Economics

The ACA: When Insurance Isn’t Insurance

We will be blunt. Hidden under the cloak of expanding health insurance, the Affordable Care Act (ACA) has fostered a massive subsidization of healthcare goods and services.

These subsidies often have little or anything to do with what economists would consider the “insurance” part of health insurance – providing protection against financial catastrophe.

Perhaps more troubling, if the past is prologue these subsidies will continue to grow, transferring huge amounts of money to politically favored groups and doing very little to decrease aggregate health spending – a presumed goal of health reform.

In order to understand these claims, it is necessary to take a step back and explain why insurance (of any form) is a good thing in the first place. Simply stated, insurance provides individuals with protection against unpredictable financial hardships not of their own making.

Most of us don’t like risk, and therefore we are willing to pay other people to avoid uncertain outcomes. Therefore the benefits of insurance are to protect us from uncertain events.

The key here is the uncertainty. If something is not going to cause financial distress, or the expense is relatively predictable, then, by definition, the service is not insurable. A health plan could cover the service, but that is a subsidy, i.e. other people in the insurance pool or an outside actor such as the government are simply paying for your service. It is not insurance.

Sadly, most of the discussion around what constitutes “real” health insurance under the ACA bears only a passing resemblance to the protection against financial risk that is the hallmark of insurance. For example, Secretary of Health and Human Services Kathleen Sebelius said: “Some of these folks have very high catastrophic plans that don’t pay for anything unless you get hit by a bus … They’re really mortgage protection, not health insurance.”

What does Secretary Sebelius think insurance is? We don’t expect auto insurance to pay for our gasoline.

Indeed, we buy auto insurance precisely so that we can meet our mortgage payments (or similar vital financial obligations) in the event that our car is stolen or worse. For a Cabinet Secretary to preside over the largest expansion of insurance since Medicare and not understand or care what insurance is supposed to be for…well, frankly we are shocked (and not in a Casablanca sort of way).

Secretary Sebelius mistakenly believes that a health plan isn’t an insurance plan unless it covers things such as routine annual visits to a physician or other services that we expect will occur each year and that we can budget for in advance. These types of services (while valuable and necessary) carry little to no associated financial risk and as a result, there is little insurance benefit to forcing the coverage of these services. It should be noted, though some may not like this fact, that this is also the case for many maternity services or for contraception.

These have been two of the more controversial mandated services and they are effectively uninsurable in most cases. In fact, when maternity services are covered by insurance, the payments for these services are largely a subsidy with little risk sharing benefits. Perhaps the most apparent example of this is when an individual seeks to purchase insurance when they are already pregnant.

While insurance companies were castigated for considering pregnancy to be a “pre-existing condition,” they were entirely correct in their assessment.

If Secretary Sebelius wishes to state, as a matter of policy, that Americans should subsidize maternity care, then she should say so. Perhaps the majority of Americans will agree. But let’s not invoke the myth that this is some sort of insurance. Furthermore, there are probably better ways to subsidize this care then forcing its coverage into the premiums of everyone on the exchanges.

Even when our health insurance plans provide protection against financial risk, this protection comes at cost known as moral hazard. Full insurance, which drives the marginal cost of a service to zero, will cause folks to buy medical goods and services even if they don’t really need it. (Either patients will demand more of it or their providers will prescribe more of it, knowing that cost is not an issue.)

This drives up health spending without a commensurate increase in benefits. Moral hazard may be inconsequential for services such as open heart surgery, but it can be quite large for other services, such as many prescription drugs, eyeglasses, contraception and even mental health care. And if the latter are not too costly, or are predictable, then coverage entails a subsidy with little or no insurance benefit making the coverage mandate even more problematic.

Insurers counteract moral hazard by requiring deductibles, copayments, and coinsurance. These measures balance risk spreading benefits and moral hazard. Low income individuals may feel the bite of financial uncertainty with relatively low medical spending.

But most of these individuals will be enrolled in Medicaid and not in the exchanges. Most participants in the exchanges can plan for nontrivial annual deductibles and can bear the financial uncertainty associated with nontrivial cost sharing.

Many of the lower tiered plans on the exchanges have relatively large amounts of cost-sharing – which makes them more like insurance than many products offered by employers. But actual catastrophic insurance plans are primarily available (likely for a political reason such as this long being a popular policy among the Republican opponents to the ACA) to individuals who are under 30 and these plans can’t be purchased using tax subsidies from the government.

Beyond limiting access to catastrophic plans, the ACA inhibits innovation in the design of health plans by setting a fairly rich set of minimum benefits for all insurance plans in the United States. This lack of innovation in plan design may be one of the largest and under discussed long term costs of the ACA. Perhaps more galling, Congress demonstrated their infinite wisdom by deciding to use the current employer-provided health system as a model for the future of health insurance.

Under the ACA, the Secretary of HHS was tasked with determining a set of essential health benefits that were similar to a “typical employer.” Yes, the ACA has decided that the structure of benefits that has led to ever increasing health spending will be codified as the definition of insurance for every American.

The rule making process of determining the “typical employer” actually left Secretary of HHS with a good deal of latitude about what would be covered. There was an opportunity to move towards a mandate that each American have true insurance. But given Secretary Sebelius’ twisted definition of insurance, it shouldn’t be surprising that she ended up choosing a very generous package of services as the “minimum.”

And coverage for some services known to be at risk for moral hazard, such as mental health and substance abuse coverage, must be covered with the same cost sharing as other services, which as we wrote about before has its own problems.

We believe that starting with generous existing employer plans as a basis for the services that should be covered is a fundamentally flawed strategy. Many features of these plans are more about quirks in the federal tax code than optimal insurance design. Employee health benefits are not taxed as income. Purchase eyeglasses on your own, and you use after tax dollars. Buy them through employer-sponsored insurance, and you use before tax dollars.

Given these tax rules, it’s no surprise that employer provided health insurance evolved into pre-paid medical services plans. Of course, taxpayers pay for a good portion of these costs – a regressive subsidy that economists have long protested (in vain, of course.)

For a long time, individual insurance policies were far less generous than employer-sponsored policies. One likely reason is that these policies did not get the same tax deduction as employer-sponsored policies. As a result, many of these policies actually looked like true insurance. Lest sound economic thinking wear out its welcome, states have mandated minimum benefits standards for individual policies. (The mandates do not apply to the self-insured plans offered by the vast majority of large employers.)

Today, the average state mandates 45 benefits, ranging from asthma management, alcoholism treatment, and treatment for HIV/AIDS to acupuncture, circumcisions, and mammograms.

A small percentage of these mandates are for services that economists would describe as insurable. Politics, not economics, explains the rest. A small number of providers and patients who pool resources to lobby for their cause prosper from these mandates. Taxpayers who are too diffuse to stand in opposition bear the costs. Congress will not be immune from this simple calculus and we expect the minimum benefit package to steadily grow.

The ink was barely dry on the EHB rules from HHS before groups that were not included began their lobbying campaigns to demonstrate their importance. As this occurs, the ACA will be less and less about providing Americans with health insurance, and more and more about subsidizing favored interest groups.

The President has said that his second administration is all about creating jobs. What we didn’t realize that he must have been referring to creating lobbying jobs for healthcare interest groups.

David Dranove, PhD 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.”

Craig Garthwaite, PhD is an assistant professor of management and strategy at Northwestern University’s Kellogg Graduate School of Management.

