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Source link: http://archive.mises.org/10883/why-health-insurance/

Why Health Insurance?

October 21, 2009 by

What people need is health care. Yet on both (or every) side of the current health care debate the discussion centers on how people will obtain insurance, not how people will obtain health care. Why is it assumed by everyone that a third-party payer should be the primary way that people pay for health care? And that the obligation of the third party to pay should be secured not by the consumer but by a fourth party (their employer or government)? Even Dr. Robert Murphy on Mises.org devotes most of his space to analyzing the problems with insurance in his discussion of the current system.

For almost every other good or service in our lives, people pay cash out of current income, obtain credit, or save up cash reserves. Insurance plays a role in only a minority of our purchases. Off hand I can think of residential property destruction, car theft, and accidental death or permanent disability as the other common forms of insurance for consumers/property owners.

Even more troubling to me is that the meaning of the word insurance has become corrupted in public discourse. What most people mean when they talk about obtaining health insurance is “How can I find a third party who will provide me with unlimited consumption of health care at no or minimal cost to me?” The current health care debate seems to be about the search for a system where everyone can obtain unlimited care at no cost to anyone.

I believe that employer-provided plans are responsible for the illusion of no cost to the insured. Most employed workers do not understand that they pay for employer costs incurred on their behalf through reduced wages. The tax system is partially responsible for this — by making the employer’s but not the employee’s premium payment tax deductible — but that is not the whole story. The lack of economic reasoning by the general public is also partly to blame. Few realize that the opportunity cost to the employer of providing the plan is less money available to pay wages.
But even if employers were not paying for insurance, why does everyone assume that a third-party payer is the best model? Let’s go back to the definition of insurance and then address this question.

Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed and known small loss to prevent a large, possibly devastating loss.

Insurable risks share certain characteristics, among them, a small risk of loss, the magnitude of a loss would be too great for the insured to afford, and when the risk is spread over a large number of similar cases, the premium for each insured is affordable. For market conditions to make insurance a sensible model, a risk must meet all of these characteristics.

Let’s segment health care consumption into various categories:

  • predictable care: annual physicals, tests you get every year, getting your teeth cleaned, care for a chronic but manageable condition, e.g. a medication or regular chiropractor visits, or a planned event such as giving birth
  • unpredictable non-serious care: minor injury, tooth cavity, a cut
  • unpredictable but serious health emergencies: getting hit by a car, a life-threatening illness

The first two of these categories are clearly not insurable because the risk of an event is close to 100%. The third category is the best suited for the insurance model, but even then, only if the cost of obtaining care for an accident or illness is necessarily too great for an individual to afford and the likelihood of such an occurrence is small enough that the risk can be spread over a large population of insured.

I frequently hear people ask, “how can someone with an illness obtain insurance?” If you think about this for a moment, the question doesn’t make any sense. It would not make sense for an insurer to insure someone who already had incurred the insured risk. What the sick person needs is care, not (necessarily) insurance.

it is not clear a priori that the cost of care would be too great for the ill person to afford. Current prices for care are quite high, but the prices of health care as they are now have a lot to do with the four-party system. This has resulted in a system where prices are high in part because we have insurance, yet we must have insurance because prices are so high.

Prices would be a lot different under a cash-paying system, for several reasons: people would become price-sensitive in their consumption decisions; costs in the provision of care would not be generated by monitoring costs created by a third party payer; and providers would have to compete on the basis of price. See this discussion of health care in India for a case study.

In making the calculation of whether they could afford care without insurance, people ignore how much purchasing power they are already giving up in terms of lower wages due to employer-provided plans. If your employer is providing a family plan that costs several hundred dollars per month, this is costing you thousands of dollars annually in lower wages. Having your employer purchase a policy on your behalf also creates the well-known inconvenience of lack of portability of plans when you change jobs. I have not seen anyone address the cost in lost wages of people not changing jobs due to health care portability. I know that this is an issue because I have heard many people talk about the insurance as a factor employment decisions. I wonder how many people do not change to an (otherwise) better job due to the portability issue.

I won’t begin to discuss the problems created by supply restrictions.

We should not limit the discussion to insurance reforms: we should be talking about what is the best system for everyone to obtain care at the lowest price. Insurance may be one means of securing this, but the word “insurance” should not become synonymous with care itself. Focusing all of the discussion on the best model for insurance leaves out the more fruitful discussion that would result if we began to compare alternative payment models, including a cash payment system.

