Arnold Kling  

Health Care Reform

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Steven Levitt... Comment of the Week, 2003-08-0...

The pundits seem to be more radical than the politicians these days. The Washington Post's Steven Pearlstein writes,


First, in a rich country with an employer-based system, firms should have to provide a basic health insurance plan to all employees and their families...
Second, all but the poorest among us have to get used to paying a greater portion of routine medical bills out of our own pockets. It should be no surprise that when something looks as if it's free, people consume too much of it -- and don't bother shopping around for the best value.

Reason's Ron Bailey writes,

Should the federal government require all Americans to buy private health insurance?
...[mandatory health insurance] offers a way out of the dysfunctional employer-financed third-party-payer system that is so grievously distorting our current health insurance system. Employers would eventually devolve responsibility for health insurance to their employees by giving them the money the companies currently pay out to insurance agents. Employees would then have a strong incentive to shop around for the best health care deals, putting pressure on insurance companies to keep costs low.

Bailey cites the proposals of the New America Foundation. There, Ted Halstead and Laurie Rubiner write,

There are essentially only two ways to overcome this and achieve universal health insurance. One is to adopt a single-payer, government-run system, which is the norm in Canada and most of Europe...
The other -- and far more promising -- path to universal coverage is to approach health insurance as we approach car insurance: Make it mandatory. In essence, all Americans should be required to purchase their own health insurance from among competing private providers, with the government providing subsidies to those who need them.

Of course, I continue to believe that the path to health care reform is blocked by mental illness.

For Discussion. Suppose that the government were to mandate catastophic health insurance. In what ways would this provide incentives for better resource allocation in health care and in what ways would it not do so?


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COMMENTS (59 to date)
Boonton writes:

This may be a surprise considering my position on school vouchers but I would support a voucher based national health policy....

Roughly it would look like this:

Some dedicated tax (national sales tax, payroll tax, what have you..) will go for a universal health voucher. The voucher would have the following features:

1. It can be used to pay for medical expenses directly or health insurance.

2. In order to be redeemed for health insurance but in order to accept vouchers insurance companies would agree to limit premiums based on pre-existing conditions or overall health.

3. The voucher or any portion of it can be donated to charity care or another person's health care.

4. The voucher can be redeemed for cash against any employer based private health insurance.

Since the voucher is linked to a dedicated tax, the choice for the voters is clearcut. Want better covereage options then accept higher taxes. Want lower taxes then accept a lower voucher.

Employer provided plans could continue without disruption and the overall system would be market centered. The major issue that I think needs to be addressed is some type of cap on pre-existing conditions premiums. For people who are sick or older they can find themselves priced totally out of all private insurance. One of the advantages of employer provided coverage is that the employer uses their bargaining power to make the insurance company cover their entire workforce...sick and healthy.

With a plan like this people could continue to use their own funds to buy additional coverage and they could use any plan they wish. Any thoughts?

Eric Krieg writes:

How about you pay for your own insurance and I'll pay for my own. The government never gets involved, other than REQUIRING that we all buy insurance, and possibly providing your voucher for those too poor to afford insurance.

In another words, bring health insurance in line with auto insurance.

Oh, and that insurance should be catastrophic only. You go to the doctor for routine care, you pay for it out of your own pocket. Only after a very substantial deductible is paid ($3000+) would you get your care paid for by insurance.

No employer paid insurance, and no tax deductability for health care. No subsidies for the non-poor.

Chris writes:

I have to agree with Eric. Third-party payment coupled to the government tax subsidy for health insurance has driven costs out of control. My only concern is for those for whom a $3000 deductible is prohibitively expensive.

Why should the insurance be catastrophic only? If companies want to offer more comprehensive plans and if individuals are willing to pay for them, I think they should be allowed. As long the plan is paid for with after-tax income, there should be no perverse incentive to overconsume. The insurance provider would simply set a premium that makes the plan economical (I assume it would be rather high).

Boonton writes:

Ironic that Eric and I seem to have changed sides with respect to vouchers. I would argue the following:

1. Unlike auto insurance, we as a society do not want to let people go without healthcare. We are willing to let people go without owning a car or being able to drive. If we have are not going to allow anyone to be denied healthcare then we must all make some provision for it which means a tax of some sort.

2. Employer paid healthcare addresses the issue of coverage for those with pre-existing conditions and those whose demographics (age, genetic history etc.) would make insurance coverage so expensive that no company would offer it to them at a reasonable price. Employers are able to provide coverage by pooling their workers together. As individuals why would healthy people choose to pool themselves with the sick? The healthy would want to lock in low premiums while the sick would only drag them down in the competition.

Eric Krieg writes:

B, I'm with you on health care vouchers, but only for the poor.

