2010 March 28 Sunday
Medical Costs Solution: Insure Catastrophes Only

Lesley Alderman of the New York Times interviewed a number of doctors and asked them how to control medical costs. My favorite response comes from Jacques Moritz MD: Insure Catastrophes Only.

“The idea of paying a certain monthly fee for insurance that allows you to have most of your routine care covered doesn’t make sense. When you buy auto insurance, you don’t insure yourself for every dent and nick — you insure yourself for serious accidents. This is the way the health insurance system should work. Our current insurance model does not encourage patients to take care of themselves. It doesn’t reward patients for being healthy, it rewards them for being sick. This isn’t good for patients or insurers.”

Jacques Moritz, M.D., director of gynecology, St Luke’s-Roosevelt Hospital Center, New York

Think about all the complaints you hear from the political Left about the administrative overhead and profits of insurance companies. Well, if people paid expenses for minor illnesses out of pocket then all that money wouldn't flow thru insurance companies. It also wouldn't flow thru governments. Even better yet, the payer of the service and the receiver of the service would be the same person. That big change would align interests and cut out interference from third parties. The relationship between doctor and patient would be the primary undiluted relationship when a patient gets treatment.

Another advantage: hypochondriacs and those obsessed with every imaginable treatment would have to fund their own treatments rather than get all insurance payers to fund their desire for overtreatment. Faced with having to spend their own money people would need to ask themselves if they really need medical help.

My ideal: health savings accounts combined with very high deductible medical insurance. When something really serious happens (e.g. accident, cancer, need for a transplant) you'll have the HSA to pay up to the deductible and the insurance to pay beyond the deductible. But this is the opposite of what the Left wants: Single payer where the single payer is government.

Update: Some research shows that high deductible health plans tied to HSAs produce good results

Share |      By Randall Parker at 2010 March 28 12:33 PM  Economics Health

Red said at March 28, 2010 2:53 PM:

I believe Chile has done well with their medical savings accounts. You may want to take a look at them.

Zachariah said at March 28, 2010 4:31 PM:

The "insure catastrophes only" approach reveals a very limited understanding of how incentives actually work in the field of health and the economic costs and value of insurance.

Some people consider insurance to be a valid form of income/consumption smoothing: The practice of balancing out your expenses equally over a long period of time rather than having spikes and valleys... Smart people save money regularly to accomplish the same thing, but in the absence of a culture of savings in the US, "insurance" has taken on this role.

However, there is also a cost reducing benefit: When paying out of pocket, it is easy to justify avoiding early care, thus allowing a minor illness to balloon into a catastrophic problem (causing costs to dramatically increase). For some reason, models also show that preventative care is also discouraged, thus increasing the likelihood of medical catastrophes and thus, costs. Basically, the aggregate of humans seem to be unlikely to make "rational" spending decisions in regards to their health.

Interestingly enough, if you somehow insure the cost of "catastrophe" and "emergency" care, you can accidentally create a disincentive to correct minor health problems before they become major ones. Thus, there is an argument to be made for transferring the decision making power of whether or not to receive routine health maintenance and paying for the care of minor health problems (before they become expensive health emergencies).

Thus, we uncover the problem of the car insurance analogy. People don't buy one car for their entire lifetime. If the cost of fixing a car is greater than the cost of buying a new one, then we don't fix it and consider it "totaled." When I first learned how to drive I knew nothing about cars and knew nothing about how to maintain the vehicle. As a result, I destroyed the engines and catastrophically totaled my first two cars in less than a year without even realizing it was my own fault. If those cars were my body, then they would have wound up in the emergency room and insured or not they would have received care and been revived - despite the cost being greater than the value of the car. And forget about pre-existing conditions. Would anyone want to cover a $5000 car that was basically guaranteed to have $100,000 of fixing expenses in the future? Probably not.

So, let us suppose that the government mandated that every car be insured with full coverage insurance and a moral judgement was made that "a car's live is a valuable thing that should be revived at all costs" (similar to how we make moral judgments about human life and insure our own bodies). It would be in the best interest of the insurer to start taking steps to guarantee that these cars were being properly maintained, safely driven, and so on and so forth. They could trust the car's "owners" to do the right thing, but as we have already seen there is a broken incentive structure in this regard. Therefore, it becomes in the best interest of the insurer to build the cost of routine maintenance, traffic safety school, and even lobbying for stricter traffic laws and enforcement into the insurance premium. Because the insurers would become directly responsible for the potentially massive cost of keeping our cars on the road for a lifetime, they would essentially become the car's owners and we would merely be the car's custodians.

