Asymmetrical Information

So how do you get away from employer-provided insurance? You could eliminate the tax exemption for employees, but all that does is bump up the cost of their insurance contribution by the (marginal rate) X (the cost to the employer). I'd bet a lot of employers would still use health care as a benefit to attract employees, because it's what we've come to expect as a culture.

Interesting comments.

One difference between health and auto insurance is that auto insurance typically only covers damage (i.e. the car is broke (or lost) and became broke (or lost) all at once due to a specific cause) and not mechanical breakdown (though there are separate warranty markets).

If I like to drive fast or park in bad neighborhoods, then I have a heightened risk, and yes I can marginally "screw" the insurance company by buying full coverage. But there's still a chance that I never have a claim. The NPV of the policy for the insurance company may be negative, but its not negative to the full replacement value of the car. I might, after all, be accident and theft free forever. A few of me pooled with hundred of safe drivers and the insurance company still makes money at price levels in the ballpark of the cost of covering risk to the average policyholder.

But with health, there is an added problem for the insuarance company - namely that I start feeling bad and then go get a policy. That is, I have information that the insurance company does not have - and its information not about a heightened risk of a claim, but about a near inevitability of a claim. In this case, the NPV of the policy for the insurance company isn't just negative - its incredibly negative. Pre-existing condition rules are never perfect, after all.

Just a thought: Would it be advantageous to de-couple the risks covered by health insurance? For example, separate trauma insurance from cancer insuarnce. I would think that you could have a market for trauma insurance that was relatively free of economic distortion from either adverse selection or moral hazard - much like the market for auto insurance. You'd still have a problem with the market for cancer insurance, but at least you're separating out the parts of the system that are fixable and fixing them.

Typo catch: "product", I imagine, not "produce".

I can think of one simple way that government could improve the health insurance system. They could set some standards so that people could realistically compare insurance companies and pick the best ones.

There could, for example, be "Plan A", which gives you all the coverage in the world and no copay. "Plan B" would cover everything but have a small copay. Down at the end, "Plan Z" would cover 80% of hospitalization only.

Companies could then (voluntarily) offer plans that meet the government spec - but you can only advertise them as "Plan A" or whatever if you meet the gov't spec.

This way, a company in the market for insurance for its employees could do a straightforward comparison and actually shop around for the best deal. The way it is now, you can't compare two companies, becuase what they offer is always totally different.

One difference between health and auto insurance is that auto insurance typically only covers damage (i.e. the car is broke (or lost) and became broke (or lost) all at once due to a specific cause) and not mechanical breakdown (though there are separate warranty markets).

Yes, if you want to generate a "car care spending crisis" and engender a backlash against the overly-stingy CMO (car maintenance organization) bureaucrats who make care decisions rather than ASE techs, the best way to do it would be to mandate that oil changes, car washes, and new tires all be covered by your auto "insurance."

Rob: That's a good point, and I think you've touched on a special case of a more general problem: Complexity in consumer decisions. We've reached a point where broad inability (even for smart people) to understand the exact terms of what they're buying, severely distorts and hinders the market. We see this not just in health insurance, and not just in insurance, but also in mortgages (which have gotten a lot of attention recently), credit cards, warranties, and in some cases, utilities.

Scott Adams (author of Dilbert) has a term for markets which have few dimensions to compete on, and resort to extremely complex product differentiation: "confusopolies". Ideally, you should be able to transparently lay down the different possible e.g. mortgages for a neat apples-to-apples comparison. But unless you can coordinate them all to "integrate" into some template, no one wants to be first.

The government already does something like what you've described: regulation of the use of the term "APR". But as you can see, as long as they offer complexity on other dimensions, it doesn't matter much that they have to be honest about the "annual percentage rate". (Incidentally, what peeves me is how the term "interest rate" itself is misused. I've seen it used to mean something like "annualized ratio of contractual monthly payment to original loan" -- often for neg-am loans -- when it should only be used to mean "annualized rate at which unpaid balance accumulates".)

I'd bet a lot of employers would still use health care as a benefit to attract employees, because it's what we've come to expect as a culture.

I'm not so sure about that. Look at what has happened to the market for pension plans, which were also "culturally expected" in the not-so-distant past. Once the workforce became fluidly mobile, the market converged upon 401(k) type arrangements. Employer contribution arrangments vary, so the level of benefits are still a variable incentive, but the basic scheme is the same and the accrued funds travel with the employee.