It is my view that the four party system is an artifact of the regulatory regime, not a successful market model for payment. In a deregulated market, most care would not be paid for by insurance companies; it would provided in return for cash payments directly from the consumer to the provider. Insurance, were it used, would only make sense with very high deductibles and low premiums in order to segregate routine care from infrequent but high cost risks.

{ 29 comments }

Bogart October 21, 2009 at 5:16 pm

You forgot the real issues that increase costs that give people the wrong perspective about health insurance vs other forms of risk management:
1. Licensing of medical providers.
2. Restricted markets by state.
3. Mandated coverages for insurance pools.
4. Mandated coverages for certain types of care.
5. Irrational assignment for liability when damages occur.
6. Regulation of the development of medical devices, tests, procedures and pharmaceuticals.

If Congress and the states would get out of these businesses then the whole insurance thing would be mostly a non-issue even if the states and Congress continue to mess up peoples lives by messing with items 2,3 and 4.

Hennie October 21, 2009 at 5:24 pm

Robert,
You have articulated a point of view that needs to be presented in the larger discussion about health care, but rarely is. Were we to use insurance for high-cost unpredictable but serious events–as you suggest–, we would side-step the “I want it free to me and someonle else pays” element. I also appreciate your breaking out the the cost to individuals and to the employer.

twv October 21, 2009 at 6:10 pm

Bravo. Excellent article. The inability of most people — including, alas, most people who think about and discuss the issue of medical provision in public — to understand what insurance can and cannot do is astounding.

Along these lines, I’ve argued that the way most folk treat insurance companies is to corrupt what Wieser called “insurance contracts” into poorly run “social contracts,” the latter having none of the ethical validity or economic viability of most voluntary contracts. And this policy preference is largely the result of past regulation, as the author here states.

It’s helpful to remember the ways in which a person can pay for something, including medicine: out of ready money, out of savings, out of previously contracted insurance, out of charitable donations, out of booty gained from theft. Government programs try to behave, a bit, like insurance, but usually weigh in on the charity/theft end of the spectrum.

It is a pity that we’ve turned a whole generation or more of people into demanders of goods, like a highwayman, in the name of charity, under cover of “insurance.”

K Ackermann October 21, 2009 at 6:41 pm

I agree with this article, but I do think there is a roll for insurance too.

I stitch up my animals, and I would have no problem stitching up my neighbors too, nor would I have a problem with them stitching me.

Why can’t I draw my own blood and send it to a lab? I should be able to do that, and punch in the numbers on a website, and get some indication back on something that might need a follow up.

There are many one-off things that we can treat ourselves but don’t. I can’t write a prescription for a common antibiotic, but I can treat a heart attack with my refurbished portable defib unit that I bought for $700 and change.

We know when we have to see an expert.

Where things get dicey on pay-as-you-go is in the case where you have children with serious medical problems. You could easily become a slave to that illness.

There are no simple answers. I do know that the insurance industry has seen its profits rise 488% over the same period that premiums doubled. To me, that indicates the free market is not working in that area.

mpolzkill October 21, 2009 at 7:26 pm

“To me, that indicates the free market is not working in that area.”

It will never end, I reckon. How do people look at the medical industry in this country and call it a “free-market”? What does “free” mean to people? Right in the same short post he describes how the market is not free. I don’t know, I guess there is the Soviet way and everything less controled than that is “free”. Weird.

EotS October 21, 2009 at 8:12 pm

Good root cause question Robert. It’s funny how it’s so easy to lose track of the root cause (cost of medical care) and address the symptoms (cost of insurance, cost of government.)

RWW October 21, 2009 at 9:57 pm

…I would have no problem stitching up my neighbors too, nor would I have a problem with them stitching me. Why can’t I draw my own blood and send it to a lab? …There are many one-off things that we can treat ourselves but don’t.

Brilliant points, though I’m afraid most people would see this as raving madness.

There are no simple answers.

Actually, I think the answers you provided (I’d sum them up as “stop restraining the market”) are pretty simple, and would address the majority of current problems with the health industry.

Walt D. October 22, 2009 at 12:33 am

In the “Free Market” for health care, Adam Smith’s “Invisible Hand” was nowhere to be seen.

Dr. J October 22, 2009 at 12:53 am

“Best Quality Docs and Lowest Prices in Town!”

