Bryan Caplan  

Questions for a Dissertation Defense

Question for Recalculationists... Corrigan's Contradiction...
Tomorrow morning, Robin Hanson is chairing a very interesting dissertation defense:
One part finds that US firms that self-insure, thereby avoiding many health insurance regulations, spend 18-25% more per employee on medicine...
The take-away:
For those who think med is great, this seems a strong argument for reducing med regulation; burdensome regulations seem to get in the way of folks buying the med they want.  Those like me who think we are over-treated should admit this favors more regulation; burdensome regulation makes medicine seem less valuable, and so folks buy less of it.
My questions: Couldn't this just show that contrary to all their bad publicity, health insurers are actually relatively good at controlling costs - that what appears to be bureaucratic pettiness serves a useful function?  And if so, exactly how exactly do health insurers achieve these economies?  Could it be that morale-wise it's easier to turn down cost-ineffective treatments for your customers' employees than for your own employees?

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COMMENTS (10 to date)
Curt Doolittle writes:

Or why doesn't It show that companies that can afford to self insure can afford to be more generous with their employee benefits, or divert more compensation to healthcare?

One of the largest companies in America has one of it's best healthcare policies, so it attracts families with high medical costs, and retains employees against competitive salaries, by exorbitant health care that includes such things as exclusive health club memberships.

It's cheaper to manage your own healthcare. The reason most companies don't do it is either risk, or

The reasons companies do choose to do it, is because they can get better service for their employees when they're spending that much money. In other words, the extra cost is in providing decent customer service. Furthermore, they are less likely to attempt to avoid payment for legitimate claims than are insurance companies, who are not so much efficient as intentionally obstructive.

Tom West writes:

I agree that self-insuring risks the wrath of the employee when making cost-savings measures. People will accept being told "no" by a giant faceless insurance company without huge resentment while being bitterly unhappy about being told the same from any person/organization that they think should "understand".

It's the same reasoning behind children who accept unreasonable (in their minds) orders from teachers, but would rebel if the same order came from their parents.

mdc writes:

I don't see how this man can say that, because he thinks people have too much medicine, he should be able to coercively prevent them obtaining more. I think this all has a much simpler explanation. Statisticians, including economists, define a 'cost-ineffective' treatment as one that is over a certain cost per life year extended, or over a certain cost per % of people still alive after 5 years (or whatever). In the final analysis, real people value their life years and % chances of survival rather higher than statisticians think they should. And that is their decision.

mbp writes:

I think this post might suffer under a misconception. Yes, large firms tend to self-insure. But they do contract with health insurance companies to process claims, negotiate discounts with providers and perform all back office functions. So from the employees' perspective they will see little or no difference in the way their benefits are managed whether or not their employer self-insures. I would take an educated guess that most employees have no clue whether or not their firm self-insures or pays the insurance company to assume the risk.

I tend to agree with the first commenter. Large firms can compete against smaller firms on the quality of benefits they offer to employees.

TomB writes:

Yes, some firms pride themselves on the quality of their benefits. I believe that many of the firms that appear on the "Best Places To Work" or "Best Places for Working Mothers to Work" lists have really good benefits. Such places probably attract more parents (as opposed to single people). Hence, health costs per employee would be higher.

Ryan Vann writes:

Good points made by TomB. You have to consider the employees being studied anytime you look at benefit costs, otherwise, you could be committing an error of omission.

Dan Weber writes:

Do we have any measure of the results of the self-insured health care? How healthy are the workers, or how satisfied are they?

One other thing is to consider is the tax-benefits of insuring through an external organization. It may be that the self-insured need to spend 33% more just to match the level of benefits. I'd need to think a lot more about this to figure out which way it washes, though.

wm13 writes:

What mbp said. Indeed, many, perhaps most, employees at large, self-insured companies don't realize that their employer self-insures and that the "insurance company" to whom they submit their claims is just a claims administrator.

Now this result may show that insurers are less diligent when they act as claims administrators than when their own money is at stake. Or that large companies design plans that are more generous than what insurance companies design when they are the actual insurer. Or something else: it's actually a difficult question and informed analysis would require both a detailed understanding of the nitty-gritty details of market operations plus theoretical background, a rare combination.

Steve writes:

Many firms that self insure still purchase administrative services from an insurance company (an Administrative Services Only ("ASO") contract). Such firms should realize any benefit from health insurance bureaucracy that other firms realize who purchase insurance.

Blakeney writes:

Note that Ms. Kicinger's 18%-25% differential is specifically a difference in employer costs. It may be that there is no difference in total per-member health cost between fully-insured and self-insured firms, but the fully-insured firms charge their employees more in payroll contributions. It's probably not that simple, but from the two quoted passages, we can't really say whether there are differences in plan administration that are leading to the cost differential.

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