We have a terribly broken health insurance system that needs fixing. We knew that.
The US is split on whether Obamacare is a good idea. (Personally I'd think a Canadian-style single-payer system would actually be more cost-effective, but that's not what I'm going to advocate here.) The Republicans get a lot of flak about being the "party of no," but had a few good ideas in their own proposals that got drowned out because Obamacare had the initiative and the Republicans didn't act when they had control of both houses.
I am of course not particularly an Obamacare fan. As an alternative, I ask: "Why can't a Gecko sell me health insurance?"
The real problem is everything but the profits. The health insurance industry rakes in about $885 Billion each year, and somehow only 4% of that is profits! Where the heck are the other $850 Billion going?! The entire health care industry is $2.8 trillion, which means that the costs chewed through by health insurance companies are 30% of what you spend.
Remember, this money isn't the money that they pay for your stuff--this is money they're chewing through in their own internal machines. It's essentially waste--all health insurance companies do is move money and paper around. The total Americans pay for car insurance (which includes the payouts for service you get) is $105 Billion.
With 86% of drivers having auto insurance and maybe half of everyone (this is a guess) driving, then the people served by auto insurance are about half the number served by health insurance. Yet we're paying well over 8x as much (and auto insurance agencies make twice the profit margin, at 9%).
So there's clearly far, far less waste in this auto insurance market, and it's very clear why: it's a relatively competitive, free market, and health insurance isn't.
Imagine! Silly ads in the Super Bowl advertising how much money you can save on health insurance by switching to their company!
Imagine a wild scrap for your money by insurance companies, in a market where it's easy to switch, and your costs plummet!
But are Americans willing to move to a free market healthcare system? Absolutely not.
I want to cover the most-heard objections:
1) Insurance companies increase profits only two ways: increasing premiums and lowering coverage. Because they must grow their profits, they will always squeeze the consumer. Sounds good, except it doesn't hold up. Auto insurance companies will universally automatically provide discounts to users without them even asking as they age to maturity or go for a few years without an accident or even just stick around. And no, they're not also reducing your coverage.
So what gives? Well, notion #1 here forgets that auto insurance companies are competing for market share, and that it's very easy to switch. This gives the consumer very powerful leverage, without even having to lift a finger. The mere threat of losing a customer to someone else quoting them lower compels auto insurance companies to give you free, un-asked for rate drops. Pretty cool, huh?
Auto insurance companies also compete on service, introducing new features and giving you dedicated representatives to make sure you're happy (rather than chopping away at those services like airlines--another story of regulation gone awry, for another day). When I told my auto insurance company I'd go get my windshield fixed and ask for reimbursement, they offered to send someone to my house to do it for me, and that I could pick any time window convenient for me. I didn't have to do anything. When my motorcycle got hit, an agent came to my house without me having to be there and assessed--without a fight of any sort--that the cosmetic damage on my motorcycle made it "totaled" and that I'd be recompensed the full value of the bike at purchase. Since I'd forgotten to leave my beat-up jacket/helmet, she accepted photos and declared them similarly totaled. I could have replaced everything, without my premiums going up.
Imagine if health insurance worked like that?
Auto insurance companies do find ways to cut costs, but from other angles. They get much lower prices than individuals from mechanics due to bargaining power and negotiating savvy--they have the data and expertise to call "bullshit." They move between suppliers of different goods to find lower prices. We can see from the lower-cost higher-profit auto insurance company that they simply have less waste within their system. But what they can't do is stiff the consumer, because the consumer will leave to a better company. The free market gives the consumer the win.
2) Health insurance is too complicated for Americans to choose individually, and they'll be taken advantage of by insurers. I agree it's complicated, but we ask Americans to choose between plans in Obamacare or the Massachusetts Health Connector, and there doesn't seem to be an uproar. A little regulation on contract clarity can go a long way to not getting hosed by fine print... but so can competition.
Your auto insurance is fairly complicated, too, but it's presented simply. When consumers are comparing plans, they'll quickly reject the plan that is complicated or has lots of fine print--specifically because when it's too complicated, they don't feel comfortable making the choice. In the free market, health insurance companies would compete on clarity of contract as well, lest they lose potential customers to clearer, more straightforward plans.
3) The poor can't afford it. In the free market, healthcare prices would plummet, meaning many many more people would be able to afford it. Like all things (including housing, clothing, and even food), there are those who are so unfortunate and destitute that they cannot afford health insurance, even in a cheap system. But this doesn't mean the state has, or should, take over the housing, clothing, and food markets!
We can solve this problem in the same way: with welfare. It gives the poor consumer much greater choice, and is ultimately much more cost-effective, as a consumer with money chooses a plan on price, where a consumer with a blank check puts no price pressure on an insurance company.
