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Why is competition between health insurance companies useful?
Kevin Drum (and Matt Yglesias) asks an excellent and important question:
Tyler is arguing for keeping the insurance industry competitive. But I simply don't see what that buys us. Even if the health insurance industry were dramatically improved, this wouldn't especially make healthcare any more efficient. It would only make the insurance industry more efficient. That would be nice, but hardly earthshaking...
Let me be clear: the incentives today are screwy. Let me also tell you my ideal world. Insurance companies are judged by honest third party intermediaries. Insurance companies compete like heck to make customers satisfied. Insurance companies monitor doctors, read Robin Hanson, and require evidence-based medicine. Insurance companies which fail at these pursuits either go bankrupt or they must abide by an ex ante contract to permit the exile of their CEOs to Greenland. Every year prices would fall in real terms, quality would improve, and coverage would be expanded. Imagine the whole health care sector working like laser eye surgery or cosmetic surgery.
This is not the world we live in, but it is the world we should aim for and I am more than willing to consider how government might get us there. (Mandating greater price transparency is but one step.) But if we institute a single-payer system, or highly regulated mandates, we will never have much chance of arriving in that world. Ever. We will have a fairly static sector with high coverage levels but rising costs long term and less innovation.
I believe we know why insurance companies don't work this way, namely monitoring problems; they screw you over instead of serving you and they can get away with it. Go ahead, call me a pollyanna, but modern information technology and measurement can indeed resolve many monitoring problems. We can now monitor central bank performance quite well or show up in Sicily with a credit card and rent a car. Neither was the case forty years ago.
Here is one summary of how health insurance companies are improving information technology for claims processing, medicine itself, and promoting evidence-based medicine. I don't mean this industry-supplied link to be a good summary of the current truth; take it as one vision of what might be possible. To put the point another way, insurance companies are not just risk assessors or dollar transfer mechanisms; they also can be monitors and buyer agents and that is why competition is potentially so useful.
The policy point is not: "you must die today so that the reign of Milton Friedman can arrive in forty years' time." It is more like: "whatever transfers we wish to do today, let us proceed so that such a future remains someday possible."
Medical care is just starting to cure human beings, so don't think the future will look like the past. I know that preaching the virtues of insurance company competition is not a popular position in the blogosphere but like Arnold Kling, I see the single-payer advocates and mandate advocates as the conservatives, not the visionaries.
Addendum: A month or two ago, one MR reader left a long and very good comment about all the innovations provided by private health insurance companies. I can't find it, can any of you? Please let us know in the comments or email me.
Addendum: Kevin Drum responds.
Posted by Tyler Cowen on February 12, 2008 at 06:39 AM in Medicine | Permalink
Comments
Who are the "honest third party intermediaries?" (If it's not rude to ask, are you voting today?)
Posted by: Craig at Feb 12, 2008 7:59:30 AM
It seems a single-payer system, with vouchers each of us take to our HMO of choice, would give that kind of good competition, perhaps with less of the bad kind of competition (where insurance companies exercise control over the quality of their patient pool).
Posted by: odograph at Feb 12, 2008 7:59:46 AM
It's not clear that IT will help when combined with competition. It could easily make insurance much worse.
Consider that an important and highly profitable task IT has done is radically improve companies' ability to identify customers and accurately price their products. E.g. Airline's yield management systems save a seat for the last minute business traveler and charge her $2000 instead of $200. Credit card companies, retailers, manufacturers, hotels, banks, etc have all benefitted from such IT systems.
How would this apply to health insurance? Better information and technology could enable them to more accurately price their services, but the price differential could be 100x or more. That's how much more a person with certain cancer risks, or even diabetes, might cost to treat than a similar, but healthier person.
As systems get better, the accuracy of pricing and customer selection improves. A perfect system would charge each customer exactly that customer's expected medical costs (plus a profit).
Ironically, that would defeat the whole purpose of insurance!