Dranove and Garthwaite are the authors of the blog, Code Red, where this post originally appeared.

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72 replies »

  1. “You are making my point for me. In one bad year, the insurance company spent everything you had paid them for multiple previous years.”

    I do get your point, but that was the cash pay price, insurance would have cost less, and along with my deductible they still made money. I’m actually what insurance companies hope for in an insured – work at staying healthy and try to use the system as little as possible. It was BCBSs attitude and poor service to a small legitimate claim I attempted to get reimbursed for that really drove me away. Here in NC not much choice other than BCBS.

  2. Peter1,

    “I had a new hip joint in 2012, first major medical in my life. Could have had it fixed here for about $35k, which would have been what I’d have spent on premiums over the years if I was insured”

    You are making my point for me. In one bad year, the insurance company spent everything you had paid them for multiple previous years. And although nobody loves insurance companies they have expenses to pay too. So you would have been a net loser to the insurance company for all the years they covered you.

    I admire you for setting up your own medical self insurance fund but I don’t think it is realistic to expect most of our population to do that.

  3. I agree that this is a bit of a stupid discussion, but insurance is all about selling fear – no matter how remote. I guess we’d have to get inside the actuarial math just as we’d need the math for Vegas odds.

    If you think you will get a major medical in the future that will balance off the, “every 8 years” prediction you’ll have a lot of catching up to do and I’m not sure life would be bearable then.

    I had a new hip joint in 2012, first major medical in my life. Could have had it fixed here for about $35k, which would have been what I’d have spent on premiums over the years if I was insured – not including the deductibles, co-pays and co-insurance, etc. I did however set up a self insurance fund where premium equivalents were (are) deposited every month. Got it fixed in India for total 10k – all costs. I still have most of my health war chest in tact and continue to save. So it’s not like I am avoiding the risk or can’t afford it, I just find the insurance prices grotesque.

    Friend of ours had breast cancer, fought it long and hard with much debt incurred even with good employer coverage. Died last year from re-occurrence, still in debt. Life’s a crap shot, not everyone dies from breast cancer.

    I don’t think people should have to incur such high deductibles for hospital only treatment, at a time when they probably can’t work. I can’t argue with Bob’s opinion of $1500, but over $6000 is just obscene.

    Obamacare assumes a family earning just over $63k does not need a subsidy – where did that notion come from? I’m not sure that family can save anything for deductibles and may have to tap into 401k if they have one.

  4. Peter1

    You said:

    “Not sure how old you are legacy, but have you had a major claim every 8 years? I think you overstate the odds.”

    That is just math. If one has a 15% chance of something happening in one year, then on average it will happen once every 8 years.

    I am 60 years old and you are correct, I have not had a major claim every 8 years in the PAST. However, I am more concerned about what the FUTURE holds.

  5. Not sure how old you are legacy, but have you had a major claim every 8 years? I think you overstate the odds.

  6. That comment reminds of the man who jumped out of the 50th story of a building.

    As he was passing the 10th floor someone yelled out:
    “How is it going”
    He yelled back:
    “So far so good”

    So with a 15% chance of incurring a large claim, on average you will be hit with such a claim once every 8 years.

    Clint Eastwood: “Do you feel lucky punk?”

  7. “In any given year, less than 15% of the population incurs more than $5,000 of medical claims at contract rates.”

    So we’re paying these exorbitant rates for an 85% chance we’ll never need the coverage? Staying uninsured seems a pretty good bet.

  8. If anyone still is not convinced that The Act is nothing more than a very expensive distraction as well as a jumble make work maze to wear people down and a propaganda tool to smooth the way for federal government control of health care and health insurance, please begin to notice how many times the 9.5% of earnings figure (sometimes alternating with 8%) but fewer times mentioning it is actually household income (including your kids living in the basement and your uncle living in the attic). Even knowledgeable, intelligent people are being conditioned to this number. I suggest the “single payer” aka nationalized health care that will be promoted as required when the pretend private sector solution fails will magically be paid for with a new 9.5% payroll tax on all employees with another 9.5% match from their employers. Get ready, because that’s what’s headed your way if you still work and/or run a company.

  9. Peter1 –

    I think you overstate the importance of deductibles. In any given year, less than 15% of the population incurs more than $5,000 of medical claims at contract rates. Even among the elderly, less than 15% of them don’t have enough drug claims to reach the donut hole and more than two-thirds of them don’t come out the other side of it into the catastrophic coverage zone.

    Even I, who had some significant health issues over the last 20 years, had only four years with claims, excluding drugs, above $5,000 and zero years before that. Drugs are usually covered by a separate plan with a separate deductible. Mine never cost more than $3,000 per year or so if I had to pay for them out-of-pocket and, now that they’re all generics, the cost would be under $1,000 annually. Hardly anyone has large claims every year though a few do if they need very high cost specialty drugs to keep them alive or a care giver to help them function. Custodial care is generally not covered by health insurance in any case.

    I don’t think there should be deductibles for hospital based care that must be delivered under emergency conditions. If people had more discipline and less grand lifestyle expectations, many more of them could save enough money to handle an occasional high cost claim year up to $5,000 or a bit more. I’ve said before that Europeans pay for their safety net with much higher taxes and a much more modest lifestyle – far smaller homes, tiny cars, mopeds, etc. Americans can’t have it both ways.

    To reduce costs, let’s have price and quality transparency and fix the tort system.

  10. Bob —

    The maximum deductible in Switzerland is 2,300 CHF or about $2,500 per person as of two years ago. The minimum is 300 CHF.

  11. Bob –

    What you’re suggesting sounds reasonable in isolation but I think it would have significant unintended consequences on the employer based system where at least 150 million people currently get their health insurance.

    If everyone in the individual market and the currently uninsured were told that they wouldn’t have to pay more than 9.5% of income for health insurance with the rest of the 2nd cheapest Silver level plan premium covered by subsidies, people in the employer market who are implicitly paying considerably more than that now are going to want the same deal. Unions and other interest groups will lobby Congress to change the law to allow employers to offer tax favored vouchers that would be usable to buy coverage on the public (subsidized) exchanges as well as other possible benefits including 401-K contributions.

    So, for example, say a large company with 100,000 covered lives in its self-funded health insurance plan is currently spending $5,000 per covered life and $15,000 per covered family for health insurance. New rules passed by Congress at the behest of the unions allow employers to make that sum available to employees in the form of a voucher but if they like their current employer coverage they can keep it. Young and healthy employees could go to the exchange and buy a Bronze level high deductible plan for, maybe, $3,000 excluding subsidies. If their income even including the value of the voucher is low enough, they may even qualify for a subsidy and they could use the left over voucher money to put into a 401-K plan. Or, the value of the voucher could vary by age to accommodate the 3 to 1 age rating band on the exchanges. Meanwhile, the sickest 5% of the employer’s covered lives stay with the employer plan because they like the coverage and want to keep it. They account for 50% of claims in a given year. The net effect then is that the employer’s cost for health insurance coverage could increase from $500 million (100,000 covered lives x $5,000 each on average) to $725 million ($250 million for the sickest 5% of covered lives + a $5,000 voucher for each of the other 95,000 or a tweaked amount to accommodate the age rating bands).

    The bottom line is that things like this are never as simple as they might appear.

  12. Note to Peter1:

    If it was up to me, the 8% of income would be for premiums.

    Deductibles would be capped at something like $1500 a year, which is the maximum in Switzerland. The maximum deductibles in Germany and France were about $500 but my information is dated.

