At a party in Somerville on Saturday night, we were talking about the constitutionality of the federal government’s proposed requirement that everyone buy health insurance (see The Dirty Dozen book review). A woman of about age 30 said “I would be dead without health insurance.” She explained that she had required a two-day stay in the hospital not so long ago. I pointed out that she had paid at least $60,000 in health insurance during her lifetime and that, aside from this one incident, she had never required anything more than routine care. Surely she could not have run up $60,000 in charges in two days?
After paying out all claims, health insurers have enough money left over to pay nearly half a million employees (source; UnitedHealth is a typical example) and still declare consistent profits. So it should be obvious that the average consumer of health insurance does not come out ahead. Premiums for a single 30-year-old here in Massachusetts are approximately $3600 per year (source; ever since Massachusetts passed a law requiring everyone to buy insurance we have had the highest insurance rates in the U.S. (and therefore the world; source)). Even a “catastrophic” $100,000 illness can be paid for with 30 years of premiums, or fewer years if you assume that you were able to earn interest or investment returns on money set aside.
Our almost-always-healthy young woman was unconvinced. I asked her if she would be better off with her employer (a university-affiliated research institute) paying her $3600 more every year rather than buying insurance for her. “No, because if they didn’t have to buy insurance for me they would just pocket the money; they wouldn’t pay me anything extra.”
I thought about arguing that in a classical free market, employers relieved of the burden of paying for health insurance would have more money to spend. With more money, they’d bid up the salaries offered to workers. Since her salary was already above the minimum wage, it was clearly being determined by some sort of competition among employers.
However, I reflected that classical Economics tells us that in a free market there can be no involuntary unemployment. Looking around in the U.S., this is not exactly what we see. Mancur Olson has some persuasive explanations, but it is not exactly clear how to apply his theories to the question of what would happen if the U.S. ended the employer-paid tax-exempt health insurance experiment that we began during World War II.
Perhaps the reason that we can’t sort out health care policy is that so many of us think that we have gotten something of tremendous value from health insurers. We don’t want to keep paying 500,000 Americans to work at health insurers but we still want the benefits that we think these folks have bestowed upon us.
Although a person’s lifetime premium payout might be larger than $60,000, in practice most people of ordinary means could not cope with an unexpected bill of that size on very short notice. This is an aspect of insurance that isn’t recognized by the reasoning you present: the cost of money that must be obtained on short notice can be very high. This is separate from the question of whether the insurance regime we have now is beneficial; I think most of how medical care is funded in the US is wrong and provides the worst incentives, but I don’t think individuals would benefit from a pure cash-on-the-barrel system as you seem to suggest. Individuals are relatively powerless in this kind of market, invalidating many predictions of classical economics.
I’d love to hear the woman’s side of it. How did health insurance save her life?
The Massachusetts law says that everyone must have insurance, nothing wrong with that, everyone is required to have car insurance too. It also gets you a benefit — no more pre-existing conditions. Not sure how that’s working, I heard there’s no way for a person to buy health insurance in Massachusetts. The only way to get insurance is through an employer. Not sure if it’s true.
I don’t know what the insurance industry is paying all those people to do, but it probably doesn’t have much to do with providing health care, which is why any of us pay for this stuff. Imho, it totally needs to be reformed. Other countries have, as you pointed out, much lower cost of health insurance. We should just copy them.
Health insurance is as sensible as car insurance. You don’t know what illness is going to hit you, when. Health insurance doesn’t just cover hospital stays.
I had suffered through four lower back operations before I was forty
years of age. And though I’ve never made exact calculations as to the total costs of the procedures, back of the envelope math shows I rang up in excess of $80,000 in med bills and fortunately, I had/have pretty good health insurance that paid all but about $2,000 of those costs. I had paid nowhere near that amount in premiums by then end of operation #4.
It’s a calculated gamble to go without it and nothing more.
(I regularly read your blog and admire your achievements in comp sci education and acs)
You’re missing the mark with this point. Insurance is a risk product, not an investment.
You can argue premiums are a little high (16% percent of gdp), however, you would then have to reconcile why they are higher in free market america than socialist europe (typically 6% of gdp).
Indeed.
Interestingly, I can’t think of another kind of insurance about which the public has this kind of mentality. Auto, home, life. These are all centered around catastrophic coverage. People pay the premiums and are, by and large, happy if their insurance company never has to pay out on a claim.
