Paying for Health Care with House Money

An article in The New York Times on the now-infamous $1,000-a-pill Sovaldi (which I wrote about in The New War on Drugs) made the cogent argument that the problem isn't the price of the drug, but rather in how we finance health care.  Sovaldi is just a vivid example.

Let's try a thought experiment:

You know you're going to have expenses of about $30,000 once every 6 years.  When they hit, the expenses could be as low as $10,000, or as high as $100,000, and they could come as often as every three years or as infrequently as every 10 years, but $30,000 every 6 years is a good estimate.

How do you prepare for these?

Well, if they're medical expenses, of course, chances are you're going to make sure you have health insurance.  You'll probably try to get a plan that gives you the best return, minimizing how much you'll have to pay in premiums and cost-sharing and maximizing how much of your expenses the health insurance pays.

On the other hand, if these are expenses for buying a new car, chances are you'll be paying them yourself.

Many of us regularly buy new cars, and the timing/order of magnitude of those purchases average about as I outlined.  We tend to save up for them, take out car loans, or perhaps consider a used car or a lease.  Certainly we carefully research the makes/models/features to find the car that best fits our needs -- and our budget.  But as far as I'm aware, no one offers insurance that helps spread the cost of those purchases over other people (although we may be getting there!).

I'm a thrifty guy; I drive a Subaru.  But if other people were helping me pay for my cars, I suspect I'd be driving a BMV.  The trouble is that so would they -- and what I paid for this car purchase insurance would skyrocket.

Sounds a lot like what has happened with health insurance.

Why do we think about financing the two kinds of expenses so differently?  Of course, there's a lot more uncertainty with medical expenses, both in terms of timing and cost.  They can easily end up much more than (almost) any car costs.  Then, again, that may be in large part because both consumers and their health care providers tend to treat costs as though they were concerns of some entirely unrelated people, and are only arrived at long after the "purchase" of the care.

Let's try another thought experiment.

There's no such thing as health insurance.  No private insurance, no Medicare, no Medicaid.  And hospitals aren't obligated to accept anyone, even in emergencies.  If you want care, it has to get paid for.

Fortunately you and I live in a progressive community, of about a million people, and we know that sometimes people need help paying for health expenses.  Being a tech-savvy community, we set up an online forum where people can explain their health care needs, and concerned residents can pitch in to help fund them.

Take, for example, a young couple whose baby was born prematurely due to some unforeseen complications.  It's going to cost a million dollars to care for the infant.  I suppose the couple could pay off such a debt over the course of their lifetime, but it would literally mortgage their future: they'd never be able to buy a house, send their kid to college, take vacations.  It's a grim future.

Personally, I'll contribute a dollar towards their expenses.  Heck, I'll contribute $2, recognizing that not all the other residents have an extra dollar, or maybe some of them are just more hardhearted than I am.  I don't think it's fair to wipe the young family out with such a large debt.

As a second example, also a couple with a million dollar baby, this one born with serious congenital defects.  The couple knew, based on their genetic risk factors, that a baby was likely to have defects, yet even paid for fertility treatments to maximize their chances of having a baby.  This couple is more prosperous than the first couple.  They may not have an extra million dollars just sitting around, but they are definitely have some assets and significant ongoing earnings.

In their case, I'm not going to be so quick to contribute my dollar.  Yes, I know -- a sick baby! A million dollar debt! -- but I'm not sure why I should subsidize their choices, especially not when they have some ability to pay themselves.

Or take an example of a woman in her late thirties, with a middle management job, who wants to get her annual gyn exam.  She argues persuasively to the forum that this is a good investment, as it should help detect issues much earlier. She wants help in paying the $100 or $200 cost of the exam.

She may be right about the importance of her exam (although maybe not), but I don't think I'm likely to contribute towards these expenses either.  They seem like budgetable expenses.  If something comes up in the exam and she suddenly needs something expensive like surgery or chemo, sure, let me know.  But otherwise I don't think she needs my money to pay for these expenses -- nor would I expect her to help pay for my preventive services.

On the other hand, if the same request came from, say, a minimum wage worker who is living paycheck to paycheck, yes -- I'd contribute my share.

All of this probably sounds familiar to advocates of health savings accounts/consumer-directed health plans.  They advocate using self-funded, tax-preferred accounts to pay for more routine expenses, with high deductible plans to help pay for larger expenses.

Of course, now these plans provide first dollar coverage for preventive care, due to ACA requirements and employee preferences.  It's also disappointing that the data shows CDHPs have at best only slightly moved the needle on getting people to be more responsible for their health decisions, although they do seem to save money.

Plus, even these plans don't do anything about equity between lower and higher income employees.  Having the CEO pay the same premiums and cost-sharing as lower paid workers fails on almost every level of social equity (not to mention that the tax preference for employer contributions disproportionately benefits higher paid employees).

CDHPs and HSAs may point in the right direction, but aren't in themselves "the" answer.

Frankly, health insurance is an ineffective mechanism for wealth transfers, and instead of using more effective mechanisms we end up with healthy lower-income people subsidizing sicker wealthier people via their health insurance.  It works the other way too, of course, but that's not the problem.

The point of all the preceding, of course, is that insurance is about spreading costs across some pool of people, but we don't think very carefully about where the money comes from or how we're distributing those costs.  The pool might be the employees of a specific company, or of a class of employers (e.g., by size or industry), or it might be based on individuals in a geographic area.  Whomever the pool includes, if you are a low cost person, as most people are, then you pay in more than you get back, in any given year and probably over the course of a lifetime, but if you are a high cost person then other people subsidize your expenses.

The question is, what kind of subsidy is reasonable to expect?

I fear that most people fail to recognize the subsidies inherent in health insurance, and only seek to maximize their own payback, as if the money was coming out of thin air instead of from other people.  They may think the insurance company has big pots of money that just happen to be there, or that the government will simply come up with the money, but that big pot of money has to come from other covered people and the government gets its money from us (or from loans from the Chinese government, but that's a whole different discussion).

This attitude that we're using house money - other people's money -- for our health care goes a long way to explaining why health care prices are so high, and why there is so much unnecessary or even unwanted care.

We should be thinking of health care expenses like we'd have to in my example of the online forum.  I.e., specifically when do I want my dollars to go to pay for what other expenses from which people?  I'd like to believe that most of us would choose to do right by poor people, but our experience with Medicaid hasn't suggested that to be the case.  I'd also like to believe that most of us would want to pitch in when catastrophic expenses happen to someone, but, again, our track record on this isn't too great either.  

We just pass off responsibility to these mythical "other people."

ACA -- ObamaCare to its critics -- took a lot of flak for being more about insurance reform than health reform, but even the insurance reform took on mostly only lower hanging fruit.  What we need are new mechanisms to encourage healthy behavior and more prudent purchasing of health care services, with more equitable financing for costs.

I've touched some suggestions in previous posts (e.g., I'll Take My Care To Go or 20th Century Health Plans in a 21st Century).  I'd love to hear some other ideas.