Coyote Blog

Mitt Romney promised his state a health care free lunch, and everyone believed him.  So much so that other states are copying his plan.  Well, the charade is ending:

Last year, then-Gov. Mitt Romney made headlines by signing legislation
to cover all the state's uninsured. . . Romney suggested that annual
premiums for a single worker might total $2,400. But when insurance
companies recently provided real estimates, the cost was much higher:
$4,560.

Arnold Kling cries "I told you so."    And, I did too.

Low-deductible health care insurance (Massachusetts does not allow, by law, any other kind) is nuts, but it is what everyone is used to.  For some reason, people have a huge aversion to paying for medical costs directly, even if it is demonstrably cheaper.  Samuelson gets at this in his article when he says:

For decades, Americans have treated health care as if it exists in a
separate economic and political world: When people need care, they
should get it; costs should remain out of sight

Let us take a quick example.  Let's say that the average family generates $1000 in medical costs in a normal year, that is, without any major hospitalizations.  This would mean that if I got an insurance policy with a $1000 deductible, my coverage should be (relatively) cheap, since I am only really insurance against catastrophes -- I am effectively paying my normal annual costs out of pocket.

Now let's say I switch to a zero deductible. The premiums are going to have to be at least a thousand dollars higher a year.  And, in fact, they are likely to be more, given markups and administrative costs.  And that extra $1000+ will now be unavoidable to me, whereas I might have managed my own out of pocket spending lower if I am paying the bills.  Paying for a health care plan that covers one's normal annual medical costs is a dead loss.  There is no free lunch  (except for tax -- historically, medical costs payed by the employer were tax deductible, whereas costs paid out of your own pocket were not, which is one reason our health care market is structured in such a silly manner).

A while back, I switched from a $500 deductible plan to a $3500 deductible plan (I pay for my own health care).  You know how much I save in annual premiums?  $3000!  Talk about the biggest no-brainer ever.  Even if my annual health care spending was $3500, this would still be a break-even decision.  But since my actual spending in a normal year is probably $1000-$1500  (depending mainly on whether my wife or I get sent for some weird test) this was a huge financial gain.  And remember, this decision would not have been available to me in Massachusetts, because they do not allow high-deductible health insurance.  For some reason we are all caught up in this paradigm that health care expenses remain out of sight.  Even my wife, the Harvard MBA  (but from Massachusetts!) took some time to get comfortable with the concept of paying medical expenses out of pocket -- you're not supposed to do that, that's what insurance is for!