Dear Mr. Smith…..

John Smith of Chicago (not his real name) asked the following question in a recent letter to a local newspaper:

“Over the last several years my annual deductible has increased from $500 to $2000…With higher rates, I have had to limit key diagnostic services that my physician recommended at my physical.  Does health reform cap deductibles…?”

The paper’s response mentioned that many preventive services are covered under the new law and mentioned something about risk pools – a decent enough answer I suppose.  Here is what I would have written:

Dear Mr. Smith,

I understand that you are upset.  No one wants to spend money on something when someone else has been buying it for them.  Healthcare is no exception, and over the years we have gotten use to having our health insurance company buy everything our doctors ordered.  The upside of generous health insurance coverage is that we are better able to avoid the risk of financial ruin.  The downside is that we sometimes agree to receive medical services that we might not need.  The latter is really true – the research evidence is overwhelming – and this has contributed mightily to the cost crisis you have been reading about.

I am sure you will tell me that you really need the diagnostic services ordered by your physician.  Then you should find a way to pay for them.  I understand that these services can cost hundreds of dollars, but I would imagine that there are other things in your life that are equally costly – car payments, vacations, new clothing, and so forth.  Don’t you give equal or higher priority to your health?  If so, then perhaps by next year you will set aside the extra money you will will need for these tests.   If not, then how can you say that you really need them?  If you are unwilling to pay several hundred dollars for medical tests, then you must not hold your life dearly.  Why then should others pay for you?

I know that I sound excessively harsh, and if your financial situation is such that purchasing these services will push you over the financial brink, I apologize.  You are in a rough situation for sure.  But consider that if your employer offered a more generous health plan, the premiums would have been thousands of dollars higher.  Think of how this would have affected your job situation.  Many employers, perhaps most, have to hold the line on wages when health insurance costs increase, so you may well have seen a substantial wage cut.  If your employer could not reduce wages, then your very job might have been threatened.  I doubt you would have preferred either of these outcomes to the present situation.  The real problem isn’t that your deductibles increased; the problem is that healthcare is so darn expensive.

All of this rational economic analysis may leave you cold, and I understand that you cannot possible like the present situation.  There are alternatives that you might prefer.  Under a government-run system, you wouldn’t have to pay for many diagnostic services.  But to keep costs under control, the list of free services would be chosen by the government, not your doctor.  The new health law moves us in that direction and many Americans like the new direction we are taking.  Others would prefer to let market forces work to control costs.  Part of that solution would require us to face more of the financial consequences of our healthcare decisions while still having protection against financial ruin.

There is no going back to the old days.  Pick your poison.


David Dranove

David Dranove is the Walter McNerney Distinguished Professor of Health Industry Management at Northwestern University’s Kellogg Graduate School of Management, where he is also Professor of Management and Strategy and Director of the Health Enterprise Management Program. He has published over 80 research articles and book chapters and written five books, including “The Economic Evolution of American Healthcare and Code Red”. He has a Ph.D. in Economics from Stanford University.

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15 replies »

  1. Very valid analysis. it may sound cold, but this is precisely the problme afficting the US healthcare market – we think some one else if paying for our health care expenses but in realty, we as a society, are way over-paying for it.
    The reason is very simple – distorted financial incentives. untill we require every body to pay for their healthcare expenses (atleast partially), we will never get the rising costs under control.
    Healthcare cost has many components, some of which are directly under the control of the consumer himself (better diet, exercise, etc.). this is particularly driven home by Mckinsey study, which found that bigget driver for our rising healcare cost is life-style related disease.
    However, this goes both ways. Healthcare providers, including the good doctor himsel, must publish their prices as well as past performance statistics, to enable the consumers make informed choices and drive competition. else, all this is emplty talk.
    All of us have a stake in the system, and we all need to make changes and step outside the confort zone if we have to get this under control. There are no free lunches

  2. Lynn,
    As someone who just recently graduated with an undergrad degree in Econ, I wonder if this “simple” economic equation really shouldn’t be so simple.
    Lets say we do live in a world of unlimited wants (the marginal benefit of consumption never reaches 0). Is it not possible that spiritual/moral/social fulfillment also produces a marginal benefit as well? Under such a system, at some point (depending on the individual’s preferences), it may be more efficient for a person to fulfill the spiritual desires over the physical desires (the marginal benefit of consumption is less than the marginal benefit of spiritual satisfaction).
    Under such a system that accounts for our spiritual and physical preferences, couldn’t equity and efficiency both be achieved?
    I ask because I think many economists (and especially students of econ) do not consider that our models aren’t just simple, but actually lack a major component of personal preferences that cannot be accounted for by purchasing an extra apple, or a pair of shoes, or a car.
    I also ask because, from my experiences as a student, I have seen a far too pragmatic approach to economics without a treatment of economics as a theoretical science. Much of what we believed was true will be altered or discarded once we sort out this recession mess; to paraphrase Hayek, economics is an imprecise science about which we are still greatly uncertain about.
    Adam Smith’s “other book”, The Theory of Moral Sentiments, when read in conjunction with his more famous work, strongly indicates that morality and social norms should not be removed from economic analyses.
    After all, there can be no marketplace without society.
    In this healthcare debate, like in so many others we are having today as a country in dire economic times, it seems that we continue to ignore the moral implications of our actions, perhaps because we have been socially coached to stay away from making strong judgments on moral worth.
    To quote Hayek again, this time fully:
    “I have arrived at the conviction that the neglect by economists to discuss seriously what is really the crucial problem of our time is due to a certain timidity about soiling their hands by going from purely scientific questions into value questions.”
    Are we still too scared to ask these questions?
    Sure, you could then ask, “Who should make these moral judgments?” My response would be that no one can make any decisions when we completely ignore the issue and pretend like we can find social solutions without considering society itself.