Seems to me that employer-sponsored health insurance could rapidly head that direction, given the right push.

"But most car insurance companies pay your claims with a lot fewer hassles than your health insurance company." - Jane

yes, but they also happily raise your rates or drop you at the next renwal. There are many places in the mountains, where you cannot BUY homeowner's insurance AT ALL. Which means that people who own houses there cannot sell them, because no one can get a mortgage without insurance. Some of these sorts of houses have survived forest fires, and the insurance company drops the insurance, which is totally stupid. After a forest fire there is no fuel for another one for many years. Those houses are actually the safest, for that reason. If you make a claim on your homeowner's policy they will raise your rates, and if you have a second claim, drop you. Other companies won't touch because you have been dropped. It can be a nasty cycle.

Also, what is a NORMAL health insurance market? Has it ever been such?

I like the idea for "collision" versus "Comprehensive" health insurance as mentioned above, rather than a ones size fits type we have, but I'm not sure how you would regulate that.

The probelem with health ins. today IMHO is the all-you-can-eat-buffet effect...

You go to a buffet and eat until you are uncomfortable, because it's already paid for. You feel like you are cheating yourself by not taking full advantage. In the current HMO/PPO system that most employers have, you pay for it anyway. So you use it when you have the sniffles.
When I was a kid, we had either no ins. or the old 80/20 system. That meant unless I was bleeding profusely, there was no trip to the doc "just to be sure". There are many downsides to that, naturally, but at least you only seek care when you need it, not just 'cuz...

This sort of system as now snowballs because so many people use it... not to say the other points are not at least as relevant... but I think a lot of what is broken is actually about the psychology of it's use.

right back to "everything would work great if there were no people to worry about..."

yes, but they also happily raise your rates or drop you at the next renwal.

Yes, but many people who get into these cycles tend to be high-risk types who are insuring themselves with high-risk insurers because they've worn out other options.

There are many places in the mountains, where you cannot BUY homeowner's insurance AT ALL.

There are many coastal locations where you cannot buy flood insurance, AT ALL. So?

AM,

The 401(k) is basically reproduced for health care in the HSA, which involves a cheap, high-deductible policy and a special tax-free account, to which employers can make contributions if they're so inclined. I had one from the private market for a couple of years when I was in law school, because the comprehensive policy throught he school was so overpriced and because I'm young and healthy.

These are not terribly popular because, as Arnold Kling correctly states, people don't want insurance, they want somebody else to pay for it. An HSA makes it feel like they're spending their own money. That particular aspect makes it both unpopular and a good system for controlling costs without rationing.

Maybe a change in the tax rules will push us to HSAs, I don't know. But they aren't real popular now.

sorry, anony-m I can see that I didn't get the full thought out there... the AT-ALL part is new... this isn't can have insurance at 5x the price because of risk... this is companies simply getting out, and oddly no-one replacing them at any price. Forest fires aren't like flooding. They don't happen often, and once done, there is no fuel to have more, for many years. I would think insurance companies would take advantage of that fact, and write the policies with the risks factored in, but it seems like they are only interested where there is vanishingly small risk...

as for the automobile high risk cycle... perhaps... but as an anecdote, I myself was accident free for 21 years, and then had 1 accident, and 1 minor fender scrape in a 2 year period. My rates tripled, and no other company was less. I knew that insurance is always 'what have you done for me lately' I guess I just didn't KNOW it. A friend was in a similar boat except his was 1 accident, 1 vandalism [4 slashed tires, all windows broken], and 1 helpful fellow parkinglot person, who decided that he didn't need that bumper, and was unwilling to stop...
Alstate dropped him after 25 years of full line, multicar, house and everything insurance.

Not that I am advocating going back to lotsa regulation, but you'd think something medium out there...

I posted this idea on the earlier health care thread, but it was pretty far down and no one has acknowledged it, probably because it didn't directly address reducing costs but focused on giving control of health care decisions to individuals, so I'll re-post it here (where it seems more relevant anyway). Sorry if anyone finds that irritating.

"Make employer-provided insurance taxable as income and give employees an option of getting a raise rather than insurance. Implement a Negative Income Tax, BUT, all payouts from the NIT go into a tax-free Health Savings Account that can be used only for non-elective medical procedures, prescription drug purchases and medical insurance.

