to answer. Not merely assume.

    One more thing in that section:

    And the govn’t interfence of food stamps on the back end and massive subsidies for the front end don’t seem to have ruined food distribution in this country.

    Really? Consider the impact of our subsidies on the developing world. How much human misery has come because of this idiotic problem? And then there are serious arguments that obesity–which costs billions and billions every year–is a direct result of our heavy subsidization of food. I think it’s entirely possible that food distribution has been ruined, and we’re paying the cost in lives and years lost.

    Well, I just addressed your FIRST comment and how many words was this? :-) I’m gonna leave the other 1.5 as they are. I need sleep.

  10. says

    Interesting post, but I think it is far from clear that HSAs with high deductible plans are the ideal solution to this problem. It’s also far from clear that it’s the solution a truly free market would produce. I’d like to make a couple of points:

    1. Your point that health insurance the way we see it today is not really insurance is a little flawed. I see this argument a lot, but it neglects the fact that insurance that provides coverage for ordinary office visits tests can actually be insurance. Imagine that you contract a chronic disease such as diabetes. If you have insurance that doesn’t kick in until a deductible of $2000, you are likely now on the hook for $2000 in out-of-pocket costs from ordinary office visits, drugs, and tests every year. In other words, your high deductible “insurance” plan didn’t insure you against the costs of contracting a chronic disease. Now, it’s not clear that full coverage is the right way to solve this problem, maybe risk-adjusted HSA contributions (i.e. people with diabetes get bigger contributions from their employers) plus a high deductible plan is the way to go. I just want to point out that if you use a more dynamic model of insurance, coverage for “ordinary” events may actually be insurance.

    2. High deductible plans have a giant flaw: After the deductible, there is full coverage. Meaning, as soon as someone hits their deductible, they again have no incentive to shop around or avoid unnecessary care. This is a very important point in a country where the top 1% of health care spenders (all of whom are above these deductibles) account for a HUGE portion of total health care costs. In other words, high deductible plans are unlikely to make a dent in costs.

    3. I very much agree that the employer-provided insurance system is highly flawed. A system more similar to that of Switzerland or the Netherlands where everyone is required to purchase insurance on an exchange with risk adjusted premiums seems much better. This is actually what the exchanges in Obamacare mimic. The idea is that if individuals would rather purchase high deductible plans with HSAs, then why not let them? Or, if they want to purchase a highly restrictive plan from an integrated insurer/provider such as Kaiser, why not let them? The key regulation in Obamacare is that premiums be risk adjusted so the premiums reflect the services offered by the plan rather than the mix of risks the plan attracts (i.e. adverse selection). It is welfare-decreasing to allow premiums to be a function of risk.

    4. The ability of HSAs/high deductible plans to fix many of our problems relies on a elasticity of demand for health care expenditures that is much larger than reality. There was an experiment on this in the 80s, the RAND HIE. People respond to prices, but not that much. The more fruitful route seems to be managed care. Supply-side cost-sharing (i.e. transferring risk to doctors and hospitals) is much more effective at reducing costs while maintaining quality than demand-side cost-sharing via high deductibles. Obamacare also implements this style of supply-side cost-sharing in Medicare via ACOs. The ACO format is also being adopted by many private providers.

    In sum, the solution seems to be fairly straightforward.

    1. Remove the employer-provided insurance subsidy
    2. Implement Obamacare state health insurance exchanges with aggressive risk adjustment
    3. Allow individuals to choose whether they want high deductible plans+HSAs or highly managed plans or whether they want to maintain the status quo

    Obama care does 2 and 3, and, a little known fact, it also makes some progress toward 1 by taxing employer provided plans with high premiums. In fact, employers are already slashing benefits due to this tax.

    Anyway, I love seeing discussion of the merits/demerits of our current health insurance system, but the attacks on Obamacare don’t seem merited. Obamacare makes some big steps toward improving the health insurance system in this country. There is much to be desired of the law, but it does fix the individual market, a first step toward taking everyone off of employer plans. We can’t kick everyone into a non-functioning market. So, let’s give credit where credit is deserved.

  11. says

    Thanks for weighing in, timothyjlaytonTim!

