Thursday, September 29, 2011

How Is Health Insurance Like High-End Fashions For Women? On The Costs of Health Insurance.

Answer: It is getting ever more expensive and skimpier and skimpier.

You probably read about what has happened in the last year:
Premiums for employer-sponsored health insurance continued to escalate this year even as the share of workers getting less generous coverage reached a new high, according to survey data released Tuesday.
In 2011, for the first time, half of workers at small firms with individual policies faced annual deductibles of $1,000 or more. In 2006, that figure was 16 percent. At large firms, the share has grown from 6 percent to 22 percent over the same five years.
At the same time, the survey by the Kaiser Family Foundation found that premiums for family plans rose 9 percent in 2011, after several years of slower annual growth. A similar recent survey by the consulting firm Mercer found that yearly premium increases have been hovering around the 6 percent mark and will grow by slightly less in 2012.
Both sources point to the same fundamental long-term shift: Faced with continually climbing premiums, a record share of employers have moved to plans that require workers to pay more out of pocket.
“Without any real national discussion or debate, there’s a quiet revolution going on in what we call health insurance in this country,” said Drew Altman, president of the Kaiser foundation, which conducted the annual survey of employers in conjunction with the Health Research & Educational Trust. “Health insurance is becoming less and less comprehensive. . . . And we expect that trend to continue.”
Employers seem to be turning to cost-shifting as an alternative to dropping coverage outright. During the first half of the decade, the share of companies offering health insurance shrank from 68 percent to 60 percent, and the figure for very small firms dropped from 58 percent to 48 percent. But since about 2005 that decline has leveled off.
Premiums paid directly by workers have galloped ahead of wage increases and inflation — rising 131 percent between 2001 and 2011 for family plans. Employer costs for those plans have gone up 113 percent over the same period, as some have asked their workers to take on a higher proportion of premium costs.
Still, employers are primarily coping with rising health-care expenses by moving their workers into plans with higher out-of-pocket costs such as deductibles, co-pays and co-insurance.

You, the worker, pay more and get less.

Some of these changes can be explained by health insurers trying to get the most out of the current system before the planned changes set in. But the rises mentioned in the quote (a 131% increase in premiums over a ten-year period!) are not unique to the recent past. Health care has not become more expensive simply because everything is getting more expensive; it has been the engine that pulls up the general cost of living. And that is a very important point.

I could write a book, all about why the costs of health care rise so rapidly in the United States. It's easy to say a few basic things about those reasons, much harder to discuss the whole mess in a few sentences.

This is because we can look at the problem from many different angles: Where, when, who and why. Just to begin with, mind you. The overall problem is like a large number of necklaces, all intertwined and knotted. When you try to pull one out, the others may get more knotted. You have to tease them apart, slowly and with care.

But to begin with, let's set certain Rapid-Repsonse-Reactions about health care costs to rest here:

No, it not just the greediness of health insurers which makes the costs rise so rapidly, as many on the left believe.

Neither is it the fault of the government messing with the markets and not allowing them to compete so that prices could come down, as many on the right believe.

And no, it's not just Americans getting so much sicker ("those lazy, fat and greedy buggers who refuse to take care of themselves" argument). Whatever role these explanations might play, none of them is sufficient to explain more than a small part of the rising health care costs.


One way to look at the health care cost debacle is to ask which parts of the system are most expensive, and this gives us the following list:

First, hospitals, then physician visits, then durable medical equipment. If hospitals and nursing homes are treated together as institutional care, almost half of each dollar spent on health care goes to institutional care.

Looking at that list suggests that the control of health care costs requires that we do something about the cost of institutional care and about the cost of physician visits. Drugs are also expensive, of course, but note that they are not among the top three contenders, and neither have the costs of drugs risen terribly fast in the recent past.

Note, also, that we should not "press one end of the balloon" in trying to control the high-cost products and services. If you press the balloon at one end, gently, it will just inflate at the other end. Likewise, controlling costs in hospitals could simply transfer them to nursing homes or out-patient care without always causing an overall cost reduction. To give an opposite example, it might be a good policy to spend much more on some drugs if that reduces hospitalization. It's the overall savings to the whole system which matter.


The most expensive patients come from two overlapping groups: Those in the last year of their lives and the elderly.

Health care costs are rising both because we live longer and because we can do more to prolong life. But some of those end-of-life technologies are very, very expensive.

The costs of nursing home care rise partly because many more of us live to a very old age, rather than succumbing to a heart attack at sixty-five. In a paradoxical way, leading a very healthy life may not reduce the overall costs to the system, if it means several years of need for medical assistance at the end of one's life.


This question is my way of asking whether costs rise so rapidly because of something the providers do or because of something the consumers do, or both. I'm ignoring the dance between the two and the rest of the participants, just to keep things very simple.

Let's start with the consumer side.

Most of us are consumers of health care services. What is it about the way we buy them that might push costs up more than in, say, the case of computers or cell phones?

The first thing which comes to mind has to do with the amount we would be prepared to pay for something like life-saving care. Few needing such care will spend time and energy comparing prices and looking for alternative providers, and when it comes to life-or-death, many of us would be willing to pay almost anything for that care.

In other words, the markets for certain kinds of health services have a very low price elasticity, meaning that consumers are not going to exhibit great price sensitivity and are not going to hunt for the cheapest provider (assuming that they are conscious and able to do so).

Add to this the second aspect of the consumer side: The majority of the health care buyers still have insurance. The very existence of insurance makes us less price sensitive: If we are not going to pay the whole bill, we are going to accept higher-cost alternatives more easily.

