Arnold Kling  

The Real Cause of Market Failure in Health Insurance

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Two-person Sudoku... Descent into Warlordism...

I write,


What we are left with, then, is that people do not want real health insurance. I would gladly take a health insurance policy with a $10,000 deductible per individual, and I suspect that many of my wise, risk-averse TCS readers would, too. But we are in a tiny minority! Most people do not want to be responsible for the first $10,000 in medical expenses, and most people believe that an insurance policy that is expected to pay no claims 95 percent of the time is a bad deal.

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Could people be persuaded that what I think of as health insurance--a policy with a very high deductible and a relatively low premium--is decent health insurance?


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COMMENTS (24 to date)

Of course, some people can be. And have been. The real question is can we convince enough legislators to pass the laws necessary to allow Blue Cross et al to come up with a package they can market.

Robert Cote writes:

Perhaps if we could get an insurance company to quote an -auto- policy that covered flat tires, oil changes and wiper fluid the example would illustrate your point.

Paul N writes:

I agree this is the type of insurance I'd want, although I'd actually expect it to be quite expensive (more than half the cost of the $500 deductible plan), because many people spend $0 on health care in a given year (e.g., me the past 20 years of my life), while many spend more than $10,000. My son was in the hospital for an infection, basic treatment, no intensive care, 4 day hospital stay = $28,000.

In fact, my current Blue Cross PPO has a $500 deductible and $6000 annual out-of-pocket maximum (@ 40% of cost) - this is similar to the type of plan Kling envisions, only $6500/yr instead of $10,000/yr. Premiums cost $800/month for me, my wife, and my son. Between insurance premiums and health care costs, we have spent $16,000 this year on health care - and only one of us got sick, a single time!

Randy writes:

Could people be persuaded? Some could. But not the people who really need help for healthcare - those at the lower end of the income scale. People for whom a $1000 dollar medical bill can put them over the edge. These would need such a low deductible that the cost would still be prohibitive. Its a good idea, but it doesn't solve the problem.

Gil Guillory writes:

Surely you know that the reason is taxes. Comprehensive medical insurance is a non-taxable benefit when given to the employee by his employer. If the employer gives that money directly to the employee as wages, it is taxed. The marginal tax rate of most employees is plenty of incentive to maintain the current system. If the use-or-lose provision of the tax-free medical savings account were eliminated, we would see a return to traditional, high-deductible health insurance.

daveg writes:

It is remarkable that health care from your company is pretax while your own dollars are post tax.

Companies know this is one small way to discourage you from going out on your own so they work behind the scenes to keep it that way.

daveg writes:

As someone who buys insurance "off-the-shelf" I can also say insurance companies price their health savings accounts so as to discourage you from using them.

To wit:

I have a blue cross saver plan for my family. This plan has a 1200/24000 dollar deductable and you pay for office visits out of pocket. The plan for my family of 5 is about 360/month. It is not so bad, except you pay the rack rate for medical services including medical testing. This make an otheriwse very attractive plan medicore. The rack rate for an office visit is ~60.00. If I was in a "plan" the office visit is something like $20(!). The $20 is not the co-pay, it is what the doctor receives. In another example, the rack rate for a cholesterol test is $120 while the plan rate is about $32. Needless to say this can add up, but even with this difference I still think I save money from a full plan while would be around 900/month. So, the 6480 I save each year in premiums is less than the out of pocket I incurr, and my kids are sick a lot and my wife takes the kids to the doctor for most sniffles.

Now, an HSA plan has a deductable of 4800 flat. Eventhing less than 4800 is paid out of pocket from your HSA acocunt. You are allowed to put a little more than 5000 in you HSA account each year. However, the premium on the HSA is a little higher than the basic plan - about $390. So you pay more money for a higher deductable!

Also, for some reason I can't get my HSA through my company so I pay for the HSA in pre-tax dollars!

Now, the HSA does give you the preferred rate and you fund the HSA with pre-tax dollars, but still why should I pay more for a higher deductable and why should I use pre-tax dollars!

Belive me, the insurance companies don't want you to pay for health care out of pocket. And they make sure the laws discourage you from doing this.

All of you folks that think that companies are so free market are fooling yourselves.

Lord writes:

Most people realize the deductible is just the start. Then there are the copays, incident charges, charges beyond ordinary and reasonable, uncovered expenses, etc. Policies with much lower deductibles than $10000 are really $10000 deductible plans.

PJens writes:

We have an HSA and before it came on scene had the MSA. It works great because we put the effort into making it work. At the dcotor visit, we pay a reduced rate. Lab work is done for the lower insurance company rate. We shop for insurance via different companies every couple years. We use medical services every year and pay out of pocket so the money in our HSA grows tax free.

In order to make Kling's idea (excellent one in my opinion) widespread and popular, the medical service community has to embrace it. My doctor now realizes that his offcie will get paid when I leave and there is no insurance company to wait for or negotiate with! When the business end of medicine recognizes that good customers are out there, they will receive better attention. I would like to see two lines at the doctor's office, one for insurance customers, one for cash customers.

Jim Bim writes:

Enjoy paying for your $10,000 hernia operation. It doesn't take much to run up a bill.

daveg writes:

Just to clarity, I think the idea of a high deductable plan with out of pocket payments for day to day items could work. I think it is a good idea in the abstract.

But it is not just uninformed indivuduals who put up roadblocks to this process. The insurance companies themselves do not want these plans to succeed, less they by cut out of a big peice of the medical dollars pie.

They want to inject themselves into this process.

Bud1 writes:

Good idea. But not one that will sell.

