“Basic economic theory says that employers could make their employees better off by giving them cash income rather than the in-kind benefit of health care coverage. Employees could use the cash to purchase health care coverage directly from insurance companies, which would result in a more efficient system. What precludes this from happening today is the tax deduction that employers receive for providing health care benefits, which in turn are not treated as taxable income by employees. This tax subsidy distorts the market for health care, raising the cost of health care for everyone”. –Arnold Kling, Ph.D. in economics from the Massachusetts Institute of Technology
One other factor in why employers provide health care for employers is that the rates are lower when you buy insurance for a group of employees vs. for individuals. They play the risks of insuring people likely to get ill with people who are likely not to get ill.
True, but I don’t see why this has to be done on the companies end. It could be like car insurance, and all other types of insurance for that matter; you give me the $$, and I shop around for an insurance company that does precisely what you say, spreads the risk across everyone.
I hadn’t thought of health care as a subsidy before. Good point. Though I’m a little skeptical of the market-economics principle on this issue and on school vouchers, I do see the validity of the idea. Maybe it could work. Healthy competition (pardon the pun) could provide more beneficial health-care optoins.
My question is about both health-care and education. What about those for whom a “voucher-stlye” system would still be prohibitively expensive? What would they do?
You have compared the cost of group health care insurance versus the cost of that same coverage purchased individually, right?
Scott,
I have always preferrsed the idea of paying for health insurance like one pays for auto insurance, individually and through competitive means (internet sites would pop up comparing health insurance costs, at a similar rate to how they are with car insurance)…but personally, I’d go even further, and have everyone pay out of pocket, and completely eliminate the ‘middle man’ known as insurance companies. Instead, we could use insurance companies to cover only extreme costs (what insurance is supposed to be for - think of car accidents).In other words, insurance companies would cover any medical cost, say surgeries for example, that would exceed say, 50K a year, or something. Whatever that number may be is certainly a prudence judgement, but it should definitely be very high (again, think car accidents).
I know this sounds counter intuitive, especially when you first hear of it and have been so accustomed to our current method of paying for health insurance, but if you think about it a little more, you will see that we do this already in certain fields. Think of Laser surgery and cosmetic surgery, both unique areas of the health care industry where quality has actually gone up while costs have come down. What is common between these two is that they are not subsidized by our current health care system, and are directly market driven.
In addition, up until WWII this was the primary way people paid for their health care costs, there are people who are still alive and remember this.
As far as what to do with the poor, while there are certainly more efficient ways of handling the poor, since they represent such a small portion of society, the government could still pick up the tab on the poor and leave this system for everyone else above poverty level.
To read more on this read this, and this.
Frankenstein,
Yes.
The breakdown in the car insurance comparison is that, as a system, it is only for “emergency,” ie. an accident. Health services, however, also include regular check-ups, sickness, pre-natal care, etc, etc. How would you 2nd step - paying everything out of pocket - cause costs to go down? (Again, I’m being serious, not blog-sarcastic).
There are many reasons, and again, I strongly suggest you read the articles I linked to above, but the primary reason is that if one is forced to pay for this stuff on their own, they will be much more frugal than if the costs were hidden from them.
To use the car insurance example, what do you think would happen if car insurance companies started also covering your gas, your oil changes, and all your basic maintanence? Imagine, that instead of it costing you $40 dollars to fill up your car with gas, it now costs you a $5 deductable. Instead of spending $25 to get an oil change, it now costs you $5. Etc…Do you doubt that people would actually drive more than they otherwise would have? This is why subsidies are so harmful, they artificially inflate the costs above what they otherwise would have been.
It is a basic principle of economics that the cheaper something gets, the more people buy. So when you hide costs from them, you artificially increase demand and the costs associated with it.
I hope you don’t take offense to this, but I would strongly recommend you buy this book by my favorite economist, Thomas Sowell. It explains all of this in simple terms that people like you and me, non-economists, can understand. I promise, you won’t regret it.
“What about the poor when it comes to health care? If this were the real issue, then money could be provided to take care of the poor. But here, as elsewhere, the poor are being used as excuses to fasten a whole system of controls on all of us. The left uses the poor as political human shields.”
Based on Sowell’s article (yes, a helpful link), my only remaining question is about how the allotment for the poor would be handled. I actually agree with Sowell’s assesment of the poor being used as political shields, however, I worry about the explotation of the poor. How to not expoit the poor without also disempowering the poor with gov’t dependant system?
