Healthcare Overhaul Part II-A Set Up
The problem with our current healthcare system is twofold. The first issue is the number of uninsured and I offered a solution for this in a previous post. The second issue is related but completely different. It is the issue of the overall cost of health care in this country.
Back in the mid 90s, it was the cost of health care which spurred the drive for what many dubbed “Hillary Care”; a quasi-single payer system. I recently read an article written for the CATO institute back in 1994 used to refute “Hillary Care”, an article which has a lot to tell us about our situation today.
In this article, the CATO institute, and many economists, placed the blame for the high costs of health services not on insurers, not on doctors, not on government, but directly on the American people. Over-consumption of health services was and is the largest contributor to high costs.
Remarkably, this opinion was supported by a study performed by RAND in the 1970s. During this study, RAND provided health coverage of different types to a population of 3500 families. These 3500 families were divided into 4 groups. One group paid 0% coinsurance. Essentially ALL of their health costs were covered. The other groups had coinsurances of 20%, 50%, and 80% up to a $1,000 deductible ($3,000 or so in today’s dollars).
The study found that the group who paid 0% consumed TWICE as much health services as those who paid 50% to 80% of the costs. Yet at the end of the study, there were no statistical differences in the general health of the various groups. Health could not be directly linked to a level of health service consumption (behavior, such as smoking, was a much more likely indicator).
So what was the cause? Those conducting the study believed that this 0% group, like many Americans, was too far removed from the actual costs of the goods they were consuming and had no incentive to assess value. Meanwhile the groups with the larger coinsurances had to make such an assessment, much like any other time they spent money. Is it worthwhile to go to the doctor for this tiny sniffle? Are the costs really justified?
I personally have what many term a “Cadillac” health plan, although I wouldn’t call it such. My coverage requires a small copay ($30 for doctor’s visits) and no coinsurance. Fortunately for me the costs are still relatively low (the insurer, Scott and White, is also my health provider) and are in fact lower than the group plan offered by my employer. Still, when I visit the doctor, I have no disincentive to seek as many unnecessary procedures, tests, etc. as possible. In fact, I usually feel justified in the bill being high; after all, I have paid in all those premiums, right?
The current system of third parties being involved in every day health care payments has created a tremendous disconnect between the consumer and the costs of the goods the consumer is using. This system is not remotely close to a “market type” system. Due to these third parties, the “market” is utterly failing.
Replacing insurers with a different third party, mainly government, would do NOTHING to fix this problem. The same incentive to consume goods in excessive would remain and unless government artificially depressed prices, costs would remain high. Some means, therefore, should be put in place so that consumers actually have “skin in the game” and are aware—and accountable—for the health care they consume. Only this awareness would lead consumers to end “excessive” use of medical services and bring costs back down to where they belong.
Of course, the average American cannot afford the medical bills that accrue after a catastrophe. But this is why it is called medical INSURANCE. Auto insurance is required on a new car to cover a catastrophe (such as totaling the car) because the risk is too high for the average consumer. We expect the insurer to cover the cost of the vehicle if it is lost, yet we do not expect the insurer to pay for new tires, oil changes, or car washes? The same is true of home owner’s insurance. The policy will cover the loss of the home in a fire, but we don’t expect the insurer to pay for lawn maintenance, new paint, or the plumber to make repairs! Insurance is not there to cover the costs that we can pay; it is there to cover the costs that we cannot pay!
Medical INSURANCE should be no different.
(to be continued)
Back in the mid 90s, it was the cost of health care which spurred the drive for what many dubbed “Hillary Care”; a quasi-single payer system. I recently read an article written for the CATO institute back in 1994 used to refute “Hillary Care”, an article which has a lot to tell us about our situation today.
In this article, the CATO institute, and many economists, placed the blame for the high costs of health services not on insurers, not on doctors, not on government, but directly on the American people. Over-consumption of health services was and is the largest contributor to high costs.
Remarkably, this opinion was supported by a study performed by RAND in the 1970s. During this study, RAND provided health coverage of different types to a population of 3500 families. These 3500 families were divided into 4 groups. One group paid 0% coinsurance. Essentially ALL of their health costs were covered. The other groups had coinsurances of 20%, 50%, and 80% up to a $1,000 deductible ($3,000 or so in today’s dollars).
The study found that the group who paid 0% consumed TWICE as much health services as those who paid 50% to 80% of the costs. Yet at the end of the study, there were no statistical differences in the general health of the various groups. Health could not be directly linked to a level of health service consumption (behavior, such as smoking, was a much more likely indicator).
So what was the cause? Those conducting the study believed that this 0% group, like many Americans, was too far removed from the actual costs of the goods they were consuming and had no incentive to assess value. Meanwhile the groups with the larger coinsurances had to make such an assessment, much like any other time they spent money. Is it worthwhile to go to the doctor for this tiny sniffle? Are the costs really justified?
I personally have what many term a “Cadillac” health plan, although I wouldn’t call it such. My coverage requires a small copay ($30 for doctor’s visits) and no coinsurance. Fortunately for me the costs are still relatively low (the insurer, Scott and White, is also my health provider) and are in fact lower than the group plan offered by my employer. Still, when I visit the doctor, I have no disincentive to seek as many unnecessary procedures, tests, etc. as possible. In fact, I usually feel justified in the bill being high; after all, I have paid in all those premiums, right?
The current system of third parties being involved in every day health care payments has created a tremendous disconnect between the consumer and the costs of the goods the consumer is using. This system is not remotely close to a “market type” system. Due to these third parties, the “market” is utterly failing.
Replacing insurers with a different third party, mainly government, would do NOTHING to fix this problem. The same incentive to consume goods in excessive would remain and unless government artificially depressed prices, costs would remain high. Some means, therefore, should be put in place so that consumers actually have “skin in the game” and are aware—and accountable—for the health care they consume. Only this awareness would lead consumers to end “excessive” use of medical services and bring costs back down to where they belong.
Of course, the average American cannot afford the medical bills that accrue after a catastrophe. But this is why it is called medical INSURANCE. Auto insurance is required on a new car to cover a catastrophe (such as totaling the car) because the risk is too high for the average consumer. We expect the insurer to cover the cost of the vehicle if it is lost, yet we do not expect the insurer to pay for new tires, oil changes, or car washes? The same is true of home owner’s insurance. The policy will cover the loss of the home in a fire, but we don’t expect the insurer to pay for lawn maintenance, new paint, or the plumber to make repairs! Insurance is not there to cover the costs that we can pay; it is there to cover the costs that we cannot pay!
Medical INSURANCE should be no different.
(to be continued)
posted by Cogito at 9:15 AM
2 Comments:
I absolutely agree with what you have written here, but how do you apply this principle to the "uninsured"? The whole healthcare reform debate is centered around the idea that millions of Americans can't afford health insurance. So if they can't afford the coinsurance either, how do you propose that we limit their consumption?
Brad,
This will be answered in my next post (or the current one). The principal is easy enough to see and define. The logistics is what is most difficult.
Post a Comment
<< Home