Arnold Kling  

Health Care Celebrity Death-Match

Social Security Risk... Conservatives and the Bush Bud...

The latest Wall Street Journal blogger celebrity death-match features Russ Roberts and John Irons on health care. Here's Russ:

Because of various government subsidies, out-of-pocket spending is a little more than 10% of total health spending (thanks to Alex Tabarrok at Marginal Revolution for the link). The rest comes from the government and insurance.

...Overall, the [President's Budget] proposal is a micromanager's dream -- a bewildering patchwork array of tax credits, new programs and more bureaucracy. That desire to micromanage is what has created most of what is dysfunctional in our health-care system.

Here's John:

The demand for health care is relatively insensitive to price, and this is especially true for the kind of care that is exceptionally expensive, such as end-of-life care.

...The second way fundamental way that health care differs from other goods is an information problem. For the obvious reason that people are unsure about their health and the risk of incurring large medical bills, people find it useful to have health insurance. One problem with the health insurance market is that you, as a purchasers of health insurance, know much more about your health than do health insurance companies. Insurance companies are therefore very worried about offering good health insurance for fear that only those who expect to have very high medical expenses will buy the insurance. The result is an overall breakdown in the private market

...For me, it comes down to whether we want to throw more people into the private market for health insurance -- which we know has fundamental flaws. Or do we instead have an effective system of public supports? I would suggest that the latter is the only feasible solution.

Let me finally address your statement that patients are "spending other people's money." ...A recent report found that 50% of bankruptcies were due to medical expenses. This is hardly a free lunch.
* * *

That last link that John provides is interesting. The report on medical-related bankruptcy says
Among those whose illnesses led to bankruptcy, out-of-pocket costs averaged $11,854 since the start of illness; 75.7 percent had insurance at the onset of illness.

...Our data highlight four deficiencies in the financial safety net for American families confronting illness. First, even brief lapses in insurance coverage may be ruinous and should not be viewed as benign...

Second, many health insurance policies prove to be too skimpy in the face of serious illness...

Third, even good employment-based coverage sometimes fails to protect families, because illness may lead to job loss and the consequent loss of coverage. Lost jobs, of course, also leave families without health coverage when they are at their financially most vulnerable.

Finally, illness often leads to financial catastrophe through loss of income, as well as high medical bills. Hence, disability insurance and paid sick leave are also critical to financial survival of a serious illness.

My reading of this fascinating study is that health insurance is neither necessary nor sufficient to provide financial support for families struck by illness. I am coming to believe that health insurance is designed for the benefit of health care providers, in order to make their incomes more reliable. It is not of value to consumers.

What consumers need is illness insurance, which provides payment based on a combination of the health costs and the disability costs of an illness. It would be more useful to a consumer to receive a large lump-sum payment for an illness that is expensive in both dimensions than to merely insure reimbursement for medical procedures.

UPDATE: For a critique of the bankruptcy study, see this article.

For Discussion. If we got rid of today's health insurance, might the market provide the sort of insurance that would keep more people from being bankrupted by the cost of illness?

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The author at Hispanic Pundit in a related article titled Health Care Debate writes:
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COMMENTS (12 to date)
Boonton writes:

Disability insurance already exists in both public and private form. Insurance against specific illnesses could be useful in a limited number of cases where the diagnosis is objective and the ability to game the system is limited. For example, a broken leg or cancer is pretty clear cut. ADD, depression, and others are much less so.

In the past I've leaned towards a universal voucher system to ensure universal coverage while allowing people to use their own private money to opt for supplemental insurance. Perhaps the solution would be a universal voucher for catastrophic illness. Say for medical expenses over from $5,000 a year and beyond.

People would still be free to buy private insurance for under $5K expenses & such insurance might be useful. Medical care suffers from a double disconnect...not only is the consumer not often directly paying for the care he uses but the consumer often isn't sure how much care he really needs. The doctor & medical industry has a conflict of interest in that they can always over prescribe care to pad their income. In theory HMO's should be useful since they can act as a counter balance.

