I have been engaged in an email debate with a libertarian about the value of “freedom of choice”, impact of payment sources on health care expenditures and inflation thereof, and potential impact of consumerism on health care costs.
He is of the opinion that health care costs are best addressed by patients paying their own way – at least that’s what I think he is saying. Leaving aside the question of how someone of modest means pays for a knee replacement much less a heart transplant, the debate spurred me to further investigate who pays what, and who incurs what kind of charges.
My theory is that consumer-directed health plans will have little to no impact on total health care costs, that they are really cost-shifting from employers to employees. I’m not making a value statement about cost-shifting, just stating a fact. By the way, most employers also don’t believe CDHPs will have any material impact on health care expenses.
The thinking behind my theory is the belief that most costs are incurred by people who spend way more than their health spending account would hold, and therefore their behavior is not influenced to any significant degree by the funds leaving their spending account.
Here’s the support for my theory. (thanks to George Halvorson of the Kaiser Family Foundation for some of the statistics)
Healthy people – 70% of people spend less than $1000 per year on health care costs. These folks are not contributing to the nation’s, or their employer’s, health care costs in any meaningful way. So, while they may make a “better decision” about health care because they are spending their own dollars, the impact is on the margin.
Catastrophic patients – about 5% of the population, those with really expensive acute or chronic conditions, such as serious heart disease, advanced arthritis, cancer, or significant multiple morbidities, are also not affected – they’ll blow through their MSA account balance in a month or two, after which the insurance company or Medicare or Medicaid pays the rest. So, no funds out of their pockets, and realistically, no way for them to pay the huge costs of their health care. By the way, the top one percent of the population that falls into this category spends 40% of all health care dollars, the top five percent that falls into this category spends over 50% of all health care dollars.
OK, that leaves the medium users. The remaining part of the population consumes more than $1000 in health care (a typical MSA plan deductible), and therefore might be more influenced by finances than the other two groups. But there’s a problem here. Studies indicate that a significant percentage of people with high deductible plans tend to not fill prescriptions, not seek care, and otherwise “under-utilize” health care due to financial reasons.
Well, their costs are constrained, at least for today. But what if they are not taking their hypertension medications and suffer a stroke? What if they don’t get a mammogram and their breast cancer is not diagnosed until it is marginally “curable”? They’ll become part of the top 5%, where costs are really uncontrollable.
Some libertarians will claim that their decisions are their responsibility. Not so in health care. There is ample evidence that the costs of the uninsured are borne by private payers; in fact about a thousand dollars of the average family’s insurance premium goes to pay for uncompensated care. So, free marketers, who base their policy theories on the merits of the invisible hand, miss the fundamental problem – there is not, and never will be, a free market in health care. One can intellectually debate the merits and benefits of the free market, but that discourse is irrelevant in the real world.
In the real world, people seek care, all of us end up paying for it, and in the US we pay 40% more for health care than in any other industrialized country. And none of the so-called free-market initiatives will in any meaningful way change that.
True change will come from applying more science to the art of health care. Data mining, outcomes analysis, intelligent reimbursement based on that analysis, and financial incentives for insureds that factor in lifestyle choices are all necessary. But consumerism alone will do nothing to hold down health care inflation.
What does this mean for you?
Avoid ideologically-based solutions, and stick to the facts. If the facts don’t support your position, find another position.
Sep
22
As I have said here before, healthcare insurance is not “insurance” at all because it is guaranteed that everyone will need healthcare, even if it is simply preventive care and annual checkups.
No, what we pay for is a healthcare cooperative where I (and/or my employer)pay my premiums, and then we wait to see if I spent more then I paid every year.
Because of the high administrative cost pulled out of the healthcare dollar by carriers, we all pay a lot more than in other countries and the healthcare distribution system is inequitable.
