I learned a little about healthcare today

health care

(note: My own position on healthcare is much more conservative than this cartoon would suggest)

I’m reading a book called “code red” about the healthcare system, and I like it, not because it’s the best book on healthcare (it’s clearly very sketchy in areas), but because it matches nicely with my ignorance about the subject.

So, some conservatives argue in favor of health savings accounts. The idea is that people would pay for high deductible health coverage (which is pretty cheap for that reason) and pay, along with their employer, into a tax free account. This account can be used to purchase healthcare, and leftover money from a given year can be used toward retirement or future healthcare costs. The idea is that such a system encourages people with coverage to shop around and to avoid spending money.

There is actually one really strong argument for this position, which was a study done by RAND in the mid 1970’s at the government’s behest. This study, unlike almost all other health studies, had random assignment to the control and treatment groups. What the study found was that consumers without any copayments on their insurance incurred roughly 40% more costs than those who had copayments. The real shocker though was that those who incurred more costs were not ANY HEALTHIER. The conclusion to draw then, is that when consumers have to care about price, a bunch of overtreatment is avoided.

That’s the argument for a consumer driven healthcare system. There are a bunch of problems though, and I think that they are fatal to such a proposal.

1. This study was done against the backdrop of mostly indemnity insurance where fee for service was rampant, but today, people are mostly enrolled in managed care of some sort. The savings versus managed care would be much less since managed care also controls costs from the provider side (managed care plans watch how doctors treat you, contract with cheap providers, and often capitate or salary their doctors). See 4 below also.

2. Roughly 15% of people in the U.S. incur 80% of the healthcare costs. This means that many people have such costs, month in and month out, that they will pay the full amount of the deductible on their care and so will have no incentive to shop around. No matter what they will pay the 5000 deductible or whatever, and so the cheapness of the care is irrelevant if it’s over their deductible.

3. This one is related to 2. People with high and consistent health care costs will have to pay high out of pocket costs (the full deductible) and so probably won’t enroll at all in the health savings plans. Translation: there is a nasty adverse selection problem. Healthy people will want to enroll in HSAs because they will keep all their tax free contributions to their account and take advantage of the lower premiums (due to the high deductible). Sick people will stay in HMO’s. Thus, there won’t be any savings created by HSA’s, they will just attract people who don’t really need care. THIS IS REALLY IMPORTANT, because if HSA’s catch on, they will make it look like HMO costs are rising while HSA costs are falling. This will just be an illusion created by the adverse selection problem.

4. It’s really hard to shop for a lot of healthcare because it’s almost impossible to tell the price of anything to begin with. Hospitals have really complicated billing schemes that don’t really approximate how much it costs to help you, and even if you find out the medicine your doctor will give you, you don’t know how much. You also don’t know how these prices equate with quality. You may find out that x hospital is cheap, but are they cheap because their care sucks or cheap because they got really efficient at delivering good care. The big point here is that we should try to restrain cost from the payer side, not the consumer side. Consumers don’t know anything about healthcare and are poorly equipped to find out (o yea, and it’s hard to shop very long when you or your kid is sick, you just want help right away, payers on the other hand don’t operate under duress). Managed care organizations and payers on the other hand have rooms of accountants and analysts going over data about quality and pricing to try and cut costs. So, they should shop and not you.


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