From an economist’s view, insurance makes the most sense when it covers only only emergency or non-routine costs. Normal operating and maintenance costs are best paid through the free market. I could never understand why a dental coverage paid for regular cleaning and x-rays - this REALLY distorts the market, doesn’t it?
1/3 of the current population has no health care many of them poor, so the poor are already not covered by corporate health plans.
The reduction of cost and increase in quality for laser surgery is not a result of the fact that insurance does not cover it. It is a result of the fact that this is a relatively new technology. It is the same reason that I paid $69 for a DVD player last month while in 1985 I paid $300 for a crappy VCR.
I guess under your plan, you are now going to tell wealthy CEO’s who are used to getting everything paid for including country club dues that they now will have to pay for their own health care costs.
Using pre WWII as an example of quality healthcare might not be the best idea. Do you know how low our life expectancy was back then.
Also, in actuality most people even insured people do not overindulge in healthcare costs. This is not a fun activity that everyone wants to partake in. Many insurance plans provide for free physical exams every year. Less than half of the participants take advantage of this.
Also, why are you using auto insrance as the shining example of how a market system is fair. I don’t know what it is like where you live, but where I am NO auto insurance is cheap, it is ridiculously expensive. Even the cheapest ones like GEICO. Plus, have you ever filed a claim with your auto insurance company, to repair a minor dent on any car costs thousands of dollars. I know people in the auto body business. There is a tremendous mark-up on the costs.
I am sympathetic to HispanicPundit’s point of view, and it is good to see intelligent dialogue about an important issue most people don’t think enough about.
No one can reasonably argue that prices do not affect behaviour, even for something that is not normally considered pleasant like health care. This kind of price-distortion is almost always present when someone other than the beneficiary is paying. As explaned in the entry and prior comments, when insurance companies pay for health care, patients will use more of it; demand goes up and so do prices. If someone bought be lunch every day, I would certainly eat more!
There is another aspect unique to health care costs, though, that has not been discussed - the costs of malpractice litigation. When the patients are not paying (and thus less likely to object for reasons of costs) doctors are likely to order more and more tests to protect themselves from liability, even when the liklihood of the testing coming back positive is very low. The doctor benefits from the extra level of liability protection, the patient does not complain, and the insurance company pays.
It sounds like the primary objections to private party “car insurance” style insurance programs or pay-as-you-go programs with insurance for catastrophic events is that they leave the poor behind. (By the way, these systems should not be mutualy exclusive, a competetive market would determine the prices of each type of plan based on supply, demand and tolerance for risk). As already noted, in the current system many of the poor are not coverend, so these changes would likely be neutral with respect to the poor. Even conservatives must concede that there is some role for government in our society, and that role should include health care for the poor, at the very least for poor children, the disabled and mentally ill, etc. that are not responsible for their plight.
Walt -
I think one needs to understand how the medical billing system actually works to understand why in the current system price does not impact demand. I think one needs to understand how the medical billing business actually works. Currently the prices of health insurance do not work like other products.
Basically if you go to a doctor to have a procedure say an MRI. The doctor prepares a bill for whatever amount he sees fit. Say $1,000. If you have a pivate insurer and you have a PIP or HMO plan he then will charge the patient their minimal co-pay (say $25) and submit the remaining $975 to the insurance company. The insurance company will pay whatever the reasonable and customary rate they deem, say $500. The doctor for these type of insurance plans eats the remaining costs.
If you are on medicaire the rates are much lower but the same theory.
If however you are a private pay customer, you owe the whole $1,000.
Since this is not a free market system, the doctors prices are irrelevant. The insurance companies drive the rates and every region has basically a handful of insurers who cover a large majority of the insured population. It is a near monopoly.
So eliminating the insurance company will not necessarily reduce price. The doctors will charge whatever they can get. Incidentally, the private pay patients make up the opposite ends of the spectrum. There are some high end doctors who refuse to take any insurers. They charge an arm and a leg for procedures for their patients. The others are clinics, who charge low rates and in general the quality of care is not very good. That will be the problem with this. If there is a free market system the poor will be living a lot shorter and a lot less healthy lives.