This gives the citizens ownership of their own health care because, even though they can't use the money in their HSA to finance a house or car or whatnot, it's still *their* money, and they can will it to their heirs (who can cash it out and pay taxes on it, or roll it over into their own HSAs and NOT pay taxes on it).

Once you've done the above, eliminate all other forms of government-financed medical assistance. Probably there are other things that could be done in regards to streamlining overhead, mandating industry standards in insurance claims forms and record-keeping and suchlike, but I don't know anything about those aspects of it all."

You can't ask your friends about their insurance.

Or do most employers not offer multiple health insurance options? I've never had a job that didn't.

Except for major operations, I'd rather spend my money on herbal medicine and naturopathic doctors. Can we please get a plan which lets us opt for those things instead of conventional meds?

Thx

The truth is, for better or worse, we are in the process of making health care a right. It isn't in the Bill of Rights, and it isn't one of TJ's "inalienable rights", but we want it, and we are going to have it.

It is not economically feasible for private institutions to be in the business of providing for people's rights. If it's a right for someone who can't pay, it is a right for someone who can, but won't. Business can't survive that.

One big problem in comparing car insurance to health insurance is that if you don't have car insurance, and you wreck your car, that's that: You either pay for a replacement car, or you go without.

Health insurance doesn't quite work that way. If you don't have health insurance, and you get sick, you have to pay out of pocket if you have the money. But if you don't -- say, if you're an illegal immigrant in LA -- you don't go without. You go to the emergency room in the county hospital. Either the hospital -- which is required to care for you, even if you can't pay -- or the government ultimately eats the uninsured loss. There is always a backstop somewhere.

The result of this is that the market gets horribly distorted, with health-care providers passing the losses incurred in caring for the indigent onto insurance companies and solvent fee-for-service patients. Then there's the litigation premium (where the inherent uncertainty of the tort system requires overinsurance) and other factors, and it's no wonder that the U.S. spends more public money per capita on health care than other countries which provide universal care.

I just finished paying off a $30,000 medical debt I incurred in connection with the birth of my now-5-year-old daughter due to a combination of insurance-company malice and personal wet-behind-the-earedness. The cash cost to me of insuring my family through my employer's insurance plan is over $600 per month. Much of that money is used to defray the cost of providing medical services to people who can't pay, or to make up for the lowball Medicare/Medicaid reimbursements.

In short, I have a powerful sensation that I'm paying for the equivalent of socialized medicine without getting any of its benefits. If a conservative is a liberal who has been mugged, a liberal is a conservative who's dealt with an employer-provided health-insurance plan. (Without providing specifics, let's just say that I root for the stagecoach robbers in old Westerns.) This otherwise granite-ribbed conservative sometimes wonders whether government has screwed up the health-care market so much and so irreversibly that going the last step to full public provision of a basic HMO-style plan (leaving people free to improve their standard by paying for private insurance or care) may be most realistic means of solving this mess.

We have adverse selction in health care in the fact that the medically uninsured include much higher numbers of young people, who do not generally have the chronic (and expensive) diseases that old people have. The young do occasionally get a bit crazy and do stupid things, thereby leading to horrible emergency-room costs, but I know from seeing the costs for a simple broken ankle for a 90-year-old woman, that the elderly cost a LOT more than the young.

The elderly ALL have health insurance, thru Medicare/Medicaid, and we ARE paying for it.

We need to have _everyone_ paying into the health care system, and getting services in return. But the problem there is that the politicians won't be able to limit the amount of care in any way, and "needs" expand to fill the resources available. Especially when the needs involve a health matter. Politicians who do not have the intestinal fortitude to control expenditures are the true problem. Compassion is hard to fight.

Just an extension of what Ralph said. Compassion is hard to fight...when you're spending other people's money.

I've got a brother who makes as much as I do, but he lives in Arizona and I don't. His kids are on some kind of insurance program where he pretty much pays $0 in maternity. He pays $60 a month for this coverage. Meanwhile I pay $360 a month for my wife and child and it costs me $5000 out of pocket to have a child, in addition to my insurance premium. And I understand from others posting that my $360 is a great deal.

But WTF is going on here! How is it I can pay close to $10k out of pocket to have a child and my brother pays $700 bucks, while someone else is paying $10k just for annual premiums.

Like some other posters I get the feeling that many of us are heavily subsidizing others health care, when we probably don't need to.

It's not adverse selection; that's a red herring. There's an easy cure for adverse selection in most cases--it's called underwriting.