Andrew writes:
The plan for my family of 5 is about 360/month. It is not so bad, except you pay the rack rate for medical services including medical testing. This make an otheriwse very attractive plan medicore. The rack rate for an office visit is ~60.00. If I was in a "plan" the office visit is something like $20(!). The $20 is not the co-pay, it is what the doctor receives. In another example, the rack rate for a cholesterol test is $120 while the plan rate is about $32.

Please name one doctor that receives only $20 for an office visit. Maybe the co-pay they receive is $20 but unless you are going to some sort of indigent clinic, the doctor is getting more than $20.

If you are paying the rack-rate, you should switch insurers. Several high deductible plans offer their lower contractual rates that are used for regular insured. I know United Health Care does for sure.

Marc writes:

High deductible health plans (HDHP) are a tremendous boon to insurance providers. Chances are they will never have to pay out any money. All they have to do is collect the premiums.

Read The Effectiveness of High Deductible (HDHP) and Consumer Driven Health Plans (CDHP). It's a report by the Employee Benefits Research Institute (ERBI), and indicates that people in an HDHP are twice as likely to delay or avoid seeking care.

The US system of burdening business with the responsibility of providing health insurance is flawed, and any attempt to revamp it using the same profit motivated structure, currently in place, is doomed to failure also.

Health care is not a commodity, and there is no justification for the obscene profits ($4 billion dollars in the case United Health Group) being made on the suffering of citizens of this country.

rakehell writes:

No.

"wise, risk-averse?"

Regular visits to the doctor are a normal part of taking personal responsibility for one's health. Going on a plan like this is akin to someone who doesn't save for retirement--you are uwisely emphasizing current consumption over future consumption.

Jim Glass writes:
"Most people do not want to be responsible for the first $10,000 in medical expenses"

Which is why the politicians set up Medicare to cover the first dollars of medical costs -- such as routine checkups and now prescription drugs -- but not the last million dollars, calamities that lead to nursing home confinement.

Which is of course the exact reverse of a rational insurance system. (As Krugman et. al. proclaim it to be so "efficient". ;-) ) Think of auto insurance paying for gasoline, oil and tires, but not crashes and injuries.

People don't want to pay the first $10,000 -- everybody wants free lunch -- and they don't want even to think about the million dollars that could follow.

Still, if government was responsible it would set up a rational insurance system that covered calamities while keeping predictable, routine costs paid out-of-pocket by persons going to competing providers.

But government is politicians, so they cater free lunch to everybody to get the votes. Which doesn't leave enough money left over to save people's homes from Medicaid if they really get sick.

As an aside, when people tell me they favor "national health care" I sometimes ask them, you mean health care designed and directed by [a bunch of locally known politicians]? It's amazing how often their response is, "Oh, no, not by politicians! By the government!!"

Yet government is politicians, nothing but. ;-(

Jim Glass writes:
It is remarkable that health care from your company is pretax while your own dollars are post tax. Companies know this is one small way to discourage you from going out on your own ...

Well, self-employed health insurance premiums are deductible these days, which makes them paid with post-tax dollars, so this doesn't stop one from setting up shop on one's own these days.

Still, it is a horrible thing -- among the other badnesses to it, it makes the real after-tax cost of insurance premiums dependent on your/the business's tax bracket, which depends on a host of arbitrary things (the health of the business, whether it is start-up or mature, various tax strategies, etc.) and even on where you live in the US, since tax brackets change significantly with local cost of living differences. (I'm in Manhattan, ouch.)

Tying health insurance to employment was of course another innovation of the politicians, as part of the WWII wage control system.

It's amazing how so many people point to all the ways the today's health system has been screwed up by the politicians, and then use 'em as an argument for giving the politicians total control over everything.

dsquared writes:

There is a fairly material proportion of the population for whom a $10k excess might as well be a $10m excess because they have equally minute chances of being able to pay either sum of money. And I think this group has quite a lot of overlap with those who are not covered by medical insurance.

daveg writes:

Well, self-employed health insurance premiums are deductible these days, which makes them paid with post-tax dollars, so this doesn't stop one from setting up shop on one's own these day

Isn't this only true for expenses above 7.5% of AGI, which means the deduction is basicaly useless?

See this.

IRS Publication 502 clearly states that medical insurance premiums are a medical expense eligible for deduction as an itemized deduction subject to reduction by 7.5 percent of your adjusted gross income, or AGI.

I know individual HSA premiums are not deductable as there was a law to change this last year that was not passed.

Am I missing something here?

Chris Bolts writes:

I think the only people that really need convincing are the politicians. If we can convince the politicians that it is in the best interests of individuals to handle their own health costs as opposed to allowing the government or business to handle them we can truly begin to have an unabashed dialogue about healthcare.

The other way to convince people to change their thinking of having someone else handle their healthcare are for businesses to mutiny against the status quo and quit providing health insurance. I'd really love to see the chaos that would result from this course of action.

Robert writes:

But not the people who really need help for healthcare - those at the lower end of the income scale. People for whom a $1000 dollar medical bill can put them over the edge.

The demographic that cannot pay a $1000 medical bill after a minor emergency (or even the $100 medical bill for a child with a potential strep infection) is the same demographic on which the paycheck loan business thrives. The enterprising general practitioner should offer paycheck garnishing as a payment option.

Paul N writes:

To summarize: a $10,000 deductible plan is essentially already available, and it still has substantially expensive premiums.

sf writes:

For federal employees, the GEHA $1,000 deductible plan costs more than the Blue Cross Basic plan with 0 deductible. Most plans have $55 allowable for doctor visits, with $20 copay and 35 paid by insurance.

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