Health “insulation” policies are the problem

Arnold%20Kling%20011007.jpgEconLog’s Arnold Kling is doing some of the best thinking and writing on America’s broken health care finance system these days. In this lucid Cato Unbound article, Kling channels one of this thoughts from his book Crisis of Abundance: Rethinking How We Pay for Health Care (Cato 2006):

The health coverage most Americans have is what I call ìinsulation,î not insurance. Rather than insuring them against risk, most familiesí health plans insulate them from paying for most health care bills, large and small. [. . .]
Real insurance would pay for treatments that are unavoidable, prohibitively expensive, or for illnesses that occur relatively rarely. Instead, insulation reimburses even relatively low-cost services, such as a test for strep throat or a new pair of eyeglasses. Insulation pays for treatment even if it is commonplace or discretionary.
For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctorsí recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a health care provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price.
Consumers are happy as well. Insulation relieves the patient of the stress of making decisions about treatment. The patient also does not have to worry about shopping around for the best price.
The problem with insulation is that it is not a sustainable form of health care finance. Individuals, employers, and government are all under stress. [. . .]
Today it is fairly deeply ingrained with most Americans that health care services are something that you should not have to pay for yourself. Insulation is the norm, and real health insurance as I would define it is almost nonexistent.
Ultimately, I think we are headed for a collision of cultural values. We prefer insulation to real insurance. We expect services to be readily available, without the supply limitations or waiting lists that exist in countries where government is responsible for more health care funding. And yet we are growing increasingly concerned over the expansion of health care spending that takes place in a system that lacks constraints on either supply or demand.
Real health insurance may not be popular now. But when Americans see that the providers of insulation, including Medicare, have to turn to the rationing of health care services in order to meet budgetary constraints, real health insurance may start to look like a good alternative.

3 thoughts on “Health “insulation” policies are the problem

  1. We’re starting to see some movement away from blanket “insulation” policies, as we’ve discovered that the HMO model (cover all those little things with the notion that paying for “maintenance” type care prevents bigger bills down the road) really didn’t work as social planners thought they might. Now, we’re seeing quite a few policies that don’t cover 100%, or only cover 100% after a deductible is met. That’s not the same as true insurance, but it’s a step in the right direction (and is driven by costs, as HR departments realize they simply can’t afford the 100% insulation insurance any more).
    Of course, one BIG advancement is the rise of HSAs coupled with high-deductible insurance accounts. Because that combo was made possible by the 2003 Medicare reform legislation and because most libertarians and conservatives simply like to bitch about the “cost” of that legislation without delving into its details (where the truly important HSA reform was “hidden” to get it past Dems who otherwise would have balked), it’s a great, mostly untold story. The action by the lame-duck Congress to boost the HSA contribution amounts was another good move that was largely ignored.
    My employer began offering such accounts in 2006. They’re great! And they function more like an insurance account and less like the insulation accounts of which you speak. They’re still relatively new, but I think we’ll see more employers begin to adopt them. Unless the new Congress manages somehow to squash this important reform.

  2. For the record,while I think that HSAs are absolutely a good idea (mostly because they treat patients as actual health care consumers and attempt to correct for the gruesome inefficiencies of a virtually complete third-party payor system), their efficacy is really a matter of some controversy at this point. The best evidence I’m aware of does not indicate any dramatic changes in HC expenditures, outcomes, or any other relevant measures that attend the use of HSAs.
    Of course, this doesn’t mean HSAs aren’t a good idea, because I think they absolutely are (I have one too, for the record), but even if they are efficacious their scope is limited because they are generally only available to those who already had insurance through an employer in the first place. If we think that having 40 million Americans without HC insurance is a problem — and I think it is, even if one doesn’t deem it a crisis — then pushing HSAs is going to have little to no effect in ameliorating that problem (to be fair, HSAs were never intended to ameliorate that problem). The extent to which we think health coverage is really the issues, I’m not sure just how important a reform HSAs really are, even as good an idea as I think they are.

  3. I think Daniel is right about HSA’s. Their impact is mostly symbolic, particularly given that insurers are still administering them and the allowed amount of medical expenditures in any one year (call it the “HSA deductible”) before the health insulation insulation policy kicks in remains rather low. But Daniel is also correct that they are a good starting point and provide a template for changing the culture of expectation that has developed among citizens who can afford health care.
    Two things could be done immediately to improve the market for true self-health insurance. First would be to remove the conflicting tax treatment for employer-based health insurance versus non-employer-based insurance. The former is currently tax deductible and the latter is not. Beyond making both consistent in terms of tax treatment, I do not care whether the tax deduction is extended to individual policies or simply removed from employer-based policies.
    The second thing that should be done is raise the HSA deductible level to $15,000-$20,000 per year and remove any requirement that an insurer be involved in administering the product for an individual. This would create a market for catastophic policies that individuals could buy to insure against unforseen expenditures in excess of the higher self-insured amount. Perhaps the catastrophic insurer would require some degree of oversight and/or control with regard to the administration of the self-insured amount, but at least that would be a negotiated item between the individual and the insurer and would not lock an individual into an insurer selling an HSA product.
    Finally, I agree with Daniel that some form of government-subsidized health care is always going to be necessary for folks who cannot afford it. However, by changing the culture of expectation with regard to health care, perhaps we could also change the culture regarding answering the hard questions that must be addressed regarding the extent to which a government-subsidized system will go in providing certain types of care. To date, our society has been unwilling to address those questions.

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