My Answer on Private Health Insurance

A Cafe Hayek Reader asks:

Imagine we had entirely private health insurance market "“ no Medicare or Medicaid.  If I live to be sixty-five, I will probably have a personal and/or family history that indicates a strong probability of developing an expensive chronic condition. I would wager that is true of almost all sixty-five year olds.

So here is my question: which insurer in their right mind would take on my risk?

I suspect none. Once philanthropy and savings were exhausted, I would surely risk a painful life and preventable death.

Do I want this? Does anyone? Isn't "socialized" medicine for older people an unpleasant moral necessity for our wealthy society? Please note I am deeply suspicious of most arguments cast in moral terms in discussions of politics and economics. I ask these questions guardedly.

I answer in the comments:

Imagine we had entirely private life insurance market "“ no government options at all. If I live to be sixty-five, I will probably have a pretty high probability of dieing in the next 15 years or so. I would wager that is true of almost all sixty-five year olds.

So why would anyone insure me?

Because the life insurance market has developed a very reasonable solution to this -- you negotiate a term life rate for X number of years. Your rate might be Y a year for 10 years, or 1.5Y a year for 20 years, or 2Y a year for 30 years. The longer the rate guarantee, the higher the rate. You are explicitly paying higher rates than you might have in younger, less risky years to make sure you get a coverage guarantee at an affordable rate in later, risky years.

Of course, if you play the grasshopper and never buy insurance until you are 65, your price is going to be awful. But I don't think it is a reasonable role for government to do all kinds of individual-liberty-defying and costly things just because you did not take responsibility for your old age earlier in life. However, saying that, I of course know that this is EXACTLY what the government does with Social Security.

I have a high deductible individual insurance plan from Assurant who specializes in insuring individuals, and they have been evolving to a pricing model sort of similar to the term life model I listed above, though they are not quite there yet.

To the folks that say this is no solace for folks already 65, that is an implementation transition issue, not an argument against the market's ability to deal with this. Certainly a lot of folks have paid Medicare taxes for years and are counting on it. Some kind of phase out, possibly where the government redirects Medicare funds to make up the difference in policy prices for having not started locking in earlier, is possible. But the question was not an implementation question - it was a question of whether the market inherently fails for 65-year olds, and I think the answer is that it does not. We have a perfectly serviceable analog in life insurance to prove it

I call this the "failure of imagination" argument against free markets.  Some sector of the economy (such as education) has been dominated by government for so long that folks can't imagine a private model.  For example, when I argue for private grade school education, I can't tell you how often people say "private schools are all really expensive, no one could afford them."  Private schools are expensive because in the current government model, the only market niche for private schools is for families that can afford to pay the government for education they don't use and then pay a second time for a private school.

  • morganovich

    further, if we alter the way in which we look at medical spending, we can avoid this quandry as well.

    imagine 2 scenarios:

    scenario one, you pay $2000/yr for a $500 deductible plan that provides all you can eat healthcare.

    scenario 2, you put $1500/yr into a tax free "health ira" and pay $500 yr for a high deductible plan with a $2500 deductible.

    the out of pocket cash is equivalent for you, the government, or your employer.

    the expense in an emergency (to you) is identical as well. if you need a $20,000 treatment, you're out $500 in cash on top of premiums/contributions either way.

    however, in a year in which you consumer less that $2500 in care, scenario 2 is always preferable. if you spend less than $1500, as most young, healthy people do, you have money left over in your account and this rolls over.

    so, just like in a conventional IRA, money builds up over time. you save when you are young to spend when you are old. people ought to be allowed to put their own cash into this account as well and hold it tax free (though exclusively for medical use).

    assuming you do so, you will also get another benefit: you can buy cheaper insurance. over a working career, it would not be difficult to amass $30,000 this way. if you have $30k to spend, you can more comfortably select a higher deductible plan, which will save money. alternately, you could enter into an "i'll always spend my money first" plan with an annual cost fixed for a long period of for the rest of your life. these measures would help offset the greater expense to insurers of covering the old.

    making scenario 2 even more attractive, this money is better than insurance payments in a wide variety of ways. not only does it not disappear if you don't use it (like an insurance premium) but once you have it, it's yours. you can spend it on health as you see fit. there's no arguing over covered procedures or medicines. it's just between you and the doctor of your choice.

    best of all, this system will finally allow cost containment to occur. under the current system, you have no incentive to care how much any procedure costs if it's over your deductible. under the new system, you do. until a consumer cares about price, nothing can reign in costs.

    under the current "buffet" system, the utility maximizing choice is to get every medical procedure you can imagine wanting/needing once you hit your deductible, and with such low deductibles, this happens frequently. facing the first $2500 in costs from money you care about is very different from only $500, much less the $100 that is increasingly common.

