Why is competition between health insurance companies useful?

by on February 12, 2008 at 6:39 am in Medicine | Permalink

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.

Craig February 12, 2008 at 7:59 am

Who are the “honest third party intermediaries?” (If it’s not rude to ask, are you voting today?)

A student of economics February 12, 2008 at 8:01 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.

Grant February 12, 2008 at 8:47 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.

Cliff February 12, 2008 at 9:06 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?

greatzamfir February 12, 2008 at 9:30 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.

Stephen Downes February 12, 2008 at 10:12 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.

Grant February 12, 2008 at 11:03 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?

Sebastian Holsclaw February 12, 2008 at 11:16 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”.

improbable February 12, 2008 at 11:22 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.

Grant February 12, 2008 at 12:03 pm

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.

Cliff February 12, 2008 at 1:20 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.

john pertz February 12, 2008 at 1:55 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.

Parke February 12, 2008 at 2:25 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.

andrew February 12, 2008 at 2:28 pm

“Ironically, that would defeat the whole purpose of insurance!”

You can’t ever arrive at a solution if you can’t even come to agreement on the problem. The role of insurance is to defray risk, not provide the unhealthy with a medical cost lottery.

Sam February 12, 2008 at 2:32 pm

Tyler,
Going back to your earlier post about comments, do you think longer posts garner longer comments? Maybe this post just struck a nerve and people don’t write as carefully when they are upset.

Grant February 12, 2008 at 3:13 pm

M1EK,

PayPal only has 24% of the online payments market. Its big, but there are plenty of alternatives. As someone who works with online payments, I can say PayPal is a very good choice for many businesses. Their rates are competitive with the rest of the market, and they offer many services and currencies others do not.

Craigslist isn’t an online market, its just ad listings. eBay does have plenty of competitors which anyone can find by using Google. In fact, eBay isn’t even close to the first listing under “online auction”.

If people can’t be bothered to use Google (or one of its many competitors) to find alternatives to a business they may dislike, then no, I don’t think markets will work. But neither will anything else.

Dan Weber February 12, 2008 at 4:13 pm

“A perfect system would charge each customer exactly that customer’s future medical costs (plus a profit).”

If your perfect system could predict that I would get leg cancer in 15 years, then I could take specific action right now to address that issue. Which seems good for me.

I do worry about adverse selection, but if I belong to some group that has a higher than normal chance for leg cancer, there ought to be incentives to get me to address the chances of leg cancer.

Lord February 12, 2008 at 5:23 pm

Monitoring isn’t merely an IT project. It takes a lot of regulation too. Few providers are even willing to provide cost information for one. It will take a lot of regulation to even create a healthcare market. Insurers are no better when it comes to providing this information. Secrecy is highly profitable. They are often more an obstacle to markets than providers.

Grant February 12, 2008 at 6:07 pm

Me,
So don’t use eBay? There are plenty of alternatives. The fact that some may not like others using PayPal and eBay isn’t an indication of anything really. eBay in fact has higher customer satisfaction ratings than its competitors:
http://www.theacsi.org/index.php?option=com_content&task=view&id=147&Itemid=155&i=Internet+Auctions

Student,
If information was that good, insurance would be unnecessary. People would know how much to save and invest in order to deal with future health problems. But thats true in many areas, where technology and innovation render some industries obsolete. Its happening all around us. So I’m not sure how your observation helps us understand the problem?

Lord,
All thats really relevant is the satisfaction of the customer. That is easily monitored, but that information isn’t very helpful in the USA today because the patient isn’t the customer. The insured isn’t even the customer in most cases. As far as suppliers providing information so that online markets can function, I agree. There would be resistance to that as there has been resistance to that sort of thing from established suppliers in many other industries. None of that resistance has stopped change from occurring and prices from being driven down.

Grant February 12, 2008 at 6:19 pm

One thing that I think bares remembering when discussing online markets (in health care monitoring, auctions, or whatever) is how search engines can aggregate relevant results from many sites at once. eBay was a significant improvement over other methods of sales, but the time may come when it is only used due to being “locked-in” via the network effect.

Enter the search engine, which could pull from 20 auction sites. It starts to matter less how many users browse eBay directly, because even auctions on a low-traffic site will be spotted by a potential customer. eBay would still have more trusted sellers and a bit of a network effect there, but eventually trust metrics based on OpenId-style systems will replace eBay seller ratings.