You have done a great job of articulating some of my same thoughts about healthcare and health insurance. It is clear that government intervention in health care, via tax incentives, and over regulation by federal and state governments have created “unintended consequences”. (Although I’m certain that the State always intends to control more and more of our lives).

In my view, one of the fundamental problems that will hinder any meaningful progress towards a free-market healthcare system is the perception that many voters have of healthcare as a “right”. Of course this fallacy has been intentionally perpetuated by the powers that be to channel support for a “public option”. The health insurance industry is the government’s scapegoat. Like Global Warming, once an issue such as this has been overly politicized, it is a runaway train that is impossible to reverse until it comes to a complete stop and the damage (or in this case, legislation) has been done.

As a physician I have to prepare myself for what is likely coming. In the meantime, I am trying to educate as many people as will listen that healthcare is not a right, and that government intervention is evil. Thank goodness for Mises.org and the great service that it provides in educating all of us.

MarfMom October 22, 2009 at 11:04 am

While I agree we could definitely look past an insurance-run system, there are a few points that you miss.

1) We’ve done a cash out of pocket system before. There were issues with price gouging and an inability to determine what was good care. Patients are not always able to determine what quality care is. (Not that insurance companies have a perfect way of determining quality care by any means.)

2) What about all the people who work for minimum wage and aren’t offered insurance by their employers? Wage loss isn’t an issue for them and they wouldn’t be able to pay for routine medical care out of pocket.

3) How do you determine what a manageable chronic illness is? My husband has Type 1 diabetes and I have Marfan syndrome. They are manageable with daily medications, frequent tests and doctors visits, and for me, occasional surgeries. Bearing the cost on our own would in no way be manageable, however, and I doubt we’d be able to be the insurance for catastrophic illness that you mentioned, b/c surgery is related to our so called manageable chronic illnesses.

4) We would need a drastic overhaul of how healthcare costs. I’ve done some research on out of pocket costs for route tests and surgeries for Marfan syndrome. My medication is around $60 a month out of pocket. An MRI is at least $1,000 or so (though this varies by hospital). Routine surgery is $150,000 (without complications, which raise the cost). This doesn’t include doctor fees.

So, in your suggestion, what would happen to those who could not afford to pay out of pocket for their care? Would you suggest the government regulate costs or otherwise help out? Or would people just be out of luck?

michael October 22, 2009 at 11:07 am

exactamundo maestro… insurance is for the small percentage of people who skydive for a living and need somebody to give their family money if they crash into the ground. EVERBODY needs health care so we should take the 30 to 40 % of premiums that go to marketing and finding reasons for recission… declare health insurance an illegal racket under rico and use the money saved to improve healthcare and lower the price for everyone.

Luff October 22, 2009 at 11:15 am

The effects insurance have on heath-care cost is obvious to those who understand how the market works. Today there is no competition between hospital, and therefor little incentive to lower prices by increasing efficiency. This have to change. There is little doubt that a cash-paying system would be the optimal solution to lower the prices. But what’s standing in the way of implementing it is that it’s not our only goal.

We want low prices, but we also don’t want to see people die because they can’t afford what’s being charged today. In an ideal world, people would have a lot of money saved up in the bank for unforeseen expenses. When in need of care, they would choose a hospital with a reasonable reputation/cost ratio. But what if some young adult, with no amassed wealth, nor wealthy parents, gets sick?

The best solution I can think of is health-care specific government supplied loans. Yes, I know that you don’t like it when the government interfere, but no private entity would loan money to people who might not survive the treatment. To further reveal how fascist I am, I would also like to see a parallel system like that of Japan, where government(the citizens) subsidize 50% of the cost for everyone, this to avoid putting to much pressure on people who are already weak from health problems. I believe that the cost that remains with the patient would still be enough to reintroduce competition in health care, without sacrificing the poorest.

Mark October 22, 2009 at 11:37 am

People talk about health insurance for the same reason talk about insuring your home against fire: because health problems can crop up that cost hundreds of thousands of dollars that you aren’t prepared for.

But I agree that the idea of health insurance has been corrupted to include the regular, predictable purchases like doctors visits and prescriptions. This is another case where a term has been so corrupted that multiple people can be using it and they can all be talking about something different.

NAVDOC3rdMAR October 22, 2009 at 11:42 am

Congressional Budget Office (CBO) score’s the baucus plan at $829 Billion over a 10 year period, that is paid for. The CBO also states that it will lower the deficit by $80 Billion and it would be much lower if there was a public option.