This is basically what happens on an economic level when you provide insurance coverage for human bodies. Because insurance companies are still somewhat prevented from controlling how we live our lives and thus reducing our medical catastrophes, they are forced to make what we could consider "bad" decisions about how to provide coverage. Even without a profit maximizing incentive, just to stay out of the red and in business, companies have the incentive to deny coverage for any excuse they get, not cover pre-existing conditions, and on down the line of so-called "atrocities" committed by the big bad insurance industry.

In order to make so-called "catastrophe" insurance work at all, the insurer needs to have the ability to take steps to make sure the object they are insuring stays in premium condition and is subjected to a minimum risk of medical catastrophes. No insurance company is every going to have the power or authority to do that. The government, however, does have the power to mandate that we live our lives in a certain lifestyle. Whether you agree that they have the morally justified authority or not, they certainly have the power and most people have conceded that they are the "final authority" as we know it in civil society.

Thus, the case for government mandated, regulated, and paid insurance starts to actually make sense. It isn't a far leap to realize that we would be ceding ownership and control over our bodies in order to adopt this system, but that seems to me to be the logical price one must be willing to pay to "insure" against catastrophe in a world where seemingly rational incentives to just stay healthy aren't working anymore. That is, of course, if you only consider the small picture of how insurance and health incentives play out among the general population.

There is a bigger picture to consider, however.

Health economists have discovered that there are other ways to provide incentives to people to take care of their bodies better. Education one of the best places to start: Better educated people simply know how to take care of themselves better, but also have numerous interrelated advantages that give them an incentive to be healthier than they might otherwise: For example, increased earning potential means greater losses when one is sick, thus providing a greater incentive to fix small problems quickly regardless of what they might balloon into. If I had been better educated on simple car maintenance, I know for a fact my engine wouldn't have failed when it did. If my car was highly irreplaceable and driving it every day earned me a high income, I would have also had a higher incentive to make sure it wasn't going to break down on me unexpectedly.

All this is to say that there is no simple silver bullet solution to directly "fixing" the problem of increasing medical costs. Anyone who says so is not only wrong, their solution is likely to create more problems than they fix. On the other hand, there are many indirect ways to improve the situation. The best approach to fixing any problem is to understand how the whole system works and then manipulate easily controllable variables that will push things in the direction you want them to go. Direct and drastic interference with such complex economic systems might seem to make everything better on the surface, but the unexpected ripple effects could cause a tsunami of disastrous consequences that make the problem worse in the long run.

So go out there are get better educated! It will not only make you more adapt to tackling these complex issues, apparently it will make you healthier too. *wink*

Randall Parker said at March 28, 2010 8:29 PM:


You said a whole lot without reference to public research to back up your assertions. I find that approach unpersuasive.

I tied high deductible insurance with health savings accounts because I know research supports their efficacy. The American Academy of Actuaries found that HSAs tied to high deductible insurance plans work well and do not result in a reduction of valuable preventative care. Get over to that link and get educated!

BTW, the economist, Alex Tabarrok, who wrote the blog post about that HSA/high deductibles study works on health care economics and I watch what he says on health care.

gcochran said at March 28, 2010 8:40 PM:

"Basically, the aggregate of humans seem to be unlikely to make "rational" spending decisions in regards to their health."

This is why we have to _make_ kids get vaccinated: a substantial fraction of parents would otherwise refuse to, out of laziness or some line of bullshit. Even though vaccination has an incredibly high payoff. Same thing with car safety: only about a quarter of the population wore seatbelts voluntarily, before the law forced it. Reminds me a long-ago girlfriend who claimed that she'd jump out of the moving car on to the 405 if I kept insisting that she buckle up: to this day, I regret giving in.

And _she_ graduated from MIT.

People who believe that the average Joe can't be trusted to make rational decisions on a host of practical life questions are elitists, authoritarians, and the enemy of every good libertarian. They are also correct.

Polichinello said at March 29, 2010 8:55 AM:

High deductibles and HSA's create incentives to take care of small problems. First, waiting for a problem to get big does not save money. You still have to pay the $5,000 or whatever deductible you have. You might as well spend it upfront and have it credited to your deductible in case of later problems. Second, the HSA usually takes money direct from your paycheck and can only be accessed for medical expenses. Again, you might as well spend the money upfront. Too, some companies offer free or subsidized preventative care, like check-ups.

Will we always have morons amongst us, as Greg points out? Yes, but which is worse. One set of morons getting themselves killed through their own neglect, or another set of morons getting the rest of US killed by overusing medical facilities and personnel on OUR dime?