If you REQUIRE people to have health insurance, just like we do with auto insurance, then you WON'T have the problem of people not having health insurance. Also, by making it mandatory, you ensure that people are continuously covered by insurance, so the pre-existing condition clause doesn't apply.

Again, the insurance would be paid by the individual, not the employer.

By making it catastrophic insurance only, with a very high deductable, you make sure that it is affordable.

Boonton writes:

Pre-existing conditions would continue to remain a problem because people would end up 'locked into' their insurance policy. If they wanted to leave they would be a customer with a pre-existing condition. The insurance company would have little incentive for them to stay since they would be a loss making client. Also we have the whole issue of genetic profiling & other techniques that would let insurance companies zero in on sick (or potentially sick) customers.

Insurance only works when there is an element of mystery. If you know 1 house in 1000 will burn down you can have everyone covered by fire insurance. If you know which house in a thousand will burn then insurance becomes impossible.

Matt Young writes:

Car insurance allows for lower rates for safe drivers. Health insurance should provide lower rates for young, healthy folks. I think the best insurance for the young and healthy is a high deductable catastrophic insurance.

People complain that 40 million go without health insurance. What they don't say is that having 40 million young healthy people pay for cancer and heart treatments for 40 million old folks is unfair. Many young get a better deal with no insurance in todays system. The young cash labor worker gets the best deal of all, he keeps all of his money.

Eric Krieg writes:

>>Pre-existing conditions would continue to remain a problem because people would end up 'locked into' their insurance policy. If they wanted to leave they would be a customer with a pre-existing condition.

Eric Krieg writes:

I lived for 3 years without health insurance. It's called college.

My father's insurance kicked me off when I was 19, and I didn't pick up insurance again until I was employed. I could have gotten insurance through the college, but it was $1000 a year. I didn't see the point of having it, and I wanted to spend my money on beer, not insurance. So I didn't get it.

A great deal of the 40 million uninsured are uninsured willingly. They choose not to be insured.

Boonton writes:

I was not aware that pre-existing conditions were ok as long as you maintained consistent coverage. I see the advantage in keeping people from seeking coverage just when they get sick but I also see the advantage in an insurance company trying not to cover people who are more likely to get sick.

Insurance companies want people who don't need health insurance and people who need health insurance are not wanted by insurance companies. In a world of rapidly expanding information why would insurance companies not take advantage of genetic profiling, pre-existing conditions etc. to either screen out those that really need insurance or charge unreasonable rates for it?

In Kreig's system insurance companies have no incentive to grant exemptions for continuous coverage for those with pre-existing conditions. Since everyone has to be covered there are no lapses. Why would HMO B want to overlook a pre-existing condition that is afflicting someone who is trying to leave HMO A? Of course you also have the entire enforcement issue. Believe it or not but it takes a lot of work to enforce mandatory auto insurance and even in a state that is pretty strict about it like NJ there's lots of people breaking the law. I find it hard to imagine the gov't sending lots of middle class people to jail because they decided to use their insurance money for car payments.

Eric Krieg writes:

>>Believe it or not but it takes a lot of work to enforce mandatory auto insurance and even in a state that is pretty strict about it like NJ there's lots of people breaking the law. I find it hard to imagine the gov't sending lots of middle class people to jail because they decided to use their insurance money for car payments.

Boonton writes:

I suppose it could be done but not without a very uncomfortable expansion of gov't. And by expansion I don't mean a few more % points of spending versus GDP...I mean tracking down people who don't pay their health insurance and putting them in jail...having insurance companies be able to report you to the FBI for failing to buy their product and so on.

It appears that society is starting to think of healthcare the way we think of police protection. A good that should be provided 'free' to everyone but individuals should be allowed to purchase additional coverage with their own money (i.e. bodyguards, alarms, night watchmen etc.).

A universal voucher has an advantage here because it respects this belief while it is also less intrusive in its enforcement. For those who never bother to use their voucher the gov't could have private companies compete for 'default catastrophic coverage' in case those people are suddenly wheeled into the hospital and have no means to pay.

Mcwop writes:

“For Discussion
Suppose that the government were to mandate catastrophic health insurance. In what ways would this provide incentives for better resource allocation in health care and in what ways would it not do so?”

In general people are pickier about price when the money comes out of their own pocket, but there are important exceptions to recognize. For example, many people will pay sticker for a car RATHER than negotiating on price. The deductible may be used more quickly, and the insurance may kick in sooner under this scenario. As result the cost savings may be negligible.

Secondarily, the government stipulations (mandates) that accompany mandatory health insurance will effect resource allocation. Examples:
- force insurers to cover experimental procedures
- force insurers to cover non-medically necessary procedures (sex changes, massages)
- is the government willing to place limits on punitive court awards to keep malpractice insurance rates low
- will the government micromanage care (example: mandate that women that give birth stay in the hospital for 3 days versus letting the doctor and patient decide)

Eric Krieg writes:

>>It appears that society is starting to think of healthcare the way we think of police protection. A good that should be provided 'free' to everyone but individuals should be allowed to purchase additional coverage with their own money (i.e. bodyguards, alarms, night watchmen etc.).

