Insurance, cash, and moral hazard

November 26, 2013 at 10:13 AM Leave a comment

I was speaking at a conference, and someone raised a question from the audience.  “Health care reform seems to be driven from the top down.  What can you say about driving change from the bottom up?  Specifically, why not have people buy things with their own money, and give them an incentive to bargain with providers instead of just accepting prices set by insurance companies?”  I said I believed in giving consumers incentives to shop wisely, like reference pricing and coinsurance rather than copays.  “But I don’t think any of us want to give up our own insurance as a practical matter,” I said.


This gentleman came up afterwards, and followed up.  He was serious about this.  “You dodged the question, by saying no one wants to give up his own insurance.  If we just had people shopping for their own health care services instead of through insurance, the prices would come down a lot.  Look at Lasik eye surgery.  Even poor people could buy some things for cash once prices became competitive again.”


I told him that I was actually for people spending their own money more than they do right now, that moral hazard (the lack of price sensitivity when others pay for a service you receive) is real and should be mitigated as much as we can without bankrupting people.  But I doubted that a purely cash economy in health care would work.


It dawned on me after that conversation that what he was opposed to was insurance itself.  Interestingly he advocated catastrophic insurance for everyone, including the poor, and was for having government pay for the poor’s coverage.  Where we differed, I think, was where to draw the lines.  How poor do you need to be to get government subsidies for your insurance?  What constitutes “catastrophic” thresholds for insurance to kick in?  Should policy limits be different for rich people vs. middle class, given that it takes a lot less for the latter to spend down resources?


I actually think that he is in theory correct.  Much of the lack of selectivity we have in choosing medical interventions is that the cost of them to us personally is often very close to zero at the point of purchase.  The differences between treatment options is also often literally zero; one drug and another cost us the same at the pharmacy, even though the list price of one can be half that of another.  Indeed, in this setting, we often maximize our perceived value by getting the most expensive option, since we perceive we are getting more for our money, or more accurately, more for someone else’s money.  When paying zero or $10, who wouldn’t want to get $100 of drugs vs. $50 of drugs?  Surely there’s something about the $100 drug that justifies its cost to the insurer, and therefore is getting us more value for our same copay? 


Whether you subscribe to the libertarian view or not, though, the tricky part is where you draw the lines.  Notice that he wasn’t for doing away with insurance altogether, just doing away with insurance for things you could afford to buy yourself.  He still accepted the thought of catastrophic insurance, in which moral hazard would still obliterate any price sensitivity.  


This line of thought is influencing plan design and cost containment efforts more and more.  Philosophically it is appealing because it is in line with the values of individual choice and individual responsibility (both very American).


Nonetheless, it is a hard sell because we process risk emotionally, not intellectually.  For example, psychological studies show that we fear loss to a much greater degree than we desire gain.  Therefore, things (like insurance) that mitigate risk are valuable to us, perhaps beyond rationality.  “De-insurancing”, therefore, goes against our primitive brain, and is likely to be resisted viscerally by most, despite its intellectual appeal.

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