People want a system that provides affordable, quality care to all. What this has to do with insurance, and why they think that insurance is the answer, I have no idea.
“However, I reflected that classical Economics tells us that in a free market there can be no involuntary unemployment. Looking around in the U.S., this is not exactly what we see.”
Might I suggest that with minimum wages, union shops etc, the labour market in the US isn’t that free as you think it is. More info on it here: http://www.heritage.org/Index/Country/UnitedStates
Insurance is just a means to ration scarcity. Insurers make a handsome profit for the service rendered, but the root cause of the problem is runaway inflation in health care costs. This is due mostly to the medical profession’s cartel, the pharma industry’s successful lobbying to ban Medicare/Medicaid (50% of spending) from negotiating prices down, and gross lack of productivity in hospitals, some of it due no doubt to fear of lawsuits.
There is no reason why the median income for medical doctors should be $250K after deducting malpractice insurance, or why we pay $100+ per visit to a GP when the same service in France costs EUR 25.
One encouraging sign is that new medical schools are finally cropping up:
http://www.nytimes.com/2010/02/15/education/15medschools.html
That said, the Federal government has an easy way to boost supply – it could massively ramp up the military medical schools and offer scholarships (I would suggest abolishing the Department of Education to fund this). This is what the Japanese did in the 1860s. They offered free medical education to poor students, in exchange for a 10-year commitment to work for the Army. As a side benefit, we would have an army of MDs with NBC training and be much better prepared in case of a biological terrorist attack.
I think you almost answered your own question? Classical economics does not always apply.
Firstly, “on average” does not capture enough complexity. What if
I need the $60k before I’ve had a chance to save up for it? What if,
due to fluctuations, I need more than “average”? I might choose to pay extra to eliminate that risk. Are you arguing that insurance of any kind is always a bad deal?
Secondly, there is lots of evidence that people do not behave rationally, in the sense of wisely choose the course of action that maximizes their gain “on average”. And I don’t mean they are smarter than rational. Quite the opposite. (Are you arguing that buying insurance is inherently irrational?)
Thirdly, (I’m not an economist, not even close), I don’t see how a classical market for doctors would work efficiently. Worse than getting your car fixed. What if you need a bypass, and your doc is having a 3 arteries for 2
sale? Do the extra artery? People’s choices about managing their health would be very, very different. (I wanted to say, “distorted”, but of course they are distorted now, just in a different way.)
Anyway, I do think we are getting significant value from health insurance.
I don’t mean to defend the current system; there must be ways to deliver it for lower cost, and hopefully without distorting the behavior of patients (it’s free, so I should take all I can get) and doctors (I get paid for services, so I should order as many tests and services as I can). But not having it at all would be even worse.
DavidQ: I’m sorry, but I did not mean to imply that her hospital stay had cost $60,000 (roughly the amount that she had paid in). The average cost of a hospital stay in the U.S. is under $20,000 and that is for a 5-day hospitalization. So… with $3600 paid in every year and $600/year set aside for routine care, she could afford to pay for her own hospital stay every 7 years.
Dave Winer: How did health insurance save her life? She thinks that going to the hospital saved her life and that it would not have been possible without insurance. You ask if it is possible for an individual to buy health insurance in Massachusetts? Of course it is! In fact, I linked to the government-run site that sells it. You can buy a pavement-melting SUV from a federal government-owned car company. Why shouldn’t you be able to buy health insurance retailed by the Massachusetts state government? “Health insurance is as sensible as car insurance.”? The legally required component of car insurance is for liability, in case you run over a pedestrian and kill him, depriving his family of a lifetime of future earnings. According to http://en.wikipedia.org/wiki/List_of_motor_vehicle_deaths_in_U.S._by_year, this happens to 0.000142559 of the population every year. If you drive for 50 years, your chance of killing someone is still less than 1%. That’s what you have bought insurance against. Your chance of going to the doctor or going into the hospital at some point in your life, however, is nearly 100%. This is the first time in the history of human society that we have decided to insure against risks that are more or less certain.