Competition would only make things worse, as companies raced to identify good and bad risks before their competitors -- a race to avoid the "lemons".
Perhaps the enormous success of the VA in using IT is a better model to consider.
Posted by: A student of economics at Feb 12, 2008 8:01:28 AM
That raises the question of what the purpose of health insurance is. Is it supposed to be a wealth transfer from those who have low expected costs to those who have high expected costs, a sort of health care handicapper general? Many people seem to think that it is, since health care is a right and never mind that you can spend unlimited amounts with diminishing returns for various levels of this right. If that is so, shouldn't we write checks to those with high expected costs rather than force companies to charge fixed amounts? Right now the primary competition amoung companies is likely to end up being finding ways to attract the profitable (healthy) customer without attracting the unprofitable (sick) customer through whatever means are legal, since you can't price discriminate. Your skill at doing that will dwarf any efficiency competition that's going on in the background since the stakes are so much bigger.
Posted by: Zvi Mowshowitz at Feb 12, 2008 8:31:17 AM
Student,
IT helps all businesses figure out who their profitable customers are and who their unprofitable ones are. Some insurers will use it to dump unprofitable risks while others will use it to pick up profitable ones that may have previously appeared hopeless. In a competitive environment, there would of course be insurers who specialized in low-cost solutions to otherwise terribly expensive health conditions. In most industries, this sort of competition is considered "good", and I'm confused why it wouldn't be good in medicine as well.
How would perfect forecasting of insured outcomes defeat the purpose? The purpose of insurance is to hedge against future health care costs, not to pass a lemon off as a profitable investment (although I do realize that is its purpose to many of the insured).
It seems to me that better forecasting by insurance agencies would place larger incentives on people to remain healthy; incentives which they don't have as much under employer-provided care. If charities and such fail, people could certainly suffer due to lack of health care. However, that is a problem of scarcity, not the model of the health care system, isn't it? Health care must be rationed somehow, would you prefer the government do it? Given the calculation problem, is that a good idea?
I think the answer to the insurer's incentives to screw their customers over can be answered by third parties. Consider an online market where the uninsured post (or have their doctor's post) their medical information. Insurers could bet on various ailments occurring, and patients (or doctors) could choose whether or not to accept those bets (i.e., its a prediction market). The market would have the incentives to attract both insurers and patients, so it would try to be as fair as possible to both. It could be possible for third-party arbiters (employees of the market) to decide whether or not a claim was paid out. The huge capital backing required to insure could be mitigated by allowing insurers to aggregate investments, which would attract many insurers to the system. Insurers could also highly specialize in predicting the outcome of only certain conditions, while ignoring others. The cost to develop a system like this would be minuscule compared to the amount spent on health care in this country. It of course does not touch on treatment, only insuring.
I've been told the market for insurance is too highly regulated to allow for competition and innovation like this, though. Whatever ends up happening, it seems absurd to me for economists to critique competition in health care or health insurance, when they don't have a damn clue what solutions a future market could bring (no one does). There are plenty of markets out there which have adjusted to larger asymmetric information and agent problems just fine.
Posted by: Grant at Feb 12, 2008 8:47:50 AM
I'm not sure about increased efficiency, but I do know the only time health care costs went down in the past 20 years was during the HMO boom of the '90s. That was ended by a combinaion of consumer complaints (despite a 90 percent procedure approval rate) and a flight to oligopoly by the providers. This is a case where anti-trust regulation could have been helpful, but the government failed to step in. What strikes me as interesting is most single-payer systems seem to bring the same complaints you heard about HMOs in the '90s (read today's posting on Newmark's Door). I guess the question becomes, "What does efficient really mean?" If it means doing the cold equations and allocating health care according to the most likely best results, people won't like the process. If it means providing the best services in the shortest time, people won't like the cost. If it means providing preventive services that stop small problems for becoming big problems (e.g., vaccinations, diabetes management), then we'll need to re-examine how we deliver medical services rather than how we pay for medical services.