The market creates something imperfect, and it then creates imperfect solutions to that imperfection, etc. etc. I guess some of this stuff is hard to predict if you’re not familiar with the industry, but then I think a good number of people need to read Hayek before arguing for public policy, and realize they should probably not be trusted with a democratic vote over things they know nothing about (I know I shouldn’t get to vote on health care!).

Cliff February 12, 2008 at 6:34 pm

ASOE,

“The counter-intuitive, yet nonetheless true, result is that better information can have negative value in the context of insurance (and other situations as well, for that matter).”

You mean, negative value _for the insurance companies_? Because yes, in your (impossible) scenario, they would all go out of business. But obviously people would be much better off, because they would no longer need to pay the insurance companies’ profits in order to protect against risk, since they would know the timing and cost of the necessary expenses and plan accordingly.

But since that will not happen for at least 100 years and most likely will never happen, it hardly seems relevant.

(I am assuming they know the timing of expenses, since that is necessary for your hypothesis that the purpose of insurance would be defeated)

Daniel Reeves February 12, 2008 at 7:11 pm

Universal health care proponents argue that the government can create a cheaper AND better service. Most of us know that this is pure crap. The three reasons why other countries are cheaper than America with health insurance is because a) there are huge shortages, b) they make huge cuts on what is treated, and c) clinics can charge whatever they want. Fix these problems while keeping the system competitive, and you’ll have an amazing system.

Sorry to all the Moore’s out there, but American insurance companies are not denying claims left and right, and people are not charged high just so a few CEO’s can be rich.

The problem with health insurance is that it doesn’t provide an incentive to not spend a lot of money. Want to spend? OK. Here are inflated prices. Oh, no, my insurance is paying for that. When is the last time anyone has ever even asked for a price when going to the doctor?

Cowen rightfully praises cosmetic and eye surgeries. I’d be arrogant to assume he doesn’t know why– I’m only a high school student– so I’ll summarize on what both of us can probable agree. Cosmetic surgery has become so much better and cheaper in the past few years, and it is not a coincidence that insurance barely ever covers it. axel is 100% right. When people spend their own money, the have the incentive to receive what they desire at the cheapest price they can. Competition in prices also leads to better competition in quality.

Our current system is failing in that sense, but there’s a shred of hope. In these places, you’re more likely to get treatments only if you need them. People know what they’re paying for, doctors have more intimate customer relations to attract business, and only what is needed is paid for.

Once insurance companies take the initiative to offer “accounts” where money builds up over time and people spend it on less serious treatments, and when people realize that this is the best solution, then we’ll see some real change; some GOOD change.

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.

Parke, is it any more unnecessary than a trip to Six Flags or any other leisurely ways of spending money? Your criticism is completely invalid.

matt wilbert February 12, 2008 at 9:22 pm

As far as I can see, you are saying that if health insurance companies had different incentives to do something different from what they actually do, competition might result in them doing it well.

Could be.

Zach Alexander February 12, 2008 at 11:27 pm

It is definitely a good thing for Insurance companies to compete with one another. A solid insurance company will monitor your doctors and monitor pharmacies to make sure everyone is doing their job correctly. Unfortunately today’s world is different; of course there are those few companies who actually care that much, but they cost too much. With competition between companies people can have options like picking a company that fits their income.
Maybe after this recession insurance companies along with others can compete with reasonable rates and prices. Allowing less income families to afford insurance.

Ziggurat February 12, 2008 at 11:40 pm

“As McGuire and Ma pointed out in their 1997 American Economics Review article “Optimal Health Insurance and Provider Payment,” the only way to get the incentives right for insurers to compete for and therefore provide appropriate care to the sick is to set the premiums they receive for insuring a high risk individual or family higher than the actuarially fair rate, and the premiums for the low risk below their actuarially fair rate. Of course, if employers had to pay more to insure their high risk employees or high risk dependents, it might encourage employment discrimination against them.”

What is an actuarially fair rate? Do you mean a single rate for everyone? If you took out the catastrophic illnesses, then you could have a reasonably small number of rating variables and charge based on the expected value based on age, sex, etc. Probably have to skip income, race, maybe gender, and any other socially unacceptable variable.

Personally I favor a two tier system. A basic plan that is universal and the ability for individuals to purchase more if they wish through a provider. The basic plan would cover stuff that is cheap and anything associated with public health. You might as well have a government catastrophic pool also, since most really sick people will end up there anyway.