Randall Parker said at March 29, 2010 10:59 PM:


Sure, some cheap mandatory stuff cuts the incidence of disease. Sure, most people are pretty stupid. But high IQ people with HSAs and high deductible insurance policies would bring some needed market forces in medicine. We need incentives for lower costs in medical care.

Currently we have incentives for the opposite where doctors run up high expenses on dying people. A nurse friend who spent years working in ICU told me how when her father was dying lots of specialists kept their daily consults on him even when he had a DNR order. Why was a kidney specialist clocking in with daily checks on someone in a coma with DNR? Ditto a cardiologist. Ditto some other specialists for a patient who wasn't coming back out of that coma and didn't have long to live. But the family wasn't paying for this. The government was paying. Since she knows hospitals she was able (with considerable argument) to cut off the specialists and let her father die. The doctors were making rational decisions for their bank accounts.

I've seen similar stuff with my own family. In one case a chemo oncologist kept insisting on return visits for a treatment that had stopped working. For him it was ka-ching at the cash register. The terminally ill relative eventually said no and this relative was surprised to find that a doctor would try insisting on a course of treatment that was pointless. Again, the government was paying.

kurt9 said at March 30, 2010 12:58 PM:

I have a high deductible catastrophic policy that is optimized for my needs. I am also a practicing "life extensionist" in that I take supplements and other compounds (e.g. Resveratrol, etc.) that may have anti-aging properties. This mandate requiring me to pay for "comprehensive" insurance that would include maternity care, substance abuse treatment, among other things enrages me no end. I have no intention of buying such insurance and, if the penalties become too large, will actually consider moving back to Asia by 2014.

I know my risks. They are, in descending order, 1) motor vehicle and other trauma injury, 2) cardio-vascular "events" (both stroke and heart attack), and 3) cancer. I want a reasonably priced insurance policy that is not rescissionable that will cover these things if they should happen to me. I have no problem with a high deductible (say, $7,500 per year) because I consider this reasonable and I have already budgeted for this personally if any of this stuff happens to me.

Parts of the health care bill are reasonable. Banning rescission and other questionable practices on the part of insurers is reasonable and I'm glad to see this in the bill. I would have no problem with a mandate that required people to purchase the kind of catastrophic health coverage that I already have. What I despise about this bill (and I WILL vote on this issue in November, as will many others) is the mandate to buy the kind of insurance that ties me into a "risk pool" with every Dick, Joe, and Harry, of whom I would never have anything to do with in any other capacity. My rage against this bill goes beyond economics. It forces me to "associate" with people whom I would never, ever, ever have anything to do with, and this is worse than economic socialism for me. It is down right offensive to me.

What you have to know about me is that I came into libertarianism, not because of its defense of capitalism and free markets (even though I do believe in these things), but for the far more fundamental issue of free association. This issue of self-ownership and free-association is far more fundamental and personal to me than any debate about economics (the merits of socialism vs. free markets).

If we had a society of thoughtful, considerate people who always did What I consider to be The Right Thing, I would probably be as content in a quasi-socialist system as a free-market one. When I am around people who I feel a commonality with, I am not picky about the specifics of the relationships that I have with them. However, when I am surrounded by people whom I feel I have nothing in common with, which includes 99.9% of those in ANY society I have lived in (both sides of the Pacific), the thought of having to have any "connection" with such people irritates me to no end. This is just unacceptable. This bill requires me to "connect" to people I have nothing in common with in a manner that is unacceptable to me.

NotProgressive said at April 5, 2010 10:00 PM:

What about Charity Hospitals? If we allow Doctors to reduce their taxes by donating their hours, then the cost per medical hour goes down dramatically. For example, if the Doctor is in the 40% tax bracket, then it costs only 40 cents on the dollar to fund the Doctor, as compared to ObamaCare. With Obamacare, the cost to deliver medical care to the poor is full cost, plus added inefficiency inherent in all Government Programs. Many Doctors would work for Free, and many businesses would love to give money to Charity, just to be good corporate citizens, so the actual savings are probably more than 50% over that of Obamacare.

If Doctors are able to reduce their taxes, then the supply of Doctors will increase. With increased Supply, then costs will go down even further and access will go up.

If we have tort reform, then costs go down as Lawyers are no longer rent seeking from the Doctor Class. Medical Savings Accounts shift the burden of rationing onto the user. What is more humane, a person who self rations their medical dollars, or the Obamacare bureaucrat forcing rationing?

Obamacare is wrong on many levels, and is economically illiterate.

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