By the way, watching "The Diving Bell and the Butterfly" made me think the French medical system was no more "efficient" than the U.S. system. How many resources were spent on the intensive care of a man who would never recover? In a truly efficient system, Jean-Dominique Bauby would have been given a lethal injection. So, once again I ask, What is an efficient health care system and do we really want it?
By the way, I apologize for the long post.
Posted by: Ted Craig at Feb 12, 2008 8:54:22 AM
"Ironically, that would defeat the whole purpose of insurance!"
Whoa, what? Isn't the purpose of insurance to hedge against unpredictable and unbearable risks? How is that incompatible with accurate pricing? Surely a person with a greater probability of a negative outcome (cancer) should pay more to hedge against that risk?
I don't get why people conflate insurance and free health care. They are not in any way similar, are they? If you want people to get free health care, just give it to them, right, why do you need insurance? It seems like so much is lost by lumping together free (or subsidized) health care and insurance in every debate. If you think we should redistribute money from the healthy to the sick, say that. If you think the best, most efficient insurance is run by the government, that's a different issue.
What's also strange to me is low deductibles. THAT defeats the purpose of insurance. Why insure against routine and easily borne expenses, isn't that terribly inefficient? Is it just a web of confusion where consumers think they're getting health care for free when in reality their employer is paying for it instead of paying them an amount of money worth more to them than the insurance?
Posted by: Cliff at Feb 12, 2008 9:06:44 AM
Ted, how about efficiency is a system consumers are happy with?
Health insurance appears to have rather poor customer satisfaction rates (considerably lower than life insurance, for example), although they went up a bit in 2006:
http://www.theacsi.org/index.php?option=com_content&task=view&id=147&Itemid=155&i=Health+Insurance
Ironically, the USPS has higher ratings. The worst industry seems to be cable television providers.
Posted by: Grant at Feb 12, 2008 9:11:40 AM
It seems like so much is lost by lumping together free (or subsidized) health care and insurance in every debate.
This might be true from the perspective of insurance, which is possible without transfers from rich to poor, and without transfers from the healthy to the sick to the extend that these groups can be identified ahead of time.
But the opposite is not true: any transfer from the healthy to the sick will also act as an insurance system, and so does subsidized healthcare as tranfer from rich to poor. Any proposal with some of these aspects will have to discuss the more general health insurance system.
Posted by: greatzamfir at Feb 12, 2008 9:30:53 AM
1. Isn’t Kaiser Permanente already doing some of the stuff that you are calling for?
2. No matter what the insurance companies do with IT wouldn’t they still need more help from the insured than they currently get with low deductible and low co-pay policies?
How about much higher Co-pays or a system like term health insurance with an accompanying annuity?
BTW it almost seems that a person should buy a term health insurance policy with an annuity for their child while the child is still in the womb. This would be to avoid the problem of an expensive congenital condition.
Posted by: Floccina at Feb 12, 2008 9:48:36 AM
You write, "Every year prices would fall in real terms, quality would improve, and coverage would be expanded. Imagine the whole health care sector working like laser eye surgery or cosmetic surgery."
The nice thing about laser eye surgery is that it is not a life-or-death thing. People can do without it, which means that the demand can more or less match the supply, as regulated by the pricing policies of laser eye surgery providers and the purchasing decisions of potential clients.
But this is not true of health care in general. For the most part, people cannot do without it (or, in some cases, doing without it means the likelihood of much larger health care needs in the future). So there isn't an abatement of demand as a result of pricing policies. This means that, all things being equal, if the supply of health care is even slightly less than the demand, nothing prevents a price increase into infinity, except the premature deaths of those unable to pay. Which is the current situation in the private health care system.
