Milton Friedman on Health Insurance

I’ve already disagreed with Don Boudreaux about third party payment for health care. I may as well complete my heresy and disagree with Milton Friedman.

IMO, Friedman’s history of group health insurance is too simple. Further, in comparing medical care shopping with gasoline and food purchases, he ignores that shopping for medical care is at least an order of magnitude more complex than shopping for consumer staple goods.

Friedman is correct that World War II wage controls and the tax shield demanded by labor provided incentive for employer-based group health insurance. But enrollment in group health insurance plans – third party payment plans – grew rapidly in the decade prior to World War II controls. Clearly the value of third party payment predates government interference in the market.

The most significant benefit of group health insurance is risk sharing. But that is not the only benefit. Insurors use superior buying power to negotiate lower prices from health care providers on behalf of millions of consumers. Insurors help those consumers make spending decisions by evaluating the effectiveness of medical treatments. Though most who comment here will probably disagree, I do not believe consumers have the knowledge to evaluate and negotiate today’s complex medical treatments.

Though most who comment here will probably disagree, I do not believe consumers have the knowledge to evaluate and negotiate today’s complex medical treatments.

That's why God made second opinions.

John Dewey, I still have to disagree that shopping for medical care is more complex than shopping for a house or a car or technology. I don't know anything at all about cars and I know little about building a house and I knew nothing about computers when I built my first trading desk (from scratch). I relied on resources to figure it out. I asked people in the field. I hired professionals. And, as they say, if I can do it, anyone can. Thus, I think that purchasing medical care is exactly like purchasing any other good. If the only professional you choose to hire is the insurance company, so be it. But, not everyone so values the insurance company's ability to evaluate treatments.

And let's face it – medical science is not that precise because it is, after all, practiced on humans. One doctor will treat a disease more aggressively than another and that level of treatment may or may not be appropriate for the patient. Patients respond differently to different treatments. Medicine is pretty squishy in the end and no insurance company can come close to taking the place of a doctor evaluating treatment options with his patient and the patient's willingness to do what it takes to inform himself on an issue so important.

Group health insurance happens to be where I made my living for 30 years. A few observations form my experience. Group plans were pretty modest in the early days, hence they were know as Accident and Sickness plans. Early BX/BS plans covered hospital and surgeon's bills, no Rx drugs. Then came “major medical” superimposed over the basic plans, usually with a $100 dollar deductible and then 80% to some low maximum like 100-250K. There were few if any first dollar benefits. I submit that consumers were more prudent in those days since a good part of their care was paid for with their own money.
After Medicare and the Blues moving to UCR reimbursement there was less cost sharing, but it was the advent of managed care with its $5 office copays and other first dollar benefits that launched the entitlement era. Yes, there is no reason for healthcare to be linked to employment, but even with the link, more cost sharing would hold down healthcare inflation. Add taxation of employer premium payments as compensation and the system becomes even more rationale. All IMO, of course.

>>Further, in comparing medical care shopping with gasoline and food purchases, he ignores that shopping for medical care is at least an order of magnitude more complex than shopping for consumer staple goods.
…I do not believe consumers have the knowledge to evaluate and negotiate today’s complex medical treatments.<<

I've looked into purchaasing an individual health insurance plan. I've also made choices between employee offered plans. That's fairly complex and yet not so much so that it isn't done all the time.

Count me as disagreeing but I can imagine easily choosing to have one procedure done or not. And I can easily imagine making just one choice amongst mulitple procedures; it does seem complicated at all. Plus, some enterprising business would capitalize on providing information to would be choice makers in much the same way Consumer Reports does for potential purchasers of other goods and services.

“And, as they say, if I can do it, anyone can. “

I could not disagree more. I'm not suggesting that patients should be denied the right to make medical decisions. I'm only arguing that there is nothing wrong with those who rely on insurance companies to assist them.

” Medicine is pretty squishy in the end and no insurance company can come close to taking the place of a doctor evaluating treatment options with his patient and the patient's willingness to do what it takes to inform himself on an issue so important.”

And no one is suggesting that they should. But the benefits provided by insurance companies in exchange for consumer's premiums should not be infinte. Insurance companies are exercising cost control on behalf of all their customers when they deny payment for certain treatment.

“clearly costs have been driven up as more and more people have obtained insurance.”

Clearly costs have been driven up as:

- medical technology has become more complex and more costly;
- medical care providers have successfully lobbied state government to issue more mandates for their medical specialties;
- demand for medical treatment by seniors has skyrocketed due to demographics and Medicare;
- juries have stupidly awarded outrageous awards in malpractice and other suits;
- tax shields on employer-based insurance benefits led employee groups to demand insurance rather than cash benefits.

Sorry, vidyohs, but I do not see third party payment as being a significant cause for the rise in medical care costs. I still see huge economic benefits to risk sharing and group buying power.

