What's the point of employer-based health care?

Great Debates
61

Big whoop. “Elective” surgery, by definition, is surgery that you don’t need in a hurry. I’d cheerfully undertake to wait four months for an elective surgical procedure if it meant that my ordinary and emergency healthcare needs would be taken care of in a reliable way, irrespective of whether I had just lost my job or developed a chronic illness or visited a foreign country or earned too much money to qualify for Medicaid or any of the other routine things that constantly block so many people’s access to healthcare in the US system.

One of the reasons it’s unsustainable is because the hurrah’s nest of competing and contradictory private coverage programs sends our healthcare system’s overhead costs through the roof. We could fund a whole lot of actual medical procedures with the money we currently spend paying insurance company bureaucrats to reconcile claims from different insurers, contest claims, deny coverage, etc. No UHC-system developed country spends as much on healthcare overhead as we do, or gets such low satisfaction with the system from the average citizen.

Not to worry. There are fewer and fewer US healthcare customers who actually have plans that allow them “access to whatever treatment they want”. The US healthcare system is gradually training us to regard universal government-funded (even government-rationed) healthcare as a step up rather than a step down.

62

[QUOTE=Sam Stone]
What insurers really want to do is pick up a clientele made up of a random selection of individuals across society. Then their actuaries can apply statistical methods to figure out the cost of the risk they are taking on, and price themselves accordingly. But how do you do that? Well, a good approximation is to set up health care through employers.
[/QUOTE]
I followed your post up to this point. Pricing insurance too high will drive away low-risk customers; customers that would otherwise subsidize high-risk customers. This in turn will raise prices. Presumably in a stable market, insurance companies would find the sweet spot that maximized profit by balancing cost vs. number of customers. This is the complicated science every company has to do in order to set their price. However, it makes sense in the current market where healthcare costs are increasing rapidly. As costs soar, low-risk customers are more likely to leave.

But starting with the quote above, I found your logic a bit harder to follow. Perhaps it is the use of the term ‘random’. If I follow the logic: Insurers want to insure all the employees of a company because it gives them a nice, random cross-section of people: some with no health problems, some with severe problems, and most with moderate problems. This is better than insuring random people that sign up individually because why? These people will have a non-random distribution of severe or costly problems?

If that’s the case, then I follow, but I object to the use of random. I don’t think an insurer wants randomness at all – anywhere. What they want to do is minimize randomness and thus filter out risk. By insuring people at Company X in Industry Y, the actuaries can use existing data to filter and minimize. They can certainly establish average salary ranges, education levels, and other factors based on the industry. This also automatically filters out unemployeed people which I assume are more expensive. It also minimizes the number of people that have not been insured in the past; most people that have insurance today also had it last year (the obvious exception are students who are already low-risk).

63

[QUOTE=Crafter_Man]
Companies - especially larger ones - have more negotiating power vs. individuals. This means a company can usually get a better “per-person” rate for their employees than the individuals negotiating on their own.
[/QUOTE]
But is there any reason to assume that a company will expend the same amount of effort in negotiating lower rates than the aggregate of all of their consumers individually? My opinion is that those with the most to gain will negotiate harder than those with the least to gain. A corporate HR deparment has less to gain that the sum of all of the employees.

An HR department will negotiate in earnest and since they represent many customers they certainly carry a lot of muscle. But at the end of the day, the money doesn’t come from their pockets directly. At worst, it reflects on their internal objectives and possibly their bonuses. If they fail to negotiate strongly enough, the costs will be passed to the employees in the form of higher premiums. In addition, a large company will have to do business with a shrinking number of insurance providers.

Contrast that to the same number of employees individually purchasing their insurance. They won’t have much direct bargaining power, but they can bargin with their feet and move to a different insurance provider very easily. This would increase competition in an open-market which should result in better costs or services.

Additionally, even large companies offer a limited number of plans. If the plans they offer don’t meet your needs, your out of luck. The only price-sensitive option you have is to switch jobs. A more open-market should offer a larger number of choices, or customized choices.