Francine: You ran up $80,000 by age 40? In Massachusetts, by age 40 you would have paid approximately $120,000 in health insurance premiums. If you had been able to keep the $120,000 you could have bought yourself a trip to France, Israel, or Australia and had those back operations done with equal skill for perhaps $30,000. (A friend’s parent had a heart operation in Los Angeles at a cost of over $50,000. It was unsuccessful. The family went over to France and had the operation repeated by the surgeon who had invented it. This time it was successful. They paid out of pocket for a private room in a beautiful modern hospital and a lot of excellent French food. The cost was about $7,000.) So in a world without health insurance, you’d be ahead by either $40,000 or $90,000 depending on your willingness to travel.
Bob: Once again, this woman did not need $60,000. She probably needed closer to $10k to pay for two days in the hospital. She has had no difficulty raising similar sums of money to pay for college tuition, automobiles, rent in the Boston area. You ask how could health care possibly function efficiently if not distorted by government intervention and people being insured against predictable risks. That’s how it did function in human societies starting in Ancient Egypt and right through until about 50 years ago. Plenty of people lived into their 70s and 80s in ancient societies and during the Roman Empire and they weren’t bankrupting themselves with health care expenses, so I don’t think we should be quick to assume that our current system represents any kind of success.
I am surprised to be the 10th commentor, and no one yet has mentioned the Public Option, which would eliminate the cost of the 500,000 insurance company employees. Of course then we have more unemployment problems.
One outlier note on “insurance”. First, I am very fortunate to have lived and worked during a boom time in computers and because of that I made quite a bit in stock options. Since stock options are taxed as regular income I not only paid to top income tax rate for that income but I also paid medicare tax on it. In addition my employer matched the medicare tax I paid. Sum total medicare tax paid by me and my employers over the last 20 years? $750,000. My wife “qualified” for medicare last year (I put “qualified” in quotes because you are basically forced to sign up for medicare). The benefit for 3/4 of million dollars in “premiums”? We get to pay 3 times the normal medicare rate! (no, that is not a typo) As far as “spreading it around” I’m afraid we have been well down that path long before BO moved into the white house. I predict it will get much much worse before we finally go out of business as a country.
Phil,
Self insurance is always cheaper than paying another for insurance.
Economic costs associated with paying a third party include: administration including claims and underwriting, cost of diversification, and their cost-of-capital.
I believe one problem with your analysis is, assuming the 30 year old was paying for the insurance herself in after-tax dollars, she would need to allocate $6000 of pre-tax earnings to purchase the same amount of coverage that her employer pays $3600 for.
So yes, she *would* be worse off if she bought insurance for herself.
>>I asked her if she would be better off with her employer (a university-affiliated research institute) paying her $3600 more every year rather than buying insurance for her. “No,[“]
Narrowly, her answer was right. Her employer would need to pay her $6k more per year in order for her to be ambivalent about the choice presented.
I think the normative argument you’re trying to make, which I agree with, is that people should be self-insuring for predictable and economically bearable unpredictable risks, and purchasing insurance for the unpredictable, economically unbearable ones. [i.e. the tails].
Which is the way every other insurance market in every country and century insurance has has been in existence.
The cost of health care could be treated as a separate issue. Health care [as distinct from insurance] has divorced itself from economics. Which is another issue, which I think you’ve already discussed.
@philg: I am glad for your friend’s parent, but “Fly to France” is a strategy that only works for some conditions. The itemized bill for delivering my daughter in San Francisco (no complications, no specialist care, one night stay) was more than $20,000. Circumstances required that we have a hospital birth in case of a possible complication. That has to be local. If our second child is born in SF with no complications, that’s $40,000 subtracted from my lifetime insurance payout for two healthy adults. Many conditions require long term follow-up, which also doesn’t fit the globalized free market for knee surgery model. Again, I’m not arguing that these costs are reasonable, but I have no reason to think that cutting HealthNet out of the picture would let me drive costs down by taking my business elsewhere.
Regarding car insurance: Perhaps the law is different in Mass., but I know of only two legal requirements that force you to buy auto insurance: a) total coverage on a vehicle that is owned by a bank (the bank requires you to insure the car enough to repay the loan when you borrow the money from them) and b) liability insurance is required to cover any damage you with your car do to other’s property or health. If you own your vehicle free and clear, I know of no laws that require you to insure it for its replacement value.
In my perfect world everyone would pay out of pocket for the majority of medical costs (giving everyone a strong economic motive to keep costs down) while having insurance for catastrophic costs (e.g. a good friend’s wife whose immune system suddenly decided that a major organ was not hers, leading to a transplant and a close and long-term relationship with a leading transplant hospital….).
