Sick Pay

New at Reason: Ron Bailey on how we can deflate medical costs by dismantling the third party insurance system.

Comments

[Ron Hardin]

The immediate and correct fix is make health coverage taxable income. That in itself undermines the whole unstable system by removing the source of demand feedback. No other changes is needed, except you get to opt out of course.

No doctor can stay in business charging more than people are willing to pay.

[Jason Ligon]

I dunno, Ron. I struggle with the notion that an overall increase in taxation is the remedy we need. I get the argument, but I think consumer driven feedback on pre tax dollars would be just as effective.

What I can't quite wrap my head around is how much weight the bulk purchase argument has. You certainly gain effeciency by having people pay for care they want, but it is also true to some extent that pooled resources in an insurance plan have a lot more buying power. How do we tell to what extent one offsets the other? Anyone?

[Shultz]

I'm self employed and HSA's are great for someone like me.

The thing that perverts the pricing of health care in America, more than anything else, is the fact that none of the government programs pay full price for hospital care. I would like to see a study on the effect of having medicare and medicaid(cal) pay full reimbursement to hospitals. Of course, I would anticipate the cost to taxpayers to go WAY up (last I saw, Medi-Cal, for instance, pays only about 12.5 cents on the dollar and Medicare pays about 22 cents on the dollar for the average code). But, on the other hand, I would also expect to see health insurance premiums drop dramaticly.

I worked on the business side of a hospital for almost ten years, and the most important statistic to the CFO on any given day is patient mix; that is, the ratio of medicare/medi-cal patients to insurance patients. You have to have so many insurance patients to compensate for all the money you lose to deadbeats...I mean...medicare and medi-cal patients or else your hospital WILL CLOSE.

The interesting thing to see would be whether or not most people, with lower insurance premiums and higher taxes, would choose to clip Medicare and Medicaid(cal). Yes, their direct insurance costs would go down, but because Medicare, etc. is financed out of general tax revenue, and because more than 85% of tax income is paid by people making more than $75,000 a year, much of the electorate may feel like they're getting more from the government in health care subsidies than they're paying for in taxes.

Yes, the amount of money the government squanders on public health is to the detriment of every tax payer; but it seems to me that most people, generally speaking, don't tend to miss what they could have as much as they fear losing what they already have.

[Ron Hardin]

Jason,
The important thing is to make the health dollar comparable to the non-health dollar. ``Being able to afford'' is always a preference question.

My favorite thought experiment: in the 80s: ... there was a coffee freeze in Brazil and the price of coffee went through the roof. Yet you could buy all the coffee you wanted! The shelves were full. It just cost $10 a can. Magically, there were no coffee lines. So far, a typical free-market-solves-problems story.

Now, how is it that there's enough coffee? Obviously some people stopped buying coffee. The ones who could no longer afford it.

So here's the thought experiment: take somebody who can no longer afford coffee at $10 a can, and give him $10 as he enters the supermarket. Does he buy coffee? No. There's other things he prefers to coffee at $10 a can.

The meaning of ``afford'' is teased out by this. He has the money but chooses something else.

Now an added thought experiment: make coffee a benefit pre-tax. How much coffee will he buy? What will happen to the price?

That's what has happened.

A coffee savings account is not going to solve this! Taxing the coffee benefit will, if people can opt out and take the money.

[Trey]

Of course, the other way around this is to stop taxing income; say with a national sales tax, or better yet, no tax.

[Warren]

I've been critical of Ron in the past but this time he hit the nail flat on the head. Health care woes stem from the divorce between the care and the money. Over the years, the separation has always been increased in attempts to correct the consequences of the previous correction.

As far as I recall, this is the first program that will return market forces to the health care system, of my lifetime. That provides real hope.

[Bostonian]

There's something wrong with the idea of insurance for routine costs--no matter who buys the insurance.

For whatever market segment you are, the insurers can predict how much you'll need to spend routinely, and they charge more than that, of course. You (or you & your employer) end up paying more for the coverage than you would for those routine costs. (This is one reason why car insurance doesn't cover oil changes and new tires.)

Catastrophic coverage, on the other hand, is a very good idea.

[Jennifer]

Ron--I liked your coffee analogy and for the most part I agreed with it, but I can't help pointing out that health care is often a bit more demanding than a caffeine jones--if I really had to I could go without coffee, but if I have appendicitis or have been in an accident "going without" isn't much of an option.