BT writes:

Physicians, not individuals, decide which services they will sell; thus, providers have a captive market. If a person sees a physician for a headache and the provider recommends a MRI, then 99% of people will get that MRI; the consequences of not getting the MRI are too great. The best insurance scheme aligns the physician's incentives with that of their patients. The focus of medical care should be on wellness not procedures as is the case currently. I hate to agree with the Clinton administration, but the HMO style plan proposed by Hillary may be the best option available. Added bonus, a universal HMO would stimulate the economy. The number one problem faced by small businesses is accessible health care. A universal healthcare system will free up the job market as talented individuals leave corporate America to start their own companies. These new and old small businesses will boom, as the burden of healthcare is no longer an impediment to progress.


Lawrance George Lux writes:

Government must mandate that medical Underwriters at least offer a Basic Care policy without Catastrophic illness provision. Families can always look to Government and Charity for outsize expenses, but they need a steady medical payment schedule for normal medical care.

Underwriters currently insist Policyholders pay for a combination of Basic+Catastrophic Care, with unbearable Deductibles, unsustainable premiums, and unrealistic Co-Payments. Care Providers have no restriction to limit Costs, nor due Underwriters who make a percentage Profit off premiums based upon Provider charges. lgl

Randy writes:

The market might provide it, but the target population, lower middle class working people who have a hard time meeting the bills from payday to payday, aren't going to pay for it. They will hope that nothing happens, and if it does, bankruptcy is their health insurance.


1. Let the health care providers take out bankruptcy insurance.

2. Provide some needs based assistance, but to keep the prices down, move healthcare purchase decisions as much as possible to the healthcare consumer.

James writes:

John sez:

The demand for health care is relatively insensitive to price...

Apparently, he needs to spend some time in Europe. I'm given to understand that a number of European states have problems with massive waiting lists for routine procedures, precisely because people have figured out that "an ounce of prevention is worth a pound of cure" + "free MRIs" = get an MRI every time you get the sniffles, just in case.

The thing is that with medical care, there's no such thing as too much. This is why the elderly are costing so much more to maintain than they did a century ago -- medical science lets them live longer, but only at the cost of more (expensive) medical treatment. Result? More and older seniors, paying more to stay alive longer, so that they can pay more, so that they can live longer, so.... ad infinitum. It's positive feedback, and that never ends well.

I maintain that there are two distinct ends of a spectrum: 1) Universal care of some sort, where the level of care everybody gets is commensurate with what people are willing to spend (tax-wise) and no individual spends any money directly, or 2) Privately-financed care, where the level of care each individual gets is based on his or her ability to pay, though the actual money may come from somebody else (insurer or government). I further maintain that for the reasons listed above, the (1) end of the spectrum should be avoided.

Of course, none of that answers your actual question. As for catastrophic coverage -- I'd love to get that, but the question is how much cheaper it would actually be than my current, soup-to-nuts, $15 co-pay-for-any-doctor-visit coverage. I haven't seen anybody run projected numbers. Could we provide $5000-deductable "catastrophe" coverage to everybody in the country for some reasonable amount? OK, sure, but I'd be surprised if we saw it happen. I don't think it's a question of if the market would provide -- the question should be, "If the market did provide, would anybody want it?"

Jon writes:

A free market for medical care has all of the problems cited; but I think it is a gross overstatement to maintain that consumers are not sensitive to price. If they had to pay, they would be more sensitive; though perhaps not nearly as sensitive as the free market purist camp would like us to believe.

The proposal of giving a 'lump sum' for illnesses sounds appealing, but has many flaws that are apparent in current government problems. First and foremost the incentive for abuse.

There is no getting around the one salent fact -- if it costs more in the market place to keep someone alive then they can produce, the free market solution is for them to die. Also their optimal course of action to break any laws they can to get what they need to stay alive.

Valuing a life and allowing someone to die or based on some measure of present or future projection also is not consistent with the values of most of our society.

Maurice Sonnenwirth M.D. writes:


This can be true, but the flip side is that doctors over prescribe care and tests to "cover their asses" for reasons of avoiding malpractice suits. There are those who say this is a minor thing...but in my experience (I work in an Emergency room), ALL of us "over order" though we don't get paid personally for any tests we do. This goes on in offices too, not just the ER or the hospital.

