Has anyone ever had the experience of going to a doctor and being told that the cost would be X, and then after being informed that you don’t have insurance, the cost is changed to a much smaller number?
I have. We have private dentistry in Canada, but many people have their own insurance. It was so common at one point for dentists to charge one price for insured people and another for the uninsured that laws had to be changed to prevent it. And it still happens all the time.
Making people responsible for their own routine medical care doesn’t just have the effect of making them less likely to use the system frivolously. The far more important effect is that it allows the price system to work. If people are spending their own money, they have an incentive to spend it wisely. That opens the door to doctors having to compete with each other on price, which is key to keeping costs down and creating innovation.
Third party payers, whether it’s an insurance company or the government, should be the last resort. They are by their nature inefficient and least able to control costs.
Imagine what car insurance would be like if it covered preventative maintenance for your car. Every trip to the shop would be a paperwork nightmare. Every garage would have an incentive to pad their bills as much as possible. There would be no competition between garages. In fact, demand would probably be so high that there would be waiting lists for routine auto work. The insurance would be hellishly expensive. The poor wouldn’t be able to afford it.
But the advocates would say, “But preventative maintenance makes your car run longer, and in the long run saves money! If we make people pay for their own, costs will go up.”
Eventually, the situation hits a crisis, so the government steps in and provides universal car insurance that covers all car expenses. Then to control costs, it sets up fee schedules and fixes the pay of auto service people. No one can charge more or less than what’s on the schedule. Every decision is scrutinized by an army of bureaucrats. New maintenance procedures have to be greenlighted by a score of agencies, each of which has its own agenda.
Can you guess what such a system would ultimately look like? There would be shortages in supply caused by price gaps. Long waiting lists for car maintenance. The guy with the car which a suspicious knocking sound in the engine compartment has to wait three months to get in for service. Taxes go up to pay for the hellishly large bureaucracy.
That’s government health care in the nutshell.
Here’s your simple, sane health care plan:
- End taxpayer subsidy of employer-provided health care.
- Provide universal catastrophic care, indexed to income so it’s progressive.
- Take the tax subsidy money and give everyone a tax credit for their own health savings accounts.
- Use Cass Sunstein’s ‘nudge’ idea, and have businesses by default withold some small percentage of income and put it in the health savings account. Employees can opt out, but the default is to opt in.
- Eliminate medicare, and put the elderly in the same system. Rich elderly people are just as capable of paying for their own health care as are rich young people. If necessary, the government can provide additional financial aid to those on low fixed incomes.
There you go. You can achieve all your social aims by changing the amount of indexing for income. Maybe people on the poverty line only pay the first $100 of their health care per year, while millionaires pay the first $50,000. Ideally, you want to index this to utility - the amount of financial pain is equal regardless of income.
There are many positive benefits for this. For one thing, you get insurance companies out of the mix for the vast majority of small medical bills, greatly easing paperwork costs. You get providers competing for customers.
One of the problems with health insurance is adverse selection - insurers would like to insure the healthiest people, but the people who need it the most are the least healthy. Also, there is an information asymmetry - the insurance companies know less about their health of their clients than their clients do. This means insurance companies have to charge a risk premium, which drives up costs and drives out the healthiest people, making the risk pool even worse.
But if private insurers changed to a ‘gap insurance’ model, where they only had to cover people up to the government’s catastrophic limit, their downside risk would be much smaller and the premiums lower. The problems of adverse selection and information asymmetry go down by an order of magnitude or two. And since poor people have smaller caps, their insurance would be much cheaper. Gap insurance could be offered by employers for low cost, or people could choose to finance their gap through health savings accounts.
Cass Sunnstein’s ‘nudge’ idea would be a great help here. Studies have shown that when employers put part of an employee’s salary in a retirement account by default, the employees tend to save far more money. If the employee is responsible for setting up his or her own retirement account, the savings rate goes down. So have employers set up HSAs by default. We’re not talking about mandatory savings - the employee can still opt out. We’re just talking about changing the default settings to ‘nudge’ people in the right direction.
Variations on these kinds of systems are working quite well in other countries, including New Zealand and Canada. Canada is moving more and more towards a system where private clinics will take up the routine health care needs of the people, and the government will pay for the expensive major surgeries. New Zealand already has a 25% co-pay with gap insurance being the common way to cover it.