[digamma]

Jennifer is right. In principle I agree with Bailey, but what do you say to the politician who says, "Your plan will force people to choose between paying the rent and going to a doctor"?

[Jim Roberts-Miller]

I was hoping it wasn't just me wondering how this plan helps people who are on low incomes with no taxes to deduct from already.

[J. Alexander Lowman]

It helps by lowering health care costs for everyone.

[Does it matter]

but what do you say to the politician who says, "Your plan will force people to choose between paying the rent and going to a doctor"?

I'd say, why ask me? Why not ask the doctor who's demanding payment instead of giving the poor slob a little free service?

[Jean Bart]

Shooting the patients would also curb health-care costs; that's how China curbs prison costs. 🙂

[Jason Ligon]

Egad, JB. You sound like my dad, but maybe with a French accent.

I don't believe that health care is a human right. It is a commodity. Varying degrees cost more or less and it is not anyone else's obligation to forego their medical care so you can have yours, which is the demand that redistributive health care plans make.

Asking me how much health care I am willing to pay for is not the same as asking me how much healthcare I think you should buy for me. That divorce needs to be corrected somehow.

[Jennifer]

Jason-

I'll admit, I support a form of socialized medicine (with private health care still available for those who wish to pay for it) because I believe any society benefits in the long run by not having its members drop dead. I support the free market only when it does not fail to make a vital necessity available to the majority.

Example: I support the free market as pertains to food, because it works: good cheap food is available to the overwhelming majority of Americans, except those few unfortunates who would likely be at the bottom of any social pyramid. However, if food prices rose so high that one in seven Americans couldn't afford to eat then I say give them subsidized food before they either die or, worse yet, decide they want to live and realize they have nothing to lose.

One in seven Americans can't afford health care? Something is not working, and most people don't care about how "in the long run" the invisible hand will fix everything, because the long run is longer than a lifespan.

[Andy D.]

Bostonian, insurance agencies have an incentive to cover routine costs because they're also the ones that foot the bill for non-routine expenses (i.e. if you detect on oncoming health concern early, it's generally much cheaper to treat).

Car insurance doesn't cover routine oil changes & maintenance because car insurance companies don't pay for wear & tear car repairs. But warranties become invalid if you fail to perform routine maintenance, which tends to decrease the price of warranties.

[Jason Ligon]

Jennifer,

The problem is one of demand and expectations. People eat corn. Corn is cheap, but corn was also a food source in antediluvian times.

Everybody in a free market can afford antediluvian medical care.

Care keeps getting better, and the standard of what everyone 'needs' keeps rising to include all manner of expensive doo dads, pills, and procedures. No system can supply everyone's health care needs under the standard of newest and greatest.

Also, there is the very real possiblility that you are killing Peter to pay Paul. The government decision to force person A to spend X on the health care of others is the decision to prevent person A from investing in their own healthcare or that of their children, if it must be about the children.

[Jennifer]

But Jason--

When you talk about person A having to pay for person B you make it sound like some playground Robin Hood stealing lunch money from the athletes and giving it to the nerds. Even if taxes currently covered every penny of health care costs, we're still talking--what? A dollar or two per person, on average? Something ridiculous, anyway.

Yes, I know that in a perfect world the government would have no right to force any free person to give up even those two dollars for any reason, but since we will never live in a perfect world I'll compromise when necessary.

Again--this isn't a case of a few pathetic people who made some VERY stupid choices and thus find themselves in bad situations; this is one out of seven people.

[Jennifer]

By the way, I am talking about life-saving health care; I do not propose subsidized face lifts, breast implants, etc.

[Bostonian]

Andy D says: "insurance agencies have an incentive to cover routine costs because they're also the ones that foot the bill for non-routine expenses"

Theoretically, but they also have a short-term incentive to take in more money than they pay out. If an insurance company had the choice between paying for an extra test right now and not doing so, what do think they choose?

Don't get me wrong. Insurance has its place. But everyone should remember that the job of a health insurance company is to make money selling health coverage to people, which is not the same as keeping people healthy. The insurance companies have done a lot of PR in the last few years to convince us that our health is the most important thing to them, but it simply isn't true.

I think that the real reason insurance companies cover these routine costs is because they want to be part of some employer's benefits package, and all those goodies sound nice. Things would be different if a lot more of us were buying health insurance for ourselves. People always take better care of their own money than of other people's money.

[Jason Ligon]

"Again--this isn't a case of a few pathetic people who made some VERY stupid choices and thus find themselves in bad situations; this is one out of seven people."