Hey Michael,
For now, let’s leave out the poor. We can return to them later, but for now, to keep the discussion focused, lets concentrate on the non-poor (from an economics perspective, the efficiency gained by moving to this new system would be so dramatic that one could decide to have the government pay for all medical costs for everyone at poverty level and below and everybody would still be better off than our current medical system).
The reduction of cost and increase in quality for laser surgery is not a result of the fact that insurance does not cover it. It is a result of the fact that this is a relatively new technology. It is the same reason that I paid $69 for a DVD player last month while in 1985 I paid $300 for a crappy VCR.
No, the fact that you paid $69 for a DVD player last month has more to do with free trade (which has drastically went up since 1985) than it does with the fact that it is a new technology.
I am one of the beneficieries of laser surgery, and as far as the equipment they use, you don’t see a drastic drop in price, in fact, some of their equipment has gone up in price, not lowered. The precision and accuracy involved is so high, that it takes a lot to make one. In addition to laser surgery, you could count cosmetic surgery as another area that has went up in quality while at the same time drastically reduced in price. In fact, what seems to be constant in all of these unique cases is not the price of the technology they use, but the fact that they are not covered by insurance companies. They are as close as you can get to out of pocket medical costs.
I guess under your plan, you are now going to tell wealthy CEO’s who are used to getting everything paid for including country club dues that they now will have to pay for their own health care costs.
Yes, everybody should pay for their own health care costs. Why should I share some of the costs associated with this rich CEO’s surgery?
Using pre WWII as an example of quality healthcare might not be the best idea. Do you know how low our life expectancy was back then.
This has nothing to do with the way medical costs were paid. This has more to do with the rise in nutrition, the different work people do now, medical breakthroughs and the advancement of technology. To say that this has anything to do with how medical expenses were paid is about as fair as for me to criticize your method of health care based on the Soviet Union’s failed health care system.
Also, in actuality most people even insured people do not overindulge in healthcare costs. This is not a fun activity that everyone wants to partake in. Many insurance plans provide for free physical exams every year. Less than half of the participants take advantage of this.
Yes, but we are not talking about the mean, we are talking about those people on the margin. It is a basic premise of economics (something we should all agree on), that the cheaper something gets, the more people are going to use of it. On the other hand, if people had to directly feel the costs associated with it, they would be much more frugal in their decisions. Or, as Thomas Sowell writes,
Also, why are you using auto insrance as the shining example of how a market system is fair. I don’t know what it is like where you live, but where I am NO auto insurance is cheap, it is ridiculously expensive. Even the cheapest ones like GEICO. Plus, have you ever filed a claim with your auto insurance company, to repair a minor dent on any car costs thousands of dollars. I know people in the auto body business. There is a tremendous mark-up on the costs.
Right, but imagine how much more expensive things would be if those insurance companies now started covering the cost of your gas, your oil changes, your tires, all maintanence on your car etc…Or, to go the other route, how cheaper they would be if the minimum amount of coverage was raised, say two fold? In other words, the less an insurance company is required to cover, the less expensive are the costs to insure.
Now, allow me to comment on some of your responses to Walt, you write,
So eliminating the insurance company will not necessarily reduce price. The doctors will charge whatever they can get.
Yes, but the difference being that that charge will properly reflect supply and demand, there will be no subsidies and no way to hide true costs from the patients. I strongly believe, when all is said and done, that if we move towards my proposed method, medical costs will be overall much lower than is presently the case, for both, the patient and the medical community.
Medical care is not like other commodities. It is not like buying a camera. No matter how much research we do can we effectively say, that mole’s funny color is nothing to worry about? We need people with extensive training, effective diagnostic tools like biopsies and CT scans to say that it is nothing. If it costs a prohibitive amount of money to seek treatment for this situation, many patients will be less likely to seek treatment early. Untreated these moles, bumps etc are less likely to be caught early and more likely to be treated later on as cancer progresses and becomes more costly to treat if treated at all.
Regarding the auto insurance example. There is one important difference in the metaphor. If your car stops performing earlier than expected because you do not maintain it with oil changes, tire rotations etc, you will eventually sell it and buy a new one. We do not have that luxury with our bodies. If we don’t pay for maintenance now we will pay later, when the problems are worse and more expensive to fix.
