The Advantages of 'Substandard' Health Plans

Stanford economist Edward Lazear, who chaired George W. Bush's Council of Economic Advisers from 2006 to 2009, explains why one man's "substandard" health plan is another's optimal coverage:

Plans that exclude the president's "core" benefits may be exactly what is desired for those in good health with the means to cover their limited every-day and predictable medical expenses….

Just as it would be a bad idea to require that all cars come with power windows, power locks, and automatic transmissions, it is also unwise to order citizens to buy health care that includes maternity benefits or other care. 

Some may have no intention of having children.  

Others may not want to devote the time required to take advantage of the preventive care that is covered.

Still others may be skeptical of the effectiveness of mental health care….

The fact that a health care plan does not include all the benefits of other plans does not imply that it is "substandard." Instead, the [Affordable Care Act] replaces plans that cater to needs of a particular consumer with those cluttered with bells and whistles that may be of little value.  

Lazear also notes that generous coverage contributes to health care inflation by encouraging overconsumption: When someone else is picking up the tab, consumers do not worry much about the price. In fact, because the health care market is dominated by third-party payments, patients typically do not even know the price before they decide whether to "purchase" a particular medical service. The other day The New York Times published an op-ed piece in which Peter Ubel, a professor of medicine at Duke University, proposed a radical idea: What if doctors deigned to tell patients, before asking them to approve a procedure or course of treatment, how much it will cost them? Ubel argues that doctors should "discuss out-of-pocket costs with patients just as they discuss any side effects."

That is eminently sensible, except that doctors may have no idea how much the services they offer will cost the patient or his insurer, because the answer depends on carrier-specific negotiations, the details of the patient's policy, and his prior covered expenses. Patients may not find out how much a treatment costs until months after they buy it, when they get an "explanation of benefits" in the mail. Even then the answser may not be final, because there is room for dispute about exactly what is covered. Furthermore, out-of-pocket costs may be negotiable, since hospitals are accustomed to receiving only partial payment of the bills they issue (and presumably inflate them with that in mind). The upshot is price signals that are late and faint, if not utterly obscured.

The major exceptions are medical services, such as dental care, vision correction, and plastic surgery, that consumers typically buy with their own money. You can easily get a price quote for a tooth implant, Lasik surgery, or a nose job. It is almost impossible to get a clear idea of how much an MRI or a tonsillectomy will cost. In my experience, such questions usually elicit blank stares, as if they've never been asked before. Imagine how well the car repair market would function if customers had no way of knowing how much a new transmission would cost until months after agreeing to buy one.

Obamacare, Lazear notes, compounds this problem by requiring people to buy more coverage than they would otherwise choose:

Health economists, notably Daniel Kessler at Stanford, have demonstrated that the failure by the consumer to pay for health care on the margin induces high and in many cases over usage.  

Plans that have low co-pays, first-dollar coverage, and insure routine predictable health care events induce high and excessive use of care.

By contrast, those like catastrophic care plans that do not insure the routine and cover only unpredictable high cost events induce consumers to behave more efficiently. 

Banning such "substandard" plans makes no sense from a cost-control perspective. Last month I compared Obamacare's minimum coverage requirements to the federal ban on incandescent light bulbs, which likewise overrides consumers' assessments of their own interests. But while the light bulb requirement was defended in the name of efficiency, Obamacare mandates inefficiency.