The real underlying problem is regulation. If you can't charge high risks premiums proportionate with their expected costs, you get our current mess of a system.

There's also the horrible state regulation of insurance. It smells like a constitutional violation, but so far it hasn't been determined to be - growing one plant for personal consumption brings in the commerce clause, but making insane insurance autarkies doesn't, cause lawyers are weird and don't believe in rational economics.

Cdub: it's very likely because of the differences between your state's insurance rules and Arizona's. It sounds like Arizona's rules are looser and allow for a lower minimum standard of cover, while his plan has a low deductible for mat care, either by choice or thanks to regulation. All state insurance regulators (everyone working for them and who has ever approved their budgets) need to go to jail for violating people's constitutional rights (Commerce Clause is a civil right too). Unfortunately we don't live in the world where my word is law.

In short, I have a powerful sensation that I'm paying for the equivalent of socialized medicine without getting any of its benefits...This otherwise granite-ribbed conservative sometimes wonders whether government has screwed up the health-care market so much and so irreversibly that going the last step...may be most realistic means of solving this mess.

I completely agree. We have socialized medicine via the most convoluted route possible, to maintain the illusion that we don't have socialized medicine.

Whatever your problems with private health insurance are now they will all go away if you live long enough.

At age 65 our reward is to put all this crap behind us and enroll in Medicare and never have to ever worry about our medical insurance again.

I don't know why we just don't cover everybody with Medicare. Talk to the 48 million seniors who are now covered and not a one of them would give it up for the uncertainties of private insurance.

Sure, having your bills paid by someone else is always a richly satisfying experience. But not one that scales up particularly well to the entire national market, unless you know some foreigners who are willing to step up to the plate.

I don't know why we just don't cover everybody with Medicare.

Because in many cases, Medicare pays health care providers less than the cost of providing services? Medicare's fee schedule has many such perversities built in to it. The key is to figure out what they will pay for on a given diagnosis and make sure that you hit the appropriate service codes to be sure that you get a reasonable reimbursement.

My father was a podiatrist and his reimbursement for an office x-ray was less than the cost of the film. However, if the patient had an x-ray at a hospital, they got paid quite a bit more - and there was a good chance that the x-ray would need to be repeated to get the exact view he needed. The office x-ray was ready in less than 30 minutes, so he could tell the patient what the problem was and how it should be treated right then, saving them a return trip (and a separate charge for an office visit to Medicare).

The reason for the disparity was twofold: hospitals have good lobbyists and Medicare didn't want doctors "enriching" themselves by providing services in house.

What this blog really needs is a post that discusses both health care and Social Security reform. That way Medicare can be the Real Solution and the Real Problem at the same time.

Averse Selection does not exist in individual insurance because you can be denied if you admit to certain conditions and coverage can be refused if you lie about your health to get past underwriting.

That being said, it does come into play with small group (under 50) because Federal law requires acceptance of a group of 2-50.

As to who to ask, ask someone like me. The first question should always be "Who have you been licensed with that you moved all your business away from because of service issues?" The second, "Will you help us with any claims or billing problems?"

In the small group market (our agency's 220 clients average 7 employees each) the agent must be actively involved in assisting the employees and business owners in solving problems generated by insurance companies and doctors billing offices. (The primary failure point.) Occasionally an insurer will come into the market with lower rates/benefits ratios (called buying business) and will pick up quite a bit of business. When the "rubber hits the road" the agent learns what sort of service they really have and how much they invested in being prepared for the influx of business they generated. In some instances the clients are moved elsewhere ASAP.

I have literally told prospective customers that have asked to get a quote from a particular company or two that they couldn't pay me enough for me to write their insurance with those companies.

And for those who haven't done small business, normally you have to have at least 100 employees before you can get them to agree to multiple insurers for the company. Multiple plans from the same insurer start at three employees.

Also I have had some business owners that have gone on Medicare and are seriously critical even with the savings and have asked if they could go back to fully insured on their companys' plans.

Thomas,

I think the last part of your comment about going to a basic service for everyone but topped up with private funds for those who want better than the standard care won't solve the fundamental problem. There will always be the calls for equality, and how the best healthcare available is a right for everyone, not just those that can afford it.

Yancey,

Well, at some point, we'll just have to tell the "callers" to pound sand. Sure, there will always be pressure for everyone to have the "best" healthcare. But except for Canada, national healthcare services seem able to resist that pressure.