The one thing in all these discussions that is missing is what are the true causes of why health care is so expensive in the first place, and can it ever be brought down to a level where it was affordable outside of the insurance issues. Is there anything that can be done to minimize the bureacratic layers upon layers, to maximize competition, to increase the level of physicians available, to minimize the costs of malpractice premiums as well as the "CYA" factor mentioned above? Can we figure out how physicians don't need to hire extra office workers who check for compliance with regulations and billing? I know the nurses in the ER spend huge amounts of time filling out papers, forms, scanning the forms into a computer..there are other clerks who have to shuffle the papers, record keeping has to do more, and our bills are farmed out to a company out-of-state that goes through the billing. Somewhere I read that for every hour a patient is in the ER, an hour's worth of paperwork and bureaucratic nonsense must be filled.

Because there is SO much money floating around the "medical system", I do believe there is no real invcentive for anyone to cut back and fix these problems. The government throws its weight around with Medicare/Medicaid and payments to providers...the insurance companies make goodly amounts of money...the doctors DO try to keep up their incomes and will work in a system that is horrible as long as they can maintain some steady stream of income, even if less than in prior years, depending on the speciality...the bureaucrats want to keep their (sometimes useless, IMHO) jobs, Big Pharma wants to keep profits up (which there is nothing wrong with if done fairly, for taking the enormous risks they do), the litigators don't want that party to end...and the patients want to keep getting any test they want at little or no out-of-pocket cost, and let's face it, most patients with insurance through their employers have not thought out the true expense of insurance, i.e. that even if they have a relatively inexpensive policy, said policy is not "free" to the is taken out of what otherwise could be given to them as cash salaries.

So what's my point? No one is innocent. All groups are guilty of greed, ignorance, wanting to maintain the status quo. The government, in some ways, is the biggest problem, because their rates of what they'll pay for anything set the tone for the private insurers...and the government does control increasingly large segments of healthcare spending. The government effectively already rations care, sets who can set up a hospital or an MRI or a clinic, how many doctors there can be and how they are licensed (govt. being both Federal AND state)...government set up the rules for the HMO experiment. Government is at the heart of much of the growth of the bureaucracy that costs enormous amounts to the medical care system.

I don't have THE answer to any of this. I don't kow how to effectively or easily get the government out of the medical care system, but I can't see that involving it more will lead to anything sane. But I think that it is easy to blame one facet or the other (it's overutilization by patients who don't know the true costs, it's the insurers, it's the doctors...etc.), when we need to look at ALL of these and figure out how to bring the level of the cost of health care down, so that an ER visit, for instance, only costs a fraction of what it does now. How can wwe get all those additional layers of cost wrung out of the system?

Make it affordable so that many things now that are ridiculously priced could be brought down to a level where it doesn't hit an average family so hard...where the Tylenols don't cost $9 apiece...

Yes, that brings in the whole business of the "right to medical care"...and we have to address that there are those who will always need some help. That's a whole 'nother discussion. But I can say this: You can throw billions more at health care...but if you get people using the ambulances as cabs, as some of our "customers" do, or people overutilize the ER for silly things, like scraped knees and paper cuts (no exaggeration) or for pregnancy tests because they'd rather we pay for it than having to spend $7 at Walgreen's for a home test (and of course, these folks, if they are pregnant, will end up on Medicaid with a baby whose care they don't have to pay for, but pity the middle class couple who frets and scrimps to pay for another child...but that's another story too)...this ends up crowding out someone who might need the ambulance for a real emergency...or might end up using up our resources in the ER, tying up a room that someone far more in need might need and extending the waiting times....there are only so many doctors the hospitals can hire, only so many who are adequately trained, only so many rooms you can build, only so many ambulances you can purchase and staff...those who advocate for unlimited care, don't think this through...but as someone else wrote, look at Europe or Canada, look at prolonged waits for treatment etc.

None of this is easy. But that's my overlong point. There is not one simple factor we can point to and say "fix this and it'll all be ok". Address all of it or you will make adjustments that will only work for a short time, if at all.

