Flier and Goldhill maintain that health care reform is headed in the wrong direction. Instead of trying to bolster and extend the system of health insurance that we currently have, they maintain, we should move away from it. Specifically, they think we should move to high deductible plans that encourage consumers to economize. Then we could rely on the normal workings of markets to hold down inflation in health care. Doctors and other health care providers would compete for consumer spending based on the quality and cost of their care. Consumers would choose the care that offered the best combination of quality and cost to suit their desires and budget.
The explanations for why our health insurance system is structured the way it is often turn on the tax code. Furman’s article covers different ways of altering the tax code to encourage a more socially desirable health insurance market.
Once upon a time, I had this idea that our first-dollar health insurance plans amount to a combination of savings and insurance. We pay premiums that really amount to advance payment for the predictable care that we will use during the year plus some extra to cover the risk of needing really serious care.
Well, it’s true to this extent: your premiums will include the cost of your predictable care plus some extra to insure against big risks. But Jon (and Remy) demonstrated that this is not the same thing as a savings account coupled with a high deductible insurance plan.
The crucial feature of that arrangement is that you get to keep what you save if you don’t spend it. This isn’t so with insurance premiums: you don’t get any of your “savings” back. Consequently, if we pay for routine care with insurance, we have no incentive to economize. Our premiums depend on what all policyholders spend, not on what we spend individually. So individuals have no incentive to economize even though everyone would be better off if everyone did so.
Here’s a question. Why don’t insurance companies tailor their policies to encourage economizing? Why don’t they offer their subscribers a rebate for using the system less, for instance? If the rebate is slightly less than the money they save by not paying for care, they come out ahead. In other words, I would think it would be possible for insurance companies to reproduce this. I wonder why they don’t.
Another thing that intrigues me is the question of who would be better at economizing: individuals or insurance underwriters, whether in the public or private sector. Here’s my assumption. We order too many procedures and pay prices that are too high because doctors (and other providers) recommend the procedures and set the prices. Very few people demand various tests and treatments on their own, without having them recommended by a doctor.
So the trick is to get someone to subject the doctors to scrutiny and say no when their recommendations are not supported by the evidence. Flier and Goldhill basically think that individuals are the ones who would do the best job of standing up to the doctors.
Is that true?
We have some evidence that it is. The RAND study sort of suggests this.** See The Health Insurance Experiment (2006). It shows that when people pay more out of pocket, they use the system less and, in most cases, do not suffer any ill health as a result. However, it also shows that their decisions are indiscriminating: they turn down both genuinely effective care as well as ineffective care. It’s a mystery to me why the health effects are negligible. But be that as it may, we’d like to turn down mostly the ineffective stuff. In theory, a big organization could help here: it could hire experts, collect data, and act impersonally. Yet there isn’t much evidence that either public or private health insurance agencies do that now. So score that for the market guys.
On the other hand, we have the rest of the world. The rest of the world uses insurance plans, whether public or private, to hold down costs. They act as monopsonies, either for the country as a whole or a region, and negotiate prices with the health providers. Score that against the market solution.
We also have something like this in the US. Some health care providers pay their doctors a salary, collect a lot of evidence, and subject their doctors’ recommendations to scrutiny in the light of this evidence. These are groups likes Kaiser, Mayo, Intermountain Health, and so on. The lesson here is ambiguous. On the one hand, these are examples of companies that both take insurance premiums and regulate care by using experts rather than consumer choice. That’s the anti-market side. On the other hand, this is the sort of system that individuals might choose if they had to make their decisions on their own since it delivers good results at reasonable prices. That’s the pro-market side and Flier himself suggests that it is one possible outcome of a more market driven system, the other being high deductible plans with a lot of consumer choice.
We know a lot about why it’s difficult to establish efficient markets in health care. There are a lot of information asymmetries, the profession resists market mechanisms, and we generally want it to do so. Health care isn’t expensive in McAllen, TX because the people there demand lots of services. It’s expensive because the doctors prescribe them. Until people feel confident in challenging their doctors, I don’t see how this will change. On the other hand, it could be that nothing inspires confidence like “it’s going to come out of my pocket!” Again, that’s what RAND’s Health Insurance Experiment seems to have shown.
In addition, it’s going to be very difficult for market solutions to work without published prices. Goldhill, for instance, couldn’t even get hospitals to quote him prices! Jennifer has been referring to this phenomenon all term; now we have it in print. And this just in from a new RAND study:
After sending more than 350 hospitals letters from a fictional, uninsured patient seeking legally required information about the price for different kinds of work — including a colonoscopy, a hysterectomy and laparascopic removal of a gall bladder — fewer than a third of the institutions answered back, researchers say; two-thirds of those that did gave estimates with costs that exceed legal limits, set based upon Medicare reimbursement. Researchers say their results bode poorly for state moves to give the uninsured fair, accurate information they can use to make better decisions about their health spending.†† Farrell, et al. “Does Price Transparency Legislation Allow the Uninsured to Shop for Care?” Journal of General Internal Medicine, 2009. Abstract.
Finally, I’d like to note one finding of the old RAND Health Insurance Experiment: even though people paying more out of pocket used the system less, there were no improvements in the quality of care they received. This makes sense, given that they economized on effective as well as ineffective options. So consumer choice does not appear to be an answer to some of our quality problems. Maybe these problems are due to government regulation and first-dollar insurance. But if they’re inherent to markets in health care, the market solutions won’t give us everything we want: high quality, low cost care. (Of course, even if that is so, it doesn’t follow that there is an available alternative that would do better.)
To wrap up, here’s another question. Could we combine the market ideas with the basic elements of the current system? I don’t see why a publicly regulated or sponsored health insurance plan couldn’t heavily favor high deductibles. The public sector could use the idea just as well as the private sector. Whether it would do so is another question, of course.
I handed out Flier’s editorial in the Wall Street Journal.
Michael Cannon, of the CATO Institute, is also an interesting representative of this position. If it had been published earlier, I would have included his Policy Analysis essay.
Finally, I wish we had read the summary of the RAND Health Insurance Experiment I referred to earlier.