Closing Thoughts: How Would We Get There?
A free market health insurance system would require a major overhaul, similar to the scope of Obamacare. State regulations would have to be gutted and made much more consistent for companies to be able to compete across state lines and open up the market.
Similarly, paperwork and reporting obligations would have to be slashed--this will not only reduce much of the overhead that insurance companies are legally stuck with, but it will make it at all possible for startup insurance companies to break into the market (today it's impossible because the amount of startup capital and manpower you need to just fulfill those reporting requirements is just ridiculous).
We would absolutely have to abolish most mandatory coverage. Currently most folks pay for coverage they don't need because it's included in their plan (under Obamacare for example, you're obligated to pay coverage for a sex change operation).
Finally (at least on my list, but I'm sure there's much more), we'd need to let the free market set co-pay rates. Everyone hates co-pays and thinks abolishing them is a good idea, but it leads to massive over-consumption. Americans get far more MRIs and all sorts of other expensive procedures and medications than their brethren across the pond, and yet remain quite unhealthy. If we had higher co-pays, we'd think twice about just getting an MRI for our shoulder pain, going to the doctor when we had a cold, or going to the ER (where fewer than 15% of visits even get to admittance).
It would take some time, but you'd see some companies clever enough to "see the light" and compete more rigorously. You'd see more T-Mobile and Southwest Airlines and AirBnB types start to emerge from the soil, disrupting the system in ways we couldn't have previously imagined (Pay your contract break fee? $40 per flight? Private hotel rooms? Madness, in the old world!).
So imagine with me: in a free market health insurance system, who will be trying to help you save money on health insurance? And what would that mean for those 30MM uninsured?
The US is split on whether Obamacare is a good idea. (Personally I'd think a Canadian-style single-payer system would actually be more cost-effective, but that's not what I'm going to advocate here.) The Republicans get a lot of flak about being the "party of no," but had a few good ideas in their own proposals that got drowned out because Obamacare had the initiative and the Republicans didn't act when they had control of both houses.
I am of course not particularly an Obamacare fan. As an alternative, I ask: "Why can't a Gecko sell me health insurance?"
15 minutes can save you 15% or more on Health Insurance!
What I mean is this: why can't health insurance be just like car insurance?
It was, once... but when WWII came around, the US put wage controls on most jobs to control spiraling costs. In order to compensate for this, health insurance became a special, non-taxed benefit, which meant employers would save money by simply providing health insurance themselves rather than paying individuals to buy their own. This was sortof the beginning of the end for any seriously free competition in the system.
Lots of other things happened--hundreds of laws across the states increased the barrier to entry for any small guy or any cross-state competition, and added cost in the form of paperwork and required coverage. Non-insurance related costs from hospitals (whose staff counts exploded by 7x per bed between the inception of Medicare and the 1990's) and pharmaceuticals (who have just silly-long monopolies on their drugs due to ridiculous patent law) add to this, but let's focus on insurance for now.
Right now, it's noncompetitive, period. Insurance is expensive. Interestingly, it's not because of profits--health insurance profits (at 4% of revenue or so) are lower than most big industries:
Remember, this money isn't the money that they pay for your stuff--this is money they're chewing through in their own internal machines. It's essentially waste--all health insurance companies do is move money and paper around. The total Americans pay for car insurance (which includes the payouts for service you get) is $105 Billion.
With 86% of drivers having auto insurance and maybe half of everyone (this is a guess) driving, then the people served by auto insurance are about half the number served by health insurance. Yet we're paying well over 8x as much (and auto insurance agencies make twice the profit margin, at 9%).
So there's clearly far, far less waste in this auto insurance market, and it's very clear why: it's a relatively competitive, free market, and health insurance isn't.
Imagine! Silly ads in the Super Bowl advertising how much money you can save on health insurance by switching to their company!
Imagine a wild scrap for your money by insurance companies, in a market where it's easy to switch, and your costs plummet!
But are Americans willing to move to a free market healthcare system? Absolutely not.
I want to cover the most-heard objections:
1) Insurance companies increase profits only two ways: increasing premiums and lowering coverage. Because they must grow their profits, they will always squeeze the consumer. Sounds good, except it doesn't hold up. Auto insurance companies will universally automatically provide discounts to users without them even asking as they age to maturity or go for a few years without an accident or even just stick around. And no, they're not also reducing your coverage.
So what gives? Well, notion #1 here forgets that auto insurance companies are competing for market share, and that it's very easy to switch. This gives the consumer very powerful leverage, without even having to lift a finger. The mere threat of losing a customer to someone else quoting them lower compels auto insurance companies to give you free, un-asked for rate drops. Pretty cool, huh?