So what are you proposing? that consumers not be allowed to contract with health insurors for prepaid medical care? that groups of consumers not be allowed to do so?

If you truly wish free markets, advocate removal of tax shields. Advocate interstate insurance purchases. But do not advocate removal of third party payment, which is a choice employee groups have made.

Not sure where to insert this comment in the discussion above, so I'll just put it here. The information that concerns me about a medical procedure is just how much it will cost me. Below a certain figure, I can handle it. Above a certain figure I would like to have a policy in place. The insurance companies and the providers can work out the details amongst themselves. If I can't pay it, I'll just declare bankruptcy.

I do believe the consequences of poor medical treatment purchase decisions are far greater than the consequences of poor automobile purchase decisions.

Not if you were the proud owner of a Ford Pinto in the 1970's!!! And eating the wrong kinds of food can have some very nasty effects on your health.

I've really never noticed that my insurance provider ever plays a role in deciding what my medical treatment should be. All it decides is what it's willing to pay for. All discussions of treatment options are always with my doctor and I've usually chosen an option not paid for by the insurance company. I feel very well informed without my insurance company weighing in – if that should ever happen. Frankly, John Dewey, I just don't see how insurance companies are providing an advisory service. They reduce the volatility of medical expenditures over your lifetime and that's valuable. So, I agree that insurance companies are providing a valuable service. However, as hard as I try, I can't see how they're giving any kind of treatment purchase advice – valuable or not.

“he ignores that shopping for medical care is at least an order of magnitude more complex than shopping for consumer staple goods.”

Could that be because of third party payments? Few shop when they're not paying, so there's little to no need for transparency on prices and we take big assumptions on quality too.

“I do believe the consequences of poor medical treatment purchase decisions are far greater than the consequences of poor automobile purchase decisions.”

You're severely under appreciating the value the marketplace has driven into automobiles which makes it possible for you to even make that statement.

The consequences of purchasing a poor automobile are severe since vehicles often carry multiple people at high speeds while filled with toxic and flammable materials.

Yet, the marketplace has emerged to deliver safe and reliable autos of a standard that makes this relatively safe bet, even for the poorest quality cars on the road. And, nobody really has to know much about cars to get a good one.

Now, sure you can say there are safety standards and testing agencies that have contributed. But, overall, the reputation of a manufacturer is its most valuable asset and it builds on that asset by making the very dangerous act of propelling human bodies at 60 – 80 mph safe enough.

The point is being missed here. Medicine has long been a highly paternalistic profession, much to it's discredit. Doctors don't ordinarily spend time educating patients on their problems or the care thereof. Information on costs and outcomes is proprietary information held by insurance companies for their financial benefit, in negotiating contracts with doctors and hospitals. That information should be made available to patients, then they could become much more informed consumers. Unfortunately, patients are treated like chattel, since they are simply the grist for the mill in healthcare dollars. Since the patient isn't paying the bill directly, the allegiance of the physician, despite how the profession protests, does not hold the patient benefit in highest regard. It's hard to serve two or more masters, and since the patient isn't paying, the doctor has limited interest in doing what's in the best interest of the patient, but rather in doing what it takes to get the patient to acquiesce to treatment and followup, for the physician's financial benefit. Of course the doctor has to keep the patient happy, as the patient cannot be coerced to accept any treatment. But still, the patient is a cog in the machine, not necessarily the point of the whole process.
A far better system would be for the patient to retain ownership of premiums paid by him or her, or on his or her behalf by an employer, benefactor, or public entity. The insurance company would become a bank, and a true facilitator of information for the patient/depositor. The (private) insurance company could assist the patient/depositor to vet the information they hold on costs and outcomes for different providers available to the patient, who could then consider the options. The interests of the insurance company would align with those of the patient more completely, ie, to get the best care at the most reasonable cost. Currently, insurance companies deny care, mostly, on usually specious grounds, and while they may contract for better prices to benefit their policy holders, they wind up taking care decisions out of the hands of doctors and patients. The government does this in a far more draconian way, with no recourse for patients and doctors. The whole enterprise becomes adversarial, inefficient, corrupt, and often damaging to patients, and virtually never takes individual circumstances for individual patients into account. A first-party payor system will always be superior to a third party payor system, with better care, better service, lower costs, more efficiency, less waste, less fraud, more innovation. Compare the rapid improvement in smart phones with the intense competition of a free market for a personal service, and the trend to improved costs, etc. Why doesn't medicine work this way? Because of a third party, bureaucratic, cumbersome, regulated, government controlled system that deprives individuals of the level of participation in their healthcare that would dramatically improve the whole system.

There's no risk sharing involved when health insurance pays for routine doctor visits. That's pre-payment and cost-sharing.

To break out the old analogy, imagine going to dinner with a large group of people you don't know very well. You'll order differently, and more expensively, if everyone agrees in advance to split the check versus if everyone pays his own way. That's the damage of third-party payment in a nutshell.