Eric Krieg writes:

In the KHCS, there would be no punative damages, only economic ones. F the trial lawyers.

In the KHCS, the government would not mandate what is covered and what is not. Being catastrophic health insurance, I don't think mandates would be as much of an issue, because fewer people would be racking up big insurance bills. $3000 per year goes a long way, after all.

Ditto for non-medically neccessary procedures. $3000 buys a lot of massages. People who want sex changes need powerul psychotic drugs, not surgery. The first would be covered, the later, not.

Getting back to Boonton's criticism that enforcement of mandatory insurance laws would be costly, the one thing the government knows how to do is garnish wages. Ever try to opt out of income tax withholding? I didn't think so, it can't be done.

We could have the government require that anyone who doesn't provide proof of insurance to be automatically enrolled in some basic insurance program, the costs of which would be deducted from wages.

Boonton writes:

Who would provide this 'basic' insurance program and how do you address the unemployed or those with minimal wages etc.? My argument about the mandate is not that it is costly but that it is burdensome. Your observation about withholding is accurate but there is at least a basic level of freedom in that no one can force you to work (no income, no income taxes)...likewise no one can force you to buy (hence you don't have to pay sales taxes) etc. Your policy, ironically, is much more damaging to freedom since you are forcing people to buy a product and I assume insurance companies will be allowed to call the gov't in on you if they suspect you are not buying..... If you thought the record companies had too much power wait till you see that!


"In the KHCS, there would be no punative damages, only economic ones. F the trial lawyers."

In NJ there was recently a 'doctors strike' to protest in favor of a cap on non-economic damages. What's interesting is that malpractice insurance has not done a very good job of tracking doctors who get sued very often. Even the auto insurance companies (not very popular in NJ) do a very good job figuring out who is higher risk and charging properly. I wonder if maybe part of the problem is that, for whatever reasons, malpractice companies have not been very efficient at charging the doctors who committ the most malpractice higher rates.....

Regarding thinking of Health Care as a Right: I agree that it is dangerous to create any entitlement. Perhaps a better way of phrasing it would be to say society is starting to think of health care as a good that should be provided to all like police protection. We generally feel everyone is entitled to police protection but we also recognize that this is limited to what the voters will tolerate in terms of taxes. If you want a 24/7 'posse' of guards like Brittany Spears has then you have to buy it yourself.

What I like about my universal voucher plan is:

1. The good society is providing to all is defined in terms of money, not a set of services. If society feels the care provided by the voucher is too shabby then they can vote to increase the voucher but they must also accept the taxes to fund it.

2. Aside from the tax, the limitation on liberty is minimal. You don't go to jail if you fail to make your payments to Prudential HMO. You can be covered even if you want to be a bum on the beech or live deep in the woods away from society.

3. Incentives for cost containment are preserved since it still pays for a HMO to minimize costs. Yet the individual has the option to buy the type of healthcare he wants. If someone wants to be covered for a sex change he can....the market determines what is covered and what is not..... Not a fiat ruling from Eric or anyone else for that matter.

Eric Krieg writes:

>>Who would provide this 'basic' insurance program and how do you address the unemployed or those with minimal wages etc.?

Eric Krieg writes:

>>1. The good society is providing to all is defined in terms of money, not a set of services. If society feels the care provided by the voucher is too shabby then they can vote to increase the voucher but they must also accept the taxes to fund it.>2. Aside from the tax, the limitation on liberty is minimal. You don't go to jail if you fail to make your payments to Prudential HMO. You can be covered even if you want to be a bum on the beech or live deep in the woods away from society.>3. Incentives for cost containment are preserved since it still pays for a HMO to minimize costs. Yet the individual has the option to buy the type of healthcare he wants. If someone wants to be covered for a sex change he can....the market determines what is covered and what is not..... Not a fiat ruling from Eric or anyone else for that matter.

Boonton writes:

Why shouldn't people pay $50 for a doctor's bill? A plumber, auto mechanic, or other skilled professional will very easily charge you that or more for just a visit and evaluation.

I don't think I really read you correctly when you said that we should not allow people to buy the health insurance they want.

Eric Krieg writes:

B, I'm not saying that doctors should not be able to charge $50 for a visit. By all means, doctors should charge what they can get away with charging.

But "health insurance" should not be paying that $50. It should be coming RIGHT out of the patients pocket.

No one needs "insurance" to pay a $50 fee. Again, that isn't insurance, that's a tax shelter.

