Online only: Expensive healthcare, part 2

In my last column, I addressed two government policies that contribute to high health care costs by restricting the available supply of medicines and providers.

Now, let’s examine the policies that drive costs up by inflating demand.

One major culprit in this category is the policy of using the tax system to favor the financing of health care expenditures with insurance, particularly employer or government-provided insurance. There are numerous flaws with this policy, but the one most pertinent to this discussion is the fact that paying for health care in this way encourages overconsumption.

This is because, when consumers are largely insulated from the full costs of the services provided to them, they tend to consume more than they would if they were charged the full price at the time the service is rendered.

Another significant problem in this area is the practice of using insurance to pay for expenses that are not actually insurable in the proper understanding of the term. Mandates enforced by each of this country’s 50 state governments are largely to blame for this practice. These policies require insurers to cover a certain minimum slate of procedures regardless of whether insurers want to offer such coverage or consumers want to buy it.

As the writer Robert Blumen has explained, “Insurable risks share certain characteristics, among them, a small risk of loss, the magnitude of a loss would be too great for the insured to afford, and when the risk is spread over a large number of similar cases, the premium for each insured is affordable.”

Blumen goes on to argue that there are essentially three types of health care: “predictable care,” such as annual physicals; “unpredictable, non-serious care,” such as a tooth cavity; and “unpredictable but serious health emergencies,” such as being hit by a car.

He argues that the first two kinds should not be financed with insurance because doing so renders the term insurance meaningless and transforms insurance from a risk-sharing arrangement in which all participants have a roughly equal chance of coming out ahead into a vehicle for getting others to pay for as much of your routine expenditures as possible.

The financing of so much predictable, non-catastrophic care through insurance contributes to overconsumption because people are insulated from the full costs of their care and are thus a) less well equipped to shop around for the best care at the best price and b) less likely to consider the option of foregoing non-essential procedures in order to reduce both their own costs and the strain on the system.

An analogy to other common types of insurance may be instructive. Auto insurance doesn’t cover routine maintenance,and homeowner’s insurance doesn’t cover remodeling. This is because these types of insurance are used only for truly insurable risks, such as catastrophic or otherwise serious damage.

The use of these types of insurance for far more predictable, far less serious expenses would result in overconsumption and excessive costs in these areas, too.

Although it may be obvious in some cases what my preferred solutions to the above problems are, I plan to devote my next column to a discussion of potential policies that might address them, with an emphasis on intermediate reforms that might have less trouble garnering public support than the more extreme solutions I’d ultimately prefer.

—jarlower@indiana.edu