Most advocates of private health care take an attitude something akin to "it's OK if the poor people die off prematurely." Usually it is couched in more diplomatic language, but the sentiment is nonetheless there. And, indeed, it is unavoidable. You cannot have free market health care otherwise. Any attempt to mitigate this effect is a step toward public healthcare, and the question at that point resolves to one of how best to deliver health care services to the entire population, rather than one debating whether or not health care should be subject to the free market.
The proposition in the post above is essentially that improvements in health care technology will make health care accessible and affordable for everyone. Only in this way would it be possible for market forces to be able to balance the production of and demand for health care services. The suggestion that we should plan for such a time is well taken. But the suggestion that our system should be currently structured as though such a time were already here is not.
You write, "But if we institute a single-payer system, or highly regulated mandates, we will never have much chance of arriving in that world. Ever." This is simply false.
Historically, when government has mediated distribution because of market failures, such as shortages in supply that lead to infinite demand, such mediation has persisted only so long as the shortages have prevailed. Food rationing during the war years evaporated once supplies expanded after the conflict. Public housing in many areas has gradually given way to rental and owned accommodations. In Canada, telephone companies and energy companies, both owned by the government, have been privatized. The mechanisms exist, and so long as there are people working for pofit, there will be at least some movement toward privatization.
An thus with health care as well. In Canada, the movement is strong and well-funded (from U.S. sources). Even so, Canadians en masse vote against such measures because the supply of health care services is not yet sufficient. We would not be able to depend on being able to access and to afford health care in a private system, so we preserve our public system. We have the example of the United States, the richest nation in the world, with a private system that leaves 50 million people uninsured, and which sees people financially ruined by illnesses that would be nothing more than an inconvenience in Canada.
I, too, hop for the day that health care will be as common and as accessible as grocery shopping, where I can choose which store I go to, where I can expect government regulations to monitor the quality and safety of the offering, and the marketplace to moderate the price. But while oranges go for a couple of dollars a dozen, quality health care is rather more expensive, and rather less accessible.
That said, people who are proponents of private health care can take concrete and useful initiatives today, to hasten the day when costs approach clients' ability to pay. Instead of trying to force a marketplace solution into a market that cannot sustain it, advocates should be lobbying for and working toward policies that will significantly lower the cost, ensure th quality, and increase the affordability, of health care.
- a major form of government intervention in the health care marketplace, patent protections on drugs, has been one of the most significant drivers of increased costs in recent years. Drug company lobbies have successfully convinced governments to extend periods of patent protection, with a corresponding rise in the price of the drugs protected.
This system actually slows innovation, as improved drugs will not be rolled out until the protection period for other drugs expires. This is especially the case for high-end and specialist drugs, where there is very little competition.
Patent protection also slows the research effort as laboratories try to keep their processes secret in order to maintain an effective monopoly on research. Ironically so, since most of the research is funded directly by government, or indirectly through the participation of university labs and professors.
- mandate open access of all government-funded research. This would ensure that any research that is funded by the taxpayer is available to all agencies, thus maximizing the propagation of that research. Thus, the same work could benefit a large number of companies, rather than the one or two it does now.
This stipulation should apply to raw data as well (and perhaps more importantly). The sorts of discoveries Kepler made from Tycho Brahe's observations would be impossible in today's environment, because Kepler would not have had access to Brahe's observations.
- voluntary patient-owned electronic health care record - creating an effective system of one-patient one-record would enormously streaming health care and reporting processes. However, clients quite naturally trust neither governments nor corporations to preserve the confidentiality of such records (in large part because such records would later be used to deny health care insurance).
Thus the mechanisms prescribed in the 'Innovations in Health Information Technology' booklet are, for the most part, a step forward in a positive direction, and merit consideration by public and private health care providers alike. That said, if our experience in other technological domains is any guide, care must be taken to ensure operators are willing to adhere to common and compatible standards for electronic services; a health care record that "doesn't run on Linux", for example, is unacceptable.
