Arnold Kling  

Health Insurance Idea

PRINT
Gas Tax Debate... Milton Friedman on health, edu...

Brad DeLong writes,


now the Kerry campaign has dusted off and brought forward a very clever idea from Brandeis's Stuart Altman...Have the government take its task of social insurance seriously, and reinsure private insurers and HMOs: construct a 'premium rebate' pool to pay annual health-care bills over $50,000.

In effect, the government would offer catastrophic (re-)insurance. This would reduce the incentive for health insurance companies to play Old Maid with high-risk applicants for insurance and also, by lowering the cost of health insurance, make health insurance more attractive to consumers.

I think that something like Altman's proposal is needed to make mandatory health insurance (which I favor) work. That is, just as with automobile insurance, the government has to step in to subsidize coverage for the highest-risk applicants.

For Discussion. DeLong argues that this is an idea that Republicans should "steal" from Democrats. Would economists of both parties tend to support it?


Comments and Sharing





TRACKBACKS (2 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/87
The author at The American Mind in a related article titled Kerry's House of Ketchup #14 writes:
    Kerry speaks. Welcome to the latest edition of Kerry's House of Ketchup mildly admonished by Glenn Reynolds. Memorial Day... [Tracked on June 3, 2004 12:46 AM]
The author at Chicago Report in a related article titled Playing the Health Care Crisis writes:
    Brad Delong has a good post about probably the only good idea in the Kerry health plan, the so called catastrophe fund. Now, let me be clear that I am against socialized health care, I believe that a private system... [Tracked on June 4, 2004 9:47 AM]
COMMENTS (21 to date)
Steve writes:

Arnold,

I appreciate the "bleeding heart libertarian" approach you take. It is very enticing in that I don't want people to suffer either. However, what about the observation by Alexander Fraser Tyler,

A democracy cannot exist as a permanent form of government. It can exist only until the voters discover they can vote themselves largess (defined as a liberal gift) out of the public treasury. From that moment on, the majority always votes for the candidate promising the most benefits from the public treasury, with the result that democracy always collapses over a loose fiscal policy, always to be followed by a dictatorship.

Seems to be a problem to me. What is to prevent the mandantory catastrophic care coverage from becoming "near" catastrophic coverage, then pretty bad stuff coverage, then bad stuff coverage, then sort of bad stuff coverage, and finally, "Oh the Hell with it, we'll just pay for everything" coverage?

sudhir writes:

Sounds like a good idea. The problem of there coming into being an under- or un- insured underclass (illegal immigrants, people way below the poverty line etc) would only then exacerbate. Right now, from what I know, Calif. mandates all hospitals to provide emergency medical care without first checking for health insurance. The disaster this has caused is that for legit insurance holders, costs have climbed while service has suffered.

JT writes:

One key issue in this proposal to keep an eye on: does that $50k threshhold increase with inflation (CPI/health care inflation/some index)? If not, it is a path towards total government control of the health care system.

Mr. B writes:

The problem is that the cost of providing healthcare is rising at a rate faster than everything else. Do you really need an MRI test if you come in with a headache. Is your stomach acid treated with a Rolaids pill at less than $0.01 or by the a prescription pill at $0.75?

Problem #1. Unless users are forced to bear a proportional cost they will ALWAYS opt for the more expensive treatment. In healthcare, the perception that cost equals quality is ingrained.

Problem #2: Users are lazy and don't give a damn about long term care. Why are smokers in health plans anyway? What about grossly-obese people? What about those with AIDS contracted through unprotected sex? When serious illness or medical ailments are brought on by lifestyle choices, why should the rest of the community pay?

I'm all for spreading the risk. I just don't want to pay for idiots.

Therefore, I think the government stepping in as the insurer of last-resort is a TERRIBLE idea. Clever companies will find ways to pass risk to the government at every angle. The government, being an in-efficient, non-market driven entity will be forced to swallow it whole and spread it back out.

Look at the disaster that is California's worker compensation insurance program. It is a well known hotbed of fraud.

