David R. Henderson  

About That High-Quality Insurance

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Paul Krugman writes:

the quality of insurance has gone up, too, because canceled policies were canceled because they offered little real protection.

Of course, as with much of what Paul writes about ObamaCare, he doesn't back up this assertion.

So let me tell you a true story about a friend of my wife's in coastal California. Her husband is a contractor and so they buy their own insurance. Their old insurance policy didn't comply with the new ObamaCare rules and so they had to buy insurance through Covered California. Here's a vent she recently posted on Facebook. (I have her permission to quote but not by name.)

Went to my doctor today for my annual exam. Here's how my conversation went.
Receptionist: Mrs. X, I am sorry to inform you that the doctor is no longer taking Blue Cross/Covered CA.
ME: Oh really and why is that?
Receptionist:The doctors have not been able to negotiate a fee with Blue Cross. Blue Cross wants to pay less than what MediCal [MediCal is the name for California's Medicare] pays the doctor. I'm sorry you will have to pay the out of network price.(Full Price)
ME: Then what do we have insurance for?
Receptionist: There are very few doctors that are taking insurance that was purchased under Covered CA . The doctors are not being paid fairly so they are choosing not to take Blue Cross.

Mrs. X adds that she doesn't blame the doctors.

So I looked into it further and found out that this is not a cheap policy. Their children are grown and not on the parents' insurance. For both of the adults, they pay a total of $886.94 a month, which is $10,643 a year.

One anecdote? Yes. But it's not just about 2 people. It's about a whole area, the area around Monterey. Note the receptionist's statement: "There are very few doctors that are taking insurance that was purchased under Covered CA."


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COMMENTS (23 to date)
Dan W. writes:

Why is insurance the default form of payment for an annual exam? By definition this exam was not unexpected and its cost should certainly not be be prohibitive.

Funny but sad that a problem can be right in front of our noses and society refuses to acknowledge it.

Jon Murphy writes:

There are lots of anecdotes like this out there. Here in New Hampshire, no hospital north of Concord accepts the Obamacare plans. That means anyone living in the northern 2/3rds of the state with Obamacare plans would have to drive at least an hour for a hospital.

David R. Henderson writes:

@Dan W.
Why is insurance the default form of payment for an annual exam? By definition this exam was not unexpected and its cost should certainly not be be prohibitive.
Right. You’ve identified the two reasons that it’s not an “insurable event.” But the larger point is that they don’t take Covered California. I’m pretty sure the receptionist didn’t mean that they don’t take it only for annual checkups.

Jon Murphy writes:
Why is insurance the default form of payment for an annual exam?

You are right Dan W. That is a problem with health insurance and, what I suspect, is a major reason why it is so expensive.

Dan W. writes:

@David,

Could the customer agree to pay in cash for the difference between what Covered California pays for service and what the provider wants in payment?

I assume not but has anyone ever asked why this is so? Does the law prohibit it? Is such law Constitutional? (OK, that's a silly question since we know today that the Constitutionality of a law is whatever it needs to be to justify the desired outcome).

Greg G writes:

----"Why is insurance the default form of payment for an annual exam? "

One possible reason is that insurers might find that finding and monitoring health problems early saves them money in the end. Often it is easier to keep people healthy than to than to fix health problems that have been neglected.

David R. Henderson writes:

@Dan W.
Could the customer agree to pay in cash for the difference between what Covered California pays for service and what the provider wants in payment?
Yes. I’m pretty sure that is what happened. See the following statement that’s quoted above:
"I'm sorry you will have to pay the out of network price.(Full Price)"
I’m guessing that she will pay the full out of network price and then bill her insurer, who will pay that below MediCal rate to her.

James Oswald writes:

A great example of the Cadillac fallacy. If you outlaw cheap things, quality does improve, but the optimum level of quality isn't infinity. Some people really do want bare bones policies if it means paying a lower price.

Nick writes:

I am assuming that since they are empty-nesters, not yet eligible for Medicare, the people in your anecdote fit into the 55-64 age demographic. The average annual medical claims costs for that age group is about $9,000/person/year (depending on geographic area). So a 2 person, $10K/year policy, is actually pretty cheap, even after considering the subsidy of older populations by younger ones.

Not that this changes the "bait-and-switch" aspect of the story, but it's important to calibrate people's expectations properly when it comes to the real costs of health care. Almost any medical insurance plan for a 25 year old male will have an expected benefit of $5,000/year or less, but a 62 year old male who purchases a plan at that dollar level will have to make some pretty serious trade-offs.

Part of the problem with health care in this country is people who believe "I pay (heavily subsidized) $x for my insurance so I should get everything I want covered". People don't believe that they can have their infinite wants met by their finite costs when it comes to cars, iphones, or houses, and it's long past time to disabuse them of the assumption for health insurance.