Auto insurance companies also compete on service, introducing new features and giving you dedicated representatives to make sure you're happy (rather than chopping away at those services like airlines--another story of regulation gone awry, for another day). When I told my auto insurance company I'd go get my windshield fixed and ask for reimbursement, they offered to send someone to my house to do it for me, and that I could pick any time window convenient for me. I didn't have to do anything. When my motorcycle got hit, an agent came to my house without me having to be there and assessed--without a fight of any sort--that the cosmetic damage on my motorcycle made it "totaled" and that I'd be recompensed the full value of the bike at purchase. Since I'd forgotten to leave my beat-up jacket/helmet, she accepted photos and declared them similarly totaled. I could have replaced everything, without my premiums going up.
Imagine if health insurance worked like that?
Auto insurance companies do find ways to cut costs, but from other angles. They get much lower prices than individuals from mechanics due to bargaining power and negotiating savvy--they have the data and expertise to call "bullshit." They move between suppliers of different goods to find lower prices. We can see from the lower-cost higher-profit auto insurance company that they simply have less waste within their system. But what they can't do is stiff the consumer, because the consumer will leave to a better company. The free market gives the consumer the win.
2) Health insurance is too complicated for Americans to choose individually, and they'll be taken advantage of by insurers. I agree it's complicated, but we ask Americans to choose between plans in Obamacare or the Massachusetts Health Connector, and there doesn't seem to be an uproar. A little regulation on contract clarity can go a long way to not getting hosed by fine print... but so can competition.
Your auto insurance is fairly complicated, too, but it's presented simply. When consumers are comparing plans, they'll quickly reject the plan that is complicated or has lots of fine print--specifically because when it's too complicated, they don't feel comfortable making the choice. In the free market, health insurance companies would compete on clarity of contract as well, lest they lose potential customers to clearer, more straightforward plans.
3) The poor can't afford it. In the free market, healthcare prices would plummet, meaning many many more people would be able to afford it. Like all things (including housing, clothing, and even food), there are those who are so unfortunate and destitute that they cannot afford health insurance, even in a cheap system. But this doesn't mean the state has, or should, take over the housing, clothing, and food markets!
We can solve this problem in the same way: with welfare. It gives the poor consumer much greater choice, and is ultimately much more cost-effective, as a consumer with money chooses a plan on price, where a consumer with a blank check puts no price pressure on an insurance company.
Closing Thoughts: How Would We Get There?
A free market health insurance system would require a major overhaul, similar to the scope of Obamacare. State regulations would have to be gutted and made much more consistent for companies to be able to compete across state lines and open up the market.
Similarly, paperwork and reporting obligations would have to be slashed--this will not only reduce much of the overhead that insurance companies are legally stuck with, but it will make it at all possible for startup insurance companies to break into the market (today it's impossible because the amount of startup capital and manpower you need to just fulfill those reporting requirements is just ridiculous).
We would absolutely have to abolish most mandatory coverage. Currently most folks pay for coverage they don't need because it's included in their plan (under Obamacare for example, you're obligated to pay coverage for a sex change operation).
Finally (at least on my list, but I'm sure there's much more), we'd need to let the free market set co-pay rates. Everyone hates co-pays and thinks abolishing them is a good idea, but it leads to massive over-consumption. Americans get far more MRIs and all sorts of other expensive procedures and medications than their brethren across the pond, and yet remain quite unhealthy. If we had higher co-pays, we'd think twice about just getting an MRI for our shoulder pain, going to the doctor when we had a cold, or going to the ER (where fewer than 15% of visits even get to admittance).
It would take some time, but you'd see some companies clever enough to "see the light" and compete more rigorously. You'd see more T-Mobile and Southwest Airlines and AirBnB types start to emerge from the soil, disrupting the system in ways we couldn't have previously imagined (Pay your contract break fee? $40 per flight? Private hotel rooms? Madness, in the old world!).
So imagine with me: in a free market health insurance system, who will be trying to help you save money on health insurance? And what would that mean for those 30MM uninsured?
Probably the thing I need to add here as an objection is #4: The sick will get totally hosed as their premiums will be ridiculous.
ReplyDeleteI have no idea how the overhead on insurance in auto vs. health actually plays out, but I think you're over looking a couple of points in your analogy:
ReplyDelete1) auto insurance *only* pays for accidents, not ongoing maintenance. Health "insurance" includes coverage for monthly medications, check ups, etc. Possibly that's an error in what the "insurance" product is, and people should have to pay full price for those things, or get subsidized in some other way, and insurance should only cover the actual short-term catastrophes, but it's a distinction you want to address.