The bulk of most people's healthcare expenditures come later in life, when they're covered by Medicare. Really, how much more would it cost to extend coverage to everyone -- and to adjust the reimbursement schedule to something closer to market value?

going to a basic service...

Define basic.

Why basic includes:
therapy
anti depressants (and practically everyone who feels lonely, lost, confused, stressed between the ages of 2-80 has clincal depression or adhd these days ya know)
triple bypass heart surgery
abortions
birth control

and on and on....

I'd be fine with health care that covered:
freak cancer
broken bones
3 trips to the doctor a year and made other reasonable limitations

If you have a heart attack because your arteries are clogged up, if you have lung cancer because you smoke like mad, you have to pay for 50% of the costs. If you think your clogged arteries are the result of genes and completely unrelated to the cheesburgers and fries you eat once a week or more then the burden of proof is on you to prove it.

After that you pay out of pocket on some kind of sliding scale.

Actually I'd really just be happy with health care for those who paid for it and none for those who don't. If doctors want to volunteer their time to help others and if charities want to setup funds to help pay for the less fortunate that would be great and I'd likely donate.

But as is, I feel like I'm getting hosed everytime I pay a doctor bill and see a charge for $80 for a breating mask (plastic mouth cover with a tube) or $5 for a couple aspirin on my wife's maternity bill.

cdub, the pain is real, but the prices aren't bullshit. That $5 aspirin includes:

1. Patient wants pain medication
2. Nurse is notified via buzzer
3. Nurse calls doctor
4. Doctor agrees and orders pain medication
5. Nurse faxes order to pharmacy
6. Pharmacist goes, grabs medication, tubes it up to floor.
7. Nurse takes medication into room and gives to patient.
8. Nurse goes back to station and documents medication, dose, time given, and patient reaction

Steps 5 and 6 can be automated by placing common medications in a dispenser on the floor that nurses can use. You're paying for the documentation, not the medication. And JCAHO (the Joint Commission on Accreditation of Health Organizations) says that for the hospital to be accredited, patients cannot keep their own medications - if they take their own supply, those medications must be stored in a locked location on the floor (to prevent theft) and their dispensing controlled by the nurse responsible for that patient.

Documentation, not medication.

Some writers blame the shortcomings of the US health care system on the large role of medical insurance provided by employers. It is frequently argued that overpriced, gold plated plans are encouraged by the fact that salary is taxable but health benefits are not, and that “Almost no one has any control over their health insurance, so there is no incentive for companies to develop a reputation for speedy resolution of problems.”

Bosh. Health insurance is still an expense, and every penny overpaid for health insurance is lower earnings for the shareholders. Shareholders hate that. Managers choose between competing providers, but as a general rule they end up with the same health insurance provider as the other employees. They have a direct incentive to choose one that gives good service.

There are other reasons, however, why health insurance is different from other insurance markets.

1). If you can’t afford to pay for health care, health care providers are reluctant to just let you die because you can’t pay them. This is especially true if they are nominally non-profit charities, but even the employees of a for-profit hospital will have some compunction about letting an indigent patent die when they could prevent it. This has a number of interesting consequences: if you have a low enough income to qualify for charity care, buying health insurance may not make sense. At our local hospital that threshold is well above minimum wage. If an employer has a lot of low wage workers, the health insurance may cost the employer more than it’s worth to the employees.

If your car needs to be fixed and you can’t afford it, that’s your problem. But not a huge one: you always have the option of scrapping a car that costs too much to fix.

2) If you *can* afford to pay for health care, your bargaining position as an individual is very poor if you need immediate care. An agent that negotiates in advance of an emergency, and that will go elsewhere if the price is to high, can get a much better price for health care. The price a hospital charges an insurer with substantial market share is much, much lower than list price. This is a big part of the value they offer their customers. It’s also a powerful force towards oligopoly or even monopoly in the health insurance field.

3) Some people are going to need much more expensive health care than others, often for reasons completely beyond their control. Health insurers can often make a pretty good guess about who these people are based on their history and other risk factors, and either deny them coverage or quote an unaffordable premium. Technically, this is not adverse selection, since it doesn’t hinge on asymmetrical information. However, it is selection, and it can be pretty adverse if you’re the one selected out of the risk pool.

I'm a little confused on one point: Where is the moral hazard in health insurance? Are you suggesting that health insurance encourages unhealthy behavior?

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