Boonton writes:

Actually there is a non-tax shelter reason to have insurance pay that $50. HMO's manage to contain costs by having a network of doctors who agree to cost controls when they order expensive treatments. Why would a patient agree to limit their choice of doctors? Because the insurance company let's them pay only a small co-pay for the visit. Why would a doctor agree to be part of such a group? Because the insurance company can provide them with a steady stream of business to keep their waiting room filled and let them meet their payroll.

Similar plans exist for insurance type products that do not enjoy tax benefits. For example there are car warranties and other 'breakdown insurance' that pays for even minor repairs but requires you to go to only certain service stations.

In fact the tax benefits apply to all types of health insurance. There is no reason an employer couldn't opt for a policy that doesn't pay for doctors visits but has more generous coverage for catastrophic events. It's not like the tax break is any different for $100 spent on HMO coverage or $100 spent on catastrophic coverage.

It seems to me that the market is the best place to decide the mix here. If HMO 'pay for everything' type coverage causes more expensive care then the premiums for such plans will have to go up to cover that. Catastrophic coverage plans would then have a market advantage and could offer lower premiums. In either case the consumer should be free to spend either his pre-tax dollars or his voucher on the plan that makes the most sense.

Eric Krieg writes:

>>HMO's manage to contain costs by having a network of doctors who agree to cost controls when they order expensive treatments. >Similar plans exist for insurance type products that do not enjoy tax benefits. For example there are car warranties and other 'breakdown insurance' that pays for even minor repairs but requires you to go to only certain service stations.>In fact the tax benefits apply to all types of health insurance. There is no reason an employer couldn't opt for a policy that doesn't pay for doctors visits but has more generous coverage for catastrophic events. It's not like the tax break is any different for $100 spent on HMO coverage or $100 spent on catastrophic coverage.>It seems to me that the market is the best place to decide the mix here.>If HMO 'pay for everything' type coverage causes more expensive care then the premiums for such plans will have to go up to cover that.>Catastrophic coverage plans would then have a market advantage and could offer lower premiums.>In either case the consumer should be free to spend either his pre-tax dollars or his voucher on the plan that makes the most sense.

Boonton writes:

Actually you may have an incentive to use every last penny of that voucher but remember the voucher can pay for insurance in addition to actual health care. When a healthy person buys insurance, he is getting a good (protection against the cost of a serious illness) but he is not directly increasing demand for healthcare. In fact he is providing healthcare because his premiums allow the company to pay the bills for those who are sick.

Health care costs are not so high because everyone is running to the doctor because it only costs them $10 a visit. We probably have the same level of worry-worts who run to the doctor every time they get a sniffle as we did 40 years ago just like we have some people who never go to the doctor even though it would cost them nothing. What is driving demand is the fact that we have decided that we will provide healthcare for people no matter what.

To me this indicates that we are arriving at the decision to provide a basic level of health care for all just like we provide a basic level of security. If this is the case then it seems that the burden for this should be born by the tax base. At the same time we also seem to recognize that people should retain the right to purchase additional healthcare with their own resources as well as the utility of having a market produce healthcare rather than the gov't.

The voucher solution, IMO, seems to square this circle quite nicely.

Eric Krieg writes:

>>Health care costs are not so high because everyone is running to the doctor because it only costs them $10 a visit.

Eric Krieg writes:

We already provide a basic level of healthcare for everyone. It is called the emergency room.

Now, maybe you think it is more fair for the taxpayers to foot the bill for emergency care, rather than hospitals, and ultimately health insurers. But that doesn't make it any more economically efficient.

Boonton writes:

"I will leave it to the economists to hit that one out of the ballpark!
It's called supply and demand. It is one reason that HMOs make you get a reference from a primary care physician before they let you go to a specialist."

So what? If an HMO wants to provide coverage for both catastrophic care and routine care that is their business. If they are behaving irrationally, driving up not only the cost for both types of care, it is they who will be hit the hardest.

Suppose there was some very rich person who one day said he will pay every person in the nation $40 every time they see a primary care doctor for a routine appointment. By your reasoning this person would be an economic terrorist causing the price of healthcare to rise so dramatically it would swamp the benefit of having $40 of every visit covered! It would seem if some foreign nation volunteered to pick up the tab for Americans seeing their primary care doctors then Bush should consider it an act of war worse than 9/11!

If it is irrational to cover both catastrophic and routine expenses in a medical insurance policy, then the market will figure it out. If the true answer is more subtle, that it is a sensible policy if done in the correct manner, then the market would be the best method to determine that.

Boonton writes:

"Now, maybe you think it is more fair for the taxpayers to foot the bill for emergency care, rather than hospitals, and ultimately health insurers. But that doesn't make it any more economically efficient."

