Is Health Insurance Too Cheap?

Researchers at USC recently published a study designed to find out how much people are willing to pay for better drug coverage from their health insurance plan.  The question they posed to the general public was straightforward: How much extra money would you pay per month for a health insurance plan that would pay for “specialty drugs” if you need them?

Specialty drugs are expensive new treatments for diseases like leukemia, multiple sclerosis and rheumatoid arthritis.  These drugs often cost tens of thousands of dollars, and in some cases even run into six figures per patient.  But these high costs can be accompanied by significant benefit.  Gleevec for example can dramatically increase life expectancy for people with otherwise fatal leukemia.

Keep in mind that not only are specialty drugs expensive but they are being used with increasing frequency.  According to the USC team, 3 out of 100 people in the United States will use at least one specialty drug in the following year.

How much would you pay to make sure you aren’t responsible to pay for these drugs out of pocket?  Would you be willing to give your insurance company an extra $5 per month? $10?  Maybe even $20?

The USC team found that, on average, people were willing to spend around $13 extra per month to make sure their health insurance plans cover such specialty drugs. (The study was published in the April issue of Health Affairs, and was led by John Romney.)  To put that into perspective, the actuarial cost of such coverage—how much insurance companies would expect to spend per person if everyone obtained such coverage—is around $5 per month.

Sounds like a win/win/win situation.  Win #1: Insurance enrollees could fork over, say, $10 a month and get coverage they value at a higher price.  Win #2: That $10 would leave insurance companies with enough money to profit from this expanded coverage.  Win #3: Pharmaceutical companies would be happy, because more people would have affordable access to their products.

But this deceptively simple survey is, in my view, deceptive in its simplicity.  My background in behavioral economics has taught me that if the USC team wanted to obtain a high estimate of the public value of specialty drugs, they could not have found a better way to do so.

The problem began with the way they asked their willingness to pay question.  To illustrate the problem, imagine the following situation.  I gather together ten groups of people.  I ask the first group how much money they would give to a charity that would save the lives of thousands of children in Africa.  I ask the second group how much money they would give to a charity that would promote clean water in their communities.  I ask other groups about other causes, supporting children’s healthcare, rebuilding local churches, etc.  Let’s suppose, on average, that people are willing to give $50 to whichever charity I mention to them.

Do you think if I gathered an eleventh group of people and described all ten charities, that they’d be willing to give $50 to each of the ten charities?  That they’d be happy to fork over $500 additional dollars for good causes?

Not even close.

In fact, studies in behavioral economics have consistently shown that people overweigh the ideas that have been made most prominent in their minds.  Ask people to think only about specialty drugs, and they will be glad to give $13 a month to make sure they’re covered by insurance.  Ask them about any one of a dozen things that aren’t fully covered by health insurance presently—long term care, for example, or co-pays for physical therapy appointments—and they might fork over $13 for any of these services.  Describe all dozen such things to people however, and let’s see—12 items, each worth $13 per month, . . .   that would add up to an extra $156 per month.  Do you think they’d be willing to pay that much more for broader health insurance coverage?




How did an accomplished research team from an elite university fall prey to such a basic survey blunder?  A cynic might assert that the researchers, who were funded by Bristol-Myers Squibb, looked for a way to get the kind of answer that their funder wanted to see.  But I don’t share such skepticism.  I favor an alternative explanation.

The research team was made up of people trained in what you might call traditional economic methods.  Perhaps this team is not thoroughly knowledgeable about what behavioral economists have learned about willingness to pay measurement.  Or perhaps they simply do not believe the behavioral economic findings.  In academia, you see, most of us are prone to intellectual myopia.  We know our own field, and barely have time to recognize (much less appreciate) anyone else’s research.  Traditional economists have long believed that willingness to pay questions yield useful data.  Many of the flaws in willingness to pay methodology have been uncovered by folks who don’t “hang out” in traditional economics circles.

But as good scientists, or as good citizens, we need to see beyond our own biases.  The USC team was addressing a very important issue.  As a society, we need to figure out, as they set out to do, what kind of insurance to make available to people so they can spend their money in ways that fit their own tolerance for financial risk.

But we don’t come close to figuring this out by focusing people on one single class of healthcare services, as if their willingness to pay for such things in isolation reflects the true value such interventions hold for them.

We need to measure public willingness to pay in a manner informed by the insights of behavioral economics.

Peter Ubel is a physician, behavioral scientist and author of Pricing Life: Why It’s Time for Health Care Rationing and Free Market Madness. He teaches business and public policy at Duke University. Peter’s new book, Critical Decisions will be available in the fall of 2012. You can follow him on his personal blog.

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9 replies »

  1. Cheap, try being a 2 time breast cancer survivor – the one insurance I could get wants over 400 dollars a month. No job… no insurance.. and too young to retire. No one cares!!!! I have not been to a doctor since my last radiation treatment 3 years ago. No one cares!!!!

    • Linda, yours is not an isolated case. It’s worse than tragic; it’s shameful. There is no reason the richest country in the world should allow that to happen.