Those who believe that it is the consumer-side of the market which drives health care cost increases use these two arguments: low price elasticity of demand and widespread insurance, to explain why market competition doesn't seem to result in price competition.

What about the provider side?

Here's where the dance between the consumers and providers matters. Given the nature of the consumer side of the health care markets, what are the best alternatives for the providers? Insured consumers are not going to be terribly price-sensitive, so competing in prices makes less sense than competing in quality.* But increasing quality drives up prices because it drives up costs.

That is, of course, overly simplistic, because a closer look at the supply side of the health care markets reveals an enormous variation of institutional forms, a mix of for-profit and not-for-profit firms and all sorts of different combinations of the two (for instance, for-profit physician firms may use not-for-profit hospitals for their patients).

It is difficult to know whether not-for-profit firms (such as many hospitals) actually try to maximize something resembling profits, and if they therefore try to keep costs down.

These firms are also subject to many government regulations, most having to do with safeguarding the quality of care the patients receive. But some of those regulations can also be used to limit entry to the industry, and that increases the market power of the firms. Firms with market power set their prices higher than firms in a competitive market. And hospitals in some areas are natural monopolies, in the sense that they have no real local competition. The entry of students into the occupations of physicians and dentists is highly regulated and the professions are highly unionized. In short, there are very few parts of the health care industry which look anything like competitive markets.

Those who favor the supply-side explanation point out the market (and labor) power in the industry as a major reason for rising health care costs**. Put in very simple terms, the consumers' expenditures are ultimately the incomes of those who work or invest in the industry. Any successful cost containment will therefore hurt the incomes of some in the current industry.


That is the sixty-thousand-dollar question. Because of the arbitrariness of the expositional device I have picked, the why-question has already been given many answers. But two which are most important, in my not-so-humble opinion are these:

1. What can be done in medicine has changed drastically in the last one hundred years. These changes have included cost-saving inventions such as penicillin and various vaccines. But in the most recent years medical inventions and innovations have largely been of the kind which increase the costs of care.

Take one simple example: Arthritis in the hip joints. Before hip replacements, most that could be done for the sufferers consisted of cheap pain relief prescriptions.

The hi-tech, institution-centered aspect of medicine is now taken for granted. But it is a very expensive aspect of today's medicine and one of the main reasons why health care costs are rapidly rising.

Inventions and innovations in medicine are not independent of the incentives the system offers. The incentives for quality-increasing innovations are strong in the American system, the incentives for cost-saving innovations are weak. Thus, what researchers focus on is much more likely to increase the quality of care even if that means higher costs.

I also suspect that the traditional paths of research are now yielding rapidly diminishing returns. By that I mean that we are getting ever more expensive inventions which may only bring marginal improvements in the quality of care: An extra month for a terminally ill patient, some marginal improvements in the control of a chronic disease.

The "technological change" is certainly an important part of the answer to the high health care costs puzzle. But it does not suffice to explain why the US costs are rising more rapidly than costs in other countries. For that we need to add:

2. The patchwork approach to health care provision with exactly the wrong type of market solutions.

It is useful to read about the accidental births of many aspects of the American health care system, because it lets us understand why we now have such an illogical patchwork system. Many of those patches were introduced because of tears in the initial fabric. But once the patches were there, they were taken as part of the original fabric, not to be interfered with. Instead, we keep on adding more and more patches:

Keep employment based health insurance (which leaves out those too ill to work, many of those in low-paid jobs and those working for small firms), pick up some of those who are not covered with Medicaid (which depends on the charity of the states and does not cover all low-income people) and institute Medicare for those over sixty-five only. Observe what happens under such a system when costs keep on rising and count the number of the uninsured or under-insured. Estimate the unpaid care that laws require to be offered, observe the continuing drop in the number of the still-insured and weep.

Then fix the system! Except that the fix requires all the old patches to be left in place. All it does is reinforce some of the seams and put down a few new patches. We will still have an increasingly for-profit health insurance industry with incentives to limit care as much as possible, we will still have providers with market power.

Any attempt to define insurance packages in a newly created market will not get around the information problems consumers have:

If all I know is that I'm buying apples and the price per pound, how can I make an informed decision? The apples will be delivered at some point in the future. What if I find I didn't get a pound for every pound I paid for? What if the apples are rotten?

Or in terms of health care, what if my claims are denied?

And health insurers will price their products, if allowed, in such a manner as to attract the young and the healthy and to discourage the old and the sick.

Add to that all the exemptions that seem to be in the works and what you have is a New And Improved Patchwork Health Care Quilt. It will continue to get more and more expensive to maintain.

*On the other hand, some intermediaries on the consumer side, such as large firms buying insurance coverage for their workers, do have price sensitivity and the time and energy to look for better deals. Whether they do so in a way which replicates what well-informed final consumers would do is unclear. I think they might not choose to bargain for prices but accept the skimpier coverage as the easier road to go.
**Micro-level explanations also discuss the incentives that providers are given to either limit costs or not to limit costs, based on how they are reimbursed. The problem with reimbursement systems which encourage cost-containment has to do with the possibility that costs could be contained by cutting necessary care. In general, the problem of informational asymmetry in health care is a huge giant lurking behind this post and the ultimate reason for many of the otherwise-problematic aspects of the system. Providers are so strictly regulated to protect consumers, but that strict regulation does increase costs through its impact on market concentration.