Actually that is the current policy. Hospitals are forbidden to refuse necessary treatment. This means the balance will have to be paid by either the taxpayers or by the hospital overcharging those who can afford to pay either by insurance or their own means. There are a host of reasons why this is not the most efficient means of financing a 'basic level' of healthcare.


You have advocated that everyone be mandated by law to purchase health insurance. Is this any different than a tax? If I had to buy 5 pounds of sugar per week by law is that really any different than being taxed the value of it in order to subsidize sugar producers? I think you are basically your program is almost the same as my voucher system but it is less efficient.

Eric Krieg writes:

>>If it is irrational to cover both catastrophic and routine expenses in a medical insurance policy, then the market will figure it out.

Eric Krieg writes:

>>If I had to buy 5 pounds of sugar per week by law is that really any different than being taxed the value of it in order to subsidize sugar producers?

Boonton writes:

"No it won't, because it is not the market that is pushing this policy. It is Congress, through tax policy. Thus, perhaps the market will devise the most efficient system under the current tax policy, but it is not going to come up with the most efficient system overall."

Your missing my point, there is no special tax deduction for purchasing HMO style coverage. If you spent the same money on a catastrophic plan it would result in exactly the same deduction. If HMO's are irrational in the face of catastrophic coverage then they cannot be saved by an accross the board tax benefit that covers both types of plans.

Boonton writes:

I hardly think it is less political. If anything its more political because now the gov't is in your daily business. If the store owner notices you only brought one pound of sugar this week he can have you arrested!

Regarding the incentive for low cost production; that exists in either case. If the gov't supports the price of sugar through subsidies at $3 per pound, I'm still better off if I can produce sugar at $1 per lb rather than $2.

Eric Krieg writes:

>>Your missing my point, there is no special tax deduction for purchasing HMO style coverage.

Boonton writes:

Yes the HMO has benefits that the catastrophic policy does not, such as the $10 co-pay. Yet the catastrophic policy also has benefits that the HMO doesn't. For example, after you meet your deductable you are reimbursed for just about any reasonable medical treatment regardless of which doctor you go to.

How do you measure a HMO that offers you a $10 co-pay but limits on more expensive care versus another policy that has few limits on expensive care but offers no co-pay? I would say the market so a $500 per month HMO would be equal in value to a $500 per month catastrophic plan (of course individuals will have their own preference, just like you do between coke or pepsi).

Tax wise the benefits are the same. The employer gets the same deduction for either $500 plan.

Eric Krieg writes:

>>Yes the HMO has benefits that the catastrophic policy does not, such as the $10 co-pay. Yet the catastrophic policy also has benefits that the HMO doesn't. For example, after you meet your deductable you are reimbursed for just about any reasonable medical treatment regardless of which doctor you go to.

Boonton writes:

By definiton the 'distortion' can would have to be equal to or less than the monthly premium. If an HMO's average cost is $500 per month, then the HMO can, at best, be paying out $500 per month for healthcare services. Ditto for the catastrophic policy. Otherwise the insurance company would be making a loss and wouldn't be able to survive for very long.

Since most healthy people do not see make $500 worth of regular doctors visits in a month, even with just a $1 co-pay we must conclude either policy is mostly purchasing serious health care. Your argument is ignoring several facts:

1. HMO's were not established as a tax shelter but as a way to control health costs. The thinking was that they could control free spending doctors by forcing them to submit to oversight as well as reduce the consumers health needs by paying for things like a yearly physical that could catch problems before they became expensive. Some HMO's even offered gym memberships based on this thinking.

2. The tax benefits are equal for either policy. In other words if HMO's are fundamentally irrational then catastrophic policies would have an edge on them in the market. They do not. Most people want health insurance for the catastrophic coverage, believe it or not. Yes many people see a doctor once or twice a year but don't need open heart surgery, but at $200-$500 per month it makes little sense to have health coverage just for doctors visits. It would be much more sensible to demand more compensation even if there's a bigger tax hit.

Eric Krieg writes:

>>If an HMO's average cost is $500 per month, then the HMO can, at best, be paying out $500 per month for healthcare services.

Boonton writes:

First, there are Car Maintenance Organizations. Some are explicit and others are implicit (extended warranties or 'service plans' where oil changes are free but have to be done at the dealer or auto shop that's in 'the network' etc.).

Second, very few people are demanding $500 a month in unnecessary medical care. Regular health care like check-ups simply does not make up the most of what HMO's are paying for. In other words, HMO's are paying for almost the same thing that catastrophic plans pay for.

You are also gliding over the fact that HMO's have been credited with reducing or at least controlling health expenditures. They do this because they do pay for regular visits which allows them to induce both patients and doctors to accept limits on more expensive services. For example, the requirement to see your general physician before being allowed to see a specialist in an ideal situation will eliminate specialist visits that could have been solved by the general physician. This would mean the specialist would optimize his time by not seeing patients whose problems could be solved by the general physician.