Seth writes:

"Why is insurance the default form of payment for an annual exam? By definition this exam was not unexpected and its cost should certainly not be be prohibitive."

It is covered by this policy. Just not at rate acceptable to this doctor and possibly others.

So, whether annual checkups should or shouldn't be covered by insurance in general is a great question, it's a red herring in this situation.

Mark writes:

First, the ACA is a political boondoggle that handsomely rewards the pharmaceutical and insurance industries, among a couple of others. For Krugman to make such a comment is both ignorant of the facts and totally misleading.

Second, the whole business of health insurance and the medical profession itself is a scam. I had some lab work done as part of a regular physical. The bill was $880, from which my insurance company "negotiated on my behalf" a discount of around $735. I had to pay almost the entire remaining balance. There was an anomaly in the results of the original lab work so I had to do some retesting. (The results came back normal. Go figure?!?). I just received the bill today for $333, from which my insurance company "negotiated on my behalf" a discount of $295. I had to pay the remainder.

Man, my insurance company is very generous on my behalf.

David R. Henderson writes:

@Nick,
I am assuming that since they are empty-nesters, not yet eligible for Medicare, the people in your anecdote fit into the 55-64 age demographic.
Yes.
The average annual medical claims costs for that age group is about $9,000/person/year (depending on geographic area). So a 2 person, $10K/year policy, is actually pretty cheap, even after considering the subsidy of older populations by younger ones.
True. That wasn’t the issue, though. They were in the 55-64 age demographic last year too. Their insurance premium was lower and they had better coverage. Also, they weren’t required to pay for pediatric dental; now they are. See the empty-nester point above.

Kevin T. Keith writes:

Oh, well if the receptionist said so . . .

It is often necessary to remind people that "data is not the plural of 'anecdote'". Apparently now it's necessary to remind them that data is not an anecdote in the plural.

Chris Wegener writes:

A little Googling (is that a word?) finds that the problem is with Doctors in the area not being happy with their reimbursement from *ALL* insurance plans, not just Covered CA plans.

Since there are apparently relatively few Doctors in the affected counties they feel they are entitled to a higher reimbursement than doctors elsewhere in the state.

Therefore the example is being forced to a conclusion that it doesn't support.

In reference to the annual exam question the empirical evidence is unequivocal. If insurance plans do not pay for well care (Mammograms, colonoscopies, annual exams, pap smears, etc) people do not have the tests. As indicated earlier these leads to dramatically poorer outcomes and are disease that far more expense to cure. (If you go to the ER and complain of a stomach ache and the doctor palpitates a mass in your abdomen the only thing that will happen is you will be sent home and encouraged to get care for your cancer.)

This is the fundamental flaw in HSAs and High Deductible plans. Those who have them frequently end up much sicker and do not live as long because of the failure to do early detection diagnostic tests.

The provision in ACA that requires insurance companies to pay fully for those tests is one of the real hopes for a long term reduction in health care costs.

Dan W. writes:

@Chris,

Coverage for early detection examination and tests is worthless unless one can receive such examinations and tests.

I will add that the "universal coverage" argument assumes an efficiency of detection and treatment that simply does not exist. Yes, in theory it should work. In theory early detection should save lives and cost "the system" less money. But as demonstrated by outcomes in states that have tested universal coverage practical outcomes have failed to live up to the theory.

Moebius Street writes:

Says Chris Wegener:


the empirical evidence is unequivocal. If insurance plans do not pay for well care ... people do not have the tests. ... these leads to dramatically poorer outcomes and are disease that far more expense to cure. ...
The provision in ACA that requires insurance companies to pay fully for those tests is one of the real hopes for a long term reduction in health care costs.
While preventive care may be cost effective, because prevention is cheaper than curing, that's not the same thing as being cost saving. For a clear explanation of the difference, see this article.

Further, not all preventive care is actually useful.

Likewise, it is a mistake for people to think that prevention will overall save money. Experts suggest that only about 20% of preventive measures, such as counseling a smoker to quit smoking, vaccinating against influenza, and screening men for colorectal cancer, actually generate true cost savings. The other 80% cost money.
(Source)
While counterintuitive, this idea is supported well enough that the CBO is acknowledging it:
"Although different types of preventive care have different effects on spending, the evidence suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall," Elmendorf wrote. "That result may seem counterintuitive.
"For example, many observers point to cases in which a simple medical test, if given early enough, can reveal a condition that is treatable at a fraction of the cost of treating that same illness after it has progressed. In such cases, an ounce of prevention improves health and reduces spending — for that individual," Elmendorf wrote. "But when analyzing the effects of preventive care on total spending for health care, it is important to recognize that doctors do not know beforehand which patients are going to develop costly illnesses. To avert one case of acute illness, it is usually necessary to provide preventive care to many patients, most of whom would not have suffered that illness anyway. … Researchers who have examined the effects of preventive care generally find that the added costs of widespread use of preventive services tend to exceed the savings from averted illness."(Source)

Hazel Meade writes:

The idea that the cancelled insurance policies offered little real protection is completely wrong and deeply in need of debunking.