Insurance is a risk sharing mechanism. It allows those who buy it to avoid a low-probability, highly adverse event by bearing a small, predictable cost. The insurer aggregates risk of these low-probability events, and in so doing can bear the cost of them and generate a profit.
Far from what you are implying, insurance creates genuine economic value. You can argue that anyone who buys insurance is engaging in a negative expected value transaction — and they are — but human behavioral preferences are not dictated solely by expected value. The buyer of insurance eliminates catastrophic risk, which makes the insurance worth the cost to that buyer. (No, I’ve never worked in the insurance business.)
The problem with health “insurance” (and to a lesser degree, car insurance) is after the fact. In an entirely free market, we would permit anyone to buy or not to buy, but when catastrophe visits the non-buyer, we as a society are not willing to watch the rigor of the free market consign that person to misery and premature death. We don’t want to put a price tag on the life of a loved one — but that’s exactly what the mathematics of insurance tries to do. Tough behavioral problem.
Rellag:
“Self insurance is always cheaper than paying another for insurance.”
Um, not when the hospitals have one price for the insurance companies and QUITE another for random individuals who don’t have insurance. Have you ever seen the official “prices” listed on an insurance claim right before the “negotiated price” that the insurance company pays?
Seth: I’m not sure that the huge price differences you’ve noted are an argument for perpetuating our health insurance system. In an efficient market, it is not possible for a vendor to charge 3X as much to one class of customers. Dell, for example, might give a 10 or 15 percent discount to its largest customers, but the “rack rates” are not so outrageous that they can afford to offer 70% discounts the way that hospitals and doctors do.
DavidQ: Your theory that most surgery “has to be local” makes as much sense as “most vacations have to be local”. If it costs $75,000 per week to rent a nice house on Martha’s Vineyard (see http://abcnews.go.com/Business/obamas-expensive-vacation-marthas-vineyard/story?id=8357806 ), Americans will just pay up. Nobody will compare prices and consider flying to a beach in Mexico. People can and do travel for medical treatment. I know a girl who contracted a parasite in her native Peru. She was studying here in the U.S., but discovered it would cost about $1000 per week to go to doctors here and get the required injections. She went home to Peru for a few months and had the injections administered by pharmacists there for a few dollars per week. She did not have insurance, but she did have enough brains not to purchase a lot of health care in the world’s most expensive market, just as she probably has enough brains not to bathe in Dom Perignon every night.
Let me ask you Phil: of the total # of hours that pilots flying 747s work, do they then afterwards have to spend an additional 33% of that time filling out paperwork?
Because as I understand it, that is the sort of burden that the Feds and insurers routinely place on doctors. If you take 1 dollar of Medicare/caid, you have to keep onerous documentation on ALL patients in your practice to the Fed standard.
This is not including the about 1.5 to 2 admin people per doctor or nurse practitioner in a simple family practice, and a higher ratio for specialists in a field, or surgeons.
Much of this could be reduced, but it takes a Congress with actual understanding of the issues and possibly a little business experience; instead we seem to get lawyers elected who are already used to the concept of having lots of secretaries and paralegals around and thus see nothing wrong with the doctor having to do paperwork himself plus supervise 2 to 3 people.
Two anecdotes:
I paid a lab bill the other day for $5.22. This was my 10% copayment on a charge of $150. How is $5.22 equal to 10% of $150 you say? That’s because the lab (the provider) is “in network” which means they give preferential pricing to my insurance company. In this case, the insurance company received a $97.77 discount on their charge of $150. I called and talked to someone in the provider’s billing department and asked how much would they charge me if I were to self-pay for this procedure. Right away she said “$150, unless you make arrangements to use a payment plan”. How much would I self-pay on a payment plan? $150 + finance charges.
Another story: someone visited from abroad for a few weeks. During his stay here, he developed an in-grown toenail that got infected. Long story short, I took him to see a foot doctor. The charge for the procedure, paid at the office, cash on the barrel style, was $300. Everything went well, when leaving I asked, out of curiosity, how much would they charge an insurance company. The receptionist said $750. To speculate, if you assume the provider is “in-network” and they agreed to a similar discount as in the first story, the “negotiated” charge would be around $250.
It seems likely that these are common stories. They emphasize the notion that at least one benefit of having insurance is in keeping “provider” prices in check. None of the “providers” I visit have easily accessible price lists, and if I ask about prices in advance, I usually don’t get simple answers like “procedure X costs $Y”. There is very little price transparency, which means they can easily over charge. Shopping around with an infected toe nail, or tooth abscess, etc, may not be convenient.