To date it looks like HMO's are better at cost containment than catastrophic plans. This is why you see Republicans advocating moving Medicare/Medicaid patients into HMO style plans. The tax break here does not favor the HMO since the employer would receive the same benefit for purchasing a non-HMO style plan.

Eric Krieg writes:

>>First, there are Car Maintenance Organizations. Some are explicit and others are implicit (extended warranties or 'service plans' where oil changes are free but have to be done at the dealer or auto shop that's in 'the network' etc.).>Second, very few people are demanding $500 a month in unnecessary medical care. Regular health care like check-ups simply does not make up the most of what HMO's are paying for. In other words, HMO's are paying for almost the same thing that catastrophic plans pay for.>You are also gliding over the fact that HMO's have been credited with reducing or at least controlling health expenditures.>They do this because they do pay for regular visits which allows them to induce both patients and doctors to accept limits on more expensive services. For example, the requirement to see your general physician before being allowed to see a specialist in an ideal situation will eliminate specialist visits that could have been solved by the general physician. This would mean the specialist would optimize his time by not seeing patients whose problems could be solved by the general physician.>To date it looks like HMO's are better at cost containment than catastrophic plans.>This is why you see Republicans advocating moving Medicare/Medicaid patients into HMO style plans.>The tax break here does not favor the HMO since the employer would receive the same benefit for purchasing a non-HMO style plan.

Bernard Yomtov writes:

Eric,

Oddly, I find myself agreeing with a great deal of what you say, but I don't understand why you object to insurance companies offering policies that have fairly low deductibles, assuming tax policies are changed.

Of course these policies would be unwise purchases, in general, but that's not our business, as long as they do cover catastrophic situations.

I'm not sure we have a meaningful way to compare the cost containment effects of HMO's and pure catastrophic policies, since the latter are rare.

Eric Krieg writes:

Oddly!?!

Now once again my opinion is not backed up by any "study" (of which you people with master's degrees are just a LITTLE too quick to accept at face value), but I just think that low deductable insurance is one major driver of health care demand.

Maybe it's just because I am male, and I don't go to the doctor very often (I don't even know his name without looking at my HMO card), but I think that, because of HMOs and the 10 dollar copay, people visit the doctor too often. Now, Boonton argues that this drives up HMO costs, which are passed on to businesses and eventually employees, but this is hardly a robust feedback mechanism. The cost of overuse of health services is being borne by everyone.

I see no reason that anyone in the lower middle class or above should have anything more than catastrophic insurance. Anything else just distorts the market for health services and causes substitution between other goods and services and health care.

Some people might think that there is no higher good than health care spending. I disagree. I think we are missing huge opportunities to improve the lives of everyone because we are overspending on the health care of a few. Too much capital is being spent in the health arena, for things like hospitals, that could be going to better use elsewhere in the economy (not that I know exactly where that might be).

Boonton writes:

In general there are few circumstances where the market is not to be trusted to allocate resources. If HMO's drive up costs for regular doctors visits, then the first to feel the pinch will be HMO's. While the transmission from HMO premium to employer to employee is slow I can assure you that premium to employer is not. Companies are very aggressive in trying to cut their health insurance costs.

This was how HMO's got to be so big. Because they promised to control costs by policing the doctors while getting people to do cheap things (likey physicals) that can promote good health. To a large degree they have had some success. Few doctors have gotten rich on HMO's. In fact next time you go to yours ask. He will likely not tell you how he brought a vacation home with all the patients that they packed his office with. He will likely tell you that they pay him next to nothing for each patient while making him fill out tons of forms & then will question every referral and script that he writes.

To a degree then HMO's have worked. They are not enough, IMO, to stop the long run increase in health costs. This is a function of an aging population plus that 'cost disease' which makes everything else cheaper in comparision.

Eric Krieg writes:

>>While the transmission from HMO premium to employer to employee is slow I can assure you that premium to employer is not.

Eric Krieg writes:

What I'm talking about!

http://www.forbes.com/lifestyle/2003/08/14/cx_0814htow.html

Boonton writes:

That's all well and good, you are missing several econ points:

1. HMO's use the paying for regular visits as a method to control both patients and doctors. Patients limit themselves to a smaller population of doctors 'in network'. Doctor's agree to get steady business but have to submit to cost controls on more expensive procedures.

2. What is the total cost of an HMO? At least $100 per month, probably $300-$500 per month. Assuming a visit costs $100 a shot (which the average is certainly less) how much additional visit demand is being transmitted by the HMO's benefit structure? I don't know any healthy person who visits a doctor once a month, even twice a year is quite a bit. This means for a $100 per month HMO, $200 out of $1200 in yearly premiums is being spent in doctors visits. Not even 20%!