Criminally corrupt politicians are the reason the U.S. is ranked near the bottom of every catagory when ranked next to other modern, industrialized nations. Time for publically funded elections.

lieberman $12.6M, mcconnell $7.8M, baucus $7.7M, cornyn $6.7M,
kyl $5.6M, grassley $5.4M, ensign $5.2M, conrad $5.1M, cantor $4.9M,
nelson $4.9M, burr $4.8M, boehner $4.4M, hatch $4.4M, lincoln $4.1M,
vitter $3.9M, carper $3.6M were paid by the Medical Industrial Complex to kill Health Care Reform. (Source: OpenSecrets.org, Aug. 09)

Follow the Money: Link

Call Congress and demand, Single-Payer Health Care for All!

(Toll Free # House and Senate)
1-866-338-1015 _____ 1-866-220-0044
1-866-311-3405

Sign Single-Payer, Public Option and Health Care as a Civil Rights Petitions: Link Link Link kucinichpetition

Don’t let the Medical Industrial Complex steal your Health Care from you and your family by donating huge sums of money to Crooked Politicians in order to maintain the Status Quo. Keep up the good fight.

SEMPER FI!

jhonsun October 22, 2009 at 12:03 pm

This is a very significant argument in the whole health care debate. It has been touched on by other Mises contributors but thanks for expounding on this even more.

This article needs to be added to the Mises.org’s ‘A Free-Market Guide to Fixing Healthcare’ compilation.
http://mises.org/daily/3737 and then affix the compilation to a permanent location on the home page.

Robert Blumen October 22, 2009 at 12:11 pm

to: mary.m.zimmerman@gmail.com

There are a lot of dimensions to this issue that I wasn’t trying to address here. I only wanted to make the point that talking about insurance has dominated the discussion, while what we need to talk about is the health care market generally, of which insurance might be a component.

1a) Pricing and quality: What I see as one of the worst aspects of a three (or four party) system is that there are one (or two) intermediaries in between the patient and the provider. This affets both pricing and quality. In the 3/4 party system, who is the provider resonsible to? The patient? The insurance company? The employer? This is unclear but in practice, some combination of the above. This intermediation affects decisions around both price and quality.

In the cash paying system, providers would have to compete for patients. Price is one of the aspects of competition. There would be multiple price points and multiple levels of quality. As with most things that we buy, purchasers would make a tradeoff between price and quality as they do now. Opening up the system to competition is the best way to ensure that people have the broadest range of choice in terms of both price and quality.

The tradeoff between price and quality exists now, only it is buried. People pay for care, as I point out, through reduced wages. I didn’t address the other means that people pay now which are taxes, inflation (to the extent that governments run a deficit). Governments and the third and fourth party attempt to manage quality through regulation and internal quality control processes, but the link between price-quality-and-choice is broken. People might be paying for more quality than they want, or less.

2 & 3) These are really the same question. The question is, “how can people who cannot afford to pay for care obtain care?” Your question seems to presume that if someone can’t afford care that insurance some how solves this problem. But it doesn’t. Or, it would, only if they could find someone else to pay for their insurance, which is really the same as finding someone else to pay for their care. Your question seems to presume that a person who could not pay for care can obtain free insurance.

As I also pointed out, the insurance model does not work for predictable costs because for an insurer to assume a known cost they would have to charge as much as the known cost and maybe more. Insurance only works when there are unknown costs that occur infrequently. Suppose that soomeone needs $500 of routine care/year (or $5,000, the point is the same). Then the premiums for a “not-really-an-insurance-policy” that paid out $500 for this care would cost at least as much as the care itself, probably more. So if the person can’t afford care, they can’t afford insurance either.

That brings us back to the real problem, which is “how can people of limited means obtain care”, not “how can people of limited means obtain insurance”. Insurance doesn’t solve this problem, it only introduces a third party intermediary and gives the problem another name. We should not redefine insurance, as if insurance means free care. Insurance is not a method for redistributing risk by substituting a large but unknown costs for a small but known cost. Insurance does not make large known costs go away.

4) Prices

There are a lot of things that affect prices. The four-party system is one of them. There are all kinds of supply restrictions. You can find a podcast over at econtalk where Richard Epstein talks about how a lot of drugs don’t reach the market because of the FDA’s over-zealous regulations. I don’t think that we have any idea how much lower prices would be under a competitive system, but I suspect that they would be a lot lower. Click through the link in my blog post and read the article about health care in India.

