Arnold Kling  

Future of Health Insurance

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Donald Moran writes,

As private insurance thins out toward a more catastrophic form, however, this dynamic can be expected to change, in two ways. First, facing a much larger share of the first-dollar cost of expensive therapies, patients will be much more price-sensitive than they are now. Second, having transferred most of the first-dollar risks to the beneficiaries, health plan sponsors will focus their cost containment efforts more sharply on the big-ticket items that represent an increasing share of their costs. The combined effect of these two sets of pressures will push back strongly against manufacturers’ pricing flexibility. Increasingly, the question of whether a high-cost technology is covered at all by an insurance plan will become the most important determinant of product economics.

Moran's thesis is that comprehensive health insurance is not sustainable, so it will gradually "thin out." Insurance companies will try to reduce coverage for expensive procedures. This in turn will force medical innovators to focus on either cost-saving therapies or lobbying efforts to get therapies covered by insurance.

In an email, Don Boudreaux pointed to a letter to the editor of the Boston Globe by a woman arguing that state-subsidized health insurance should be required to pay for infertility treatment. This is the sort of political issue that Moran would predict will heat up going forward.

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COMMENTS (7 to date)
Andrew writes:

Two thoughts on the piece in the Boston Globe:

1) If you are uninsured either because you are unemployed or because you are in a job that doesn't offer health insurance, do you really have the means to raise a child? Do we really want to encourage uninsured or underinsured people to have children? Where is it written that it is a Right to reproduce that must be subsidized by the general population?

2) Is it possible that state mandates requiring coverage for infertility and all sorts of other non-life threatening health issues has caused the price of insurance to rise to the point where there are 151,000 uninsured in Mass.?

I think that catastrophic insurance is a great thing and will finally force people to evaluate if a medical service is really worth the true cost. No longer will it be a question of if infertility treatments are worth a couple of $10 copays, instead it will be a question of if it is worth the $10,000 billed by the MD, Pharmacy, clinic, etc.

Lord writes:

I doubt there will be any 'thinning out'. This is the most profitable area. Just look at AFLAC. Covering numerous small nuisance costs with a built in profit margin is precisely the area insurance companies thrive in and many people like. It is the avoidance of the rare expensive treatments insurers most wish to avoid. Cost control offers no resistance to producers, only to consumers, by dividing up the market into small classes and moving consumers rapidly among groups, with each group paying the costs of their treatment. Even group policies essentially become individual ones, and insurance becomes little more than an expense payment plan.

Victor writes:

I assume you are linking to Moran's "Health Affairs" article:

(link may require registration)

I couldn't get your link to work. (you can delete this post)

daveg writes:

Really, you should just respond to every one of Krugman's articles.

A Private Obsession


"Lots of things in life are complicated." So declared Michael Leavitt, the secretary of health and human services, in response to the mass confusion as registration for the new Medicare drug benefit began. But the complexity of the program - which has reduced some retirees to tears as they try to make what may be life-or-death decisions - is far greater than necessary.

One reason the drug benefit is so confusing is that older Americans can't simply sign up with Medicare as they can for other benefits. They must, instead, choose from a baffling array of plans offered by private middlemen. Why?

Here's a parallel. Earlier this year Senator Rick Santorum introduced a bill that would have forced the National Weather Service to limit the weather information directly available to the public. Although he didn't say so explicitly, he wanted the service to funnel that information through private forecasters instead.

Mr. Santorum's bill didn't go anywhere. But it was a classic attempt to force gratuitous privatization: involving private corporations in the delivery of public services even when those corporations have no useful role to play.

The Medicare drug benefit is an example of gratuitous privatization on a grand scale.

Here's some background: the elderly have long been offered a choice between standard Medicare, in which the government pays medical bills directly, and plans in which the government pays a middleman, like an H.M.O., to deliver health care. The theory was that the private sector would find innovative ways to lower costs while providing better care.

The theory was wrong. A number of studies have found that managed-care plans, which have much higher administrative costs than government-managed Medicare, end up costing the system money, not saving it.

But privatization, once promoted as a way to save money, has become a goal in itself. The 2003 bill that established the prescription drug benefit also locked in large subsidies for managed care.