2) auto insurance costs are pretty firmly capped - a totaled car replaced at full value isn't going to be more than $50K most of the time. That's maybe a week of hospital time, not counting later recovery expenses for a person. Health insurers have much more incentive to investigate claims harder, and a much harder time doing the actuarial work to figure out what their exposure is.
Neither of those is necessarily fatal to your argument (I think that 'none of those systems you say at the beginning get better results than us do it this way' is a bigger problem for you), but they're things you should look into and have responses to.
Hey Chope: great comments as always. My thoughts (not-quite-rebuttals):
ReplyDelete1) Auto insurance also pays for liability, which in the world of tort is essentially limitless. It does have caps on tort unless you want to pay the sortof cadillac-platinum version.
That said I do yes want to make sure I'm covering the maintenance part. Some auto insurance _does_ cover maintenance as an incentive to keep your car healthy. But at the end of the day, with predictable maintenance, you're going to end up paying the same amount either way--either directly per visit or indirectly through your insurer (why would they lose money on that)? I also think that doesn't have a big impact on the "health insurance companies are maddeningly wasteful" part of my argument, which is the key one.
2) I think I have to just rebut this one, as auto insurance covers primarily liability, rather than just your own collision.
I do think I need to be clear about separating "healthcare costs" with just "the waste of health insurance companies" and that this post definitely falls very short of covering all the issues in the healthcare world.
I also don't particularly think that "nobody does it the free-market way" is a problem for me--that alone doesn't prove it's a good idea, it proves only that it's not a politically popular idea. One can argue that free-market insurance is politically infeasible, but if it was already feasible, I don't think it'd be worth writing about.
I will say that I think a single-payer system is definitely more cost-effective than the current one--I just also believe that a free-market system has serious potential to be even more effective.
Fogg! Interesting post as always.
ReplyDeleteA couple of things I was thinking about while I was reading that make the transition from the current system to a auto-insurance-like system more challenging (but certainly not impossible - I eat impossible problems for breakfast, as well you know), and I'd love your perspective:
1. Genetic Conditions. With auto insurance, if I'm a crap driver, I'll pay more in insurance (I'm a higher risk). If I want to pay less, I'll work to become a better driver. Essentially, the more expensive customers for the insurance company are paying more to subsidize their risk. If all of the high risk drivers suddenly decide to switch to Geico, it's not going to brick their business model because the new risky drivers (massholes, perhaps?) are essentially going to pay for it themselves.
The same is true for some medical conditions - if I'm unhealthy, I should pay more, and if I want to pay less, I should get healthier. The challenge I see comes from high-risk customers, where the risk is out of their control (e.g. genetic conditions). Do they pay more because they rolled snake eyes in the genetic dice roll at the start of the game? That would solve the problem, but would be wildly unpopular. If not, their risk is being subsidized by everybody - so what happens when a large number of high-risk customers decide to switch to Geico Health (like the auto example above)?
2. Attachment to Doctors. Auto insurance companies can reduce costs by making deals with repair shops. When my car needs fixed, I don't care who does it, as long as they do a good job. If I get tired of my insurance provider, I can switch and not worry that they use a different repair shop. The same cannot be said for health insurance, as people get attached to their doctors. This either means that insurance companies have leverage ("you can't leave cause you'll have to switch doctors [evil cackle]"), or healthcare providers have leverage ("you have to include us, so no discount for you") - either way, consumers lose.
I'm sure there are holes in my logic (an engineer talking economics is always dangerous)...
A very quick reply (and awesome points as usual):
Delete1. Without some sort of specific reform, the more-sick would end up paying more than the less-sick. I'm not entirely sure this is unfair (the larger pay more for food and clothes than the smaller, etc). Certainly in the insanely-costly healthcare system we have it would be prohibitive to have insurance at all for some (if the market slashed costs like I predict, it would mostly be not a problem for most people), but I don't have any specific moral hangups over each person being sortof individually responsible to deal with the cards they were dealt (just like someone born in a particular region may be better-off than another, or etc). We already do this to some extent: younger people have lower monthly insurance rates than older ones.
Further, the principle of subjecting all to the needs of the needy applies in your argument and stretches a whole lot further than healthcare, but to some extent there is a much larger moral debate on our hands.
2) I think there may be an over-stating of the level of attachment here. I think if we're talking about a world where one is more likely to switch doctors but paying half in health insurance, folks would likely be on board. But ultimately, in any market situation, if you are so attached to a single provider, brand, etc, that you're unwilling to change even with large price differences between alternatives, then you're likely under-paying for the perceived value you're receiving, and you've won. In order to drive down cost, there has to be consumer choice, which means--yes--consumer choices. I'm comfortable with this as a whole.