  3. I’ll also note that I at least would be much more willing to pay out-of-pocket for tests if I was getting the same pricing the insurance companies are. How is it that I should pay $500 for a test that if covered by insurance would be reimbursed at $75? Am I to believe that my physician is taking a loss on every patient covered by insurance? If his business savvy is that poor, how good a doctor can he be?
    But perhaps he’s not taking a loss but is really just marking some things up by 500%. In that case, how good a person can he be?

  4. Another solution, of course, would be to use the power of government and other major payers to reform supply-side incentives and lower payments for things that are less valuable.

    Using the “power of government” should not be considered as an option when your government is by-and-large a bureaucratic entity in practice, and only superficially “representative”. It is the overuse of the “power of government” that gave rise to the thinking that the colonies should be self-representative, and free from the perceived abuses of the “power of government”. Failure to heed the lessons of history will doom you to their repetition, until such time that they have been learned.

  5. Since no one else has said it, I will:
    The somewhat snide criticism of the patient assumes the patient knows, or can easily find out, the value of the various tests.
    There is massive disinformation out there about what tests are “needed” or even particularly helpful. How is a lay person to sort it out? Doctors get it wrong often enough.
    Yes, having skin in the game helps people not to spend frivolously. But they need information to spend wisely. Also, as others noted, if as most Americans you have relatively little discretionary income, you may well end up foregoing care that would have made a major positive impact on your life.
    The choice is sometimes between Disneyland and knee surgery. But sometimes it is between keeping a home and cancer surgery. Or, paying the heating bill this month and going to the doctor for some persistent pain that ends up being cancer when you finally go some months later because it can’t be ignored any longer.
    Another solution, of course, would be to use the power of government and other major payers to reform supply-side incentives and lower payments for things that are less valuable. So far, we are too immature as a nation to do that (perhaps we are turning the corner on incentive alignment), so in the meantime we turn to more and more cost-sharing under the guise of free markets. Sometimes it’s as the man said in the song: Freedom’s just another word for nothing left to lose.

  6. However, THIS should be illegal:
    Last year we signed up as always for our employer based group health insurance in which we pay 80% of the family annual premium of $13,000 per year. Up until now, our healthcare needs have been modest. This year, however, we had a child with a congenital condition that we knew prenatally would require several major surgeries in her first year of life. After quickly paying her annual deductible of $3000 within 2 weeks of her birth, we were informed in June that the health plan would be changing in July. We had to sign up with a new plan which meant a new, $5000 per year deductible, but in this case, we only get 6 months because the deductible starts again in January. Of course the employer got a big break on their portion of the premium because in 6 months most of the employees will be paying for all their care under the deductible. An “annual” deductible should last at least 12 months! What say you, professor? You think that’s fair?

  7. What is it that people are puzzled about? The economic equation is quite simple: Your money or your life! The uninsured understand this, I guess the insured are finally clued in. In the US we allocate the scarce resource of health care based on market principles–you get what you can afford (or your employer’s insurance plan says you can afford) not what you need or deserve.
    Economics is about trade-offs between scarce resource and unlimited wants. An economic system can be efficient or it can be equitable but it can’t simultaneously be both. We (society) must choose.
    My introductory economics students struggle with this too.

  8. “All while completely failing to even try to bend the cost curve? Even worse, failing to at least identify the cost curve or attempting to convince us that it’s the best option.”
    The cost curve is because the prices are too high. I agree that this legislation will not bend the cost curve, but try to get lower prices past the well lobbied and financed providers. The present system hasn’t even been willing to bend the cost curve, even with “evil” insurance companies.

  9. “the government paid for them, through taxes.”
    – And the federal government doesn’t expect a fight when they propose a veiled taxation, through the AHCA. Trying to convince us that it will function effectively. All while completely failing to even try to bend the cost curve? Even worse, failing to at least identify the cost curve or attempting to convince us that it’s the best option.
    Not going past the argument of “those evil insurance companies”, won’t convince rational decision makers.

  10. “Under a government-run system, you wouldn’t have to pay for many diagnostic services. But to keep costs under control, the list of free services would be chosen by the government, not your doctor.”
    Interesting that you say a government-run system does not allow docs to choose the free services, but where in this private system do docs get to choose the free services? Doesn’t the insurance industry choose those services? Actually in the Canadian system I lived with, the docs chose the services, based on medical need not financial need, and the government paid for them, through taxes.
    “I understand that these services can cost hundreds of dollars,”
    Priced by the medical cartel. I’d actually insert “thousands of dollars”. Sell the car, sell the house, put the kids into foster care and just pay for the damn stuff.

  11. Or, he could simply defer the preventive care until he needs the costlier care that will be covered by insurance. A clever provider might offer these services at a lower cost, but jack up costs for the insured procedure that might come from the aforesaid tests.

  12. A few years ago I wrote an opinion piece titled… “Other People’s Money.” I referenced a lady who called my office to ask if it was legal that her individual health insurance policy did not include maternity benefits – after all, she and her husband wanted to start a family. There ought to be a law, she thought, requiring insurance companies to sell individual policies (with $12,000 in maternity benefits) to any couple willing to pay $2,000 in premiums. In other words, she wasn’t willing to pay the price for having a baby; She wanted that paid with other people’s money.