    There would be no deductibles for hospital care, cancer care, rehab after accidents, etc where the patient has effectively no choices.

    The trade off is that discretionary office procedures need not be covered at all by insurance. People pay $200 to fix their cars all the time, they can pay the same to care for their bodies.

    Ironically in this issue I endorse John Goodman the conservative. He has some good articles, one on Ideal Health Insurance, and one on Why I dislike deductibles.

  13. “Barry asks ‘what is a reasonable amount for a 55-60 year old to pay for health insurance?”
    “My answer is: about 8% of their income!”

    Bob, would that include the deductibles or just the premiums?

    My beef with insurance companies is them trying to hoodwink us into thinking that high deductibles are a good thing – a product “innovation”. High deductibles are a symptom of failure and an outcrop of the continued rise in unaffordable health care. It’s a way to make the premiums palatable and reduce peoples access to medical care. I wonder how many with high deductible plans actually have a war chest of savings put away to pay the deductibles as well as all the other expenses that will occur with a major illness, also given that they need to save for retirement, their children’s education, and other non recurring surprise expenses.

    As I said to Barry, this isn’t insurance, it’s a loan.

    The auto industry plays the same game with car prices. They went to selling leases (which are very profitable) to lower the upfront monthly price, but fool the buyer into thinking those monthly payments are low when in fact the piper is paid at the end of the lease.

    This all a game of smoke and mirrors.

  14. Barry you are correct that full single payer would require more taxes than Americans are ready to pay.

    But all I was advocating in my post was that the O’Care subsidies should be extended to everyone in the individual marketplace, not just those under 400% percent of poverty.

    This would defuse some of the tremendous bitterness that is building up toward the ACA among some independent voters.

  15. Bob –

    I think the European average is about 10% of income. In Germany, the payroll tax is around 15% for employees and employers combined but it’s capped at around €45,000 or roundly $62,000. In Switzerland, a typical policy for someone 26 and older costs the equivalent of about $350 per month per person while a child would cost between $90 and $100 per month. I don’t know what the subsidy criteria are in Switzerland though I do know that 45% of the population qualifies for a subsidy.

    Remember too that the European healthcare systems cost between 9% of GDP (UK) and 12% (Switzerland) vs. 17.2% in the U.S. for 2012. That suggests that Americans would have to pay at least 15% of income to get what Europeans get for 10%. Interestingly, Americans with family coverage provided through an employer are implicitly paying more than 15% of income now including the employer share assuming they make less than $100K per year.

    If we left Medicare and Medicaid in place and replaced employer coverage plus the individual market with something like Medicare Advantage and included the currently uninsured who make too much to qualify for Medicaid, I estimate that it would cost $5,000 per adult covered life plus $2,000 or a bit less per child between one and 18 years old excluding administrative costs. Pick your number for newborns including the expensive premature multiple birth cases and assume all in administrative costs in the high single digits as a percentage of premiums which is comparable to the most efficient large employer self-funded plans. Altogether, we’re looking at between $900 billion and $1 trillion or roughly 6% of GDP.

    To finance health insurance for the group outlined above with taxes would take at least a 15% VAT or a doubling of current FICA taxes. If people paid 10% of income out-of-pocket toward the premium, taxes to finance subsidies would be much lower. Any way you slice it, though, the cost of health insurance is significant and well beyond what much of the population would be willing to explicitly pay even though many are implicitly paying that and more now by getting health insurance through their employer. Moving away from the employer provided health insurance model would be a mighty tough sell to put it mildly.

  16. Peter1 –

    I hear you on the cost of home and auto insurance vs. health insurance. My wife and I are paying a combined $13,000+ per year for standard FFS Medicare + Medicare Supplemental + a separate Part D drug plan + the IRMAA surcharge. It costs a lot of money to make healthcare feel free at the point of service.

    The problem is you just never know when you will be hit with a huge bill. A relative of ours wound up in the hospital for six weeks last year of which about half was in the ICU and needed extensive physical therapy after discharge. The hospital portion of the bill alone, at Medicare rates, was over $70,000 ($500,000+ at list price!).

    Hopefully, you will remain healthy until you’re eligible for Medicare. You may be able to get a zero premium Medicare Advantage plan at that point and just have to pay the standard Part B premium which is currently $104.90 per month or $1,258.80 per year. Total average annual Medicare spending per enrollee is estimated at $12,000.

  17. Barry asks ‘what is a reasonable amount for a 55-60 year old to pay for health insurance?”

    My answer is:

    about 8% of their income!

    Granted I sound like a Tommy Douglas-Manitoba socialist circa 1965….
    and I like the sound of it.

    Every other advanced country ties health insurance to income, whether we refer to France, Germany, Switzerland, Scandinavia, etc.

    The ACA makes some baby steps to do this with their subsidies, but then you have these ridiculous artbitary limits of certain percents of poverty.

    I have heard it said that if we subsidize everyone, then the costs to the federal government will be enormous. I am skeptical. The last numbers I read suggested that about 20% of the policy holders in the individual market made too much for subsidies.

    That is just 3 million persons at most. If 3 million persons were suddenly to get subsidies of $4,000 each, that would be just $12 billion a year.

    Small potatoes when federal health spending is getting up toward $1 trillion a year.

  18. “Also, I know that BCBS of NC is the dominant insurer in NC.”

    More like monopoly insurer. I don’t know why BCBS in NC would have more age risk than any other state. The premium through my wife’s work is about the same (BCBS). The premiums aren’t bad but the deductibles are obscene. I’d never use the insurance.

    If health insurance were like auto or home people would not expect some pay back, but when you need to pay $8000 in premiums per year plus $6000 in deductibles, not including co-insurance, people understandably want some relief – this is not insurance, it’s a loan. I can save at least that much in a savings account set aside for health care, I don’t need to send it to an insurance company.

  19. Peter1 –

    Since I think you said you’ve been uninsured by choice for a number of years, you may not have a good basis to make a like for like comparison of insurance plans and premiums. Cheaper plans that may have been available in the past probably did not cover things like mental health, alcohol and drug abuse, and maternity benefits. They may also have had lifetime claims limits. Even my employer plan had a $1 million lifetime benefits cap for the first 15 years I worked there. Then it was raised to $5 million.

    Also, I know that BCBS of NC is the dominant insurer in NC. The Blues tend to have more high risk enrollees and need to charge accordingly, especially for the older age groups. When I retired, I needed insurance for my wife for five months until she became eligible for Medicare. My employer, which has a workforce that older and sicker than the general population, quoted $437 per month for COBRA coverage. I told her to call Horizon Blue Cross to see if she could get a better deal but their quote was $722 per month. That was at the end of 2011.

    On the exchanges, I’ve noted before that coverage in NC, at least in Wake County, is considerably cheaper than similar coverage in the NJ county where I live. I’m not sure how much you think is a reasonable amount to pay for comprehensive health insurance for someone in the 55-64 age bracket.

  20. Barry, if the ACA exchange insurance prices reflect this new MLR I don’t see it in the premiums or coresponding high deductibles – something else is going on if it isn’t insurance hide-the-ball profits.

    I agree that we need more control over hospital mark ups and faux budgets.

  21. Direct Primary Care – less patients, more dollars. If you think getting a primary care appointment is difficult now then it will be even more so if this model of medical club memberships becomes wide spread.

    EPO – where did the opposition to, “You can keep your doctor” go? This narrow network approach reduces consumer choice.