Boonton writes:

My proposal:

1. A universal tax to fund a basic health care entitlement.

2. The funds are divided evenly into individual vouchers.

a. The vouchers can be used to purchase healthcare or insurance by individuals or can be cashed in against employer provided insurance.

b. In order for insurance companies to cash in vouchers, they must agree to limit variation in premiums. In other words, they can't charge someone with a high risk with a premium that prices them out of the market.

3. Individuals are free to supplement the vouchers with their own funds if they wish to purchase fancier plans or if they wish to opt out of the system entirely.

Advantages of this proposal:

a. It is voluntary in nature. Insurance companies don't have to accept the vouchers nor do people have to use them.

b. It is not an entitlement. The voucher is set by the revenue raised by the tax. If people want better coverage they must accept higher taxes or vice versa.

c. Insurance companies will pool the risk by agreeing not to charge sick people with excessive premiums. This is what happens with employer provided health insurance. Blue Cross agrees to charge a flat rate per person to cover Microsoft employees, for example. The 60 year old worker with cancer is not charged 200 times more than the healthy 20 year old in the mail room.

Mcwop writes:

Interesting report on prescription drug trends.

Adam writes:

Ummmm... did you guys actually read Arnold's proposal? He's not talking about total nationalized healthcare... only catestrophic coverage. Most of the issues raised above have nothing to do with this. Whether you take the 1 cent pill or the 75 cent pill has no bearing on this proposal... they're both far below $50,000, so the proposal wouldn't affect them. Read a post before commenting on it.

David Thomson writes:

I am all for catastrophic health insurance. However, we need to abandon insurance for other lesser medical problems. There is one major reason why we have a health crisis: people wish to delude themselves that some public or private entity is paying the actual price tag. This is utterly ludicrous. Our tax dollars pay for government provided benefits---and employers simply divert money to one’s health insurance instead of paying a higher slalary or hourly wage. Americans take for granted that they will pay for their own automobiles and auto insurance. Why in hell do they think that health care can ever be free?

David Thomson writes:

I should another point to my previous post. Perhaps a majority of Americans are economic illiterate regarding health insurance. It is amazing how many believe that the employer is paying for their health insurance. This is crazy talk. An employer is never really paying for anybody’s health insurance! If that employer is spending $5,000 annually for one’s health insurance---that’s simply $5,000 less that will be in your paycheck. Why is that so difficult to comprehend?

David Thomson writes:

Oh heck, I’m on a roll. I’ve had a lot of coffee this morning. There is one thing that must be done if we are ever going to solve our health insurance troubles. Employers should immediately cease to offer these benefits. They are not really paying for them---but this charade encourages employees to believe that they are getting something for free. Employees should get the money currently spent on their health insurance directly into their paychecks. They can then decide to spend the money anyway they so choose.

Our current system entices employees to delude themselves. The more that they directly feel the pain of paying for their own health care---the more that they will scream bloody murder when a doctor orders stupid tests merely for the sake of deterring lawsuits. Just think about it for a moment. A $10.00 co-pay charge seems like nothing to get overly excited about. But what happens if you have to pay the whole $200.00 for a needless series of x-rays? The latter figure will almost guaranteeably get your attention.

Boonton writes:
This is utterly ludicrous. Our tax dollars pay for government provided benefits---and employers simply divert money to one’s health insurance instead of paying a higher slalary or hourly wage. Americans take for granted that they will pay for their own automobiles and auto insurance. Why in hell do they think that health care can ever be free?

What you are missing is that employers use their bargaining power to force lower rates and flat fees on the insurance companies. A person who is in their late 50's with a history of conditions who works for a large employer like Ford or GE is able to get insurance at an affordable rate (I'm counting the combined premiums paid by both employee and employer).

Americans are not so silly as to think their employer provided insurance is 'free'.

Lawrance George Lux writes:

I am against catastrophic medical coverage, so against actually, that I would legally forbid it. The law would simply state no entity, except for the Individual's personal wealth, can pay anything over a set amount per year. It does not matter what amount level is used: Doctors must come up with viable treatment procedures, Patients will have to accept they will die when treatment gets too expensive, and Premium-payers will have the ammunition to contest premium increases. lgl

David Thomson writes:

“What you are missing is that employers use their bargaining power to force lower rates and flat fees on the insurance companies.”