The reality is that HHS wrote the rules so that any policy that had even minor modifications such as increasing a co-pay by more than $10 would be cancelled.

BY DEFINITION that means that those policies were not canceled "because they offered little real protection". They were cancelled because they didn't comply with a niggling detail of the HHS regulations.

Furthermore, just because a policy doesn't conform to the ACA's standards, doesn't mean that it offers little protection.

Having a lifetime limit of $2,000,000 may be limiting, but it still offers a lot of protection. Very few people use more than $2,000,000 in medical care before they hit 60, and those few that do are probably so desparately ill that they are likely to die anyway.

The ACA mandates coverage for maternity and pediatric dental care. Which is great if you are a woman of childbearing age or a parent. But it is not so great if you you need is a lot of specialists in a particular illness, as the article above illuminates.

The people above are basically being forced to subsidize the kinds of medical care needed by a broad class of OTHER PEOPLE, but when it comes to the care that they themselves need, they are finding themselves out of luck.

steve writes:

We have a couple at our church who could not get insurance at any price. Now they can. Another couple is now getting insurance at a much lower rate than they were before. I would suggest that these anecdotes are nice, some of them might even be true (I would never, ever take the word of the receptionist. She has incentives to blame everyone but her own docs.) I would prefer to wait and see some data on the issue.

Steve

Mrs. Renard writes:

We are in a very similar boat. Our former policy was cancelled by anthem bc. Had to buy a new one with a very limited network. Our old policy is still in effect for folks who bought it before a certain date (early 2010, I believe). We moved to CA in 2012, so we don't qualify for grandfathered status. Our insurance went up 50%, and is worthless to us; doctors who take old, grandfathered bc plans won't take the new ones. I view our premiums as an additional tax, subsidizing people who decided to procreate (we did not), who have pre-existing conditions, or who make less than 100k per year. IOW redistribution. This development combined with changes in the tax code has eliminated out ability to invest the way we used to. We occasionally invested/sponsored local entrepreneurs. Not anymore. We are now busy saving for medical expenses that will not be covered by the subpar insurance we have been forced to buy. Just another anecdote to add to the pile.

Edogg writes:

So how has ObamaCare caused this? It's clear that the insurance regulations would cause some consumers to have to essentially subsidize other consumers, and that consumers would of course have less choices, but why should that affect the bargaining power between the insurance companies and the health care providers?

Andrew' writes:

"The idea that the cancelled insurance policies offered little real protection is completely wrong and deeply in need of debunking."


I don't know. If I ever need to have an abortion it is now a stone-cold lock.

Hey, sorry, but them's are the jokes, folks. This is the level of discourse economics and politics deserves right now.

Barry "The Economy" Soetoro writes:

"The provision in ACA that requires insurance companies to pay fully for those tests is one of the real hopes for a long term reduction in health care costs"

You are woefully uninformed. Insurance companies have to pay for those tests only AFTER you've paid your deductible in full, and then only a certain percentage of it until you've met your max out of pocket. So the colonoscopy I was supposed to have I decided against because I can't afford $1,500 out of pocket, which was NOT going to be covered at all until I met my $3,000 deductible.

Arthur_500 writes:

There are many problems with Insurance but the model is very simple to understand. The Insurance companies negotiate for the lowest price and charge their customers a premium that, when invested, will provide for expected use of that policy and a return on the capital invested. Notice at no time did I say that everything would be free nor did I say that everything would be covered.

The system then has the tentacles of State and Federal governments involved. Medical facilities are required to donate services to low-income individuals. Many services are also reimbursed so the medical facility does not bear the burden of free services to non-paying customers. This creates a weird, impossible to understand pricing.

If an Insurance company pays for an x-ray they pay $50 and cover that invoice in 60 - 90 days.

If a private individual pays for an x-ray they pay $80 and pay cash today. How does this figure come about?

The facility lists the price of an x-ray at $100. they then give the cash paying customer a 20% discount. They take a "donation" of $20 for helping indigent customers (all cash paying customers are considered indigent). In fact they are getting a $30 premium on cash paying customers. so the $100 price is total fiction developed for the government.

With perverse incentives like this created by the government their response to high costs is to blame the doctors and try to drive their income down. Doctors have every right to go on strike for their livelihood.

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