    Where are the “innovations” that actually cut health care prices rather than cutting benefits?

  22. Insurance companies, meanwhile, are reporting higher profits because they don’t have to pay out nearly as much as before in claims.”

    Peter1 –

    Haven’t you and Wendell Potter ever heard of the MLR rules? Insurance companies are required to pay out a minimum of 80% of premium revenue in medical claims on individual and small group policies and 85% for large groups, including Medicare Advantage plans. If they have a claims experience favorable enough to result in paid claims of less than those percentages, the difference must be rebated to policyholders. So, their profits are capped.

    Even the most administratively efficient non-profit insurers like Harvard-Pilgrim Healthcare incur administrative costs of 11%-12% of premiums. Individual and small group policies are inherently more administration intensive than large group plans. Hence the five percentage point difference in the minimum MLR percentages.

    Insurers also know that their employer clients have been complaining loudly for years about the increasing unaffordability of health insurance. More and more large employers that haven’t already done so, especially in the public sector, are converting to self-funding and just using insurers to administer claims. The profit potential of that business in terms of dollars per enrollee is far lower than on full risk business.

    In the end, health insurance is a low margin business compared to many others. They aren’t the bad guys here. My vote for that goes to powerful hospital systems that can extract high prices from insurers and the public along with brand name drug and device manufacturers. The latter, by the way, insists on confidentiality agreements in its contracts with hospitals so it can more easily engage in price discrimination.

  23. Wow! The first truly lucid and thoughtful evaluation of the true impact of this law. The real, most insidious impacts of the ACA already have been, and will continue to be, the impact it has on innovation. I’ve described the law, in my own work, as a “yawner” in that it codifies concepts that are old, hackneyed and ineffective. I can only hope that the power of the marketplace will drive innovation in those few areas where openings exist (direct primary care, EPOs, etc.) for development of new products.

  24. Michael, I don’t say HSA/HDP can’t work for some people but they are not a solution to health costs for most people. As well high deductibles don’t have an effect reducing health costs, they do however benefit insurance companies because there is more cost sharing not cost reduction.

    My point is also made here:

    “Wendell Potter, a former health insurance executive explains:

    The median household income in this country is less than $52,000 a year (lower than it was 10 years ago after accounting for inflation), meaning that most families simply don’t have the cash after paying the mortgage and buying groceries to fund an HSA. Yes, HSAs can be just what the doctor ordered for the young, healthy and highly compensated among us, but many others who enroll in these plans find out when they get sick that coverage is far from adequate. So inadequate, in fact, that growing numbers of Americans in these plans who do get sick are losing their homes and filing for bankruptcy.

    As more young, healthy and well-to-do people enroll in these plans, the cost of more comprehensive or even adequate coverage is skyrocketing. This means that even though many Americans should steer clear of high-deductible plans, they can’t afford anything else. Insurance companies, meanwhile, are reporting higher profits because they don’t have to pay out nearly as much as before in claims.”

  25. Peter1, I have sat down with 100s of people to discuss their insurance options and never once has anyone told me they wanted to setup their deductible to spend it quickly just to get the insurance companies to start paying. Nor have I ever been told their goal is to spend the insurance companies money.

    I have no idea what you mean by ” deductible rolls over to the next premium year”. There are some policies that will take what you pay towards your deductible in the last quarter and reduce the next year’s deductible by that amount. But normally deductibles restart the following year.

    Maybe your talking about people who find themselves with a bad year and reach their deductible (and out of pocket max). They do make different decisions. They will go to the doctor and get things checked out because it’s “Free now”. But that makes the point about different decisions based on ‘skin-in-the-game’

    As far as HSAs and HDHP being for the rich, I don’t think so. Of all the clients I work with, I can’t think of one that I would consider rich. In fact most make less than six figures. Yet, 85%-90% take HSA with a full understanding of how they operate, the risks involved, a plan for paying the their deductible if need be. When we offer HSA vs PPOs to companies, and we have a session that goes over how they work, 60% of the people choose the HSA. This includes when we insure restaurants or construction companies, not really normally considered the rich and famous. If we don’t have the meeting, only 40% pick HSA even though they are a lower premium. So I’m not sure it’s all about price. In fact, the company my wife works for offers a HSA and PPO options. Her coworkers get into detailed discussion about which plan they should go with. Even though they are administrative personnel, not rich, most go with an HSA, because they analyzed the risk vs benefits of both plans.

    I have clients that have been with me since I started (going on 7 years now), I have a 90%+ year-over-year retention rate. although many have hit their deductible, none have gone bankrupt over it. I know my little slice of the pie doesn’t necessary represent the whole, I only say this because if my clients had bad experiences they would have left me years ago and sought better advice. Just the opposite is true, I get many, many referrals from my clients.

    One thing I find, is that once people are on a higher deductible plan they tend to be more responsible, and active in the health care choices.

    I read the article you pointed out and there are few interesting points. The one issue I did see discussed in it, and I think is real permanent, is the cost sharing subsidy that lower income people get. For instance, if your at 100% of the federal poverty level you get two subsidies, one to pay the premium, and one to cover your out pocket expenses. This second subsidy kicks in if you buy a Sliver plan. Normally a Silver plan will have an actuarial value of 70%, but if you are at 100%FPL, then the actuarial value goes up to 94%. I’ve seen this drop Out of Pocket Max to $500. Since it mostly the low income people that wouldn’t be able to pay the deductible, this subsidy should alleviate much of that problem.

    I also find it interesting them pointing out Cleveland Clinic, since the last report I saw they dropped all networks from exchange plans, but one . In fact, most of the top 10 hospitals dropped all but one network when working with exchange plans . This would mean they are depending people paying on their own

    http://health.usnews.com/health-news/hospital-of-tomorrow/articles/2013/10/30/top-hospitals-opt-out-of-obamacare

  26. For that to happen we’d have to accept your basis that health care is like car care is like home care in that it reacts to the same market forces and that health care should be an insurance risk model instead of a care model.

    I and many don’t accept that.

    Enjoy your university’s well subsidized and rich health plan with plenty of “gasoline” features.

  27. Peter1,

    Thanks for the reference, I had not seen that before. I read the original article and found it to be suspect.

    Don’t put words in my mouth, I am saying that Elizabeth Warren exaggerated the number of bankruptcies that are due to medical debt.

    Of course I am not in favor of people being driven into bankruptcy by medical debt. But it makes a big difference in terms of policy making whether this occurs frequently or infrequently.

  28. I don’t normally respond to these comments as I feel that I have had my chance with the original blog. But I am happy to go out to the woodshed if, what we find and use there, are all peer reviewed research from the past forty years and an econometrics textbook so that we can understand the myriad statistical flaws in many older studies.

  29. legacy, are you claiming medical debt is inconsequential in bankruptcy because there is no proof of it’s percentage of the total debt?

    I’ve never seen a creditor claim it was their portion of debt that pushed the debtor over the edge to finally claim bankruptcy. Since 2005 it’s been harder to file for bankruptcy.

    http://theincidentaleconomist.com/wordpress/where-we-stand-divided-on-medical-bankruptcy/

    Pick your analysis, but health care spending is not going down while incomes and savings rates are not really rising for most. High deductibles are a ticking time bomb.