More frequent doctor visits are good things that actually can reduce medical costs. One reason women have higher life expectancies than men is that they make more frequent visits to doctors before a problem becomes more expensive to treat. One reason that the rich live longer than the poor is that they see doctors more often. There was a great article recently in the NY Times comparing three people a rich, middle class and poor person who had heart atacks in NY the same day three years ago. The rich followed his treatment plan and saw more medical professionals etc including nutritionists, psychologists etc, than the middle class, than the poor and as expected the rich person is in the best health now while the poor person has other medical problems creeping in without the proper follow up. The poor person is unable to work regularly because of hypertension that she is not treating. These are additional costs on our society.
I agree that more competion needs to be involved but that greater competion needs to be enforced through insurance regulation (I know it is a dirty word to some) of the insurance industry. In most regions, 2 or 3 insurers provide most of the private insurance for local residents. These companies due to there extensive lobbying operate unfettered and restrictive laws exist in many states forbidding new insurers to operate in a particular state. More insurers should be added. This way the patients can truly chose the cheaper insurance. However companies can still contol this to get the discounts. They do by pooling their risk. A few years ago I switched from a very large Fortune 20 company to a much smaller company. My insurance premiums increased drastically due to the smaller pool of insureds. This large company had three plans to chose from. My new company has one plan due to the fact that the insurer says that if you make them exclusive they will reduce our rates (marginally). If you ever buy insurance on your own. It is far higher than what your company pays.
As far as CEO’s, how can you keep companies from paying for this. If you take a nickel of compensation from them (and insurance is a fringe benefit compensation), they bitch and moan like you were treating them like slaves. Any employer who provides insurance has a huge advantage in attracting qualified employees.
Hispanic Pundit,
I’m buying your supply and demand argument. Sounds solid and legitimate. My dad recently moved to Mexico, and to keep it short, his experience of the health care system has been radically refreshing compared to the US system.
But, as in life, we keep putting off a real solution for the poor. I was a little shocked at how easily Michael said ” If there is a free market system the poor will be living a lot shorter and a lot less healthy lives.” As though that were somehow easy to digest. My generally viewpoint is that the self-motivation of a free market economy only uncovers our general disrespect & exploitation of the poor, ie. the theology of human depravity. I don’t believe that - in general terms - individuals or corporations or gov’t will provide for the needs of the poor without sometype of accountability.
So, getting back to the poor, and taking health care as an example, how do we address the needs of the poor and the need to truly empower, not pity, them.
Scott - I don’t appreciate my posts being taken out of context. I am not saying this dismssively. I am the one bringing this up the poor repeatedly in the argument. It is a scary effect. I keep bringing up that the poor live shorter lives than the rich. It is true and it has to be fixed. I brought it up several times hear because it needs to be addressed. The only response that I get is that I shouldn’t use them as a human shield. Its the same argument people give me when I complain about the ridiculously low tax rates on the upper incomes. All I get is that’s class warfare, you shouldn’t talk about that.
We can’t solve the problem by saying the problem with insurance is that people see doctors too often. I feel the problem is partly the opposite, people do not see doctors enough. I honestly don’t have the solution all I can think of is government aid as someone else brought up earlier, but this has lots of flaws addmitedly.
My point is that making health insurance a market similar to auto insurance will raise premium rates due to the exclsuion of pooling risks and would actually cause higher health care costs, because people will treat things only when things are really at their most expensive to treat. That would include the poor who under the market system would only be able to afford the cheapest and probably least qualified doctors.
Hey Michael,
Right from the beginning, I just want to say that I agree with almost everything you wrote in comment 14. If there was one argument against my solution to health care that makes me rethink it, it is the fact that if you make people pay out of their pocket, they will be less likely to go to the Dr’s office until the problem escalates to much worse. So on that, we agree.
But on the flip side of this, I see worse problems with the alternative. While I agree that having people pay for their own medical costs does create an incentive to delay check ups, there is still a powerful incentive pushing people to go and get that check up. To use our car analogy, you respond,
Which is exactly why the incentive to get that check-up is much stronger in health care than it is with cars. If I postpone the maintanence on my car, the worse that will happen is that my car suffers greater damage because of the delay, which in the end will only hit me in the pocket book. However, if I delay check-ups, I could suffer much worse than pocket book pain, I put my health in jeapardy. Taking care of ones health is one of the strongest incentives we as human beings have. So again, there is already a strong incentive for people to go and get them check-ups, maybe a little less than there would be if those check ups were free, but a strong incentive nonetheless.