I think we agree. I'm all for consumers' freedom to choose. Having said that, I also feel employers should be allowed to require group insurance enrollment for every employee as a condition of employment. That may mean you receive a form of compensation – pregnancy coverage and alcoholism treatment – you would not otherwise choose. The important distinction is that such coverage is part of a work arrangement you agreed to – not a government mandate.

Then advocate removal of government interference. If your proposed system is truly better, the free market will ensure it is adopted.

“Currently, insurance companies deny care, mostly, on usually specious grounds”

That's opinion, not fact. Surveys have shown that most Americans who are enrolled in group health insurance plans are satisfied with their coverage.

The marketplace has likewise emerged to deliver safe and reliable hospitals, safe and reliable medical practitioners. That has nothing to do with the complexity and array of medical decisions faced by consumers. Furthermore, there are only a couple dozen automobile manufacturers, so it is not a difficult task to assemble quality data about their products. There are millions of medical practitioners in the U.S.

I don't have data, but my guess is that routine doctor visits make up a very small portion of insured medical care costs.

I just read that IBM last month removed the employee copay for routine primary care physician visits. They actively promote such medical care because they believe it ensures more serious problems are uncovered earlier. IBM believes that routine visits actually reduce the overall cost of providing health insurance coverage.

seth: “That's the same logic that was used in the mortgage business. They can't figure it out, but let's loan them money and regulate it.”

You will find nothing in my comments about regulating health insurance. That is not part of the logic I offerred.

I'm not objecting to those who would choose to not take advantage of group health insurance coverage. I'm not advocating government mandated coverage.

If third party payment and employment based insurance were less effective and less efficient, a free market would eliminate such arrangements. However, as I pointed out earlier, employer based group health insurance was growing in the decade before government interference was introduced in 1943.

Removal of government interference is exactly what I advocate. I also advocate beneficiary ownership of premium dollars that become medical savings accounts, e.g., a universal FIRST PARTY PAYOR SYSTEM, rather than our current near-universal third party payor system (public and private). I advocate empowering the patient with dollars and information. Unfortunately, my statement is not opinion. It is my daily reality. I am a physician (endocrinologist) who spends a good share of my time appealing denials of coverage for such things as Januvia, Byetta, Insulin pumps, Continuous Glucose monitoring systems for home use, even such generics as Metformin and glyburide, with completely inappropriate restrictions by managed care and government formularies. Both private insurance companies and Medicare intermediaries routinely lie to patients about their coverage. I have had bitter conversations with medical directors over inappropriate denials of care, and have even gotten medical directors fired over their denial decisions, and some have had their medical licensure in jeopardy. Unfortunately, private insurers routinely and with imunity violate state laws, inasmuch as patients rarely challenge the decisions or file complaints with State Insurance commissions. The insurers stack the deck on indications for treatment (once an insurance company denied a thyroidectomy for a patient with a massive goiter that was growing, and gave as the only criteria for thyroidectomy acute asphyxiation. That was true in the 19th century, in the pre-anesthesia and pre-antibiotic era, but not for 20th Century or 21st century medicine. The famous Millman and Roberts criteria were put together on the dime of the private insurance industry and stacked to their benefit. I would much prefer to discuss treatment options with the patient, provide the information to the patient, and let the patient decide what course he or she prefers, with as much information as possible. I don't like insurance companies offering coverage and yet denying coverage when care is needed. However, a government system is worse because one has no recourse whatsoever. The committee under medicare that issues HCPCS codes, required for reimbursement, for 5 years has steadfastly refused to provide a code for Continous Glucose Monitors for home use. I had a patient die this month (a Medicare patient)who desparately needed one of these, who had had brittle insulin dependent diabetes for 40 years, and had hypoglycemic unawareness, with frequent severe hypoglycemic episodes with coma. It was only a matter of time before he had a severe episode with coma and was not discovered and died. Indeed, that just happened, with irreversible coma. His family adhered to his wishes and turned off life support after a week in the ICU. This was a needless death. I spent years trying to communicate with Medicare (the committee would brook no input whatsoever), wrote letters to the media, including the WSJ (Varadarajan was the editor at the time) who refused to publish my letters, same with local papers, even the advisor to the committee, Alan Garber of Stanford University, agreed that the devices should be covered, but could do nothing to persuade the committee. To this day, they are not covered.
Surveys are what they are, and Americans are much more satisfied with their coverage than they would be with a government system, which I applaud. Nevertheless, I am handcuffed on a daily basis in providing optimal care to my patients, by insurance companies, the government. The circumstances would be different in that patients would have a choice if they controlled the resources. I could better live with a patient refusing care than an insurance company or government refusing to cover needed care. In fact, when patients have resources and information, they often make far better decisions that insurers, certainly than the government, and often better than physicians. Power to the Patients!!!!