When you say "One in seven people can't afford healthcare," do you mean that
one in seven people aren't covered by insurance, or that one in seven people die because they can't buy insurance and no one will give it to them? When you say healthcare, are you talking about stitches that prevent them from bleeding to death or a million dollar brain scan and surgical procedure that keeps them from internally bleeding to death?

Just like food, some people can afford more and better, and that is as it should be. What we need to address is why the costs of care are so high. The answer lies in demand. There is too much demand because everyone else pays for it.

I would also cynically add that we are in fact subsidizing stupid choices. From a health perspective smoking is a bad choice, but so is fried chicken and alfredo sauce. If you eliminate people who have made their beds by eating poorly and not exercising enough, you are eliminating the great majority of health care consumers.

[Tom from Texas]

Working in my wife's medical office, I routinely see individuals on Medicaid who come in wearing name-brand clothes and sporting flashy bling-bling. They have pagers and cell phones, and if you go out to the parking lot you see CDs on the dashboards of their cars. They bring their kids in for sneezes and sniffles and tummy aches that don't require the attention of a physician, much less a nurse. What do they care, "someone else" is paying for it, the same attitude their kids grow up with regarding "free" lunch programs at school.

Those with insurance dress the same way and have the same nice doo-dads, yet many will bitch about paying a $5 co-pay. We have had to start requiring that co-pays be paid BEFORE they receive any service, because so many will try to slip past the front desk without paying.

People are now conditioned to not pay for their own health care. They spend their money on other things because they don't have to spend it at the doctor's office. They would be highly indignant if you suggested that rather than buy a carton of cigarettes or a new CD, they put that money aside to pay for their kid's vaccines.

Because "someone else" has been paying for health care for so long, too many believe that they have a right/entitlement to it. Short of a mass extinction, I don't see any way to break this mindset.

[Jennifer]

Actually, the bit about subsidizing stupid choices is a bit of a myth; smokers are actually cost-efficient in the long run, because they die sooner and take in less pension money. I would guess that soon we will see similar statistics for the morbidly obese.

I don't deny that a system of government-run health care would have all kinds of problems, just as any organization run by human beings has. And I am not proposing a completely protected world where every last little chance of suffering or misfortune is completely eliminated. In fact, I would even go so far as to say that in a purely theoretical, philosophical debate on this matter I would agree with you. But no principle is so sacred to me that I'll cling to it even if it leads to bad consequences.

And to round off my mea culpas here, I'll even confess that in large part my feeling is due to my own experience: the first time I had a kidney stone I was on my dad's military insurance and went to a military hospital for a four-day stay. Though it wasn't fun--at one point I had a cockroach crawling on my IV tube--I felt no more pain, and I made it through okay.

The second kidney stone came when I was in graduate school and uninsured, and though the emergency room guys DID determine the problem and give me a prescription for medication I could easily afford, they also sent me home an hour later, and to make a long story short the next day complications arose, I suffered intense pain and almost died (literally) as I made my second emergency-room visit in less than twelve hours.

But I lived, finished school, got a job, etc., and the amount of money I've paid in taxes since then is far more than the cost of all my kidney problems combined. Even if you ignore philosophical niceties about "the value of a human life," society is economically better off for my not having died in 1997. I produce more than I consume, perform a needed job, etc.

The whole point of society and civilization is that it should provide some benefits and protection to the individuals. Even in ancient times you'd see governments hoarding grain as a hedge against famine. Sure, people with money can afford better stuff--you'll never see a cockroach on Paris Hilton's IV--but I still think the basics should be provided to those who can't afford them. (For all that I support free-market food, I still have no problem with food stamps for the truly hungry.)

Basically, I believe that there is a bit of responsibility toward one's fellow man. Granted, that does not go over well with Ayn Rand fans, but since I'm not one myself this is no self-contradiction.

[Shultz]

Consider the alternative to routine costs.

Under old fashioned Medicare, or any other catastophic coverage, the health provider has every incentive to do every justifiable procedure and test regardless of whether or not it's necessary. With routine costs, the health provider has every incentive to do only those procedures and costs that are absolutly necessary.

The standard argument against HMOs is that they don't give procedures that people need for this very reason. However, there is a huge incentive to keep people healthy. HMOs were the first to give free mammograms, for instance, because if you can catch cancer early, it's not as expensive to treat. HMO patients, for this reason, are much more likely to survive cancer than traditional Medicare patients.

