Arnold Kling  

Why People Buy Insurance

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John Tierney writes,


We may not slaughter animals anymore to ward off a plague, but we think buying health insurance will keep us from getting sick. Our brains may understand meteorology, but in our guts we still think that not carrying an umbrella will make it rain, a belief that was demonstrated in experiments by Jane Risen of the University of Chicago and Thomas Gilovich of Cornell.

Thanks to Tyler Cowen for the pointer.

I think this could be really important. In general, I am not a fan of behavioral economics, but I do think that human beings have a very hard time dealing with uncertainty and probability. For example, doctors do not understand Bayes' theorem, as Ian Ayres' Supercrunchers documents.

I remember John Kerry's ads saying "I'll give you health care." He meant health insurance, but people equate insurance, which ought to be financial protection, with care. People are buying health insurance to protect against the fear of not being treated*, rather than buying it to protect against the risk of really large medical bills.

(*Some of that fear is rational, I know. Try walking into a hospital with thousands of dollars in cash but no insurance card.)


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COMMENTS (7 to date)
JR writes:

As someone who is currently receiving some health care through a medical care policy (insurance) and getting some care through a settled legal matter I have become quite aware of the different rate structures in this industry. If you avoid the places that serve the poor and low income folks and go main stream you discover the prices can be substantially higher if you are not getting your care via insurance through some "qualified" provider.

Same patient, same doctor, same issues but if you are not insured you pay a lot more.

Why? Let us examine a Group of doctors of some certain specialty - say radiology. Because the various facilities and doctors have to negotiate to become "qualified" providers and that means offering a discount to the big buyer - the medical insurer. A discount from what? A higher price that is set so that there is something to discount from. Then the Group knows they will be making most of their revenue and whatever profits they make at the discounted rate.

Issues the Group faces? If the big buyer ever does an audit and finds the Group has been offering "like services" at a better rate they may immediately take that rate from the date you first offered it to others. If the big buyer finds the Group has been providing care to uninsured persons at the same discounted rate the big buyer gets AND that those persons don't fall into any listed permitted exceptions the Group may have just established a new "list price" from which the big buyer might take a discount.

In short - good luck getting excellent medical care at a decent price if you are uninsured.

brian writes:

AK: In general, I am not a fan of behavioral economics

Why not? It seems like one of the only things that's preventing neoclassical economics from turning into a degenerative scientific research program (in the Lakatosian sense).

AM writes:
Issues the Group faces? If the big buyer ever does an audit and finds the Group has been offering "like services" at a better rate they may immediately take that rate from the date you first offered it to others. If the big buyer finds the Group has been providing care to uninsured persons at the same discounted rate the big buyer gets AND that those persons don't fall into any listed permitted exceptions the Group may have just established a new "list price" from which the big buyer might take a discount.

In short - good luck getting excellent medical care at a decent price if you are uninsured.

You can thank the government for this phenomenon. This is completely rational behavior on the part of the health care provider as they are able to 1) comply with Medicare/Medicaid Best Pricing Requirements, and 2) Offer volume discounts to large buyers of services.

Why should an uninsured patient who purchases one (fill in the treatment or procedure here) get the same price as Blue Cross Blue Shield who purchases thousands? The customer is the insurance company, not the patient.

Paul writes:

Is there really any difference anymore between "health insurance," as it is now structured in the U.S., and health care? My current health insurance policy basically pays for everything at great expense to my employer. I'm quite sure that my employer spends much more for my insurance than my actual health care costs. I don't have insurance against catastrophic loss of income and wealth. I have pre-paid health care. I think we've been conditioned into equating the two.

Blakeney writes:
The customer is the insurance company, not the patient.

Nine words to summarize America's health care crisis. Good job, AM!

To be fair, though, you could replace "insurance company" with "employer", "government", or "long-term disability case manager" and still be in the right ballpark.

Dr. T writes:

This is strange: I agree with all the preceding comments!

A slight correction to Arnold Kling: There are a few physicians who understand Bayes' Theorem. Unfortunately, those physicians are typically clinical pathologists (laboratory medicine specialists) who do not directly treat patients.

I've been without health insurance for 5 months. The biggest problem with being uninsured is the inflated prices, especially for diagnostic testing. Lab tests that the insurance companies pay $10 for will cost an uninsured patient $40 or $50. Radiographic studies, endoscopies, and biopsies cost at least twice as much as what insurers pay. Volume discounts to the insurers cannot explain this amount of difference. The high list prices are efforts by health care providers to convince the insurance companies and the federal government that they are getting big discounts.

The reality is that a patient paying cash is much more cost efficient than billing an insurer or Medicare. Many doctors used to offer discounts to patients paying cash at the time of service, but Medicare meddling nixed that: Medicare based its payments on a percentage of 'usual and customary' charges. If doctors offered cash discounts, the discounted charges became the 'usual' charges, and Medicare payments fell. Health insurance companies adopted Medicare's policy. Thus, there was tremendous peer pressure among physicians to stop discounts and to inflate list charges.

Bill Stepp writes:

You are right that many people often have difficulty dealing with uncertainty and probability, but mathematicians and insurance actuaries generally don't because they are trained in probability and statistics, and in the case of actuaries, the principles of insurance.
John Kerry's confusion, which is shared by millions of people including not a few pundits and other pols, probably stems more from a lack of knowledge of insurance 101 than from ignorance of statistics. Admittedly, the latter is the basis of the former, but only the basis and not the whole enchilada.

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