    1. Your point that health insurance the way we see it today is not really insurance is a little flawed. I see this argument a lot, but it neglects the fact that insurance that provides coverage for ordinary office visits tests can actually be insurance.

    Well, that’s not quite my point. When it comes to routine care, that’s not insurance. Coverage for major medical costs, which usually result from accidents or uncontrollable illnesses, still are.

    And in that case, you’re confusing an exception with a rule. Some people might visit their PCP or access routine medical services very frequently because of a major medical diagnosis, but these are exceptions. Most of the time routine care is routine.

    2. High deductible plans have a giant flaw:

    any costs. From Forbes:

    It appears that Health Savings Accounts (HSAs) will slip under the Affordable Care Act’s threshold for qualified coverage—although just barely. And given the fact that HSAs, and similar high deductible health insurance options, are about the only type of health coverage bending down the health care cost curve, they may even thrive.

    So it’s accurate to point out that HSAs will not effectively combat costs for major medical costs, that doesn’t mean they’re not worth doing. They absolutely can and do have an effect.

    When it comes to high-dollar costs: I don’t think anyone believes you should be surfing the web from the rubble of a train wreck trying to find the best prices on emergency care while you wait for first responders to dig you out. The fact that HSAs don’t control costs for these kinds of events is a feature, not a bug.

    Controlling costs for major medical expenses is much more effective in terms of lifestyle than healthcare in any case. If Americans weren’t all giant fatty-fatties are medical costs would be far, far lower. (And if you think that American farm subsidies have to do with our obesity epidemic, it turns out food insurance and health insurance are related in the real world after all…)

    3. I very much agree that the employer-provided insurance system is highly flawed.

    This is why the idea of a mandate was original a conservative idea: because if you force people into a single risk pool you’re keeping costs controlled for everyone, but if it’s a private market with a real price system you also get competition. Great in theory, but hard to pull off in practice.

    Obamacare doesn’t even really try. The most obvious example of this is the state healthcare markets. Given the sweeping authority claimed by Obamacare in regulating healthcare, there is absolutely no justification for not creating a national market. Instead of 50 relatively small markets,we’d have one big one. This would be a huge reduction in compliance and regulatory costs and a genuine step forward. It’s the one most blatant, obvious way to include some market forces in Obamacare, and I honestly cannot fathom why it was left out.

    I do agree with some of the goals of Obamacare, but at a certain point the execution becomes so terrible it no longer really matters what the intentions or original theory may have been.

    The idea of a mandate–or some method of forcing everyone into the same risk pool–is still a good idea. I just don’t honestly know if it can be done without significant costs outweighing the clear benefit.

    4. The ability of HSAs/high deductible plans to fix many of our problems relies on a elasticity of demand for health care expenditures that is much larger than reality…The more fruitful route seems to be managed care

    “Managed care” is a euphemism for “rationing”. HMOs tried it out in the 1980s. It didn’t go well. So politically this idea is dead in the water as long as people understand what is being proposed. I will also admit that I’m viscerally opposed to it on a values level. The idea of having a bureaucrat control my health care decisions is anethma.

    But there are also important efficiency arguments against the centralized, authoritarian approach to cost-management. The biggest two are that without a market you will have no competitive pressure and also no price system. The central role of a price system is to disseminate information about supply and demand to coordinate economic activity. (Read Hayek’s Use of Information in Society if you haven’t already.) If you erect a command-and-control scheme for “managed care” you will have no market and no price system, and thus no competitive pressure and no coordinated economic activity. That way lies economic ruin.

    I want to be honest and concede that the (classical) liberal alternative of a free market is not a Nirvana solution. Economics is the study of scarce resources. Scarcity means not everyone gets everything. In healthcare, that means some people will suffer and even die because of a lack of resources. To my mind, this makes arguments for economic growth and efficiency all the more important if we want to have the greatest care for the greatest number.

    Stop, summary time!

