In this post, I asked you to respond to this question I received from a reader, Tom:
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.
Your answers were wonderful. Thoughtful, interesting, and perceptive. But no one really got to what I think is the key to the matter. (Though AdamGurri hinted at it at one point and I stopped reading after about 150 comments so I may have missed someone else’s insight.)
Tom’s question is interesting. But it’s the wrong question. And that Tom asks it and that everyone answered it is fascinating in and of itself.
It’s the wrong question because when you’re 65 the problem isn’t getting insurance. It’s paying for health care. But the public debate has become so obsessed with health care insurance we’ve forgotten what the real issues are.
When you turn 65, the high cost of insurance isn’t the problem. The problem is that you’re old. A lot more things are going to go wrong. Yes insurance is going to be costly. But that’s because so many things are more likely to break in your body. The high cost of insurance at that point is just a result of the problem. It’s not the problem itself.
It’s like saying that if you drive your car in a demolition derby, it’s hard to get coverage for collision damage. No kidding.
What’s funny (well not funny, really) is that we’ve totally forgotten the point of insurance and why it’s economically sensible. Insurance is designed for the unpredicatable. There’s nothing unpredictable about bad health when you get old.
By the way, most of you in the early comments did make this point clearly and talked wisely about why it’s important to save when you’re young. But most of those comments if I read them correctly, were trying to explain why you’d still be able to afford insurance rather than health care per se.
Our current world of health “insurance” is absurd. It should not cover pregnancy which is a largely predictable and planned event. It should not cover an annual checkup. This is not insurance. This is just a subsidy.
What we have come to mean by health insurance is “cheap medical care.” They are not the same thing.
This confusion is most obvious when people talk about the uninsured as if the uninsured don’t get health care. Of course they do. They just pay more for it (or they get it for free under certain circumstances.)
Most importantly, the cost of health care, whether you are uninsured or over 65 has been increased and distorted by the public subsidies to insurance that artificially lower the out of pocket costs for those who are insured either via employer-based coverage or Medicare and Medicaid. This is what makes being uninsured in modern America, no matter your age, so unpleasant. It’s that what you pay when you do need health care is artificially high.
Let me ask Tom’s question in a different context.
Once I get married and have kids, how am I going to be able to get insurance coverage that pays for my kids’ college tuition? Who’s going to insure me against that?
The answer is no one. But people still manage to send their kids to college even though it’s really expensive. Hard to believe, but it would be a lot more expensive if people had subsidized insurance to cover the cost of college. And it would be a lot less expensive if there the current subsidies to education were eliminated.
This is not to say there aren’t challenging issues about how to allocate your income when you’re 80 years old and trying to decide on medical treatment. But the health insurance issue is a red herring.
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livingjp: you have correctly identified Tom's question. It seems you agree with the underlying implications of his question (society owes Tom the health care he requires because he requires it). He wants an Austrian economic theoretical answer, not one based on libertarian moral theory.
I would argue that libertarian theory is political theory, not moral theory. The difference is this: I personally feel morally obligated to give a helping hand to one in need. That would be moral theory. But when I assert that the police power of the state should be used to force everyone to practice this moral theory I am deviating from moral theory and wandering into the political realm.
Does Austrian economic theory advocate such a political assertion? Or does it begin with the libertarian moral theory designed for the individual and advance from there? Tom was unfair to expect us to refrain from moral theory simply because he fears growing old.
You're right. No doubt the subsidy portion has a significant effect, but it is probably smaller than the prepay portion–especially as baby boomers go on Medicare.
I don't disagree with you. We should all be able to buy the plan we want rather than the plan that's mandated. Not only do I agree with you about government health insurance, but I think it will actually make things worse.
However, I think neither Russ nor John Dewey mentioned mandates.
I can't speak to SKorea, but Europe's systems are no more sustainable than the US's–arguable less so when you account for the rapid decline in quality of health care services in those countries.
It is an interesting time we are in that self-proclaimed “progressives” extol the efficiencies of monopoly. Of course, when insulated from competition, monopolies are, in practice, highly inefficient. But you are not alone in your profound economic ignorance, or economic denial, whichever it is that leads you to utter such nonsense.
“If the buyer and seller of health insurance (prepaid health care) wish to enter into a contract which includes prepayment for those events, what is wrong with that?”
Nobody is arguing that any voluntary agreement is wrong:
For your pre-retirement health care consumption, the Federal government encourages it through large tax breaks.