An important step in sorting out health care policy would be to ensure providers are more transparent about pricing, so that consumers (would-be patients) can make rational choices in their care. This goes against provider interests, and they have a strong lobby, which is probably the reason why this topic rarely gets any public discussion. Anecdotally, I get a lot of push-back whenever I bring this up in conversations with doctors or relatives of doctors.
The institutional friction in this system is enormous. How many people do you have to add to your 500k on the other side? Every medical practice has a person or persons dedicated to insurance work. What about hospitals? How much do we pay for state and federal insurance oversight? Attorneys making a living off suing or representing insurance companies? It’s a giant make-work system.
If this system was one of your beloved aircraft, it couldn’t even taxi off the blocks.
I have been in an HSA plan for 6 years. For some reason, my carrier (blue shield of ca) just said it has to raise my premiums 30% this year. It will be at the point where I can swap into a “rich plan” for not much more. Incredible.
FYI
For 2007; mean hospital stay (all patients/all procedures) was 4.6 days and mean hospital charges (excluding doctor charges) was $26,120 (source: http://hcupnet.ahrq.gov/HCUPnet.jsp?Id=AAF892F31FA2A1CF&Form=DispTab&JS=Y&Action=%3E%3ENext%3E%3E&GoTo=MAINSEL)
Interestingly, the median hospital charges were: $13,776.
The source cited contains a ton of interesting data.
As a cost comparison, top-of-the-line private medical insurance in Spain costs me about $750 per month, for a family of four.
That provides 100% cost coverage (unlimited) anywhere and with any provider in Spain, *and* 80% coverage anywhere outside of Spain (limited to $750,000 per year per person), within their network of providers in each country. (If we chose or needed treatment for something in the US, “United Healthcare” is their partner network there.)
Ray: Thanks for that link to the hospital stay data. That’s exactly what I like to see in the comments section.
gms: Thanks for the stories about the non-transparent pricing. I do think that is one reason people get so angry when health insurers raise their rates. With most companies, if you don’t like their rates you can stop buying their product or service. With health insurance, if you stop paying and don’t live near the Mexican or Canadian border, you have to buy health care directly from U.S. providers at some truly insane “rack rates”.
Patrick: Regarding the costs imposed on doctors by having to deal with insurance companies… I covered that to some extent in http://philip.greenspun.com/politics/health-care-reform (depressing to look at because I don’t think a single idea in that six-month-old document has been considered by anyone in government).
My wfe had a procedure done (about two years ago) that we weren’t sure would be covered by her insurance. We opted to get the procedure and pay out of pocket if necessary.
No one could/would tell us how much the procedure would cost. At the clinic, after the procedure was performed, I went to the counter to ask about cost (they were going to bill us, but I still wanted to know how much to plan for).
There were 6 people working behind a raised counter, I was directed to a 7th at the far end. She was the only one that patients/customers could talk to. She also couldn’t tell me a price (only that it would be at least $600). It depended on whether it was billed through insurance or directly to me.
But what struck me was the 6 other women, furiously working at their computers. They looked like they were filing insurance paperwork. I had been in the treatment area. There were 3 or fewer patients being treated. (It was one of those facilities with curtains instead of walls. Only three patient areas had the curtain closed.) That meant for every patient currently being treated, there were 2 people working on insurance paperwork.
Dave Winer: Health insurance is not like car insurance. I can elect not to buy car insurance by electing not to own and drive a car. However, in Massachusetts, I cannot elect not to pay a private entity for health insurance. Even if I’m a millionaire and can afford to pay out of pocket for any procedure should I need it, I am forced by law to line someone else’s pocket whether I need treatment or not.
Well, I would be if I lived in MA. But I live in Canada. I pay 46% marginal income tax and I’m happy with the level of health care I get in return.
The negotiated price, or discount, structure is a huge part of the problem. Insurance reform now being attempted in Washington ignores this. As has been previously pointed out, it is almost impossible to find out what something costs. Providers are having to raise prices just to keep even as insurance mandates higher discounts. If there were no discounts allowed, rates public and published, everyone pays the posted rate then real competition could begin at the provider level.
Since health care is not voluntary like driving an automobile, it could be that “for profit” insurance is the wrong model.