I'm sure there are other measures that could be considered, and of course I have an open mind aout them. My own stance regarding health care is not motivated by partisan politics, but rather, the conviction that it is wrong to allow people to die prematurely merely because they are poor.
When I see a willingness on the part of those people supporting private health care to genuinely improve access, increase quality, and lower costs, I am supportive and willing to work alongside them. But when the point of their advocacy is merely to create an environment in which they and their friends can take advantage of a market failure to enrich themselves at the expense of people' health, they lose my support, and frankly, my respect.
Posted by: Stephen Downes at Feb 12, 2008 10:12:26 AM
Well, we could also argue that the benefits are pretty meaningless, given that our healthcare system is expensive, has poorer outcomes than those in other countries, and spends a lot of money on advertising and rent-seeking instead of actual progress.
I feel like private market advocates consistently discount rent-seeking behaviours in their analysis of markets and in forming their normative policies. This vision of healthcare, with aggressive competition, requires numerous competitors, transparent and truthful information and other market ideals that never happen in the real world. It is easier for drug companies to spend money on worthless patents and advertising than R&D on new drugs, especially as the cost for such R&D escalates. The evidence based medicine you cite as being desirable only works if the studies are honest, which they often aren't, being co-opted by the pharma companies and by the pressure on physicians to only publish positive results. In addition, cheap therapies that are not profitable are often ignored or not studied because of the lack of profit-motivation (e.g. cheap steroids for shock lung).
It also ignores the fact that people are not rational consumers of health in any way. They ignore preventative care in favor of fixing problems at higher cost later.
In a single payer system, you do gain some advantages, such as the reduction of overhead and those behaviours listed above. You lose some of the aspects of innovation, but if those innovations aren't real or aren't actually improving morbidity and mortality in the real world, then perhaps they are actually worthless (e.g. statins improve the LDL numbers but do not actually treat the patient)? Or, if basic, cheap healthcare is being ignored in favor of hot technologies because of profit-motives, then how do we realign incentives in both the insurance and pharma industries?
Posted by: akatsuki at Feb 12, 2008 10:26:59 AM
Stephen,
That said, if our experience in other technological domains is any guide, care must be taken to ensure operators are willing to adhere to common and compatible standards for electronic services; a health care record that "doesn't run on Linux", for example, is unacceptable.
In almost all sectors of IT, standards emerge which take care of most compatibility problems. These standards (especially the successful ones, such as TCP/IP) are rarely owned by any one entity. There are often competing standards, which causes compatibility problems but is often the only way to rationally decide between different standards. I believe any regulation or intervention into this process would be a disaster. Heavy regulation of medical IT would keep open standards from being nearly as viable, due to the legal and IT costs of development. The result is that more standards would likely be closed, in my opinion. Most of the standards in communication which the world run on were not forced on anyone, but were simply the product of people agreeing to use them.
In every free market I can think of, products improve in cost and/or quality every year, and the poor increasingly get access to products only the rich could afford. In the meantime it is true that the poor would get worse service, but health care is a scarce resource and must be rationed somehow. Is it worthwhile to have an equal number of rich and poor people die, instead of more poor people dying? If so, why? What if those poor consciously traded wealth for something they valued more? Would the outcome of better health care for the poor be worth such massive externalities (and the future legislation they might lead to)?
akatsuki, why do you think for-profit enterprises are any better at rent-seeking than other groups? In America, unions are easily just as good at rent-seeking than businesses, especially unions of public employees. Socialism is just as for-profit as capitalism, its just that the type and distribution of the profit is different.
Is there evidence health care consumers are irrational, given the incentives of the low-deductible insurance industry?
Posted by: Grant at Feb 12, 2008 11:03:43 AM
Stephen Downes wrote:
The nice thing about laser eye surgery is that it is not a life-or-death thing. People can do without it, which means that the demand can more or less match the supply, as regulated by the pricing policies of laser eye surgery providers and the purchasing decisions of potential clients.