      I put up a post yesterday about how women have been getting a bad deal from insurance and price discrimination. It links to a very comprehensive and important article by Maggie Mahar. This is for you.
      It may not help now, but it holds out serious hope for the future. And it may energize your sense of politics as nothing has done in the past.


  2. I think cheap or not cheap is depends for what coverage the insurance covering.
    If the monthly premiums is cheap but the insurance company doesn’t cover the important medical cost, it could say the premiums is expensive.

  3. I am amazed that at this late date in the health care debate anyone is still be conflating insurance with health care. They are not the same. (And I’m being generous when referring to the pharmaceutical-industrial complex as part of health care. I’m sure Dr. Ubel is a great guy, sincere in his pursuit of behavioral economics. But comparing the purchase of insurance with donations to various charities suggests that medical care is like food, that we need to discover the price-point at which insured people willingly pay more and that will help us understand that insurance may be under-priced.

    May I suggest that taking medicine is not like eating out. Insurance costs have more to do with what drug makers charge than what their products actually cost. The baseline of insurance is not how much the actuarial drug-consuming pool can endure, but how best to market THEIR products in a way that another layer of profitability for their operations can be passed on to the buying public. It sounds like a discussion of how much diners would willingly pay to eat in an all-you-can-eat restaurant.

    (Regular readers, please forgive me this copy/paste response, but it drives home a point so well I plan to plaster it around repeatedly until I sense it is no longer appropriate.)

    Here are a few more expenses, all of which have but one revenue stream — medical bills. And all of which get folded into insurance premiums.

    § TV ads — some of the most expensive air time for some of the most costly productions in the ad industry.

    § Mammoth executive bonuses and golden parachutes for both health care administrators and insurance companies

    § Facilities with manicured landscaping, marble floors, lived plants, flat-screen TVs in every room, and concierge food service

    § Elaborate accounting arrangements by which large so-called “not
    for profit” health care systems, often augmented by equally large,
    embedded insurance companies (BCBS comes to mind) launder bills mostly
    for the benefit of very profitable clinics, specialty practices and
    device manufacturers.

    § ”Free scooters” advertised for Medicare beneficiaries. Sometimes
    comes with a free recipe book or lighted magnifier “just for making the

    § Catered meals and other treats for hungry office staffs,
    compliments of your favorite drug or other supplies sales

    § And speaking of sales, don’t forget the sales bonuses for high
    performers. The only people in America with no limit to how much they
    might earn are not in medicine or other specialties, but in sales.
    (Investment bankers are in the running, of course, but they are in fact
    limited by how much capital and/or credit they have. Enterprising sales
    people have only transportation, cosmetics and a few other expenses.

    § Don’t let’s leave out some red meat for the tort reform crowd —
    legal and accounting services, and a grey area often called “defensive

    With the exception of a dedicated group of community
    volunteers who provide a few ancillary goods and services, every dime of
    all that has but two sources:

    1.) Medical bills 2.) Government grants for teaching hospitals and research by NIH. (taxes)

    What am I missing?
    *Yes, of course. I almost forgot — MEDICAL CARE!

    Don’t you love watching those ED ads where the whole landscape goes tumescent? That’s a really great special effect, huh? Makes you all horny just watching.

    Dr. Ubel, I submit that if even a small part of that list is trimmed, even modestly, the price of health insurance — both individual and group policies — would go down, not up.

    The insurance people are just trying to pay the rent.They have a menu of other products (life, casualty, liability, fire, theft, etc.) and their specialty is risk management, not health care. They are like restauranteurs whose goal is not nutrition, but sales. If customers want to eat themselves to obesity, diabetes and heart disease that’s not their concern. Their goal is to sell as much food as possible.

  4. Getting a higher premium don’t resolve anything bottom line . We should see the premium increase over and over . What we need it’s a fear cost for Hospital and that would change the whole picture. Lower cost at the end.

  5. Most people will only pay the minimum they can get by with. They already feel it is too expensive. It’s wishful thinking to want people to pay more voluntarily

  6. It’s funny, this is focused on willingness to voluntarily pay for additional services. Personally I’m not so risk averse or unhealthy that I opt for those, I go for minimal coverage. However, the government has become involved and mandated those services without regard for our willingness to pay and removed the voluntary choice of opting to pay more per service. So, if most people wouldn’t be willing to pay an additional $13 let alone $150 a month, seems to me we’ve found the problem for the adverse selection and free riders. Surely the market participants now lacks the bargaining power and the price for the new service is going to be beyond a persons willingness to pay. Decent argument for a freer market. At least absent a mandate to buy.

  7. Dr. Ubel,

    You are really out of touch with reality. Insurance is the culprit behind the artificially high cost of health care in this country. To talk as if we had more variety of insurance policies to choose from we would be better off. That’s kind of like saying we would be better off having a larger variety of venomous snakes around. Just try to survive as a self-pay patient and you might get a better perspective.

    • If they are artificially high, then it is due to protectionism of the markets involved, not too much choice. Your opinion flies in the face of very basic economic principles.

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