Sunday, April 21, 2013

The Healthcare Cost Curve And Its Consequences

Why is it so difficult to convince some people to buy health insurance? 

Consider the story about the health insurance program in Florida that was designed to provide subsidized health insurance to those that could not otherwise afford it.  It was an abject failure signing up less than 1/3 of those it believed it would help.

The ‘if you build it, they will come’ philosophy doesn’t work in health care,” said Linda Quick, president of the South Florida Hospital and Health Care Association.
Quick and others worry similar problems could bedevil the new online health insurance marketplaces that open for enrollment Oct. 1 under the federal health law.  The marketplaces are the main way the health law expands coverage to as many as 27 million people starting next year. 

Getting sufficient enrollment, especially from the young and healthy, is vital to holding down premium costs in those markets. The concern is that if all the sick people flood the exchanges and younger, healthier ones hang back, health care costs will spike, along with premiums.

Yet one of the biggest reasons for the anemic initial enrollment in the county program that began in 2006, called Vita Health, and similar programs is that many healthy people don't believe they need insurance and are reluctant to spend even nominal amounts to purchase it, say organizers.

“A lot of people who are uninsured and can afford it, don’t buy it because they aren’t sick,” said Paul Gionfriddo, a consultant who formerly led an alliance in Palm Beach County to help the uninsured. 

This chart explains what these people already know. The reality is that most people will have very little in healthcare costs in a given year.  A handful of people will have enormous costs.  A few will have very large costs.  The majority will have almost no costs.  The bottom half of the entire population only consumed 2.9% of all personal health care spending in 2009.  The top half consumed the other 97.1%.

Out of almost $1.3 trillion in personal health care spending, only $36 billion was spent on those below the 50th percentile.  The rest was spent on those above the 50th percentile.

The top 1% of healthcare spenders accounted for over 20% of all spending.

The top 5% accounted for almost half of all spending.

This is why most people will gamble if left to their own devices.  They will simply not part with their money today for the chance that they might get sick tomorrow.  That is basic human nature.  Live for today and think about that other stuff tomorrow.

This is why I have always been a big believer in high-deductible catastrophic health insurance coverage.  Anybody could find themselves facing high medical expenses in a given year but the odds are generally against it.  Most will have very low expenses during a typical year.  This is particularly true when you talk about the non-Medicare-eligible population.

Therefore, instead of living with Obamacare, if the people of the United States believe that providing health care is supportive of the constitutional provision of providing for the "general welfare", they should insist that their elected representatives focus first on providing some type of catastrophic insurance coverage.  These are costs that anybody in our society may have to shoulder and almost no one is able to do so without some type of insurance coverage.  This catastrophic coverage could also be scaled so that the attachment point is higher with someone with more wealth.  For example, maybe it is only $5,000 at a minimum level but $100,000 for someone with higher income or wealth.

Due to the fact that this type of coverage would benefit everyone it should also be financed by a general broad-based tax if we want some type of universal health care coverage.  Everyone should contribute to the cost of the coverage as everyone has the potential to benefit.  In this way it would be much like Social Security and Medicare.  This avoids the problem of people deciding they will just not buy the coverage. This is certain to be a problem with Obamacare just as it is today.
If it was desired to provide coverage for routine medical care it should be done with some type of health savings account amount that would be provided to everyone annually.  For example, $500 per year that could be used for routine care and which could be rolled over to subsequent years if it was not used.  This provides an incentive for people to use their health care money prudently.

Private insurance could be used to fill the gap between the annual amount and the level of catastrophic coverage. 

Of course, Obamacare is not structured anything like this.  It is the opposite of what a well thought out national health care policy should be in almost every respect. It assumes that people can be convinced to voluntarily sign up and pay for health insurance even though the evidence says this is unlikely. It tries to focus coverage on low end services by providing a lot of free stuff like preventive exams, contraception services and the like.  It does not use a broad-based tax but rather taxes select people or groups (medical device manufacturers, high incomes etc) to fund the free stuff.  It does not do anything to try to align incentives and to make sure people have some "skin in the game".  In summary, it will not do much to address the biggest problems in health care---high costs, affordability and access.

Healthcare reform should have been based on the reality of the healthcare cost curve.  The fact that it was not means that Obamacare will be a hugely expensive program that will likely do almost nothing that it was supposed to do.  In fact, it will most likely make things much worse by further driving up costs.

Consider the recent HHS slide show explaining the challenges of marketing Obamacare that was recently reported on by Investors Business Daily.

It turns out that the Democrats and the Obama administration apparently didn't bother to investigate who these uninsured people actually are before they forced through a $1.8 trillion plan to help them.

What they've learned since is that more than half of the 48 million who the government says are uninsured aren't interested in health insurance, which is why they don't bother to buy it in the first place.

The administration now admits that vast numbers of the uninsured will be unlikely to respond to ObamaCare's marketing pitches.

The biggest market segment identified by HHS, in fact, is what it describes as "healthy and young," who make up 48% of the uninsured population.

They have "a low motivation to enroll" because they are in "excellent to very good health" and so "take health for granted."

Plus, as the HHS has apparently just discovered, most of them say that cost is the main reason they don't have coverage.

Then there are the "passive and unengaged," which make up 15% of the uninsured and also have a "low motivation to enroll" because they "live for today." They also cite cost as a key factor.
Of course, there is one group that will respond to the marketing of Obamacare and that is the 29% who "sick, active and worried" about their healthcare coverage.

If only these people sign up, ObamaCare's premiums will spiral out of control, as the pool of insured gets sicker and more expensive.

And that, in turn, will cause still more of the young and healthy to drop insurance and taxpayer subsidy costs to skyrocket.

Democrats may think that a big, slick marketing campaign can change all this. Our guess is that it will be about as effective as Ford's was for the Edsel.

Until we recognize the reality of the health care cost curve, the fact that many people will avoid paying for health insurance on their own, and the failure to align incentives and penalties, we will continue to be frustrated with the costs and consequences of our U.S. health care system.  Instead of improving a bad situation, Obamacare is only going to make a bad situation even worse.  It's in the curve.  If we really want to do something about health care in this country, we need to first consider the curve or we will continue to see bad consequences.


  1. Just came across this post recently (2017). Good points, Scott. My only point of contention is to interpreting "general welfare" in the preamble to the U.S. constitution as a justification for universal insurance because this line of reasoning could be used to justify government intervention in the provision of most basic goods and services that people consume. IMHO as an economist, "general welfare" argument should apply only to the public goods that the free market has unequivocally failed to provide efficiently.

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