Russell Nelson February 13, 2008 at 2:31 am

Health insurance companies do three things:

1) they pay ordinary medical bills which most people could afford. This is extremely expensive “insurance” because nearly everybody ends up getting a payout.

2) They mitigate against the risk of a catastrophic (unaffordable) health collapse, say a car accident, or a chronic disease.

3) They act as a risk pool to ensure that people who lost the genetic lottery do not have to pay all their own health care.

So, if you talk about changing how health insurance works, you need to address all three of these functions if you want to make sense.

M1EK February 13, 2008 at 9:22 am

“So don’t use eBay? ”

Grant brought it up as an example of the supposed ability of the market to provide trust absent any regulatory interference. I pointed out that it’s beginning to fall apart the more heavily it’s being used. I haven’t seen any evidence that more trustworthy competitors have emerged.

Craigslist was brought up to avoid the problems inherent in shipping. Yes, they do sell a lot of goods; no, they’re not just for jobs. Where on earth did you get that idea?

nick February 13, 2008 at 2:44 pm

I think that doctors are as much of an obstacle as the insurance companies. They’ve built a myth of infallibility and indisposability, when there’s very little that they do that can’t be done by so many others. Requiring me to see an MD for any health care condition is inane. Why must I pay a Dr $100 to verify what the free blood pressure monitor at the grocery store says and write me an Rx for the same drug I would buy myself if I spent 15 minutes researching on the internet? Even if I wasn’t the diy-type, I would get identical care from a pharmacist, dentist, vet, 1st year med student and the actuary at the HMO who decides which drugs I may take.

I understand that there are times that Drs are necessary and useful, but requiring their involvement in almost every health care transaction seems like a medevial guild. The supply-demand curves would be radically altered if non-MDS were legally allowed to provide the services they’re capable of, and MDs, unable to compete on price in that market, were left to compete with each other to do the things they spent so many years in school learning to do.

Cliff February 13, 2008 at 10:12 pm

Ziggurat, if you have zero success negotiating with doctors, you are not trying hard enough. You can usually negotiate below insurance rates if you pay cash, because they like cash and like not having to fill out forms and are afraid they will not get paid otherwise. If you are willing to wait until you get a bill, you can negotiate it even lower.

Grant February 14, 2008 at 12:34 pm

M1EK,

Grant brought it up as an example of the supposed ability of the market to provide trust absent any regulatory interference. I pointed out that it’s beginning to fall apart the more heavily it’s being used. I haven’t seen any evidence that more trustworthy competitors have emerged.

There isn’t a single online auction site you trust? There are dozens of them out there. Markets work for individual’s preferences, but there are no guarantees a product or service others use will live up to your standards (nor should there be, I think). There are also escrow services which have arisen in response to fraud. Do you not trust these either? They are not free, but neither is regulation.

How could government intervention help? Auction sites already regulate their users, and they have every incentive to reduce fraud. Could the government do a better job? If they could, what prevents those policy makers from starting a competing auction site which promises significant fraud reduction? There are likely ways in which existing trust metrics can be improved upon, although that doesn’t mean the improvement would be significant enough for users to switch over to a new service.

Obviously the Internet poses unique challenges to dealing with fraud, but I don’t think that is any indication of market failure. Its very hard to even know if reported instance constitutes fraud or not; you can’t just take the word of the buyer or seller on its face value. In most cases it probably just makes sense for eBay to side with highly-trusted power sellers. In all likelihood, users are just not willing to pay for a third party to provide more expensive fraud protection.

I don’t think that would be the case health care markets, where people are more than willing to pay for trusted service. Its hard to say though, since the government runs most health care markets.

M1EK February 15, 2008 at 9:37 am

Grant, I’ve had 4 jobs in the past 12 years, and 8 insurance companies. You’re woefully out of touch.

Dean February 16, 2008 at 11:17 pm

Grant,
Maintaining employer control over health benefits is no longer in the patient’s(ultimate consumer’s) best interest. If one loses their job due to health issues, they also lose their health benefits. COBRA tries to protect those benefits, but the cost is staggering to one dealing with debilatating health and unemployment. M1EK is right, I have had the same employer for 19 years, but 3 different insurers in the last 18 months. The solution lies in bringing simpler economics into the picture. I think most employers would gladly lose the legal advantages of providing benefits if a reliable alternative was available.

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