Personally I wish health insurance was decoupled from one’s job. Or that it was possible to get great insurance at the same price my employer pays. I find health insurance to be a restrictive factor in my career and I would like a better option. That said, I am also suspicious of my open-market claims above; hence my use of ‘should’ instead of ‘would’.

64

[QUOTE=silenus]
Working for the government is a wonderful thing sometimes. The State of California would have to go tits-up for my pension and insurance to be in serious danger.

[/QUOTE]

Aah, you’re one of the reasons my taxes are so high. :slight_smile: Actually, I’m all for decent pension plans. At least one entity doesn’t renege on the deal it made with its employees.

65

[QUOTE=Renob]
Here’s a whole paper for you. On page 3 you can see the figures for “Patients Having to Wait More Than Four Months for Surgery (as percentage of all adultsurgery patients receiving elective [nonemergency] surgery in last two years)” that the figure is only 5% for the U.S. It’s 27% in Canada.
[/QUOTE]

Your cite is a bit light on statistics or references. It all seems a big bunch of assertions, many of them contradictory. It says (and I can’t cut the two column format easily) the democratic pressures drive health care dollars from the few to the many. I’m not sure he considers that a bad thing or a good thing. Then it says minorities and the elderly would lose out under such a system. Then who are the many? The elderly are doing okay under our current single payer system for them, and I have a hard time believing that minorities are going to do worse under universal health care.

But it is true that if we spend constant dollars under a more universal system, those of us who get immediate treatment of trivial ailments are going to wait for those who now don’t get treatment for critical ones. Maybe it’s because I’ve become soft and liberal, but waiting a few months to get my bunion looked at in return for some poor child being able to see a doctor right away doesn’t bother me at all. It appears to bug the hell out of some people, though.

66

[QUOTE=CaveMike]
I followed your post up to this point. Pricing insurance too high will drive away low-risk customers; customers that would otherwise subsidize high-risk customers. This in turn will raise prices. Presumably in a stable market, insurance companies would find the sweet spot that maximized profit by balancing cost vs. number of customers. This is the complicated science every company has to do in order to set their price. However, it makes sense in the current market where healthcare costs are increasing rapidly. As costs soar, low-risk customers are more likely to leave.
[/quote]

You’re assuming that insurance companies can set prices just like other markets do. But they can’t, because of informational asymmetry. When one party knows something critical that the other doesn’t, it’s difficult or impossible to find a price that results in gained value for both sides.

For example, let’s take used cars (and this was a great example from a highly recommended book called “The Undercover Economist”). The used car market is somewhat broken because of informational asymmetry. It works like this:

Let’s say you’re looking for a used Ford Taurus. A Taurus in average condition of the age you are looking for might be worth $5000. A crappy one might be worth $2500. An excellent one might be worth $7500. So, you see a Taurus advertised in the paper for $7500. Are you going to buy it? Nope. You don’t know if it’s excellent or a piece of crap. So you assume it’s of average quality, and you offer $5000 for it.

Now let’s say you’re the buyer, and you know your car is excellent. So you put it up for sale for $7500. That’s what the car is worth to you. But no one will pay that, because they are going to price in the cost of risk that it’s a lemon. So no one will offer you more than $5,000. Since the car is worth more than that to you, you take it off the market.

So eventually, the excellent cars leave the market. Now all thats left are average cars and lemons. But now if you’ve got a 50/50 chance of getting a lemon or an average car, the most you are willing to pay is $3750. But the average cars are worth $5,000 to their owners, and soon THEY leave the market. Eventually, you wind up with a used car market filled with overpriced lemons. Excellent cars cannot find buyers. The market is broken.

Of course, there are ways to minimize this problem. Mechanical inspections, paperwork retention, used-car warranties, etc. A big one is reputation. Excellent cars often wind up being traded in for new vehicles. Of course, so do lemons. But now there’s an expert in the mix who can evaluate the vehicles. A trade-in that turns out to be mechanically excellent will be sold on the dealer’s lot, perhaps with a used-car warranty. If the dealer has been around for a long time, and has a lot of money invested in buildings and high-quality fixtures, he has a reputation to maintain, so you can count on the cars he sells not being lemons.