[Jeff Smith]

Good discussion. A few remarks:

1) Jennifer is off by several orders of magnitude
on what it would cost to provide government
health care to all. 15 percent of GDP is not
one or two dollars per person, and it would
cost more if it was all provided by the
state. Part of the reason (though by no
means all of the reason) that my marginal
tax rate in Canada was nearly 50 percent
(even though I was a lowly assistant prof)
is precisely their system of government
health insurance.

2) Insurers have an incentive to keep costs
low. Because of this, it is not clear to
me how much savings would really result
from the "buyer pays and shops" argument
in Ron's piece. Given that insurance
companies are buying in volume, and that
research into costs is expensive and a
fixed cost, insurers actually have far more
of an incentive than individuals to shop
around. Shopping that is optimal if you
are buying 100 operations may not be
optimal if you are buying one (and in a
hurry about it).

3) The point about after-tax and pre-tax dollars
seems to me the key one. If the marginal
tax rate is 30 percent, then the relative
price of medical care is 30 percent less
(roughly speaking and ignoring equilibrium
considerations) than it would be in a
system that did not provide a tax subsidy
for such expenditures. As noted above,
MSAs do not solve this problem. Making
employer health benfits taxable would.
Without doubt, Americans spend far more
on health care than is optimal.

4) The point that "health care" is not a
discrete on or off good is also a very
important one. In the food market, some
folks go to McDonald's and some go to
Denny's and some go to Trader Vic's and
some go to Chez Paul. Health care, in my
view, should be the same way.

5) Not all measured health cares costs really
represent health care. I was shocked to
find that many hospital rooms in Canada
do not have a TV. I have never seen one
in the US that did not. This is part of
why "medical" expenditures are higher than
the U.S. [As an aside, I wonder if there
are any behavioral medicine papers on the
health effects of having a TV in your
hospital room.]

6. I think too little attention is devoted to
the negative incentives of socialized
medicine for both innovation in techniques
and organization and for innovation in
drugs. Canada free rides here by copying
innovations that are made in the U.S. by
insurance companies seeking to cut costs
that would never by discovered under their
socialized system.

Enough.

Jeff

[david]

Great discussion here...this should be required reading for all Presidential and Congressional candidates.

[AJMB]

Tom mentions a similar problem to one we are currently wrestling with in Ontario. OHIP (the provincial healthcare provider) used to charge a nominal fee for services provided. Never anything onerous, just enough to remind you that healthcare wasnot really 'free'. Many years ago the government of the day scrapped this policy. We now see an overabundance of colds and cuts clogging our emerg. wards. I say, bill people a small monthly amount for the plan, and charge a user fee at emerg. wards for anything deemed a non-emergency. People still get covered, but get to see what the true cost of their 'free healthcare' is.

[Erik Goransson]

A couple of thoughts from someone in the health insurance industry (apologies in advance for my rambling, incoherent writing- I blame my friend Vino Rosso):

1. HSAs are a very big deal (no, I'm sorry, a huge flipping deal!!! and one more !) and should dramatically change health care delivery in the US. I've looked at my recent renewals and noticed that in every case everyone would be better off with a higher deductible and the premium savings going into an HSA (this is true whether the employee foots most of the insurance bill or if the employer pays it)
2. The money that gets socked away in the HSA actually belongs to the employee as opposed to "disappearing" in premiums. This is in and of itself a good thing- bad for me b/c my commission just got cut in half... noooo!
3. As an simplified (but true) example to #2: ABC company pays half of the insurance premium for the health plan. The current plan costs $5000 per year ($2500 from ABC, $2500 from the employee) and has a $250 deductible, $1500 maximum out of pocket, $20 copay, and a $10/20/35 drug card. The new $2,500 ded. plan costs about, oh, er, $2500 (it's true!). So, the old plan cost $5,000, the new plan $2,500. The employer decides to spend the same and picks up the full cost of the new plan ($2500). This leaves the employee with the option of saving her share of the premium ($2,500) in the HSA, or if she feels lucky, nothing.