    here’s what drive’s the buffet: imagine you have a $500 deductible. this means that, to you, a $1000 and a $10,000 procedure are economically equivalent. obviously, this is not true to your doctor or your insurer. assume the $10,000 option has slightly shorter recovery time or slightly better results. your doctor would rather have you take the $10,000 option. so would you. for free, take what works better. but if you were paying out of pocket, you might think hard about paying $1000 and taking another day or 2 to recover. in the current system, you not only have no idea what the price difference is, but you would not care if you did. putting a “lobster is expensive” sign up at the buffet will not alter your economic behavior. another way to look at this is let’s say you need ACL surgery. a good orthopedist might charge you $12k. the guys who does knees for the 49er’s might do a better job, but charge $50k. is the difference worth it to you out of your own pocket? given the choice, most of us would rather drive a Porsche than a Saturn, but when it comes time to pay, far more saturns get chosen. if you want a porsche and are willing to pay for it, great, but don;t ask me to subsidize it.

    if car insurance worked like health insurance, when you wrecked your car, you could go to any car dealer in town and pick out a new one. the salesman would not have any idea what prices were (or if he did, would steer you toward the expensive one) and neither would you. you’d just grab what looked good, go home, and the insurance would pay. clearly, such a system would be bankrupt in short order. the wonder is that our healthcare system has held on for so long.

    this sort of trend is massively compounded by tort liability. doctors have every incentive to run every test under the sun on you and you have every incentive to get them. you just might get useful data, and he’s covered his butt. but again, you’ve probably consumed a great deal more care that you would have if you were paying for it yourself.

    there is already a massive savings to be had just be redirecting services. the difference in price for the exact same MRI can literally be over $1000 in the same neighborhood. a hospital will charge you $1500, but you can get the same exact MRI in a private imaging center for $500. until you face some of this cost yourself, all that matters to you is which one is closer or which has a better appointment time. this is some really low hanging fruit, but no one will pluck it without incentive.

    honestly, this whole thing is such a no brainer to me that i am astounded that DC can't figure it out.

    scenario 2 outperforms or is equivalent to scenario one under every circumstance, costs the same, and unlike scenario one, will drive costs down.

    any econ 101 student ought to be able to see this. why is it we seem to elect the only the remedial group?

  • Zach

    "any econ 101 student ought to be able to see this. why is it we seem to elect the only the remedial group?"

    Because it's easier to just say "someone richer than I am should pay for my healthcare". And it's easier for the politician to say "someone richer than you are, that also happens to be not me, should pay for your healthcare", and the plebes get their bread and circuses.

  • Raven

    Your analogy to life insurance does not make sense:

    1) Life insurance is something that only the young really need to buy. Most people can safely let their policies drop after their children grow up.

    2) There is no on going cost for life insurance. It is simply a risk calculation. There is no need to factor in inflation or any other unexpected events. This makes it possible for the life insurance company to fix rates for 50 years. A similar model would never work for health care.

    3) The life insurance model means that people will be permenantly stuck with whatever insurance provider they happened to sign a deal with when they are young. If they are not happy with the service then they are screwed since the cost of switching would be prohibitive.

    4) Such a model would simply create an unfunded liability like private pension plans where companies charge too little to attract customers which later require expensive services. As these companies go bust in 30 years there will be demands for a taxpayer bailout.

    The only model that makes sense to me is a public insurance option which provides a basic level of care and the government makes no promises of providing everything to everyone. People who wanted/needed more would purchase supplimentary insurance that covers what the government does not.

  • me
  • Bob Smith

    Private schools are expensive for other reasons too.

    1) Private schools have to obey zoning and construction regulations that governments frequently exempt themselves from.
    2) Many jurisdictions have no zoning designations explicitly permitting such uses, or if the zoning is available have no parcels where a conforming structure could be built. Setback rules are particularly egregious in this regard.
    3) Good luck getting a zoning variance to get your school built, especially if a school board member sits on the planning & zoning committe, or is a spouse of one of them.

  • Current

    "I can’t tell you how often people say 'private schools are all really expensive, no one could afford them.'"

    In the UK private schools are now cheaper than the state system. The difference of-course being that those who want to use them have to pay twice through taxes and directly.

  • joe

    This is another scenario that suffers from a starting point flaw. Not everyone enters maturity as a healthy competent person able to purchase health insurance. You can set the starting point wherever you like; 2, 12, 15, 18, 25, 30 or make it some sort of sliding scale but you still need to include people that start out from a horrible situation. You proposal makes no provision for people who have a terrible risk index at age 2. Nor for people who have run into serious problems (through no fault of their own) after maturity. I’m all for having people pay their own way, but I see no way the private market

    Here are two hypothetical’s
    1. Your parents are responsible, kind, loving and will never make more than 80% of the median income. Prior to maturity you are develop a medical condition that if left untreated will be painful, debilitating and ultimately fatal. While responsible enough to purchase insurance for you prior to birth your parents lacked the means to contract for your health care needs for your entire life. You are about to reach maturity and would like to go to college but you won’t be able to function at the level required unless your condition is treated. Absent the earning power a college degree brings you can’t afford the care. How does the market handle this?
    2. You’ve done everything correct, but you got leukemia last week and your insurance company just went out of business. Alternately, you’ve been transferred to different state and your current insurance company doesn’t offer any coverage in that area. Or, you’ve been laid off, divorced, falsely arrested, and lost your house all at the same time and can’t afford coverage. How would you handle that?