  30. We published the results of a conjoint analysis last year titled “Choosing among employer-sponsored health plans. What drives employee choices” (J Occup Environ Med 2013;55:3055-9) that probes some of the issues raised in this string:

    Abstract
    Objective: To probe employee basis for choosing health plans.
    Methods: In a Web study, 337 employees from large private and public employers were asked to choose among health plans varying on several common dimensions.
    Results: On per-dollar basis, respondents were more willing to spend $3 to $4 on out-of-pocket copayments than $1 on premiums. Nevertheless, sensitivity to monthly premium is greatest among those who are younger and cover only themselves, whereas sensitivity to the annual deductible is greatest among nonwhite families.
    Conclusion: Employees are facing a complicated choice and might be well-served by more information about the value of options under different likelihood scenarios.

    I put this in a broader context in https://thehealthcareblog.com/blog/2013/06/19/the-health-insurance-shell-game/

  31. Michael, why would anyone care about not spending their deductible – so they can save the insurance company from spending your premiums?

    Most people look at when their deductible rolls over to the next premium year and get all the medical care they can/need from a dwindling deductible. The goal is to stop spending their money and start spending the insurance money.

    And just how are many people paying these high deductibles when the U.S. savings rate is dismal and wage increases stalled. HSAs and HDHP are tools of the rich and lower income people look at the lower premiums without looking at how they will or can pay for high deductible care.

    http://www.crainscleveland.com/article/20131027/SUB1/310279980

  32. Bob Hertz,

    “What is puzzling is that the USA seems to have all the medical bankruptcies”

    It becomes a whole lot less puzzling if you read Elizabeth Warren’s article and realize how she tortured the definition of a “medical bankruptcy” to fit her agenda.

    The reason that the US has so many “medical bankruptcies” is that Elizabeth Warren has cooked the books.

  33. My source for our medical prices is a piece by Uwe Reinhardt, ‘US Health Care Prices are the Elephant in the Room’, NY Times 3-29-2013

    My source for medical debt is a Commonwealth Fund study, Seeing Red, 8-20–08.

    I am not an academic researcher, so I may not have the whole picture. Actually I agree that medical bankruptcies are hard to measure, that was kind of a rhetorical flourish on my part.

  34. Bob, it could also be that you are looking at the charges and not the actual amount paid.

    Why don’t you let us in on what surgery cost $40,000 in the US and say only $15,000 in France, Germany or Switzerland. I would like to hear real numbers.

    Michael already commented on the bankruptcy question you had. The bankruptcy numbers provided by Himmelstein were bogus. A billionaire could be declared a medical bankruptcy by Himmelstein if his medical bills were $1,000.

  35. Very well-presented argument here, especially distinguishing between preventative and catastrophic coverage.

    We’ve been advising our self-employed clients to purchase a high deductible catastrophic plan with an HSA, then finding a doctor that prefers cash. A roundabout solution but quite effective.

    – Nate –
    BudgetDoc

  36. I think this is spot on. Insurance IS about risk, but health care services do little to reduce risk – in fact, they reward disease (with larger rewards for those treating more serious conditions). Reducing risk is bad for business in health care. You get what you pay for, and most people in the business make money off of disease and treatment. That is the antithesis of what insurance is for. What is needed is a business model that rewards early intervention, decreased spending, and avoiding unecessary services. Hmm….I wonder who is doing that kind of thing…

  37. The medical bankruptcy numbers are always skewed. if you notice they always say bankruptcy with medical bill attached. That means if they were going bankrupt because of $100,000 of bad credit, they also declare all their bills to wipe them out too. So if they had a $100 medical bill, it would show up in the stats.

  38. No, these mechanisms are not in place. They were starting to get in place using tools like HSA qualified plans. But HCR is trying to stop that trend. They have proven to bring costs down. Yes, companies are using them more and more,and that’s good. However, most employees, or individuals are not educated on them, and do make informed decisions when picking their plan.

    Higher deductibles are directly related to decisions. if your on the hook for the first $6K, your more likely to pay attention. Yes, you still need ‘friggin care’, but you will be making decision on what kind of care you want. The reality is the deductible argument is a red haring. The average person need medical care that would hit high deductibles 3 times in their life, and twice is after age 65. If your saving $100-$200/month in premiums, chances are you will be better off with the higher deductible and lower premium. If you want to pay the higher premium, great pay it. But I would buy the higher deductible, pay the lower premium, then put the difference in an HSA. I will be ahead almost all the time.

    EOB are after the fact, after you made your decisions, so that is worthless.

    As far as finding prices, you are wrong, you can find out the price, without changing contract law privacy. You can call most doctors and they can run the numbers wail you wait. Many doctor offices will do that and confirm your payment before they start. The issue they have if you call around is what CPT codes to use. Besides, you calling to every office isn’t a good options. That’s why there are services like compassphs.com. They use the insurance databases to analyse what the out-of-pocket costs will be given your insurance, for a given procedure, at a given facility. They are accurate to within pennies. They also analyse quality data, so if you need that MRI, they can tell you the best place in about 30 seconds. In fact, they can tell you success rates of procedures, alternative procedures and their success rates,and help you make quality, cost effective health decisions. Many of my clients have made many health care decisions using them.

    Don’t kid yourself about doctors not wanting to know the price, they know. They know what the test run at the outpatient facility they own cost and what they bill it for. They know if they point you to their facility, like lemmings you will go and never question the price because you don’t have skin in the game.

    As far as no one will do it, not from my experience. A lot of my clients use them, they go on high-deductible HSA plans, they renew each year and tell me about how its the best insurance they have used. The put in smart alternatives like teldoc or whiteglove to keep their doctor costs down.

    I’m not talking from some theoretical ideal, nor from a ‘grade school’ level, I’m taking from being in the trenches, helping clients in real situations everyday.

    So peter1, I have a link to my site so you can see exactly who I am, what about you? What do you do? What’s your point of view from? Come out from behind the internet and show yourself.

  39. “All we need to do is stand up to the 17% of the GDP invested in the status quo.”
    __

    “Every misspent dollar in the health care system goes into someone’s paycheck.”

    – Brent James, MD, M.Stat

  40. Very good point about hospitals receiving part of their budgets through general revenues in Sw’land (and Germany and France)

    When an American hospital charges $40,000 for a surgery and a European hospital charges $15,000, this is not because the Europeans are wildly more efficient. Nor are they using cheap labor of course.

    The reason is that general tax revenue covers a lot of their overhead.

    Translated to America, this means that we could in theory lower our insurance premiums if we would increase our sales or income taxes.
    Not sure if I could trust any current polticians to do this, however.

    One side issue:

    I have always been puzzled by the fact that 30% of costs are out of pocket in Switzerland or France, vs. 12% in the USA.

    What is puzzling is that the USA seems to have all the medical bankruptcies, and we certainly have the most rabid medical debt collectors.

    I suppose the problem is that our 12% is 12% of much higher billings.

  41. “Moral hazard”, “Skin in the Game”, and handmaiden notions are the century-old legacy of econometrics and actuarial science that is appropriate to home owner’s, automobile, life, and other forms of insurance. Do they pertain to insuring “health”, insuring for disease treatment, or assuring “health”? Would anyone want a useless intervention even if it came without deductible or co-pay? I would argue that the American “health care” system is largely a profitable exercise in selling a pig-in-the-poke and, as Professors Dranove and Garthwaite assert, ” the Affordable Care Act (ACA) has fostered a massive subsidization of healthcare goods and services” rather than anything approaching rational health care.