Of course, good luck finding an HMO to cover you for $100 per month. More important for the HMO is the ability to control the doctors behavior. In the article you quoted the HMO would use their leverage to permit endless 'consultation' visits that cost little but would limit the doctors ability to order those expensive tests unless the doctor was willing to diagnose the patient with a disease or if the patient fit the demographic criteria to make the test 'economically worthwhile'.

Long and short you're just looking at one side of HMO's.

Eric Krieg writes:

>>1. HMO's use the paying for regular visits as a method to control both patients and doctors. Patients limit themselves to a smaller population of doctors 'in network'. Doctor's agree to get steady business but have to submit to cost controls on more expensive procedures.

Boonton writes:

Command and control? That is what a business is supposed to do, control its expenditures. The problem with catastrophic insurance is that once you hit the deductable the patient and doctor have almost a blank check to do anything they want. Under an HMO regime procedures have to be justified with cost-benefit analysis. Yes the $500 test may prevent a major operation but is it justified if it will do so in only 1 in 5,000 cases?

Both systems have drawbacks, the beauty of the market is that it will reward or punish each type of plan according to its success. If an HMO accomplishes its cost savings by keeping people from getting decent care it will eventually lose customers. If an HMO or catastrophic plan provides 'unlimited' healthcare then it will suffer from higher costs (and premiums) as well.

Where do you think HMO's came from? Because businesses wanted to give their employers unlimited healthcare no mater what the cost to themselves? Even though they get a tax break it would be the same break if they got a catastrophic plan and by your reckoning premium increases would be contained.

Just because you can deduct something doesn't mean that it is not an expense to you. If you could buy equal coverage for $100 less per month it makes sense to do so.

Eric Krieg writes:

>>Just because you can deduct something doesn't mean that it is not an expense to you.

Boonton writes:

My point is not that the tax deduction doesn't increase demand for health insurance. That is basically what both of us want to do. That is what you are doing when you say you would advocate vouchers for those who couldn't afford a catastrophic policy. This too would increase the demand for one form of health insurance and indirectly increase demand for healthcare.

My point is that just because you get a deduction doesn't mean the cost doesn't exist. A $400 per month policy with the same benefits as a $500 per month one still makes it a better deal even though you lower your deduction by $100. If catastrophic policies have some natural ability to contain costs better than HMO's we would expect to see this expressed in the competition between the two. If it was as dramatic as you imply, catastrophic policies would be able to price HMO's out of the business.

Eric Krieg writes:

>>My point is not that the tax deduction doesn't increase demand for health insurance.

Boonton writes:

So considering that this HMO is costing you probably a few hundred a month why not switch to a catastrophic plan? Let's say that it costs $500 per month which isn't impossibly by any means.

Even considering that tax deduction, it sounds like you would be better off with a $250 per month catastrophic plan and $100 more from your employer as pay. Your employer would certainly make out better since you've cut their health costs by $250. Yes both of you lost some tax advantage but if you put that $100 per month into doctors visits and viagra you could regain a chunck of the deduction.

I agree that HMO's may increase demand for some health services such as general visits and certain drugs like viagra or claritan (usually, though, prescription drugs are a different plan with their own co-pay) but ask yourself why they have such a bad rap? One of the chief criticisms of Hillary's plan back in the 90's was that it was going to force us all into HMO's!

Certainly the popular impression of HMO's is not that of a consumer's nivana with an all-you-can-treat buffet for just a $10 co-pay! The reason is that HMO's give you cheap prices at the low end but control costs at the high end. When they go to far you hear about the horror stories of the person who can't get a drug or operation because its deemed ineffective or experimental by an Excel spreadsheet.

But you should be fair and consider HMO's a market innovation. A way to get people to save money by taking care of health problems before they become expensive. Dental plans have long recognized the value of this idea by offering one or two free cleanings per year. In the long run that prevents a lot of major work that a catastrophic only dental plan would have to pay for. Like all market innovations it could be a success or a failure or something in between but the only way to really know is to let people choose it freely and see what happens.

Eric Krieg writes:

>>So considering that this HMO is costing you probably a few hundred a month why not switch to a catastrophic plan?

Boonton writes:

"Because my company doesn't offer one. And if they did offer one, they wouldn't compensate me for the extra taxes."

But if the catastrophic plan is really better, it would be in both of your interests for them to do so. Here we run into economists assumption of rational actors. It's quite possible your company is just dumb, it's rather unlikely that nearly all companies are dumb.

"Don't get me wrong. I'm not bashing HMOs. They are clearly the best alternative as the market is currently structured by the Feds. I just think that the Feds should get rid of the deductibility of health insurance altogether. Tax health benefits as ordinary income. Then I could live with letting the market decide what the best type of insurance is."

I feel like we have gone in circles with this. The tax deductability applies to both types of health insurance! If catastrophic plans are better then they would defeat HMO's in the market and the tax deduction wouldn't save them!