    1. Remove the employer-provided insurance subsidy
    2. Implement Obamacare state health insurance exchanges with aggressive risk adjustment
    3. Allow individuals to choose whether they want high deductible plans+HSAs or highly managed plans or whether they want to maintain the status quo

    1. Agreed.
    2. Disagreed, because it fails to implement market-based reforms that could have a legitimate impact on routine care (which isn’t everything, but is more than nothing) and also fails to implement national healthcare markets which is just plain dumb. There are other reasons, but that will do for now.
    3. I agree with this in theory, but I’m not convinced that Obamacare will achieve this end. HSAs barely qualify under Obamacare currently, and that’s much too close for comfort. In addition, the price-control and cost-control schemes of Obamacare may lead to an absolutely critical shortage of doctors and nurses precisely when they are attempting to mandate cost-free access to more Americans. I’m in favor of expanded access to healthcare (obviously), but doing it this way is repeating the classical mistake of trying to spend at free market levels without a free market to support the spending. This is the same basic problem encountered by Stalin, Mao, etc. No, I didn’t just call Obama a socialist. What I am saying is that people routinely fail to understand the vital importance of a robust market and price system until after they have tried to go without one.

    • says

      Interesting points. I just have a few questions/comments.

      1. What exactly are the price-control/cost-control schemes of Obamacare? I’m unaware of anything like this in the law. The only thing I can think of is the minimum loss ratio which says that insurers have to spend 80% of revenues on health care costs. I’m not necessarily in agreement with this regulation, but I seriously doubt it will have much of an effect on the doc shortage.

      2. When I say managed care, I am not advocating forced managed care or any other form of paternalism or authoritarianism. I just think that if given the choice between a high deductible plan/HSA and a highly managed Kaiser-like plan with relatively low demand-side cost sharing both of these with the same relatively low premium, I think many individuals will tend to go with the managed care option. I would. I just think we need to take away the restrictions placed on managed care and expand the exchanges by eliminating the employer tax subsidy. Then the managed care plans will be free to compete and individuals will be free to choose them over the more demand-side cost sharing plans. Individuals will choose between delegating the rationing of their care to their doctors via contracts transferring risk to the docs or rationing their care via large deductibles. Judging by how complex health care is, I suspect that many will choose to delegate the rationing to the docs.

      In Massachusetts, on the subsidized exchange, managed care plans+competition on the exchange have succeeded in decreasing premiums over the last three years while the rest of the countries saw typical large rate increases. I think we just need to let the market decide if people prefer supply-side or demand-side cost sharing. I understand your concern that Obamacare may limit this by limiting HSAs, but that can be adjusted, the core concept of Obamacare is competition among insurers and competition between different types of benefit packages, i.e. managed care vs. demand-side cost-sharing. In other words, a free market for health insurance. The concept is based on the ideas of Alain Enthoven from many years ago. If you google Enthoven New England Journal of Medicine, the original concept is there, and it very much centered around the idea of a free market, not an authoritarian one.

      3. The idea that the “HMO experiment” is a failed one seems a little flawed to me. First, the HMOs did cut costs a considerable amount. There is evidence of this. Second, while there was a large backlash against the HMOs in the ’90s, this was largely because individuals don’t pay most of their health insurance premiums out of pocket and do not have free choice among plans. If individuals pay the full premium on an exchange, and an HMO can cut costs through rationing care and thus offer a very low premium and save individuals money, I suspect that a lot of people will purchase the HMO plan. In fact, at employers where a managed care plan and a more traditional PPO or FFS plan are offered, many individuals choose the HMO, despite the rationing, because of the lower premium and lower cost sharing. The problem in the 90s was that people were forced by their employers into managed care plans and they didn’t get to see savings in the form of a lower out-of-pocket premium. While their employers were probably able to raise their wages due to the lower premiums offered by the HMOs, consumers are not very good at recognizing this connection.

  12. says

    Excellent post, Mr. Givens! I wish all Americans could have read it before Obamacare was passed.

    Another major cost factor to consider is our legal system (e.g., “medical malpractice”). I suspect it’s responsible for perhaps 10% of total U.S. healthcare cost. It’s difficult to be certain. The mere threat of a lawsuit leads to lots of unnecessary testing.

    Adopting the “English Rule” would help (briefly, the party who loses a court case pays the other side’s legal fees). We’d have a lot less folks playing the “malpractice lottery.”

    I’ll be surprised if Obamacare addresses any of the current problems you highlight.

    -Steve

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