There is also the financial costs associated with subsidized healthcare, the more you shield costs from patients, the more expensive things get overall. We’ve already discussed one aspect of this, being that patients will go to the Dr’s office for every little thing, thereby wasting valuable resources on things that could have been solved through other means. But there are also other factors that increase the problem.
In many cases you have perfectly capable people who can afford health care costs deciding to use that money for other uses instead. They choose to buy a luxury car, or a really expensive home, or a vacation home, while all the time going through insurance companies to pay for their health care costs, and all they have to pay is a $25 deductible. This directly drains the health care market from much needed income and makes health care much more expensive for the rest of us.
In addition, you create an environment where efficiency is not rewarded. When a Dr’s income is directly tied to how many patients s/he attracts, s/he has a stronger incentive to cut costs. I once read, for example, that some Dr’s have found that X-ray specialists in India are just as capable as X-ray specialists in the United States. The difference is that Indian X-ray specialists do it at a fraction of the costs, so Dr’s could electronically send their X-ray results to specialists in India and receive the same quality results at a fraction of the cost. Solutions like this are found much sooner in a direct link supply/demand curve.
Also, by creating a middle man - the insurance companies (or an even more inefficient middle man, the government) - you are adding to the costs of health care, not taking away. Now my insurance costs have to pay for the Dr, for the Dr’s equipment, for the Dr’s assistance, and cover the insurance companies costs, be they paper work fees, their workers, their land costs etc….So I have increased net medical costs, not reduced.
Now, about what your claim that ‘pooling risk reduces costs’. I have to disagree. I agree with you if this was truly a risk situation. In other words, if we were talking about catastrophic insurance, like car insurance, or fire insurance, or earthquake insurance, or all other insurances. In other words, if the thing being insured is not likely to happen, if it is unplanned, and if it is overall an ‘abnormality’, than yes, pooling the risk is a good solution. However, you are not talking about catastrophic risk, you are talking about everyday health care problems, office visits, basic x-rays, check ups etc….In this case, you cannot make things cheaper by ‘pooling risk’, because there is no risk to pool. The likelihood that these events will occur, that a patient goes to the Dr for a check up are almost certain, in many cases encouraged. So you have hidden the costs, but you have certainly not made them cheaper. This is how Dr. Kling explains it,
Now, what happens when all of these extra costs are added and added, and keep multiplying without any checks and balances like you would get with direct supply/demand curves? What happens is that eventually costs get so expensive that other important aspects of the health care industry start to suffer. We lose economic growth, something that is so vital to life expectancy that it alone has contributed more to extending life expectancy in the last century than any other factor. You also start to move in a downward spiral where the government wants to step in, create some sort of price control, or compound the problem, thereby reducing pharmaceutical compensation, or Dr’s pay, thereby reducing the incentive for companies to create life saving cures, or highly intelligent people to enter the medical profession. Both things that in the long run drastically reducing life expectancy and quality health care.
I want to address something else you have said repeatedly, you wrote earlier,
I agree that private pay patients currently pay more for insurance than those under health insurance, but this is because of insurance companies, not in spite of insurance companies. If you didn’t have insurance companies, everybody would be forced to pay the same, which would be somewhere between what insurance companies currently charge, and what private pay customers currently pay. The only reason that insurance companies get charged cheaper is because they have the potential to bring many more customers (not because of pooled risk), so the Dr’s can charge cheaper and they will still recover their costs from quantity. Kinda like what farmers charge dept stores as opposed to the walk up customer. So I strongly believe that if you eliminate the middle man, private pay patients will be charged less, and when you factor in all the costs benefits mentioned above, you will get that price to drop lower and lower, while the quality increases, again, much like laser surgery and cosmetic surgery has.
So again, that is my solution. I would want those who can afford to pay for their own health care, to be forced to pay for it. It is not a perfect solution, but I do believe that it is the least of two evils, and subsidized health care being the more evil one.
Scott,
Now, as far as addressing the unique problem of the poor. Well, I tend to agree with Arnold Kling on this one, he writes,
In other words, the only area where the government is involved in assisting the poor is in the form of a tax based voucher, given to them to be spent on privatized health care professionals. So they get all the benefits as the rest of us, in state of the art technology, top of the line Dr’s, and efficient service, but just paid for by tax payers.
Btw, I leave to Mexico tomorrow, so I might not have time to respond to your comments, if that happens, I’ll respond as soon as I get back.