There must be a system that combines the competitive drive and profit motivation of purely private enterprise with the lower administrative costs and distributive efficiencies of a single payer system. We need to acknowledge that both systems have strong positive recommendations, put partisan and ideological rhetoric aside, and get the problem solved and everyone covered.
Indeed, no one supporting HSAs has ever done the maths. I’m reading the Cato book in vain. Thanks for writing this, and I’ve linked over to you.
Thanks for the post. I’m trying to understand why a free market approach to health care is unworkable, and you’ve given me good information.
To return the favor, I’d like to suggest that the root cause of the health care cost crisis is a fundamental misunderstanding of health and the real factors that threaten it. Medical intervention must be accountable to strict and rigorous standards. And if you believe the work of many who are critiquing these standards, medicine is too often based on faulty science.
Look at the work of Nortin Hadler, M.D. who suggests that as much as 75% of morbidity is attributable to how individuals answer two questions: 1) how do you feel about your job, and 2) how do you feel about your socio-economic status. His position is that we “treat” (ineffectively) with medicine all manner of illness and disability that really require non-medical (and often less costly) intervention.
“Throughout the centuries there were men who took first steps down new roads armed with nothing but their own vision. Their goals differed, but they all had this in common: that the step was first, the road new, the vision unborrowed, and the response they recieved-hatred. The great creators-the thinkers, the artists, the scientists, the inventors-stood alone against the men of their time. Every great new thought was opposed. Every great new invention was denounced. The first motor was considered foolish. The airplane was considered impossible. The power loom was considered vicious. Anesthesia was considered sinful. But the men of unborrowed vision went ahead. They fought, they suffered and they paid. But they won.”
Interesting quote, although I think the statement that people with new ideas were met with hatred is a little harsh. It is the snake-oil salesman who were met with hatred after the naive lost their money buying their potions.
I’d also suggest that the consumerism idea is anything but new. As one who sold health insurance programs with deductibles and copays fifteen years ago, I must be able to count myself amongst those daring pioneers, leading the way way before wiser men had even thought of consumerism as a way to solve all health care’s ills.
Consumer directed health care is nothing new, not innovative, and no panacea. It will improve things at the margins.
I’m interested in hearing practical views, not theoretical intellectual airy statements about the way it ought to be.
A commitment to pragmatism that derides theory, intellect, and a striving for ‘the way it ought to be’ is a defense of what is known and an allegiance to the status quo, all of which you are free to pursue.
What’s new with consumerism? Theories must have some basis; where’s the basis for consumerism?
I’d be interested in reactions to my comments on deductibles and copays as old news. I see nothing but fancy words and airy sentiments, not facts and proofs.
As to the comment about pragmatism deriding intellect, that presupposes consumerism is something new, interesting, innovative, ground-breaking perhaps. What about consumerism has any of those attributes?
As to striving for the way it ought to be, read my comments on how health care should be measured.
Deductibles and copays ARE old news. Read Mark V. Pauly’s response (Pauly is now a professor at the University of Pennsylvania) to Kenneth Arrow’s seminal health economics paper (Arrow was then a Stanford economist and would win the Nobel Prize) written in 1968 in the American Economic Review. This is, perhaps, one of the most famous papers in the field of health econmics.
If you are sincerely interested in a first-rate defense of consumerism in economies vs. the alternative, read the Road to Serfdom by FA Hayek (Nobel Laureate in Economics).
If you want more, read Capitalism and Freedom by Milton Friedman (Nobel Laureate in Economics).
For a contemporary application of consumerism in healthcare read Market-Driven Healthcare by Regina Herzlinger (Harvard Business School).
For a legal defense of a free economy in healthcare read Mortal Peril by Richard Epstein (University of Chicago).
To see why consumerism contributes to lower healthcare spending but does not result in diminished healthcare outcomes, read the RAND Health Insurance Experiment led by Joseph P. Newhouse (Harvard School of Public Health, John F. Kennedy School of Government at Harvard University, and Harvard Graduate School of Arts and Science).