5) People of limited means

The reason I wrote this piece is to make the point that the definition of insurance has shifted to mean “someone else pays”. Insurance can be part of the solution in those cases where health risks are insurable, which is only a fraction of the cases that we now apply it to. I also wanted to make the point that people are already paying for their insurance policies, but they don’t necessarily recognize this.

I didn’t write the article to address the question of how people of limited means will obtain care, or how people with chronic illnesses will obtain care. If we can start talking about how these people will obtain care instead of how they will obtain insurance, I think that would be the right discussion to have. Also, opening up the system to competition and removing supply restrictions would go a long way toware making health care an affordable service that people see as a normal expense, not the unaffordable service that it is now.

But I don’t really have a solution to the issue of how everyone will obtain care who can’t afford it. Maybe others can contribute something in this area. I have read some pieces that looked at how care was provided before the insurance industry and the current model.

-Robert

Walt D. October 22, 2009 at 1:30 pm

Very good article Robert. Hans Herman Hoppe published a similar article on this site a while back. Unfortunately, they were several very bad statistical errors in his argument – not up to his usual superlative standards.
Most of the problems of current health care stem directly from Government Regulation -be it Federal, State,or Insurance Commissioner. Now the people who broke the system in the first place want to convince us that they know how to fix it?
In a an insurance model, how do we pay for pregnancy? Its like placing a bet on the roulette wheel after the ball has come to rest. I like you idea of splitting things up.
25 years ago the standard model was 80/20% insurance/personal up to a $5000 limit. If you hit your $5000 limit, everything was covered 100%, plus 100% coverage for the next year. Major medical, surgery etc., was covered separately at 100%. You can’t get this insurance anymore because some government regulation prevents insurance companies from offering it.

New York requires that all insurance companies offer coverage for in-vitro fertilization – a $5,000 a month procedure. This cost is passed on to 25 year old single males. If you could buy insurance from Florida or Arizona, it would be much cheaper. However, that would defeat the object of the New York legislation. As a result, most 25 year olds who do not have employer based insurance choose not to have any.
The ultimate question does not change – if I need a $100,000 medical procedure and can not pay for it myself, who will pay for it? People forget that the Government and Corporations are fictitious entities and not some magical entity with unlimited financial resources. In the end, the answer to the question is always the same – other people.

Joe October 22, 2009 at 2:14 pm

Yet on both (or every) side of the current health care debate the discussion centers on how people will obtain insurance, not how people will obtain health care.

Not every. Advocates of a single payer system realize, as you do, that health insurance is something of a misnomer.

The current health care debate seems to be about the search for a system where everyone can obtain unlimited care at no cost to anyone.

This is clearly unrealistic. A common problem with single payer systems is the fact that some treatments and medicines must be declared too expensive for the benefit it provides, which leads to sob stories of people who were denied expensive care being used to stir up the masses. However, the same thing occurs in non-single payer systems as well.

Prices would be a lot different under a cash-paying system, for several reasons: people would become price-sensitive in their consumption decisions; costs in the provision of care would not be generated by monitoring costs created by a third party payer; and providers would have to compete on the basis of price.

Perhaps. There’s studies both ways on whether increased costs to consumers would provide a benefit when including outcomes. Most people don’t have the knowledge to evaluate whether they need a given test or treatment. Putting them in the position where their immediate financial impact might sway them to the wrong side of an uninformed decision can lead to bad outcomes or the need for a far more expensive treatment at a future date.

See this discussion of health care in India for a case study.

Do you really mistake an article about an article about a few anecdotes as a case study?

So a few things..

1. The article does not specify outcomes. India ranks poorly for average lifespan. India ranks terribly for population past 65 years.

http://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy
http://www.indiatogether.org/health/infofiles/life.htm

2. The article cites $7 for a simple doctor’s visit and prescription as an excellent price. That represents 0.6% of the average Indian’s yearly income. The same trip would cost me ~$35, representing 0.01% of the US per capita income (skewed, of course, by my insurance). The major accident cited equals nearly 10 year’s per capita income to an Indian, almost the same as the $200,000 US rate/per capita ratio.

3. The average Indian surgeon’s monthly income is 8 times the per capita, the average US surgeon’s monthly income is 1 times the per capita.