And on drug coverage, the 2003 bill went even further: rather than merely subsidizing private plans, it made them mandatory. To receive the drug benefit, one must sign up with a plan offered by a private company. As people are discovering, the result is a deeply confusing system because the competing private plans differ in ways that are very hard to assess.

The peculiar structure of the drug benefit, with its huge gap in coverage - the famous "doughnut hole" I wrote about last week - adds to the confusion. Many better-off retirees have relied on Medigap policies to cover gaps in traditional Medicare, including prescription drugs. But that straightforward approach, which would make it relatively easy to compare drug plans, can't be used to fill the doughnut hole because Medigap policies are no longer allowed to cover drugs.

The only way to get some coverage in the gap is as part of a package in which you pay extra - a lot extra - to one of the private drug plans delivering the basic benefit. And because this coverage is bundled with other aspects of the plans, it's very difficult to figure out which plans offer the best deal.

But confusion isn't the only, or even the main, reason why the privatization of drug benefits is bad for America. The real problem is that we'll end up spending too much and getting too little.

Everything we know about health economics indicates that private drug plans will have much higher administrative costs than would have been incurred if Medicare had administered the benefit directly.

It's also clear that the private plans will spend large sums on marketing rather than on medicine. I have nothing against Don Shula, the former head coach of the Miami Dolphins, who is promoting a drug plan offered by Humana. But do we really want people choosing drug plans based on which one hires the most persuasive celebrity?

Last but not least, competing private drug plans will have less clout in negotiating lower drug prices than Medicare as a whole would have. And the law explicitly forbids Medicare from intervening to help the private plans negotiate better deals.

Last week I explained that the Medicare drug bill was devised by people who don't believe in a positive role for government. An insistence on gratuitous privatization is a byproduct of the same ideology. And the result of that ideology is a piece of legislation so bad it's almost surreal.

Victor writes:

This is a really odd time to be criticizing private involvement in the Medicare drug bill. Does he not just realize that the private market is providing the benefit more cheaply than CMS guessed it could? The average premium was prospectively advertised as being around $35. Every state has a provider under $20, and most have several below that figure. Granted, I don't have a clue how Humana and some of the players are doing it. But, you know, that's kind of the point of the free market.

And his criticism of Medicare Advantage is a bit surreal. I, too, am skeptical that the private market can provide Medicare coverage more cheaply than the gov't, under current accounting and regulation restrictions. The private market won't be able to "encourage" provider cost shifting nearly as effectively as the gov't can. This says nothing about the relative merits of privatization, however. It says an awful lot more about just how subsidized the Medicare program is, implicitly.

Lastly, since we are talking about that subsidy, let's talk about the private insurance companies that are actually doing the Medicare processing and bidding for the Medicare contracts. If Medicare is efficient, then they are, too.

bernie writes:


please make your point without drowning us in needless crap. We don't need to read Krugman's piece. What do you want to say? Don't be lazy and hide behind others.

[bernie: Ad hominem remarks, flippantly crude slurs, and angry utterances are not appropriate on EconLog. To reinstate your posting privileges, please respond to our email to you.--Editor]

daveg writes:

Come on, Bernie, someone who sifts through the fog of acedemic papers should be able to wade through a Krugman column, written at an 7th grade level, I imagine.

nonetheless, I will summarize:

1) The new Medicare drug benefit does not allow you to sign up directly with the government. The only choice is among private providers.

2) Studies show that the overhead for private insurers is much higher than for government run plans. Two possible reasons for this are a) higher marketing costs and b) less leverage than government when negotiating. There are others as well, including, how do I say it ... profit!

So, has the cult of privatiation screwed the pooch again? Couldn't there at least have been an option to go with a government run program?

And these points are in addition to the last Krugman column which notes (again) that other countries pay a fraction of the amount the US pays on health care costs - sometimes as much as 25 cents on the dollar - and have longer life spans, lower infant mortality etc.

[daveg: EconLog's recent attempts to reach you at the email addresses you've given have failed. Providing a working email address is required. Please email us at to retain your posting privileges.--Editor]

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