I’m not buying this argument for a split second. Employees are currently relying on their employers to take care of their need to negotiate for lower cost health insurance. But once this logically absurd relationship ceases---the employees will quickly find other organizational means to achieve the same purpose. Have you ever heard, for instance, of the AARP? The main thing is to make sure that the employees feel directly the cost of this insurance.

“Americans are not so silly as to think their employer provided insurance is 'free'.”

Baloney. Human beings are great at deluding themselves. I’ve interacted with a sufficient number of employees to realize that they indeed do think that their employer is paying much, if not all, of their health insurance. Why in heck should you listen to me? Just ask them! Almost invariably, they will at least imply that this is so. Sometimes they will even look in your face, and not realize what you are getting at. In their mind, “Of course, my employer picks up my health insurance. What in hell are you talking about?”

Boonton writes:

If this was the case then you wouldn't have people taking low wage or unpleasent jobs just for the health insurance. If they weren't aware how expensive such insurance was, they would quite such jobs thinking it was easy to buy it on their own or get a better paying job that also covered them.

I agree that some groups can get together to buy collective coverage like the AARP. This is not as effective as employee groups. A health insurance company will look at the pool it is dealing with. If the riskier people in that pool can be weeded out then they will try to get the pool to do so. So the AARP or 'Young People's Health Federation' or whatever group you can imagine would find it in their interest to weed out the sickier and riskier members. An employer cannot easily do this since riskier employees tend to be older and occupy more essential positions in the company.

Long story short, insurance works great with ignorance of the future. The home insurance company knows 1 out of 1000 homes will burn down, therefore they know their premium should be at least 1/1000 the of the cost of a home. If you knew that Arnold's home would be the 1 out of 1000 then the other 999 people wouldn't bother buying insurance and no sane insurance company would write a policy for Arnold.

Getting into a pool is a trade off for the individual. If the individual is low risk then he will end up paying more since the pool will be charged based on its average risk. But the individual will benefit from collective bargaining power plus the fact that when he becomes an above average risk he will be benefitting.

David Thomson writes:

“If they weren't aware how expensive such insurance was, they would quite such jobs thinking it was easy to buy it on their own or get a better paying job that also covered them.”

What did Ronald Reagan once say to Walter Mondale?: There you again! The very fact that some employers offer health coverage deters these people from taking care of themselves. The employers are merely transferring money from the employee’s paycheck to their health insurance. There should no such thing as health insurance covering the ordinary medical costs of an individual and their family. This is what we already do regarding auto insurance. When is the last time you billed your standard oil change to your auto insurance company? Does it cover your need for new tires? If memory serves, Arnold Kling has argued this very point in the past.

“I agree that some groups can get together to buy collective coverage like the AARP. This is not as effective as employee groups. A health insurance company will look at the pool it is dealing with. “

The cost of health insurance is always premised up the pool the insurance company “is dealing with.” Insurance companies study the work habits and age levels of a particular group of employees. A football defensive lineman’s health insurance is almost certainly going to be higher than that of an accountant.

Boonton writes:

I do know people whose auto insurance companies paid for fixing dings in their windshields. The companys' logic is that it is better to pay their contractor $60 to fix the chip rather than wait for it to turn into a $500 claim (or even worse, an expensive accident). Some insurance companies pay for routine medical care based on the same logic. Better to let a person get diagnosed and treated for diabetes at a routine physical than to pay for it to happen in the emergancy room...if this means you gotta pay $250 extra per patient per year in 'I gotta cold and want to see my doctor' visits then so be it. As I explained many times before, if this is economically irrational then insurance companies that do not pay for such things could capture market share from HMO's by under cutting their premiums.

What you missed with the pools is that with employees an insurance company has little ability to force the creators of the pool (employers) to screen higher risk people out. If individuals choose to create voluntary pools, it would make sense for them to screen out high risk people. Low risk people would have an incentive to create their own pools. Taken to its logical conclusion, high risk people would be nearly uninsurable thereby defeating much of the purpose for insurance.

