Arnold Kling  

Mark Thoma on Health Insurance

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Why is Education so Primitive?... Robin Hanson on Health Care...

He says,


Do health markets suffer from substantial market failure? My assessment of these markets says the answer is yes and, in particular, the most difficult problem to solve, adverse selection, is the most serious problem plaguing these markets. My preferred solution is a universal coverage single-payer system, but there is room for disagreement on this.

Crisis of Abundance challenges this view. I write,

why now? If private insurance is inherently unworkable, then it should have been unworkable in 1955 and in 1975...

I also cite work by Mark Pauly and Bradley Herring that suggests that risk pooling in health insurance does not break down.

I think that the most important point about health insurance in the United States is that it is not really insurance. Thoma says, "In general, insurance gives us financial protection from unexpected events -- a tree falls on our house, we have a car accident, we become unemployed, we become sick and need health care, and so on."

But what we call health insurance covers things like new eyeglasses, which is not a rare, catastrophic event. It seems to me that the big market failure in health insurance is that it exists to protect health care suppliers from having to bill patients directly rather than to protect consumers from catastrophic loss. That is, the failure is not in the way risks are managed by insurance companies, but in the very structure of what we call health insurance.

Before we leap to having single-payer health insurance, we ought to change health insurance to something that looks like insurance, not like a scheme to insulate individual consumers from all health expenses. Unless Thoma, Krugman or some other economist can justify such insulation, it seems presumptious to suggest that we need government to provide more of it.


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TRACKBACKS (9 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/580
The author at Outside The Beltway | OTB in a related article titled Is Health Insurance Really Insurance? And Does it Matter? writes:
    Arnold Kling argues that what we call “health insurance” isn’t really insurance at all. [Mark] Thoma says, “In general, insurance gives us financial protection from unexpected events — a tree falls on our house, we have a ... [Tracked on October 16, 2006 3:18 PM]
The author at dustbury.com in a related article titled (Un)coverage writes:
    Two weeks ago I had an unscheduled trip to the dentist, the result of not looking too closely at what might be lurking in the bottom of that bowl of trail mix. (Whatever it was, it was petrified, and for... [Tracked on October 17, 2006 6:27 AM]
The author at M1EK's Bake-Sale of Bile in a related article titled Health Insurance and Car Insurance, Redux writes:
    Sorry, 'wingers: it's old-style HMO/PPO plans, NOT the high-deductible HSA plans, that are most like car insurance. [Tracked on October 17, 2006 8:22 AM]
COMMENTS (6 to date)

I find Kling's arguments convincing. But I wonder why there is not more public demand for health care insurance policies which covers only catastrophic outlays? For example, an HCI policy with an excess of 10 000 dollars? Surely that would be much more affordable? Why doesn't the market provide it?

Don Lloyd writes:

Bruce,

I find Kling's arguments convincing. But I wonder why there is not more public demand for health care insurance policies which covers only catastrophic outlays? For example, an HCI policy with an excess of 10 000 dollars? Surely that would be much more affordable? Why doesn't the market provide it?

You'd have to ban non-catastrophic 'insurance.'

As long as it exists, the costs for non-catastrophic products and services will be 2 or 3 or more times as much for the uninsured as for the insured. There is no point in a catastrophic plan whose benefits are included in the present plans. As long as a provider produces for a market made up predominately of third party 'insurance' companies, there is no incentive to hold down prices for the uninsured. In fact the higher prices are advantageous in allowing bigger numeric discounts to the 'insurers.'

Regards, Don

Don - Thanks. I see that - as things are now - 'comprehensive' health insurance has inflated the cost of even simple procedures etc.

What puzzles me is that this has happened with health insurance but not car insurance. In the UK, if you do not have comprehensive insurance for your car then you repairs are cheaper than when the money comes from insurance companies - garages ask 'is this an insurance job?'

Maybe the root of the problem is lack of supply of medical care, eg insufficient physicians due to restrictive practices wrt. licensing?

If there were more physicians and more competition etc, then maybe some of them would offer cheaper health care for direct payment from patients (thereby avoiding the transaction costs of dealing with insurance agencies).

Don Lloyd writes:

Bruce,

What puzzles me is that this has happened with health insurance but not car insurance. In the UK, if you do not have comprehensive insurance for your car then you repairs are cheaper than when the money comes from insurance companies - garages ask 'is this an insurance job?'

The car insurance would be expected to be the model norm, if everything else were equal. The repairer would drop his price just enough to get your business, if that didn't set a cap on his pricing for other individuals, assuming that what you pay isn't going to be broadcast on the BBC.

Even more important, he will judge that there is little risk that giving you whatever discount is necessary, above his marginal cost, will cause the insurance companies to remove him from their lists of approved vendors.

At least in the US, there is a strong possibility that discounting for the non-insured will cause difficulties for health providers in their dealings with the insurers. Who would pay insurance premiums if they could get the same services and prices on their own?

Some more information and thought is required as government and regulations must also fit in there somewhere.

Regards, Don

Mr. Econotarian writes:

You can purchase a high-deductible health care policy with a health savings account (HSA) today:

http://www.cato.org/pub_display.php?pub_id=5482

HSAs couple high-deductible health insurance with a tax-free savings account (the HSA) for out-of-pocket medical expenses. Individuals and/or employers can contribute money to HSAs tax-free up to the amount of the insurance deductible. HSAs must be coupled with insurance that has a deductible of at least $1,050 for individuals and $2,100 for families.

Mr. Econotarian writes:

By the way:

"State Health Insurance Regulations and the price of High-Deductible Policies"

http://fhss.byu.edu/econ/faculty/showalter/insurance-regulations-1%2014%2005.pdf

They found that prices differ by about 100% depending on state regulations. Each mandate increases price by 0.4% for individuals or 0.5% for families.

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