Wednesday, November 26, 2008


A friend of mine pointed me to the Intelligence Squared US debates. I *love* this. This is got me written all over it. Come up with a proposition, pick smart people on both sides of the proposition, vote before and after the debate, and see who changes more minds. Of course, the fact that I just love arguing may have something to do with why I like this so much.

On most of the propositions, I have an opinion and I find myself leaning towards one particular side. I am frequently surprised by how much I am swayed by the side that I didn't start off agreeing with, and how they are able to change my mind on some topics. While I like to think of myself as open-minded, it's not as true as I'd like it to be. I am ideological. I want to be open-minded, but on some topics I'm not. I simply don't believe the other side. So it's surprising to me that on some topics, I'm more open-minded than I thought I was. This is good news.

I've listened to a few of these debates. But there was one debate in which I found myself disagreeing with *both* sides. It was on this proposition: Universal health coverage should be the federal government's responsibility. I am very much against this proposition. But I'm not against it in the way that debate panel was against it. The panel against this proposition spent precious little time talking about the problem associated with 3rd party payers. They let the other side get away with the assumption that the only way to avert financial catastrophe associated with a health emergency is to have the government to pay for it.

Here's what I wished would have been argued.

Health insurance that we have today is unlike every other insurance that we use. Insurance is an effective tool for covering high cost, but low occurrence events. Think about car insurance. It doesn't cover the cost of filling up, or tire replacement, or engine checkups, or oil changes. It covers accidents, which occur very infrequently, but can be very expensive when they happen. Nor does homeowners insurance cover the cost of utilities or other activities that take place inside the house. It only covers rare, but expensive events.

These insurance markets work. They work because everyone pays a little bit into a pool, that then has the money to pay out for the expensive, but rare, events. If the events really are rare, then this works. Everyone gets to deal with the risk of expensive events, but no one pays a lot because most of the time people are only paying in and not getting coverage out. Most of the time it's worth it to pay a little out, on the assumption that nothing's going to happen, for the assurance that if it does, you're covered.

Unfortunately, insurance can't work when the covered events are frequent or common. And, this is how our health insurance works. It covers everything. Any time you go to the doctor, get a prescription, do anything related to health care, you use your insurance to pay for some or all of it. There is no system of insurance that can work efficiently when it has to cover every event, not just rare ones. This has prompted economist Arnold Kling to stop calling it health insurance and instead call it "insulation". Because what happens is that the "insurance" provider insulates us from the cost of the doctor's visit, or the trip to urgent care, or the prescription that we receive. We're still paying for it, but instead of paying the doctor $200 for the visit we pay the insurance provider $600/mo.

There are two problems that come out of this:
  1. Over consumption: People who don't know the cost of something, will consume more of it. In other words, we will start going to the doctor for everything, because we don't see a cost associated with it.
  2. Increased premiums: the insurances companies have to get the money to pay for the medical bills that we're racking up. The only way for them to do that is to increase the premiums.
And if you want to see this in action, you should try living on a health insurance plan that really is insurance instead of insulation - where you pay for everything yourself except for the catastrophes. I currently live under such a plan. Very little is covered. And what I've found is that the doctors offices simply don't know the price of things. I've gone to the doctor with my child trying to get stitches for a cut. Before I went in, I asked what this was going to cost, because I was going to have to pay for it. They didn't know.

Stop for a minute and think about this. Is there *ANY* other service provider that you pay for, where they have zero idea of what the cost is going to be?

The reality is that the doctor's office didn't need to know. Their job is not to let the patient make an informed decision about the cost and benefit of the procedure/service that is being performed. Their job is to do the service and take care of the billing later.

Do you know how much it costs to get stitches put into a kid? Only after the procedure is done, and you no longer have a choice to pay for it, you find out from the billing department that it costs about $500. This is an extremely routine procedure, which requires hardly any specialized equipment, and little training to perform. Compare that price with lasik eye surgery. Their are lasik centers who charge less than that to perform a task that requires expensive specalized equpment and requires significantly more skill and training. And the lasik surgeons offer free consultations *BEFORE* the procedure to discuss with you what will be done, what the impacts will be *AND* how much it will cost.

So why is there such a difference? Stitches are covered by insurance. Lasik is not. Every lasik surgeon knows that to win your business he has to make the cost/benefit case to you. Every *other* physician knows that he can earn a high wage without having to discuss it with you. The reality is that the cost of eye surgeries has been going dramatically down over the last few years while the cost of every other medical procedure has been going up.

My opinion is that the problem boils down to 3rd parties paying for routine events. I can't tell you how much I wish that most of the rest of the US had only catastrophic health insurance. We could then unleash market forces onto health care providers and get the costs down.

Now, that does *NOT* mean that I think we should get rid of catastrophic health coverage. I absolutely think people should have insurance for what is insurable: rare and expensive events. Also, I don't think that the best organization to provide this coverage should be the US Federal Government. But this problem can *NOT* be solved by replacing private 3rd party payers of routine services, by a public 3rd party payer of routine services. This problem can only be solved when there are pressures on providers and consumers to work on each individual transaction and determine what the cost and benefit is. No central government authority can ever hire enough people to know what health procedures people need or want most. And no central government authority can successfully lower costs by hiding the costs from the people getting the services.

Only a market that is free can do this.

So in summary, here's what I would have argued:
  1. Catastrophic insurance: good
  2. Government provision of catastrophic insurance: bad
  3. 3rd party payment of common events: *very* bad - whether that 3rd party be government or private insurance
Update: I can't take credit for coming up with this all on my own. I am highly influenced by the writings of Arnold Kling on this subject.

1 comment:

John said...

My thoughts exactly.

We need LESS insurance, not more.

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