    We could take an alternative approach that renders “insurance” both transparent
    https://thehealthcareblog.com/blog/2013/06/19/the-health-insurance-shell-game/
    and rational
    https://thehealthcareblog.com/blog/2010/02/04/the-health-assurance-%E2%80%93-disease-insurance-plan/

    All we need to do is stand up to the 17% of the GDP invested in the status quo.

  42. Bob –

    Health Affairs published a lengthy interview with Switzerland’s healthcare czar a couple of years ago. He noted that there were, at the time, 84 insurance companies in Switzerland, a country of a bit over 7 million people though the six largest insurers control 80% of the market. The insurers negotiate as a group with providers who also negotiate as a group in each canton. So, each insurer pays a given provider the same price for a given service, test or procedure in that canton. We would need an anti-trust exemption to replicate that approach in the U.S. Also, the cost of coverage varies by canton so in a high cost canton, an insurance policy can cost as much as 100% more than the same coverage would cost in the lowest cost canton. There are 26 cantons in Switzerland. Everyone 26 years old and above pays the same premium for similar coverage in a given canton. Premiums are only slightly lower for those age 19-25 and much lower for children.

    If I remember correctly from the interview, the point was made that something like one-third of hospital revenues come from general tax revenues which means prices for those services are materially lower than they would be without that money. Somehow, though, he also noted that the Swiss pay 30% of total healthcare costs out-of-pocket vs. about 12% in the U.S.. Aside from long term care, I’m not sure what the rest of it consists of.

    The Swiss spend about 12% of GDP for healthcare vs. 17.2% in the U.S. in 2012 which puts Switzerland in 2nd place worldwide. I know that they pay significantly less for drugs than we do though drugs account for only about 10% of total health expenditures in the U.S. I’m guessing that defensive medicine is much less of an issue in Switzerland as is futile and marginally useful end of life care. Fraud is probably also much lower. Their population is generally healthier with a much lower incidence of obesity. I suspect the biggest difference, though, is in hospital costs though they also have some that resemble five star hotels.

    Regarding healthcare systems in other developed countries more generally, what I keep hearing is that most of them do an excellent job at providing primary care and are pretty good at emergency care. It’s everything else that runs into sometimes lengthy wait times due to deliberately constrained supply. I don’t think Americans are prepared to tolerate that, at least not yet.

  43. “If you have a $100 copay to get an MRI, and the hospital cost $2,500 and down the road costs $500, what incentive do you have to go down the road?”

    The incentive is up to the insurance company, after all they’re paying the bill. My insured wife had the option of high cost image or less cost image – the co-pay on the higher cost was quite a bit higher – she chose the lower cost – all things being equal.

    Out-of-Network/In-Network, don’t you think that helps with less cost decisions?

    You think these mechanisms are not in place? You don’t think employers are not already steering their employees to less cost choices? You don’t think we pay higher premiums for less access cost richer plans?

    How is a $6000+ deductible relevant to the cost of care decisions? No one stops needed care because of the deductibles – they need the frigging care.

    “Think of it this way”
    Yea sure, I need the grade school lesson when your only economic vocabulary is, ‘supply and demand” in a vacuum.

    “The issue in normal medical is it’s very hard to know the price because of the current market.”

    Not one medical professional, including dentists, and vets, knows or wants to know the price – unless they run a cash only advertised business. They believe the price gets in the way of proper care. And just knowing the price does not necessarily lead to the right health care decision as it does not in any purchase.

    The EOB tells everyone the price, but if you want all prices published you’ll have to change contract law privacy – every provider is prevented from disclosing what the insurance company pays them.

  44. I happened to be reading about Switzerland’s health system last nite.
    The highest possible deductible (in 2010) was $1500, and the highest out of pocket limit was $2100.
    (and this is a rich nation)
    Any health premium that exceeds 8% of income is subsidized (none of this tortuous 400% of poverty limit)
    The largest age ratio is 1.2 to 1, in other words there is nearly total community rating.

    This breaks all the rules of the Heritage crowd, and most of the rules of Prof Dranove.

    But it works, what are they doing right?

    (a national fee schedule with no balance billing is a big part of the answer)

    P.S. thanks to Matthew for quoting Prof Robert Evans. I read him a lot in the 1990’s. I assume he has retired, have not heard from him lately.

  45. No co-pays aren’t skin in the game, its the exact opposing. It stops people from putting skin in the game. If you have a $100 copay to get an MRI, and the hospital cost $2,500 and down the road costs $500, what incentive do you have to go down the road? Think of it this way, you go grocery shopping every week and make a choice based on your cash and your want. However, if I told you that what ever you put in that basket will cost $25 per basket, would you your choices change? Would you buy more? Would you buy better cuts of meat? Co-pays have done that to our health care system.

    Dental may not cost $35,000, but make lasik or cosmetic surgery free through insurance and it will. That’s the point, health care does respond to supply and demand.

    The issue in normal medical is it’s very hard to know the price because of the current market. If the government has a roll it would be to open it up so people can shop with price in mind.

    Look this isn’t a simple solution, and there are a lot of pieces that could be put in place that could solve this using free market ideas. It would take more than this comment section to go over that.

    I am in the process of finishing up a piece that covers all of this with a comprehensive solution to the main goals of healthcare reform, which I mostly agree with. I hope to be posting and sharing in the next few days.

  46. “Until people have ‘skin in the game’, that disconnect will not be fixed and prices will rise.”

    Co-pays aren’t skin? Co-insurance is not skin? Deductibles are not skin?

    “It’s interesting that dental,…has not had the price increases like medical…That’s because the supply and demand isn’t distorted by insurance”

    Dental work usually doesn’t cost $35,000+ dollars to fix so people can pay cash, or just pull the tooth (which happens a lot to low income). Do you propose we pay cash only for hospital care?

    Health care does not respond to simple supply and demand – that’s been proven.

  47. I’m a moderately complex 99213. I’ll be paying OOP all year absent serious injury or illness. In addition to my BCBS high-deductible policy premiums.

  48. EINER ELHAUGE’S 1994 ARTICLE (there may be some typos, I used MacSpeech Dictate to transcribe this back about 4 years ago for one of my blog)

    A few pertinent snips from the lengthy “Allocating Health Care Morally” –

    Health Law policy suffers from an identifiable pathology. The pathology is not that it employs four different paradigms for how decisions to allocate resources should be made: the market paradigm, the professional paradigm, the moral paradigm, and the political paradigm. The pathology is that, rather than coordinate these decision-making paradigms, health law policy and employs them inconsistently, such that the combination operates at cross purposes.

    This inconsistency results in part because, intellectually, healthcare law borrows haphazardly from other fields of law, each of which has its own internally coherent conceptual logic, but which in combination results in an incoherent legal framework and perverse incentive structures. In other words, health care law has not – at least not yet – established its self to be a field a law with its own coherent conceptual logic, as opposed to a collection of issues and cases from other legal fields connected only by the happenstance that they all involve patients and healthcare providers. [pg 1452]

    …To ground my analysis let me assert upfront a concrete proposal, one toward which I believe the national healthcare systems of the world are (from different directions) slowly converging. The analysis of the moral paradigm offered here supports, when coupled with the strengths and weaknesses of the other paradigms, and health-care system having the following elements.

    A politically set annual health-care budget with an associated tax not linked to employment.

    Free access for all individuals to a care allocating plan.