Tax benefits do increase demand for employer based healthcare but the demand would be there without such benefits. The reason is information, information is what insurance companies want but its the mortal enemy of insurance! If it is known that 1 in 1000 houses will burn down, then it's possible to have affordable homeowners insurance for 1000 homeowners. If supercomputers could narrow that one house down to the actual block where the fire will happen then insurance becomes impossible. The other 990 homes, knowing they won't have a fire, will have no desire to buy insurance. The 10 homes on the block will face unmanagable premiums.

The ability to screen those seeking health insurance for pre-existing conditions, demographic & age based estimates of health and genetic profiling IMO creates a dangerous world where insurance will become more difficult to manage. Employer (or other large group) based health insurance retains an advantage because those who would be nearly uninsurable can be forced into an insurance company's pool.

In my plan there are limits to how much pre-qualification insurance companies can perform when setting rates. They will accept this restriction because doing so will give them access to the entire market of vouchers (the whole country!). Another great benefit, IMO, would be that the pros of employer based insurance can be preserved but employers can ease themselves out of the insurance business. This would greatly increase the economy's flexibility since people will feel more comfortable leaving jobs and employers can be more flexible in adding jobs. It has been noted that in some ways foreign companies can sometimes be more competitive than American companies because they are freed from the burdens of insuring their workers.

Eric Krieg writes:

>>I feel like we have gone in circles with this. The tax deductability applies to both types of health insurance!

Boonton writes:

Individuals can deduct health insurance if they pay for it themselves. The same principle applies. Using some real numbers from www.DiscountHealthInsurance.com (30 yr old single male, non-smoker) I found HMO's in the $500 per month range and catastrophic style plans as low as $250.

Clearly I pay dearly for the HMO's unlimited $10-co-pay. At an extra $250 per month I'm paying an extra $3,000 per year. If a doctor's visit cost $100 I would have to go an extra 30 times a year (2 1/2 times a month) to justify the additional cost of the HMO.

Whether my employer is footing the bill or I am myself, the HMO is going to have to cause a huge increase in my demand for doctors visits before it can create unnatural health care inflation. In other words the $10 co-pay alone does not justify the HMO for either consumers or business. Assuming they are equal, either would be much better off getting twice the catastrophic coverage for the same tax deduction.

Eric Krieg writes:

Money spent on HMO premiums in no way influences ones demand for health care services. In fact, the exact opposite could occur. An increase in premiums might ellicit a "I'm going to get my money's worth" response. That would drive up demand.

You can rationalize away that a "mere" $10 co-pay would not increase demand, but economic theory says it would. You wouldn't be the first person to rationalize against economic theory, and then, you wouldn't be the first person to be wrong.

Boonton writes:

I didn't say that the $10-copay wouldn't increase demand for simple doctor visits. In fact, one would hope it would. After all, patients are spending an extra $250 per month or $3000 per year for this benefit. It would seem like they are more than compensating for their supposedly higher use of normal doctors visits.

If there is an increase in demand for something, then it *should* be reflected in prices. HMO's are operating on the theory that they are really decreasing demand by giving away the cheap good (visits, simple blood tests) in the hopes that the demand for expensive stuff (operations, emergancy room visits) can be cut.

Boonton writes:

This issue is going back and forth because Eric's position seems to be that if the gov't is to provide for vouchers to purchase health insurance, it should only be for catastrophic plans. The presumption seems to be that HMO type plans are somehow bad.

In reality it is not self evident that HMO's are bad. Both in theory and reality there is evidence that they can sometimes cut costs better than catastrophic plans. They are also good for people who have illnesses. Such people will end up bearing the brunt of costs under catastrophic coverage.

Eric Krieg writes:

I don't see why the government should be providing vouchers for people who can afford to pay for health care themselves.

And I also don't see how any rational person can explain health insurance as it is now provided. Low deductible insurance makes no sense, economically anyway. That's why you are a fool if you buy extended warranties on consumer electronics, for example.

EXCEPT, of course, if health insurance is just a way to avoid taxes. Now that makes sense.

Now, I agree that HMOs do a better job than the old 80/ 20 system. But they are STILL little more than a tax dodge. We could do better with a system described in Arnold's original link.

Boonton writes:

Again if HMO's are nothing more than a tax dodge then they should fail in the market. Why not buy twice the coverage of a catastrophic policy since it would provide the same tax benefit!

As for how HMO's can, in theory at least, do a better job; We've been over that several times. HMO's can:

1. Encourage preventative care by making simple routine checkups of trivial cost.

2. Get people to substitute lower cost goods (visits to the family doctor) for higher price goods (visits to specialists).

3. Force doctors in their network to at least consider their proposed treatments from a cost/benefit analysis.

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