I have not seen anyone address the cost in lost wages of people not changing jobs due to health care portability.

This has been discussed many times in many articles.

we should be talking about what is the best system for everyone to obtain care at the lowest price.

The best price per individual or the best price societywide? The afore mentioned Indian system is great, if you happen to be upper class (or a medical tourist). But a simple doctor’s visit for a stomach bug equals an entire month’s income to 20% of the country’s population – nearly as many people as live in the United States. It is strange how few poor people are libertarians.

Out of curiosity, what kind of medical problems afflict/have afflicted you and your loved ones?

Shay October 22, 2009 at 4:01 pm

“We should not limit the discussion to insurance reforms: we should be talking about what is the best system for everyone to obtain care at the lowest price. Insurance may be one means of securing this, but the word “insurance” should not become synonymous with care itself.”

Minor linguistic point: throw in the word “average” and you don’t even need to mention insurance, since it takes it into account (an average divides the total among the number of items, and insurance divides the total among the insured): “we should be talking about what is the best system for everyone to obtain care at the lowest average price.”

Walt D. October 22, 2009 at 7:16 pm

There is a restaurant in the Napa Valley called the French Laundry. A multi-course meal is $247. If the government decided to have “single-payer food care”, people would expect to eat at the French Laundry for the price of a happy meal at McDonald’s. What would end up happening is that people would end up with a McDonald’s happy meal but they would end up paying more that $247 for it.

Robert Blumen October 22, 2009 at 7:44 pm

to: jschottm@vt.edu

“There’s studies both ways on whether increased costs to consumers would provide a benefit when including outcomes. ”

It’s almost certain that under a market system, overall costs would decrease. At least in my mind. You might not be convinced. Costs in the current system are paid, but they are shifted around in various ways such that they are hidden (in reduced wages, or in taxes), or shifted from some consumers to others. It is true, though, that under a market system, some peoples’ costs would, or could, go up, and that might be your point here.

But I’m still not clear how a study could conclude any such thing. The people doing the study would have to assign dollar values to the outcomes to compare them with the increases in costs.

Also the way that you have phrased this is a little weird. “increased costs provide a benefit?” What provides a benefit is competition, leading to lower costs, greater innovation, more choice, and a direct relationship between the consumer and the provider by the elimination of two layers of intermediaries. No one, at least on our side, is claiming that increased costs as such provide a benefit.

“Most people don’t have the knowledge to evaluate whether they need a given test or treatment. Putting them in the position where their immediate financial impact might sway them to the wrong side of an uninformed decision can lead to bad outcomes or the need for a far more expensive treatment at a future date.”

It is true that medical care is a complex purchase. We do encounter this problem in other areas as well. Many of the products and services that we need require expertise — auto repair, financial planning, home repair, etc. Markets generate information in different ways – people can do free or paid research on their own; reputational factors among providers.

In terms of balancing the present value of money against the future value, we have to do that all the time as well in making investments, planning for retirement, choosing whether to go to school and pursue an expensive degree (like law or medicine). This is a fact of time preference. Again it’s not clear to me that people make systematically “wrong” choices in that area. Many people do start a business, go to school, invest for the future, and other low time preference activities. For a person with high time preference, the money might be worth more to them now than a greater amount in the future. Sounds like you are saying that people receive care that is not consistent with their time preference. Also there is quite often not a certainty in the outcome of care. The least costly thing (or least risky procedure) might or might not work. It may be a conservative strategy to do the least costly thing first, and then, if it doesn’t work, try more costly things later.

Also it’s not clear to me that you get a superior outcome when all cost senstivity is removed from health care decisions. As I have pointed out, someone pays pay. Either you pay, whether it’s through taxes, reduced wages, or someone else pays if you can shift the cost onto other people. You have to evaluate the opportunity cost of the loss of other good things in life that could have been purchased against the additional dollar spent on health care. There may be some situations where it is absolutely clear cut that if you don’t have certain care within five minutes you will die and you wold give anything to save your own life. But most health care is not like that. Most health care involves ex ante choices that involve a degree of uncertainty. Some procedures are riskier than others, some drugs work better for some people but have side effects for others. Ex post you may be able to evaluate whether you made the “right” decision or in other cases it may be unclear whether the choice you made is right or not.