Sandy P writes:

Annual - only chronic care?

What happens say, if one has a heart attack and needs bypass?

Don't those bills surpass $50K? We might need it one year and not the next.

Just thinking about the bureaucracy instituting that makes my head spin. Think about it, taking people on, off, corp problems writ large.

David Thomson writes:

“I do know people whose auto insurance companies paid for fixing dings in their windshields. The companys' logic is that it is better to pay their contractor $60 to fix the chip rather than wait for it to turn into a $500 claim (or even worse, an expensive accident). Some insurance companies pay for routine medical care based on the same logic.”

Did you possibly learn economic theory from John Kenneth Galbraith or someone else like that? Any auto insurance company paying for the dings in one’s windshield will always past the cost along in higher premiums. Likewise, the insurance firm paying for your routine medical care. You might think you are getting something for nothing, but one way or another you get the final bill. In the long run---it is best when we directly feel the pain of paying for our own standard health care costs. As I stated previously, you are more likely to scream bloody murder when a physician asks you to undergo some marginally useful X-rays, if the money comes directly out of your own wallet. It’s got to hurt if we are ever going to bring down health care costs in the United States. Insurance should be sought only to protect you from economically devastating health problems.

Boonton writes:

David, with all do respect you haven't the slightest idea where I learned economics or what may attitude is towards medical care.

You seem to miss the point of what everyone else says except for yourself. An auto company pays for dings in the windshield because they find that it lowers claims overall! Yes, of course its costs get passed along to the consumer but such a company has lower costs than one that refuses to fix the dings and waits for them to become a $750 claim.

If you knew anything about the history of HMO's you would know that they developed as a response to the cost increases seen under catastrophic type plans. In such plans, once a person has meet their deductible they have essentially a blank check.

With HMO style plans, the person can make a lot of low cost visits but the HMO is able to impose cost controls on both the patient and the doctor. This isn't insane at all. Why would a patient be willing to give up 100% freedom under a catastrophic plan for much less under a HMO? Because in exchange for giving up the freedom to see any doctor or have any procedure they get to know that they won't pay for most routine care (except for a marginal co-pay).

Like I said, if 'paying for the dings' was insane it would be simple to drive such companies out of business. Simply offer a plan that didn't make such expenses at a lower premium, the market should then work its magic. In reality, it is unclear what is the best method for controling costs. The catastrophic system gives doctors and patients the incentive to act as if they have a blank check once they meet the deductable. The HMO system has the incentive for the insurance company to control costs by data mining and monitoring doctors decisions. The negative side is, of course, that if they are too tight you get horror stories of patients denied treatment because it was labeled 'experimental' or 'uneconomical'.

In a market both types of plans should be allowed to compete against each other. Probably catastrophic plans are good for some people and HMO styles are good for other types....just as some would prefer a 'total care' auto insurance that made minor repairs while others will want a cheap 'catastrophic' insurance.

Robert Schwartz writes:

If you are going to tackle the current health care moras. One of the pins that is holding it together that must be removed is the one that binds the availibility of insurance coverage to membership in an employer sponsored group plan. In turn health insurers must be able to reinsure their catastrophic risk at an appropriate level in financially sound markets.

It is not at all clear to me that the Goverment is the reinsurer of choice or is the best possible market. Indeed, I do not know that such reinsurance is not already available in private markets and just needs to be prodded a bit.

There is a related issue that is not so easily handeled by private markets (but maybe I just lack the data). It is the problem of the rationally uninsured person (healthy, no assets) who in the course of a normal life accumulates some assets and then an expensive illness such as cancer. Do we say sorry bub, no insurance for you? Does the government subsidize the purchase of insurance on his burning house? Do we make him pay a moral hazard tax if he does not buy insurance? Do we make him buy insurance whether he needs it or not?

My preference is for a one time fee that could be paid out of a funded account. But there is a lot of actuarial work that would have to go into it.

dsquared writes:

I see that JK Galbraith has joined Rawls, Marx and Derrida in the exclusive club of authors that Thomson feels able to criticise without having read them!

Comments for this entry have been closed
Return to top