For your post-retirement health care consumption, the Federal government simply mandates it.
Without those interventions, it is unlikely third-party financing would be the most cost-effective arrangement for consumers.
My question is not about the part of Professor Roberts post that addresses health insurance subsidies. I am referring to the part where Professor Roberts argues against insuring against costs of pregnancy:
Professor Roberts: “Our current world of health “insurance” is absurd. It should not cover pregnancy which is a largely predictable and planned event.”
I do not understand what is absurd about insuring against the uncertain timing and cost of childbirth and neonatal care.
If Professor Roberts had said:
“Our current world of health “insurance” is absurd. Government should not mandate that pregnancy costs be insured”
or
“Our current world of health “insurance” is absurd. Government should not subsidize insurance of pregnancy costs.
then I could understand his argument. But that's not what Professor Roberts argued in that paragraph, and so that's why I'm asking the question.
I agree with the portion of Professor Roberts' post about public subsidies distorting the cost of health care.
vikingvista: “Without those interventions, it is unlikely third-party financing would be the most cost-effective arrangement for consumers.”
Perhaps third-party financing would not be the most cost-effective for the total population of consumers. But group buying power would still enable employers to negotiate a better deal for their employees than most of those employees could obtain on their own, IMO.
There’s nothing unpredictable about bad health when you get old.
That's not true. Death is predictable, but poor health — particularly poor health that requires expensive care — is not (after all, a substantial number of people drop dead from heart attacks and stroke or don't have terminal cancers diagnosed until there's nothing to do for them but hospice). I would imagine that the variation in lifetime medical costs for 65-year-olds is quite large and that the costs in any given year are unpredictable, making insurance appropriate for the situation.
Life insurance (Term Life) is a poker game. You are betting that you'll die before your policy is up and the insurance company is betting that you won't. Most of the time, the insurance company is right, and you lose. On the occasions that they are NOT right, they pay up with the money they made on their other clients. What's left over is their profit.
Whole Life is much more expensive, and it's part poker game, mostly bank account. They determine how old you are and how much a year you should have to “bet” that you'll die for a certain payout. Every year that you live, a certain amount of your premiums go into your bank. If you die before your account is paid up, they lose. If you live long enough, you get to draw out your “deposit”, just without interest (or at least without as much as you could have earned if you'd not been “playing poker” with it).
Every ask yourself, if that is true, why group buying power isn't the norm for most purchases that consumers make?
The oft-stated claim that the US health care “system” is unsustainable calls for a defense. How is it unsustainable? If we spend too much, who is in charge of determining how much is too much?
I'm not sure I agree with your description of the role of insurance. This is the point, I believe, of Roberts' comment: we purchase insurance to spread risk. This is not the same as smoothing spending. By limiting the function of health insurance to the spreading of risk, we could reduce the cost significantly compared to the current regulatory regime which mandates so much coverage for buyer-controlled events like childbirth. It stands to reason that catastrophic coverage could include complications of childbirth.
Few items we buy are costly enough that group discounts would overcome the overhead group buying entails. But we do take advantage of group buying power for some products. Credit unions negotiate deals with auto dealers on behalf of their members. Employers, professional groups, and social groups negotiate deals with hotels and restaurants. AARP negotiates deals for its members.
I disagree with your limited definition of insurance. But it really doesn't matter whether you call it insurance or prepaid health care or whatever. Insurors do transform the uncertain timing and uncertain cost of health expenditures into a certain, regular payment. We know there is an economic value in doing that, because health insurance was growing even before Congress granted tax exempt status to this benefit.
I agree that government mandates and restrictions on interstate purchase have made health insurance much more costly than it should be. Favorable government tax treatment of employer provided insurance has increased demand for health expenditure insurance. But the solution is not to eliminate health insurance. The solution is to eliminate government interference. The free market will then determine what features health insurance should have. IMO, employer-based health insurance would remain the norm. but who can know?
<But the solution is not to eliminate health insurance.>
I don't believe I suggested any such thing.
<The solution is to eliminate government interference. The free market will then determine what features health insurance should have.>
I agree 100% I think employer-provided insurance would gradually go the way of the dinosaur, because of the issue of consumers' preferences and needs varying considerably, and because of the need for portability.
Housing is a major expense. We could get together on that too.
Here's the thing: it is highly unlikely that all, say, 500 employees at some firm would agree to coverage provided by the same insurer and with essentially the same coverage, and that they could not maintain if they left the company, were it not for some outside enticement, such as a near-50% government subsidy.
