As a capstone of this discussion on insurance, it is useful to summarize the features of efficient, effective insurance. The ugly truth is, most of us don't appreciate insurance for what insurance is actually able to do. We gripe and grumble about many of insurance's necessary features, and want congress to wave a wand to change it, magically offering better coverage with lower premiums and smaller copays. That is pure fantasy, whether provided in the public or the private sector.
Effective Insurance
Insurance works best when it is limited to large, unexpected expenses.
If you start covering 100% of small expenses, moral hazard becomes a serious problem. People have less incentive to weigh costs versus benefits, so they (perhaps unwittingly) choose more expensive options. They don't shop around for the best price on identical service. And they might even take less care in avoiding health issues. (Why diet and exercise if gastric bypass surgery is covered 100%?)
If you start covering health expenses that are highly likely to occur, you invite adverse selection among your clients. In particular, if you must charge all clients the same premium, only the ones who anticipate high health expenditures will be willing to sign up, resulting in high premiums and many people uninsured. On the other hand, if you can charge different rates depending on their expected health needs, insurance can handle high-probability health expenses, but the coverage will be expensive. In effect, the premium will be pre-payment of the doctor's bill.
One exception that should be made is on preventative care. Well-child checkups, mammograms, and similar routine screenings can catch issues early or encourage behavior changes, when intervention is still cheap. Thus, even though these are small and anticipated expenses, most private insurance plans cover them fully (perhaps with a small copay). Indeed, those evil profit-mongers actually have an incentive to keep you healthy!
All-you-can-eat Health Care Buffet
Unfortunately, Americans seem to generally view insurance as if their premium should be paying for an all-you-can-eat health care buffet. No copays, no coinsurance, no limits on trips to the salad bar. We want it all.
But if insurance (private or government) is set up that way, it will cost through the roof. We will be gluttonous, choosing expensive procedures with little added benefit. And those who only need a dainty snack are either priced out of the market (in private insurance) or forced into the smorgasbord (in government insurance).
The insurance we have
Of course, you might be thinking, "But most private insurance doesn't seem to meet that ideal. Hasn't the market failed us?" It is accurate that most private plans don't encourage much consideration of the cost. Only 10 to 11% of patients pay a percentage of the prescription drug or office visit cost, rather than a flat copay. Less than half pay a deductible before insurance kicks in. (These have been slowly increasing over the last decade, however.)
As a consequence, doctors aren't used to being asked, "How much will this cost?" or "Is it worth it?", and generally have no clue what price the billing department will slap on any given test or procedure. But if a significant fraction of patients started asking (some of whom would change doctors depending on the answer), they would learn the information rather quickly. It is no different than an auto mechanic who has to inform you of your repair options.
So why aren't we there already? There are several factors that have led us to the insurance we have today. The first is government regulation. In countless ways, state and federal governments have imposed rules on coverage and pricing. These can directly prevent insurers from offering the ideal insurance contract. But regulation can also distort incentives for the insurance company, indirectly leading them away from ideal coverage.
The Health Savings Account was one attempt to encourage more cost-consciousness. This offers insurance with a high deductible, so perhaps the first $5,000 was paid out-of-pocket, though full coverage was provided thereafter (we call this catastrophic coverage). In addition, you could make pre-tax contributions to a savings account (much like a 401k), to be used exclusively on health expenditures until retirement. This was a huge step towards ideal coverage described above, but it ran into all sorts of regulatory hurdles, and hasn't been widely adopted. And it appears that federally, democrats have it scheduled for the chopping block.
The second is limited competition among private insurers. Extensive competition in a market generally leads to the most efficient type of product — giving the greatest value to consumers at the lowest cost. Even though there are many insurance companies out there, there are only a handful able to compete in any particular area. State regulation is partly to blame: since each state has its own multi-volume set of insurance laws, it is difficult for insurers to operate across state lines. Employer-based insurance bears the rest of the blame. Most people only consider the couple offerings available through their employer, because their employer pays a large chunk of the premium and even the employee portion is paid from pre-tax income (neither of which are true of outside insurance options). But that means I am not going to shop outside of my employer.
Limited competition always reduce the market's natural push towards efficiency. In this case, insurers can get a bit of extra profit from their clients by offering lower coinsurance or deductibles (a point made in my academic research), even if it encourages moral hazard.
The final reason we might be far from the ideal is because that is what consumers asked for. We all know how unpopular deductibles and copays are. We want all-you-can-eat! But even though that sounds good from an individual perspective, if we all behave that way, we are worse off in the end. There is a reason our premiums are skyrocketing, and the reason is us. Perhaps the reform we really needs is in Americans' attitudes toward insurance.
3 comments:
Permitting interstate operations among healthcare providers must be tethered with minimum federal oversight lest every insurance company immediately flee to the state with the laxest standards as credit care companies did when states began to adopt anti usury laws. This would be a legitimate invocation of the interstate commerce clause (for once).
I don't know exactly which regulations you had in mind, but certainly some would be necessary. In particular, disclosure laws are needed to clearly spell out the terms of the policy. After all, one of the most fundamental roles of government is to enforce contracts.
What I would worry about is regulations that mandate certain coverage or pricing (leading to the very problems addressed above). I trust that people can sort out whether a particular policy is good for them (at the price it is offered), provided that the details are properly disclosed. Thus, consumers will reward good policies with their business.
If, on the other hand, we can't trust someone to sort this out for themselves, can we really expect a congress or bureaucracy to do it for them?
I guess health care boils down to:
Cost, Quality, and Accessibility.
Government can only control two of the three.
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