    Individual choice about which plan they wish to join for some significant period. (I suggest three years).
    Competition among care allocating plants that each receive a share of the government budget based on the number of individuals they enroll, adjusted for each person’s health risk, and that cannot retain profits from their budget (other than a possible bonus linked to total number of enrollees) but must instead spend it on those enrollees. Plans must accept all who wish to enroll.

    Management of those care allocating plans by professionals who have a range of diagnostic expertise to evaluate the healthcare needs of plan enrollees, who have salaries unaffected by spending decisions (other then a possible bonus for an role he), and who have a duty to decide how to allocate each plans budget to purchase those health services that maximize health benefit for the unit’s enrollees. Their sole incentive should thus be to do a good enough job at ration Inc. to keep and attract enrollees.

    Maintenance of the vast majority of healthcare providers as private suppliers of procedures, tests, and technologies that compete with each other to sell to the care allocating plans. This should create incentives for cost-effective innovation because suppliers will now face purchasers who have both the knowledge and incentives to trade off the costs and benefits of care.

    A politically appointed agency, the members of which are insulated from removal, that has only two tasks: setting risk adjustments and licensing care allocating plans by verifying their diagnostic expertise and fiscal soundness. In particular, this agency would not dictate a uniform schedule of covered services because that would be up to each care allocating plan.

    The individual right to purchase additional care outside these plans on the open market. [pg 1453]

    CONCLUDING REMARKS

    The potential role ascribed to the moral paradigm in this article is large. But it’s far from sufficient to guide all health-care decisions that any system must make. It is, after all, of no help in encouraging productive efficiency or in assessing scientific issues about what benefits (if any) of various treatments have. Nor should it have escaped attention that the moral paradigm has still left us with no answer to the question of how precisely to make trade-offs between health care and other social goods. That matter remains largely “incorrigible to moral reasoning.”

    To address those issues, we must rely on market, professional, and/or political paradigms for making resource allocation decisions. But why should we have any more faith in those decision-making processes, and what role should we ascribe to which process? Clearly, a full justification for the healthcare system I advocate requires more than an assessment of the strengths and weaknesses of the moral paradigm, which is all this article offers. It requires a comparative assessment of the strengths and weaknesses of the other paradigms. The details of a full comparative paradigm analysis will have to await another day, but a sketch of the argument is probably necessary to provide context to this article’s analysis of the moral paradigm.

    As I see it, the strength of the market paradigm are the standard ones: if consumers are knowledgeable, have similar resources, and have incentives to trade off the benefits and costs of each product, then market competition promotes productive efficiency, accommodates varying consumer preferences, and achieves allocative efficiency. The problem of unequal resources is largely external to the market paradigm and potentially remediable through vouchers. But the more fundamental problem of the healthcare market flows from an inherent division between knowledge and incentives. Unlike other markets no decisionmaker exists who has both the knowledge and the incentives to decide when the costs of supplying a particular good or service exceed its social value. Patients lack the knowledge and, even the fact that others (such as insurers or employers) cover much of the social costs, also generally lack the necessary incentives. Physicians and other healthcare providers are knowledgeable about medicine but not about social benefits and costs. Moreover, under current American market systems they either have incentives to provide too much care (if paid on a fee-for-service basis) or incentives to provide too little care (if paid on a capitation basis). Insurance plans generally lack the information to make case-by-case cost than if it decisions and have incentives to provide two little care, or to select for low-risk enrollees unlikely to need much care, because the insurers pay the cost of health care but do not enjoy its benefits…

    … Where markets and self-regulation fail, it is natural to turn to the political process. The main advantages of the political paradigm are (1) that it can make the open-ended trade-offs between healthcare and other social goods that do not lend themselves to objective scientific analysis and (2) that, unlike decision-makers under market and professional paradigms, political decision-makers have incentives to weigh benefits against costs because both are experienced by the polity. The disadvantages are that the political process is inevitably too centralized to effectively trade off the benefits and costs of health care in individual cases, and is susceptible to problems of majoritarian bias, intransitive choices, an interest group politics. These weaknesses counsel for limiting the political process to one global issue: how high to set a national (or state) level of health care spending and associated tax. This avoids the political processes in ability to make operational decisions, and lessens the concern of majoritarian bias because funding levels are more likely to affect everyone equally and decisions about which treatments to fund. This way of framing the political decision is also more likely to produce both “single peaked” preferences resistant to intransitivity problems and, more important, Lowell political information costs that render the process less susceptible to interest group dominance. [pp 1542-4]

    In http://bgladd.blogspot.com/2009/05/us-health-care-policy-morass.html

  49. @bob hertz
    Well Baucus surely didn’t want it free if he slipped in actuarial values of 60%. This, of course, means that the patient is going for his wallet all the time.

  50. A public good is by definition non-rivalrous and non-excludable. It may be that healthcare fits your defiition, but we must stop making up our own definitions of public good. I’ve seen many variations of public good in relation to healthcare and oftentimes they are incorrect.

    National security is a public good because an individual cannot be excluded from from consuming it, and consumption of national security by one individuals does not prohibit others from consuming it.

  51. “If we want to reduce health spending we should create a global budget (or fixed prices) and ration the supply side. That’s how rational countries do it.”
    __

    Yeah.

    Not exactly news. See Elhauge, 1994, “Allocating Health Care Morally”

    20 years later we’re still ignoring the obvious.

  52. Great blog. So very few people are discussing the real issues like this. When health insurance reform is considered the same health care reform the end results will be all wrong. Currently there is a disconnect between supply and demand in the health care market place. Until people have ‘skin in the game’, that disconnect will not be fixed and prices will rise. It’s interesting that dental, cosmetic surgery, or lasik surgery has not had the price increases like medical, yet they have many of the same driving forces (i.e., liability insurance, costly equipment, etc.). That’s because the supply and demand isn’t distorted by insurance… I.e, the patient has skin in the game. Until we fix that “heath care reform” is doomed to failure.

  53. So much wrong here I don’t know where to start.

    Someone as smart as Dranove going down the “health insurance shouldn’t be for oil changes” path is just dreadful. He needs to be taken out behind the woodshed and beaten with Bob Evans classic about the “zombie” of user fees–they don’t stop frivolous care and only really impact poor people who (as RAND reminds us) stop their use necessary care as well as unnecessary care when faced with fees. (I cant find the original, but here’s a piece that refers to it https://www.facebook.com/TowerHamletsKonp/posts/457233641045509).

    But next, and Dranove knows this full well from his excellent pieces on THCB about how hospital mergers push up prices but also increase overall spending, there is an even bigger woodshed called supply-driven demand–which as Vic Fuchs and a legion at Dartmouth have shown–almost all happens above the deductible.

    There is also bugger all proof that insurers successfully prevent ANY “moral hazard” — which is in itself a pretty bizarre concept in health given the unpleasantness of most health care consumption — by doing what Dranove says they do (“Insurers counteract moral hazard by requiring deductibles, copayments, and coinsurance”). The 70 year history of American insurance is reducing the consumers share of the overall cost and making more and more money while that happens…

    If we want to reduce health spending we should create a global budget (or fixed prices) and ration the supply side. That’s how rational countries do it.