In these sort of decisions, factoring in the cost does not necessarily make the consumer worse off. Are you better off spending $20,000 on a risky and unproven treatment that might produce a cure to your condition, or spending $1,000/year on a drug that will manage some aspects of the problem for some time while you have $20,000 left to spend on some of the many other good things in life that have value to you, whether it is education, investment, or consumption?

“The best price per individual or the best price societywide? The afore mentioned Indian system is great, if you happen to be upper class (or a medical tourist). But a simple doctor’s visit for a stomach bug equals an entire month’s income to 20% of the country’s population – nearly as many people as live in the United States. It is strange how few poor people are libertarians.”

Poor countries will always consume less of everything, including health care, than wealthy countries. There is not a system that anyone could make up where everyone in India gets $15,000 worth of care every year, or whatever the figure is in the West. The only way that could happen is either a global wealth redistribution scheme, or for them to get wealthier.

MarfMom October 23, 2009 at 2:25 am

Robert, thanks for taking the time to reply to my points/questions!

First of all, I agree with you in that I believe we’ve come to mistake health insurance for health care and that it’s not a bad idea to consider other means of providing health care.

Apparently I misunderstood one of the points you were trying to make. I thought that you were saying that if we got rid of insurance companies that everyone would be able to afford their care, which is why I made some of the comments that I did. I was certainly not trying to suggest that low-income families can get insurance now, or that the current system serves them well, just that I didn’t see how your solution would serve them any better. I am definitely not an economist. I do have an MPH though, so I’m well aware of some of the discrepancies in the system.

Now, you talk about reduced wages. What is the assurance that workers would make back in wages what is currently being taken to pay for employer-sponsored health insurance? What is to say that employers would not keep the money to increase their profits? And (please correct me if I’m wrong), don’t employers receive tax benefits for providing health insurance to employees, which indirectly help offset the cost?

Also, competition isn’t available everywhere. Sure, in big cities with lots of doctors and hospitals to choose from, it is reasonable to expect that competition would help drive down prices. However, in a rural area where there is one clinic to serve many counties (like where my inlaws live), or when you have a disease that requires a particular specialist, that competition is essentially eliminated and with it the incentive to keep costs down.

Robert Blumen October 23, 2009 at 1:08 pm

To: maya.m.zimmerman

“Now, you talk about reduced wages. What is the assurance that workers would make back in wages what is currently being taken to pay for employer-sponsored health insurance? What is to say that employers would not keep the money to increase their profits? And (please correct me if I’m wrong), don’t employers receive tax benefits for providing health insurance to employees, which indirectly help offset the cost?”

This idea is based on marginal price theory. The idea is that the amount an employer pays for wages is not as discretionary as people might think. Wages are set in a competitive marketplace. Employers have to pay employees the value of their marginal product because of competition within labor markets. Employers who tried to increase profits by underpaying would find those profits competed away as other firms hired their employees away from them at higher wages. This is a standard part of micr-economics, so I won’t say any more about it here. Many micro textbooks address this.

My point here is that benefits are part of wages. Consider a job seeker faced with two job offers, one with lower pay and benefits and one with higher pay but no benefits (or the person had the option of starting their own business and paying their own benefits). There are many factors in taking a job, but supposing that all other things were equal, then the decision would depend on the salary difference and the value that the employee attached to the benefits. It is not necessarily the case that, if the employer spends $2,000 on benefits for an employee, the employee values those benefits at $2,000. The employee might value those benefits at more, or less, than $2,000. But in either case, the total economic wage of the employee is salary plus benefits and the cost to the employer is salary plus benefits. If employers could, legally, offer jobs without benefits, they would have to increase wages to compensate. And the total amount of wage in the market tends toward the marginal value product.

It is true that taxes do affect this due the differential tax treatment of employer-purchased benefits and employee-purchased benefits. (One minor reform that I would like to see would be to make employee-purchased health insurance tax-deductible for the individual).

“Also, competition isn’t available everywhere. Sure, in big cities with lots of doctors and hospitals to choose from, it is reasonable to expect that competition would help drive down prices. However, in a rural area where there is one clinic to serve many counties (like where my inlaws live), or when you have a disease that requires a particular specialist, that competition is essentially eliminated and with it the incentive to keep costs down.”

In my blog post, I was trying to address a specific point. The area of health care is a huge issue and I’m not trying to address every aspect of it. There are two articles today 1 2 on the Mises daily articles page that cover some other apects of health care.