4. If she is smart, the employee puts away the full $2500 and over the course of many years builds up a rather nice nest egg. If HSAs were available in 1995 I would be sitting on close to $40,000 righ now (after having two children). Even with a catastrophic $1,000,000 claim, you'd be better off b/c your loss is capped by the $2500 deductible.
5. Ted Kennedy explains that HSAs are a bad deal b/c they somehow dilute some common pool where premiums go to pay the cost for the bad risks. The problem is that there is no common pool! Sure, most states have rules for small groups limiting the renewal increase based on claims, but since the low deductible plan is simply a "trading dollars" situation, no money is left for the Kennedy rainy day fund (BTW, a friend of mine has seen a 38% reduction in the number of claims in a 14,000 life group by removing coverage for tiny claims). Further, every employer group over 51 lives largely rest on their own claims experience. Also, most employers over 250 lives self fund their health plan and buy reinsurance with $75,000+ dedcutibles. In other words, there is no "pool" at the employer level- the reinsurance pools are off shore and cover losses over $500,000.
6. I'm going to bed. The above points barely touch on all the good things about HSAs.

[Erik Goransson]

Um, well, "$75,000+ dedcutibles" should probably be spelled "deductibles"

Your Friend,
Vino Rosso

[Kevin Carson]

Jennifer,

In the article, Ron pointed out the ways in which third party payments in the past have driven up medical costs at several times the general inflation costs. And a single-payer system would reduce incentives of cost competition even further, causing even more astronomical medical inflation.

When I see a doctor, the first thing they ask me is whether I have insurance. When I say no, they start using some critical judgment about what procedures are really necessary, instead of padding the bill with everything that might be even remotely useful. And I have a very strong incentive to do things like ask for generic medicine.

Of course, government interventions like the patent system and the FDA's drug testing regimen also have a lot to do with costs. Patents can make a tenfold or more difference in drug prices. And until the '60s, as someone recently posted on another thread, the FDA only required new drugs to be non-harmful. Since then, it has required proof of their efficacy--which results in an increase of testing costs of an order of magnitude. And it has the side benefit, from Big Pharma's perspective, of giving the FDA veto power over many alternative medicine practices.

[Jean Bart]

Jason,

I was merely being sarcastic. 🙂

[Russ D]

"I support the free market only when it does not fail to make a vital necessity available to the majority... One in seven Americans can't afford health care? Something is not working..."

I assume you don't know math. One-seventh is a minority, not a majority.

Tom's ancedotes about his wife's medical office are no exaggeration. I'll add that the typical approach to these "colds and sniffles" patients is to prescribe antibiotics which only renders the drugs ineffective sooner.

And don't get me started on the large number of jerks I witnessed while working at a pharmacy that ream the pharmacists a new asshole because of the cost of the prescriptions (duh, the pharmacist didn't prescribe the stuff!) even though they only have to pay a nominal co-pay... and then on the way out of the store purchase a carton of cigarettes. Most of these idiots would have their sniffles better served by laying off the smokes for a couple days, and taking a day off of work and staying in bed. But I guess a 2-hour doctor's appointment is less inconvenient than taking a day off work.

[david]

Tying healthcare insurance to employment was the beginning of the insanity. To contrast: imagine how stupid it would seem if the majority of Americans had to purchase their auto insurance via their employer.

There should be no difference between buying auto insurance and buying health insurance.

[Jason Ligon]

Ahh, sorry, JB.

My dad actually tells me that every time the subject comes up. "Why don't you just shoot them all (old people) and be done with it?"

It is refreshing to hear such things as sarcasm.

[Larry]

Third party insurance is half the problem. The other half is that employers are the gatekeepers for medical insurance. That worked fine when my grandfather took a job upon completion of the eighth grade and kept it until he retired. It causes major problems when today's workers change jobs faster than I replace my automobiles.
1. A good portion of the uninsured are between jobs or in the probationary period before coverage kicks in. I know COBRA "fixes" this, but it doesn't work very well.
2. The gay HR person has to pick a plan that fits the needs of himself and his partner and everyone else, from the empty nest CEO to the janitor with eight kids. Good luck.
3. Why should insurance companies worry about the long-term health of an employee who's only going to be around a couple of years? Preventive care they pay for will only benefit the worker's next insurer.
4. Between health insurance and retirement, any business with more than a handful of employees can't operate without an HR department. A business with few employees can't afford to set one up.
5. Anyone without a covered job or a spouse with one sucks wind.
6. (The big one) Any break in coverage, like for self-employment or unemployment where your coverage lapses puts you at risk of being medically ineligible to restart insurance.

In short, what if you could go down to your bank or financial advisor (for instance) and sign up your kids, at birth, for permanent medical insurance and Universal Retirement Accounts. Then, for the rest of their lives they could fund them with pre-tax dollars from any source of income. When they took a job all they would have to do is give the payroll clerk the account number and the amount they wanted sent.

[Used Autos]

Great blog. I'll be coming back again