  54. I don’t have much of a problem with the essential benefits package as passed conceptually though I probably would have allowed a wider range of deductibles. Also, with respect to treatment for mental health and alcohol and substance abuse, it’s much more difficult to measure and assess progress whereas it’s easy to measure metrics such as blood pressure, glucose level, cholesterol and the like. So, in theory, treatments for the former conditions could continue indefinitely whether the patient is making noticeable progress or not. Also, if one has a long history of no problems with alcohol or substance abuse, it’s highly likely that no problems will surface in the future. On the other hand, anyone could have a heart attack or be diagnosed with cancer at any time. I can understand the argument from excluding the former conditions from the list of covered benefits but not the latter. At the same time, we can’t just let people who need treatment for alcohol and substance abuse buy coverage for it but let people who don’t need it take a pass. That’s classic adverse selection.

    I always find it interesting that when people make it through a year without a car accident, they don’t whine that they didn’t get their money’s worth from their car insurance. If their house doesn’t burn down, they don’t say they wasted their money on homeowner insurance. However, if they were healthy enough to not need to visit a doctor, they complain that they didn’t get their money’s worth from their health insurance. It’s a strange mentality, I think.

    As for healthcare being free at the point of service, I don’t know of any health systems outside of Canada and the UK that do it that way and they both go to great lengths to restrict supply in order to control costs. I don’t think that approach would ever fly in the U.S. even if it were demonstrably cheaper. Every other country, as far as I know, has deductibles and copayments. In Switzerland, approximately 30% of all healthcare expenditures are paid out-of-pocket vs. 12%-13% in the U.S. a good part of which is for long term care.

    Finally, as for individual insurance policies being less comprehensive than employer provided coverage, price sensitivity to premiums and the fact that they are paid for in after tax dollars instead of pretax dollars is only part of the equation. Another important factor is that administrative costs in the individual market are far higher because it’s inherently more costly to sell policies one at a time vs. thousands at a time and medical underwriting and broker commissions add significantly to costs as well. Underwriting goes away under the ACA and broker commissions will likely be considerably lower too.

  55. Strip away maternity, mental health, home health, preventive care for children, and infertility services from EHBs and additional costs of plans drop significantly. Not nuthin, but nixing the goodies at the margin wont solve the problem of HC cost growth and moral hazard.

    While overuse of of mental health and substance abuse disorders a concern, they do need coverage–their burden too great to ignore.

    I would have liked to seen you answer the above, ie, how to include some benefits, rather than cast aside some items plans might/should include. Depression and substance abuse expensive, unpredictable, and not highly prevalent (but prevalent enough).

    Brad

    Brad

  56. Peter – Whatever the end workable HC system is you’re right that without getting costs down it’s not doable. As we have discussed in the past the problem is lobbying, their employers and our politicians all of whom prevent money being spent on the right things efficiently.

    Although I would add that the general populace bears a lot of responsibility as we put the pols into office and enough have often been all too willing to participate in bubbles.

  57. Very well written and accurate article. The problem is far too many people do not understand economics in this country and by the time they do it will be too late.

    What is and is not affordable is a simple matter of math not emotion. Any current appearance to the contrary has been created via endless market/data manipulation and an endless supply of monopoly money the effectiveness of which is nearing an end.

    This does not solely apply to Democrats and ACA, but to the Republicans and all spending in general.

    The US and the entire world is in for a very bumpy road for the foreseeable future, which is unfortunate as it didn’t need to be this way. It’s a shame that most of our species only learns under duress.

  58. There is more insidious crap to be revealed as this behemoth is unearthed. And the authors are right, most of this legislation is purely political in agenda, there is no altruistic principle here to honestly help America.

    What is the most disturbing is watching, hearing, and reading all these disturbed and harmful apologists, defenders, and charlatans only interested in partisan gains be so rude, snide, and self serving in their retorts.

    Just curious, how do people elected to represent a society claim to care and do a job elected instead be so uncaring and destructive, and people rally to aid and abet such behaviors and actions?

    And act so outraged when their fraud is exposed? Ah yes, what the criminal and their ilk cronies do. And there it is.

    Hypocrisy at its finest. Democrats howled with indignant rage when Republicans went to war on Iraq, and now feign such ingenuous outrage being called on their act of War. Just on those who won’t embrace the failed rhetoric of the left/democrats/socialists.

    Sad how so few see the real endpoint playing out.

  59. “The President has said that his second administration is all about creating jobs. What we didn’t realize that he must have been referring to creating lobbying jobs for healthcare interest groups.”

    Yep, that pretty much says it.

  60. The US has used socialized insurance as public policy in the past. Subsidized flood insurance is an example. Medicare is another example. Stuff is always easier to insure than human life. We know what it costs to replace a house destroyed by flooding or fire or wind any of your routine “acts of God.” It’s harder to determine the costs of the human life. Philosophers, theologians and poets struggle with this along with actuaries and labor economists.

    Other economically developed countries have used a social insurance models but start from a very different perspective on health and health care as a public service/good. It isn’t a “free good.” A social good or public good is a good so valuable (priceless) to everyone that it is available to all and paid for by all, e.g. national defense or homeland security or public education.

    The American challenge is that we treat health and health care as if it were entirely a private good to be financed with private funds and just some public funding. It was OK when public funding was a small portion of total health care resources but over time, as we aged into Medicare, the public portion ballooned to almost half funding. Public funding did little to control prices (as a good monopsonist should do) and much to create local public sanctioned monopolies for providers and insurers.

    These providers responded as all monopolies or oligopolies by increasing prices or increasing waste without improving value or productivity or increasing output (leaving millions without insurance coverage.) . You can’t rationally privately finance an irrational delivery system and realistically expect private health insurance to remain profitable. Remembering that health insurance is one of the publicly sanctioned monopolies we created foolishly hoping private insurance with our magic thinking would become social insurance. Sec. Sebelius isn’t our Fairy God Mother and private health insurance isn’t a pumpkin that can turn into a golden coach.

    As long as we avoid the discussion and decision about whether health and health care are a pubic or private good we remain stuck. If it’s a private good, then we can stop measuring infant mortality (except for those insured of course.)

  61. Yes Bob, seems those who tell us that private insurance should only cover catastrophic risk and that pure insurance will solve our cost problems are the ones with the best, most subsidized insurance – through their employment.

    I quick look at the health plans at Northwestern show them to be rich plans with large subsidies. They also include wellness plans – you know, the “gasoline” part of health care.

  62. Prof Dranove, your observations are correct but I do not think you have fully unearthed the motivations of Sec Sebelius and all who agree with her.

    The Sebelius point of view is grounded in the belief that health care should be free at the point of service. This point of view holds that no patient should be forced to postpone care because they cannot afford it.

    Sebelius does not care if this makes for lousy insurance. Insurance is just a funding mechanism for a moral imperative.

    To adherents of free care, whether we use taxes or insurance policies is secondary.

    This is the philosophy of Tommy Douglas in Canada and Lord Beveridge with the British NHS. It has millions of adherents in different nations.

    Now one can argue that we cannot afford to make health care into a free good –now that health care consists of more than just hearing aids and canes and blood pressure cuffs (as in the days of Tommy Douglas.)

    But that is the debate to be having.

  63. Authors still don’t know the difference between insurance and health. Other countries with government involvement do health (care) for about half the cost.

    So called “Innovation” in health plans is just benefit cuts. Insurance won’t solve our cost issues as they just pass along cost increases while keeping their spread. Reducing the pool size only creates profit centers for insurance and costs the small pool members more – as we are learning from ACA. Health costs spread over bigger pools reduces cost per member. Get rid of our politically tiered groups; Medicare, employer, Medicaid, individual, and do one big pool where we all get the same access and costs are spread equally through the tax system.

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