At some stage the actuaries would price the coverage such that it would no longer be economical for the consumer. The market would sort out what age that might be, but I consider it unlikely it would be much older than 65.
Jim, risk and spending are the same thing.
The risk you're hedging against is a large expenditure to treat a health outcome.
As John Dewey pointed out, a woman may know that she wants to become pregnant, but she cannot know when that will happen, if that will happen and how much it will cost if it should happen. She can smooth the cost of a potential pregnancy by either saving a lot of money before she becomes pregnant to prepare for a potentially large expense (self insuring) or an insurance company can translate that risk and the likely cost associated with it into series of premiums.
Nobody should be mandated to pay for pregnancy insurance if they don't want it. I'm just saying that it's perfectly reasonable for an insurance company to price and offer such insurance to those who wish to buy it.
jimpierq: “There is absolutely no way the price (because of the group purchase) is better for close to half of those employees if the subsidy is not calculated in.”
How do you figure? According to McKinsey and Co survey, the average cost for group health insurance for a family of four is about $13,000 annually. The majority of households have a marginal tax rate of 15%. So the tax subsidy for employer-based health insurance is less than $2,000 for a majority of families.
If state insurance mandates were removed, group health insurance would be much lower than $13,000. The tax subsidy would be much less than $2,000 annually.
How can you know this? We've had medicare for senior citizens for 40 years. What is the basis for your claim that those over 65 would be priced out of health insurance? Freed from government interference, it's possible that markets would offer affordable insurance products which older consumers would desire.
Medicare and social security are almost the same thing. I once calculated that if an average person saved instead of payed into medicare they would would accumulate an amount in the mid six figures by the time they are 65. What they could do at this point it take out a health insurance plan that covers say $2,000,000 worth of care and has a $500,000 lifetime deductible. Most people would not use the insurance and therefore it would BE insurance. We need health care IRAs. We can do this using the same techniques Chile used to privatize social security.
Interesting you say that. I belong to a very large and well-funded professional organization. They are constantly sending me adds for great insurance products only available to members. In each case, for each type of insurance, the rates I found for myself were MUCH lower.
And why would you think otherwise? Most economic mistakes come from not accounting for all of the costs. In this case, you are not counting the cost of a one-size fits all program. My driving history, health history, life style–the things I'm willing to do without, the things I really want covered–make me UNIQUE. By entering a marketplace full of a wide variety of options, it is not unexpected that I would find something better, even cheaper, than what a group can offer.
First, $2000 is a lot of money, particularly for someone in a 15% bracket. It is enough money to affect behavior even for people in much higher brackets.
Second, a lot of people are in higher brackets.
Third, your rebuttal doesn't even make sense. What you should be comparing is the cost of group insurance + tax break, to the cost of individual insurance. And even then, you have to be aware of the downward pressure in everyone's prices as more people choose the latter.
Some states do have a sort of insurance for college tuition, Michigan has a program where you can pay your children tuition at the the current rate regardless of their age. So you can pay your newborn tuition today at today rate.
Why would you think pregnancy shouldn't be covered? What is more important than the beginning of a life? Do you think that any doctor would suggest costly tests for development and disease if it wasn't going to be covered?
Mike-http://www.onedollarglobeinsurance.com/
“risk and spending are the same thing” ???
I need some clarification on that.
As I define it, risk involves uncertainty: the event may occur in the future, it may not. I could go my whole life and never get cancer, but the entire time insure myself against the risk that it does happen. The routine expenses of pregnancy, I suppose, can be considered risk to the extend the woman doesn't know for sure she will get pregnant, or when it will happen. But it is a reach to put that in the same category as illnesses that the insured is unlikely to contract over their lifetime.
Did I say 'know'?
That's great! Have you by any chance calculated the same thing for Soc Sec? I think if people knew how much wealth they could accumulate by saving instead of paying in to Soc Sec, they would be much more willing to hear about reform ideas.
I think it is a quite valid argument that coverage for the routine elements of childbirth is not actually insurance but savings. (Complications, neonatal intensive care, etc, are in fact insurable risks.) In almost all cases, having a third party do one's savings (whole life ins, etc) is more expensive than doing it yourself. Also, if a couple is paying childbirth expenses out of pocket (they have planned for close to 9 months, or more, so they will have saved), they will find out what the charges are and economize as they see fit, or not.
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