When a reputable dealer takes in a lemon, he’ll sell it for auction, and it will be picked up by curbers or “Ca$h for Car$” fly-by-night dealers, who don’t care about reputation and compete only on price. That’s why these kinds of lots almost never have decent cars - they’re pre-selected to have nothing but lemons.

Anyway, this was a long digression, but it gets the point across that you can’t always find a ‘fair’ price when there is a fundamental asymmetry of information. And this is a big problem in insurance markets. Let’s take your example of finding a 'price that lets you keep the optimal number of customers, just like conventional pricing theory would suggest you do. Will that work?

Well, let’s say that I’m trying to find a fair price for four randomly selected people. I know that health expenditures average, say, $5,000 per person per year for the age group I’m looking at, but I don’t know anything else about them.

Here’s the hidden information I can’t see:

Of the five people, one is in excellent health, with an excellent genetic backgound. Such people typically only cost $2,000 per year at this age group.

Another is in reasonable health, and doesn’t smoke. Cost: $4,000/yr.

A third is a reasonably healthy smoker. This person would cost $6,000/yr.

The fourth is a person with a hidden family history of diabetes, hypertension, and heart attacks. This person has regular shortness of breath, and chronic health issues. Cost: $8,000/yr.

Okay, so where do I set my price for health insurance? If I set it at $5,000, I lose the first two customers, and the people who are willing to accept the price will cost me on average $7,000/yr. So I raise the price to $7,000, and now the $6,000 person drops out, and I’m still short.

Assuming one side has perfect information and the other side has none, there is no price I can find that will result in my being able to make a profit.

Contrast that to a regular transaction where information is known by both sides, but values differ. If I can evaluate something and rationally determine that it is worth $5,000 to me, and you can evaluate the same thing and determine that it’s only worth $4,000 to you, we can settle on a price, say $4500, that gains us both $500 in value. That’s the way most market transactions work.

Without randomness, there IS no insurance industry. If all risks are perfectly knowable, there would be no need to buy insurance. In fact, the market breaks down again. The whole point to insurance is that neither side knows what the individual risks are. The insurance company buys your risk because it has a pool of customers to average the risk out and ensure a profit. You’re willing to pay a premium over what your risk really is because you can’t take the chance of being wiped out by chance.

If the risk and randomness is eliminated, no insurer is going to insure you if you are a candidate for extreme costs. If they’re willing to insure you, that tells you that you probably don’t need their insurance for the price they are offering.

The most efficient insurance market would be one where neither side knows anything specific about the other, but where overall risks can be determined statistically from the population.

67

[QUOTE=Kimstu]
Big whoop. “Elective” surgery, by definition, is surgery that you don’t need in a hurry. I’d cheerfully undertake to wait four months for an elective surgical procedure if it meant that my ordinary and emergency healthcare needs would be taken care of in a reliable way, irrespective of whether I had just lost my job or developed a chronic illness or visited a foreign country or earned too much money to qualify for Medicaid or any of the other routine things that constantly block so many people’s access to healthcare in the US system.
[/quote]

For one, elective surgery is fairly important for many people. Waiting a substantial amount of time as is common in other countries means that cancers are allowed to grow (the U.S. has a better cancer survival rate than other nations) and other problems develop. And, of course, there is the hard to quantify fact that more waiting means more pain for patients.

You misunderstand me. I mean our current entitlement spending is unsustainable. We are soon going to run out of the ability to meet the rising costs of SS, Medicare, and Medicaid. Adding a single-payer system on top of that is unrealistic.

To your point, though, as my cite above shows, the notion that private insurance wastes so much on “overhead” and that the government is so efficient is a myth that has no basis in fact.

