Asymmetrical Information

From the desk of Jane Galt:

And now for some unrestrained

And now for some unrestrained silliness from Jane Bryant Quinn:

Get ready for the next scary change in your company health insurance. Employers have squeezed almost all the costs they can from managed care. Now they’re working on ways to pass consumers the ball—and the bill. You’ll soon have to decide if you’re willing (or able) to pay extra money for the same quality care you had before.

Quinn, of all people, should know that when employers give their employees health care, they don't just go to the money tree in the back yard and pluck what they need to pay for it, nor do they trade favors with another firm that has a health care mine. If your employer's giving you health care, it's because they aren't giving you something else. That something is money in your paycheck. Those crafty employers have been passing the cost onto their employees for pretty much as long as they've been offering a health benefit.

Now, in fact health benefits are special, because they're tax deductible. It costs your employer the same amount to give you health insurance as it does to give you money, but when he gives you $100 worth of health care, you get $100 worth of health care. When he gives you $100 worth of money, you get $65 or less, after Uncle Sam is done rifling through it. So your employer can give you $65 worth of health care, and you'll be just as happy with it as you would with $100 worth of money. Presuming you want health care, and most of us do.

However, because the tax preferences skew the market, most of us are getting a lot more health care than we want. According to someone who does insurance benefits, the average employee gets between $3200 and $3800 worth of health insurance every year. That's for a single person. Now I want you to think back over all the medical services you've used over the past year. Assume $100 for a doctor's visit, $25 for a generic prescription, $90 for a top-of-the-line prescription, and if you've got something very exotic, well, you know how much it costs. Have you consumed $3800 worth of medical services? I have asthma that ain't improved by planting myself smack in the middle of a construction site 60+ hours a week, but I didn't consume $1000 worth of services.

But the young are subsidizing the old, and the healthy subsidizing the sick, I'm told, and the money will come back to me eventually. Let me ask you something: older workers make more money than I do. Why am I subsidizing them? And if I want to participate in a Ponzi scheme, I'm perfectly capable of finding an MLM or a chain letter on my own; I don't need my employer to do it for me.

BEHIND THIS new approach lies a sudden spurt in the cost of medical insurance. Employers are looking at increases this year in the 13 percent range, after 12 percent in 2001. There’s no relief in sight. Drug prices are soaring, big networks of doctors and hospitals now have the bargaining clout to win higher fees, the work force will soon begin to age and, yes, they’re gonna get high-tech care.

Employers simply won’t pay for all this

And as we've just noted, they in fact don't.

—but they’ve noticed that many of you can and will. When offered either an HMO or a PPO, 55 percent of employees take the PPO, which costs more but provides easy access to most doctors and treatments. So the next question is, will you go even higher to get convenience and choice?

Can you tell the Jane Bryant Quinn is staking out the anti-convenience and choice side of the argument? Boldest move I've seen since Abby Joseph Cohen founded Investors for Insider Trading.

You’ll face this question as soon as “tiering” is added to your company plan. It’s a system for charging different prices for different medical choices, and shows up already in most pharmaceutical plans. You might pay $10 out of pocket for a generic drug, $15 for an approved brand-name drug and $25 for other brand names. You can use any high-priced pill you want, but at your expense.

A few hospital plans—including Tufts Health Plan in Massachusetts and Premera Blue Cross in Washington state—are starting to offer tiered choices, too. Your co-payment might be low for a community hospital and high if you go to a prominent medical center.

Once that idea catches on, you’ll see tiered prices for doctors, too—with the better-known doctors becoming the Tiffany choice. Last month the Humana Health Plan of Ohio announced a new plan that gives workers access to three different groups of doctors, each one costing progressively more.

After tiering comes a whole complex of health-plan proposals, known in the business as “consumer-driven care.” I don’t hear consumers hollering for them, but never mind. They’ve become the very latest in free-market “choice” and “personal control.”

Horrors no, what next? This consumer is hollering for them, Jane Bryant Quinn. This consumer wants catastrophic coverage insurance so she can choose her own doctors while still insuring herself against catastrophic events like a car accident. But this consumer isn't allowed to have these choices, because the state of New York thinks that she shouldn't be allowed to have anything but a horrible HMO she doesn't want and can't afford. So now this consumer doesn't have any health insurance at all.

Consumer plans offer a menu of health-insurance options, each with different deductibles, co-pays, doctor groups and coverage limitations. You mix and match yourself. The more of your medical bills you agree to pay, the lower your monthly premium.

In one popular plan, your employer gives you a fixed sum of money for medical expenses—say, $1,000 a year. You pay any further expenses yourself until you reach a maximum—say, $2,000 a year for an individual or $4,000 for a family. After that, the employer pays. (Similar fixed-contribution plans exist today, but usually without as many choices.)

Taking another approach, Vivius in Minneapolis sells a plan that lets workers set up their own HMOs by naming the particular doctors they want in their network. Their monthly premium depends on how cheap or expensive those doctors are.

Consumer-choice plans come down to this: if you buy less coverage and stay healthy, you win. But if you or a family member gets more than a passing illness, you lose. Losers will grump. Winners will gloat. But to my mind, nobody wins when people play roulette with their health.