Dave Schuler writes:

One suggestion for Dr. Sonnenwirth is that he might consider dividing up the health care expenses pie and looking at the sizes of the slices. Prudent optimization suggests that the largest slices are the best candidates for attention.

Implicit in Russ Roberts's apparent position is that concentration on the demand side alone will result in actual cost reductions in health care. Is there any actual evidence of this?

Take James's comment above. Insufficient supply is as good an explanation as excess demand for the reported phenomenon. In fact, the only thing you can conclude from what's he complaining about is that there's a problem.

I spend the insurance company's money as though it were my own. I don't like to go to the doctor or hospital or use prescription drugs (or over-the-counter for that matter). Do you? Do you know anyone who does? Begin counter-intuitive and a lack of actual data would seem to be big problems with the excess demand theory for the high cost of health care.

Don't get me wrong. I would be happiest if the subsidies to demand were removed and the barriers to supply were removed. But the second-best solution may be leaving both in place and doing a better job of managing the whole mess.

spencer writes:

I doubt that if we eliminated today's health insurance that the market would provide something that prevented bankrupty. The key point that was not raised in the article or the critque is that the medical costs probably was the final straw.
Most likely -- although the article or the critique do not say -- is that most of the people that ended up bankrupt were on the verge of it before they had the medical problem and that was what pushed them over the edge. Such people would be quite unlikely to buy insurance against loss of income.

Actually, there is already insurance against loss of income because of health problems. But if you look at who buys it you will find that only the relatively well off buy it. When I first became self employeed and had young children I bought loss of income insurance. Now that I am older and my children are grown I no longer buy that insurance.

Randy writes:

Healthcare for the poor is better now than at any time in history.

The only way to permanently provide the poor with the very best in healthcare is to redistribute income, and also stop advances in healthcare.

We can attempt to improve the healthcare provided, but must be aware that unlimited desires will at some point run head on into limited resources. Will the poor be provided with replacement hearts? Certainly as fellow human beings they are entitled. And who will pay?

Brian Ferguson writes:

The argument that the demand for health care is extremely price inelastic has caused more trouble than any other, with the possible exception of the argument that doctors control the demand for their own services. It comes out of the gut feeling that illness is a well-defined thing, to there will be a well-defined treatment with a Leontief production function. It's generally backed up by reference to the RAND study of the 1970s, which found an elasticity of about -0.2. The RAND results have to be treated with caution, though. For one thing, they found Hicksian, not Marshallian elasticities. For another, the range of things the medical profession can do has expanded dramatically since the 70s; in particular there has been a revolution in pharmaceuticals.

There was a paper in Health Affairs not too long ago which concluded that the primary factor determining whether a patient was prescribed a COX-2 inhibitor rather than an older treatment for arthritis was not medical indication (although that did play a role) but rather generosity of insurance cover. More generous insurance, meaning having to pay less out of pocket, made patients more likely to use the more expensive (in total cost) drug. In other words, demand curves slope downward. This came as a great surprise to some of the paper's audience. And doctors are often unable to persuade patients to take over the counter drugs rather than prescription drugs because OTCs aren't covered by insurance while prescription drugs are. The OTCs add less to total health costs, but cost insured patients more out of pocket.

As for insurance being designed to protect doctors' incomes, this is in fact exactly what plans which adopted what is now the familiar structure(service insurance with low co-payment)were intended to do - see Paul Starr's "Social Transformation of American Medicine". It's worth remembering that the structure of private health insurance in the US was developed by non-profit, doctor-sponsored plans, and that that structure pretty much guaranteed continuing price inflation in health care.

Zack Lynch writes:

While American's think 10% is painful, think of the ROW:

The economic impact of pharmaceuticals is substantial -- especially in developing countries. While spending on pharmaceuticals represents less than one-fifth of total public and private health spending in most developed countries, it represents 15 to 30% of health spending in transitional economies and 25 to 66% in developing countries. In most low income countries pharmaceuticals are the largest public expenditure on health after personnel costs and the largest household health expenditure. And the expense of serious family illness, including drugs, is a major cause of household impoverishment.

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