  • RIV

    Private schools really expensive? This confuses cost with who pays. Public school is often more expensive than private school. However the cost is not billed to the student, it's billed to the community, usually via real estate taxes.

    Public schools do not like to give out good total cost per student numbers. However there are lots of public schools that cost in the neighborhood of $12,000+ per student per year. This is much more than most private schools. Further, when looked at in terms of the results generated per dollar spent, many public shools look obscenely expensive.

  • Septagon49

    Lack of imagination indeed! Stop looking at the world as static and flat. Only when government intrudes do you have a market that provides goods and services for a higher price and poorer quality over time. A true free market in healthcare would improve quality and lower prices obviating the conudrum discussed here.
    Health insurance is not actually insurance. Insurance is a tool for risk management for events that have not happened yet. The current discussion of "health insurance" would be better labelled "health welfare" since the goal is to shift the burden of payment from the sick to the healthy.
    The public option is immoral and unethical for it requires coersion and theft to implement. Since 1965, the Feds have been trying to fix a problem that did not exist at that time. Now the Feds have created the mess they say only they can fix by taking the entire healthcare system over. Good luck with that!

  • Ernie

    I love this blog.I would like to see someone address the real concerns about health insurance.How about children born with life threatening or life long illnesses and do not have insurance already.How about someone (like my son)who had cancer(MY insurance was GREAT it did everything I could have asked)and will not be able to get a new policy to cover him completely.Additionally my insurance company(that I must keep because of my son)will not add my wife on because of her pre-existing conditions.So I pay for two policies.What is to stop insurance companies from pricing its unprofitable customers out of their policies.Also insurance companies already ration our health care by only paying for certain prescriptions or generics.I will not even address my health cost concerns with my business but it is obvious we are all looking for ways to eliminate it.

  • DaveK

    I love seeing a good discussion of "Health Care" reform. Especially since the actual "care" that is delivered in this country is really pretty good. The problem is that far too many folks have the notion that it's their right to receive that care at little or no cost out-of-pocket. Somehow, somebody has to pay for that care.

    I've said it before... perhaps the biggest obstacle to meaningful change in our health insurance system is that few people appreciate just how expensive a low-deductible family policy really is. The costs have been deliberately hidden by most companies who provide health insurance to their employees.

    So, just what do we want to have in whatever new health care/insurance system that comes out of all this?

    1. Health insurance without limits on pre-existing conditions? If so, how do we ensure that folks won't wait until they are terribly sick before they sign up? How do we make it affordable, even for a high-deductible policy?

    2. Portability of insurance plans so we can simply move to different but roughly equivalent (or higher deductible, even) plan without penalty for prexisting conditions.

    3. Get the employers out of the business of negotiating for our health insurance. Instead, the employer can set up a health care account for each employee, and the employee can use those funds to shop for whatever insurance he wants. If there is cash left over, the employee can use that to offset out-of-pocket medical expenses, or roll it over to the next year. If the employee wants more coverage than the fund provides, he can pay for it himself. Best of all, the cost of health insurance is completely transparent.

    4. Let's get serious about tort reform and set limits on (for example) punitive damages. At the same time, make sure the losing party pays court costs. If the losing party can't afford those costs, they should fall to the losing party's attorneys. And lets find some more ways to limit frivolous malpractice suits. It's ridiculous that an obstetrician should have to pay the better part of $1 Mil per year just for malpractice insurance.

    5. One last thing I can think of for now... put some kind of a limit on what hospitals can charge as a markup for the "consumables" that you use during a hospital stay. $10 for an aspirin or tylenol is really a bit much. Same for band-aids, dressings, and other supplies used during various procedures and daily care.

    I'm sure there are lots more things that could be fixed, but that's a starting point for discussion.

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  • http://genericconfusion.blogspot.com Greg

    Raven,

    If you don't know anything about how life insurance and pensions are priced and valued, then don't post here.

    There are many forms of life insurance designed for older buyers, such as final expense insurance (like Ed McMahon pitched), or survivorship life insurance for estate planning.

    The cost of switching need not be prohibitive. Are you aware that you can get money back if you terminate your whole life insurance policy?

    There is a simple solution to the long term pricing dilemma. Put the regulator and the company equally liable for any pricing errors. Make sure both agree the assumptions are reasonable. But that will never happen.

    Coyote:
    Kill the spam link by Billy.
    Life insurance companies absolutely do need to factor in inflation, more for some products than others. Consider that in the late 70's, insurance companies that allowed policyholders to borrow funds at a flat rate like 8% got screwed when inflation led to even savings accounts paying more than that.

  • S.E.S

    I appreciate the realistic idea of combining Medicare and private health insurance. In current debates, many become very onesided because of thier general opinions without embracing the most realistic option. However, though I agree that now is not an ideal time to make a large scale change regarding health care, I have to wonder, when is a good time when you're taking into account peoples physical wellbeing?