But this is not true of health care in general.
The same is true for food, water and, in Canada in the winter, shelter. Now you might say that those other things that you would die without are cheap, but so are the most affective medical things like vaccinations and antibiotics and Tyler’s point is that the other things could be much cheaper also if more completion existed.
Also another small quibble with what you wrote drugs do not normally rise in price. In fact they fall in price when the patents run out and generics come to market. We spend more on drugs because we buy the new drugs that come out, often will reason to do so. We do not pay more for the old drugs.
Posted by: Floccina at Feb 12, 2008 11:09:59 AM
"a major form of government intervention in the health care marketplace, patent protections on drugs, has been one of the most significant drivers of increased costs in recent years.Drug company lobbies have successfully convinced governments to extend periods of patent protection, with a corresponding rise in the price of the drugs protected."
Could you please name the 5 or 10 most important drugs that you believe this happened with? The only important ones I can think of had their patents 'extended' by coming out with a new product that was similar to the old product. The old one went off patent and became significantly cheaper so if the new one isn't better, everyone can just choose to buy the old one (and insurance companies do in fact encourage that).
But it is possible that I've missed the 5 or 10 important drugs that had their patents significantly extended and were "one of the most significant drivers of increased costs in recent years".
Posted by: Sebastian Holsclaw at Feb 12, 2008 11:16:43 AM
BTW: My own stance regarding health care is not motivated by partisan politics, but rather, the conviction that it is wrong to allow people to die prematurely merely because they are poor.
We do this all the time. E.g. should we take all old cars from poor people and replace them all with newer safer models?
Posted by: Floccina at Feb 12, 2008 11:22:25 AM
"Historically, when government has mediated distribution because of market failures, such as shortages in supply that lead to infinite demand, such mediation has persisted only so long as the shortages have prevailed. Food rationing during the war years evaporated once supplies expanded after the conflict."
I think this is tempting but misleading. We really only need so much basic food, so we expect that with economic growth it will consume an ever smaller portion of our income. That's why countries could outgrow rationing.
But I don't see any such limits on heathcare. While technology will make last year's techniques cheaper, it will also keep finding better and more expensive techniques. And we will want these, and be prepared to devote an ever greater proportion of our income to getting them.
Posted by: improbable at Feb 12, 2008 11:22:34 AM
Let me also tell you my ideal world.Why is one ideal more likely to become reality than the other? In a market where the customers cannot judge the suppliers without honest third-party auditors, why is it crucial that they be spending their own money?Insurance companiesPrimary care trusts are judged by honestthird party intermediariesgovernment regulators.Insurance companiesPrimary care trusts compete like heck to make customers satisfied.Insurance companiesPrimary care trusts monitor doctors, read Robin Hanson, and require evidence-based medicine.Insurance companiesPrimary care trusts which fail at these pursuits eithergo bankruptare shut down or they must abide by an ex ante contract to permit the exile of their CEOs to Greenland. Every year prices would fall in real terms, quality would improve, and coverage would be expanded.
Of course, if instead they spent taxpayer money they would be always clamouring for more insurance. A simple case can be made on the quantity side that they would end up with too much, leading to aggregate over-spending on health care because of excessive quantity consumed by each individual. But on the price side, the intrinsic difference is not so obvious.
Posted by: Aneurin B. at Feb 12, 2008 11:44:31 AM
Anerin, you say: "In a market where the customers cannot judge the suppliers without honest third-party auditors, why is it crucial that they be spending their own money?"
I won't say most markets are similar to the above, but a great many are. eBay is a good example, where trust metrics and reputation (the Internet's version of "word of mouth") are required to keep the place running. Without them, you've just got a bunch of usernames posting pictures of things they claim to have for sale. Fortunately, eBay is an honest third party auditor; they'd go out of business if they weren't. No one whines very much about market failure on the Internet because (being a true free market) there is very little of it. When failure occurs, an opportunity is created. Entrepreneurs discover ways to correct this failure, and quality of service improves significantly every year.