Concerning people in rural areas, a lot of things are more scarce and expensive. In contrast, other things are more expensive in urban areas, such as rent. We all have to make choices and live somewhere. Health care is not the only factor, there are many factors. Even if health care were “free”, if you live in a rural area you are going to be located further away from emergency care.

Also, we don’t know how many hospitals or care centers there would be in different places if the market were less regulated. The effect of a lot of regulatory systems is to foster centralization because larger firms can bear regulatory fixed costs more easily than small firms. The impact of many regulations then is to favor large firms over small firms. What if, in the area where your inlaws live, if there were three smaller clinics instead of one larger one? Professor diLorenzo writes in today’s article about how anti-competitive regulations prevent small offices from competing against large hospitals.

Brian Macker October 24, 2009 at 12:37 pm

“Why is it assumed by everyone that a third-party payer should be the primary way that people pay for health care? “

You assume.

George R. November 1, 2009 at 12:39 pm

I know this much… if I can’t afford insurance and something bad happens to me and I cannot afford care (I don’t have $100,000 lying around), I might as well commit suicide…

At this moment only the rich can get health care. For the middle class to be able to afford care, major surgeries have to go below $5,000. Good luck with that.

George R. November 1, 2009 at 12:43 pm

Correction to last post:

At this moment many people can get care… oops…

BUT

If there were no insurers THEN only the rich could pay the major surgeries.

Robert Blumen November 1, 2009 at 1:18 pm

George R:

Insurance can only make large expenses more affordable in some cases. Whether insurance reduces or increases costs depends on the cost of the insurance. Insurance only makes an expensive event more affordable if the event is rare. For large rare expenses, I believe that insurance would be a workable solution. But for a frequent or recurring expense no matter how large insurance does not reduce costs, it increases costs because of the overhead and monitoring costs.

People have the false perception that insurance reduces costs because their estimation of how much they are paying for insurance is correct. People already pay quite a lot now, thousands of dollars per year, for phony “insurance” in terms of reduced wages and higher taxes.

Suppose someone’s income is $40,000/year. If they were giving up $8,000/year in lost income and taxes, then, if insurance were eliminated, after six years they could save up $50,000 of emergency savings. If the prices fell by 50%, then they could afford one major medical event of $100,000 every six years. The numbers are not so bad as you make it out.

Part of the reason that people have so little cash reserves is that they are burdened with high taxes and reduced wages from employer-provided plans. I didn’t mention this but the so-called “employer” portion of social security, medicaid, and medicare comes out of the employees wages in the form of reduced wages. Employed workers lose a lot of purchasing power through employer expenses paid on your behalf.

Your comment also does not take into account how much lower prices could be. I’m not sure whether or not we know how much lower they would be but there would be a significant benefit immediately just from getting insurers out of the system,

Barbara Saunders April 25, 2010 at 2:46 pm

Hi Robert,

(This is your old roommate from Carl Street here!)

I agree entirely with your basic argument. It makes absolutely no sense to “insure” services like teeth cleaning. My personal economic picture would be a whole lot better if I could purchase a high-deductible plan, open a health savings account, and pay out of pocket for routine care with the increased pay I could negotiate with employers and/or clients that don’t have me over a barrel for the health insurance access. My ANNUAL exam fee with a doctor who’s opted out of contracts with insurers is only 1/3 of my MONTHLY premium.

One tricky point in my mind, as for some of the other posters here, is the line between a “chronic, manageable” illnesses that can be handled without insurance and those that cannot. Of course, there’s some overlap. For example, some people could easily use what they currently pay for insurance premiums to get the kind of education and disease management care for, say, diabetes, that would prevent the need for the more expensive care. (E.g., personal trainer vs. insulin pump, physician monitoring, etc.)

But what about something like less controlled diabetes? Or HIV? Once diagnosed, the treatment is out of the reach of just about anyone out of pocket.

Again – great argument, my thoughts and questions are just refinements!

ishitasharma1 December 9, 2011 at 3:55 pm

Excellent article on why medical insurance….
A very informative and helpful article, a good read.

If you read the arti­cles in invest­ment­bazar on Med­ical Insur­ance, you would have under­stood how much I empha­sis on hav­ing med­ical insur­ance. How­ever, I real­ized the impor­tance and crit­i­cal­ity of med­ical insur­ance for any indi­vid­ual and spe­cially me.

Read the complete article – http://www.investmentbazar.com/why-medical-insurance/

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