68

A few thoughts on Renob’s linked article (whose author is apparently too humble to share his no doubt impressive academic credentials that would mark him as a reputable authority on the topic):

*Right off the bat, I see fundamental intellectual dishonesty in that the article uses the phrases “socialized medicine” (a system in which physicians are employed directly by the government) and “single-payer health care” ( system in which physicians work for themselves and insurance is provided to the government by all citizens) interchangably. Either the author of this article is deliberately trying to muddy the waters, or he is not well informed enough to have any business writing policy papers.

*Page 3-4 asserts that NHI countries “ration care by having fewer doctors”. WTF? Please explain how the system of payment for care has anything to do with the number of doctors being trained.

*I note that the article appears to skip around a lot… for instance, on page 6, paragraph 3, he starts out talking about Canadian waiting times, then suddenly is talking about British cancer mortality. This handy technique allows him to compare the US system to whichever NHI system it looks best against in any particular context.

Here is a more straightforward comparison of US and Canadian systems (which is most relevant, since almost all advocates of single-payer in the US are advocating a Canadian rather than British model). Note that US mortality rates for end-stage renal disease are far worse than Canada, mainly because of our overreliance on dialysis as opposed to transplant. The gentleman from the Cato Institute, however, points to the relative underuse of dialysis as a flaw in the Canadian system! Likewise, we see that all those expensive, high-tech heart surgeries that he is so fond of don’t actually seem to improve mortality rates. Here is another article comparing the US, Canada, Australia, New Zealand, and the UK, concluding that outcomes are generally similar, despite the much higher costs of care in the US.

*On page 6, he bewails the fact that cancer mortality rates vary significantly by region of the UK… then on page 8, we find him stating that the widely varying rates of infant mortality among US States "have nothing to do with the quality of (or access to) health care? Which is it?? Whichever will allow you to make whatever point you are trying to make at any given time?

Moving on to your assertion that "as my cite above shows, the notion that private insurance wastes so much on “overhead” and that the government is so efficient is a myth that has no basis in fact. "… all I see is an unsupported assertion that “determining the administrative costs of any government program is difficult”, followed by an observation that doctors and their staff have to spend time processing Medicare claims. Apparently he is unaware that private insurers also have paperwork that doctors need to fill out! Indeed, almost any doctor will tell you that figuring out the different paperwork requirements of multiple insurers is one of the most frustrating things about the job… look at want ads in professional journals and you will see that HMO, VA, or other employers which do not require doctors to deal with insurance claims mention this fact very prominently in their ads. OK, on review I see that is not quite fair…he does cite an article paid for by the insurance industry to support his claim, so it’s notquite* “unsupported”! OTOH, how does he know that this guy’s estimates of the relative hidden costs of Medicare and private insurance are accurate, since those determinations are so very difficult to make?! Here is the article from the New England Journal of Medicine which Mr. Free Society is purporting to rebut, if you would like to peruse it.

69

Thanks for the examples Sam, I follow the first part.
[QUOTE=Sam Stone]
Without randomness, there IS no insurance industry. If all risks are perfectly knowable, there would be no need to buy insurance. In fact, the market breaks down again. The whole point to insurance is that neither side knows what the individual risks are. The insurance company buys your risk because it has a pool of customers to average the risk out and ensure a profit. You’re willing to pay a premium over what your risk really is because you can’t take the chance of being wiped out by chance.
[/QUOTE]
Well that’s not what I said. I said the insurance company doesn’t want randomness. Obviously reality is random and they don’t get exactly what they want. However, insurance companies put great effort into gathering data and weighing probabilities to predict what they can and minimize the risk. My whole point was that I don’t think an insurance company wants a random cross-section of customers. I think they want to filter out the high-risk customers and sign-up the medium to low-risk customers. An employee healthplan can help them do this because many of the highest-risk people are not employed (or not employed with a job that provides a healthplan).

Of course, they don’t want to turn potential customers away, so they sign-up individuals without company healthplans, but they charge them much higher rates. This addresses the pitfall you describe above, informational asymmetry.