If the principle-agent problem actually led to market failure which couldn't be corrected by the market, we'd have problems in many industries other than health care. Fortunately, a simple solution often emerges: consumers hire third-party auditors who are known to produce favorable results.
Posted by: Grant at Feb 12, 2008 12:03:07 PM
"Imagine the whole health care sector working like laser eye surgery or cosmetic surgery."
Laser eye surgery is not covered by insurance. It is a case where the insurance model and all of its atendant problems have been entirely removed from the system. And the market for it seems to function well.
Posted by: Justin at Feb 12, 2008 12:31:41 PM
"a major form of government intervention in the health care marketplace, patent protections on drugs, has been one of the most significant drivers of increased costs in recent years. Drug company lobbies have successfully convinced governments to extend periods of patent protection, with a corresponding rise in the price of the drugs protected...
Patent protection also slows the research effort as laboratories try to keep their processes secret in order to maintain an effective monopoly on research. Ironically so, since most of the research is funded directly by government, or indirectly through the participation of university labs and professors."
Why has this been a driver of increased costs in recent years when there has always been patent protection? How have lobbyists convinced governments to extend patent protection? As far as I know this has not occurred in the U.S.
You suggest patents slow innovation by encouraging secrecy. Yet without patents, the research would not take place at all. So while secrecy may decrease innovation, on net patents vastly increase research in pharmaceuticals, one area where patents are pretty much an unmitigated success.
FYI I am a patent attorney.
Posted by: Cliff at Feb 12, 2008 1:20:02 PM
Cliff,
I don't think its accurate to say that without patents research would not take place. The world (or at least the internet) runs on software largely developed without much IP protection. In many software industries, it is commonplace for otherwise competing businesses to work together to develop open-source software which is beneficial to the industry as a whole (i.e., a public good).
I'm not saying the pharmaceutical industry could replicate this; I really have no idea. I think its a possibility, given serious cultural changes within the industry.
Posted by: Grant at Feb 12, 2008 1:27:40 PM
Question, does single payer health insurance out perform private free market health care if you applied American cultural norms to Western Europe? BTW, why do we constantly hear the U.S cited as a an example of private "free market" health care? The regulatory in the U.S could not be any further from that hypothetical.
Posted by: john pertz at Feb 12, 2008 1:55:56 PM
It is my understanding that Lasik is not covered by health insurance, which, in conjunction with the fact that it's not a required (by health) procedure, might explain why Lasik prices have fallen while its quality has improved. So the question is how those two factors impact health care costs. I think the answer is that both factors contribute to the lack of elasticity in demand of health care, and, therefore, the costs of health care increase.
There are many conditions that are not life-threatening, but because they (or their remedies) are covered by health insurance, people go see a doctor. The doctor, in turn, may charge what he wants because it's not the individual paying but a large corporation with seemingly infinite funds. Hence costs are higher than they should be.
If, however, health insurance only covered catastrophic events, such as surgery, casts, chemo, hospital stays, etc., either through eliminating coverage for other things or raising the deductible, the decision to go to the doctor would rest more with the individual. Most likely, doctor visits would decrease, which might lower health care prices. On the other hand, doctors should not be required to provide free emergency care (or care in general). This could be done through a variety of ways, such as payment plans or wage garnishments. In other words, there should be incentives for people to take preventive care, but not enough to make demand for those services inelastic.
This works with legal services so why couldn't it work with medical services?
Posted by: axel at Feb 12, 2008 2:02:57 PM
"Imagine the whole health care sector working like laser eye surgery or cosmetic surgery."
Right, imagine the world's most advanced medical system providing -- with astonishing efficiency -- unnecessary fluff to the richest 10 percent of patients. It's an economist's dream.
Posted by: Parke at Feb 12, 2008 2:25:40 PM