Okay, no one's playing "roulette with their health". The plans she's talking about could stick a consumer with as much as several thousand dollars in health bills in a year -- not chump change, but less than most of us are carrying on our credit cards. This is ridiculous hyperbole from someone who ought to know better, and does -- but doesn't care because she's out to make a point. Can anyone guess what that point is?

What’s more, we aren’t very good at assessing our future financial risk. Think of all those retirement savers who lost half their money when the stock market sank.

There I'll agree with you. But if we aren't prepared to let private individuals risk a couple of thousand dollars, we might as well appoint guardians pro-tem for the 99% of the nation that doesn't own a financial calculator.

The promoters behind consumer choice (start-up companies, such as Definity Health, Lumenos and HealthMarkets, along with such veterans as Aetna and Wellpoint) say that you’ll find it easy to select a plan. Just go to the Web, compare prices and coverage and presto, there’s the right one. But Web sites aren’t written for workers with low literacy levels. And even smart people rarely understand their plans.

And because HMO's are good, kind, well meaning companies, it doesn't matter right now -- but just let consumers get some choice! They'll ruin their lives!

What are some of the implications of tiering and choice?

Medical inequality. The well-to-do will get better health services than the middle class. Paul Ginsburg of the Center for Studying Health System Change in Washington, D.C., calls the HMO era “one of unusual medical equality.” We were all in the pot together. Now some will boil while others buy their way out.

That's why right now you can find Warren Buffett and Michael Jordan sitting next to you in the waiting room of your HMO. But if this plan passes, they'll take all the health care, and you'll have to make do with a couple of venereal disease pamphlets left over from the fifties.

Higher bills for the sick. Employers don’t want to make workers sore by cutting benefits directly. Instead, you’re being offered a clever way of “choosing” plans that cover less. Those who get sick will face higher costs. Premiums will rise on the more comprehensive health plans that middle-aged workers like.

Whereas, a much better plan is if those who aren't sick pay the bills for those who are, because those who aren't sick are going to have a strong interest in seeing that those who are get good health care. Like I have a strong interest in making sure you get to work on time when I'm driving in front of you during rush hour, looking for my exit.

Cost control. Here’s the brass ring that employers are reaching for. With these new plans, they can limit their annual contributions as health costs rise. Workers can cut their personal costs by shifting to less expensive doctors and hospitals. In theory, your choices could create more price competition—especially if plans posted the cost of specific medical services on the Web.

There’s another angle. When you have to pay more of the medical bill, you’ll presumably see doctors less often, fill fewer prescriptions and take fewer expensive tests. You’ll cut back on unnecessary procedures. (But you may cut back on necessary health care, too.)

You may. Can't let you do that. Far better to have you get someone else to pay for your unnecessary health care than ever risk that your judgement about what was necessary differs from that of Jane Bryant Quinn.

What’s the alternative? Open and contentious price increases, across the board. “Deductibles and co-pays would go even further up,” says Kenneth Sperling of the consulting firm Hewitt Associates. “Happy isn’t what we’re going to have.”

A better choice would be slimming down our immense private health-care bureaucracy and switching to a simpler single-payer system. That’s off the table today. We’re headed the opposite way.

I think that this may be the first time I've ever heard an apparently otherwise reasonable human being argue that the way to slim down bureacracy is to hand a project over to the government. Has anyone ever heard of any situation in which this was the case?

More importantly, Bryant seems to be relying heavily (though she doesn't say so; I'm guessing) on the belief that Europe's lower health care costs will translate directly here. But there's no reason to think that, for several reasons. The first is that we spend more per-capita on drugs here, because we spend more on R&D. Europe is free-riding on our drug innovations by forcing drug makers to either sell the drug close to marginal cost, or have the government break the patent and get no money at all. America's providing a massive subsidy to the rest of the world; if we stop doing R&D, we either don't get new drugs, or the other nations have to pick up the slack. It could be a tragic standoff where no one is willing to do beneficial research because of the fear of theft.

Moreover, American doctors can't be paid as little as they can in Europe, because there are other lucrative alternatives for bright science majors. Europe's moribund pharmaceutical and medical technology industries don't offer nearly as much competition for talent; hence the service can pay doctors less.

What's true of drugs is also true of medical technology, though not to the same extent.

What Jane Bryant Quinn is really proposing is that most of us get less health care so some can have more. But there are not going to be magic cost savings from handing over our health care industry to the government; the government is what created the current mess in the first place, by divorcing the person getting the health care from the person paying for it. It is an utterly predictable result that the person getting the health care spends a lot of time trying to get as much of it as possible, while the person paying for it tries to keep them from getting any.

What is not a result of this system is the fact that we can't have all the health care we want. We can't have all the porsches we want either. Limitations are a fact of life, not the machinations of evil Corporations.

But if these “consumer-driven” plans push enough workers into corners, interest in universal coverage might rise again, says Paul Fronstin of the Employee Benefit Research Institute in Washington, D.C. Combining a national system with competitive private plans and individual choice would look something like, er, the Clinton plan. (But don’t say that aloud.)

It would look something like, er, nothing that's even remotely plausible. (But don't say that aloud). Posted by Jane Galt at May 7, 2002 02:04 PM | TrackBack | Technorati inbound links