Friday, April 16, 2010

Trust me

I spend money way more carefully when it comes out of my own pocket. 

Posted via email from The Capitalist Axiomatic


Zantox said...

C'mon now ... shouldn't you show dollars spent too, and not just % split?

Clark said...

Yes, and it should be inflation adjusted and per capita.

Zantox said...

You're right -- that was just the quick graph I could find. This one is better, which shows out-of-pocket higher on a per-capita, inflation adjusted basis (though only has 2002 - 2006):

Clark said...

Well, that's not much of a historical perspective. I found a lot more data here:

and in particular, this pdf has what we're looking for (almost -- only goes to 1970)

Table 6 on page 9 shows that per capita out of pocket expenses rose from $119 in 1970 to $912 in 2008. This is only slightly faster than inflation; the handy BLS calendar has $119 compounding to $668 with inflation alone.

Of course, out of pocket expenses are only one part of what a consumer pays. Some people pay some fraction of the health insurance premium, which as you can see from table 13 has compounded at 10.1% since 1970. (Subtract around 1% for population growth to make this a per capita number)

I haven't seen good statistics on how the premium has historically been split between employer and employee, but my sense is that businesses have been passing on some of the increases in recent years.

But this actually illustrates my point. We are so far from having a market in healthcare (which of course, we wouldn't want anyway) that no price signal gets through. It too complicated. The price is never felt directly by the ultimate consumer, and at every level there are middlemen prone to conflicts of interest.

Zantox said...

I'm with you 100% on your last comment. Health care is fundamentally different and cannot be an "efficient market" in the same way that, say, rubber bands can.

The seminal paper (Kenneth Arrow’s Uncertainty and the welfare economics of health care -- -- from 1963) writes this up nicely. Krugman in term summarizes him here:

As a self-employed guy using a high-deductible HSA, I feel every penny that goes out. I have yet to figure out how to comparison shop for doctors -- only use substitution (when possible) or omission (which is long-run bad).

Clark said...

Thanks for the link; I had somehow managed to miss that Krugman post.

I should have clarified at the outset that my point wasn't that we SHOULD have a free market in healthcare, but just that we simply don't. I do still wonder whether there are ways to use some market principles in healthcare -- like maybe having people pay out of pocket for routine stuff in order to avoid overtreatment, but having catastrophic government insurance that guarantees the expensive treatment. This brings up equality (and moral hazard) issues of course.

One thing I've been trying to think about is why the mandatory auto insurance market works pretty well, and why healthcare should be any different. The only thing I've come up with is that routine car maintenance is not part of the insurance, which means that nobody WANTS to use their car insurance.

Zantox said...

Fair enough. Though I would say that having (all) routine care come out of pocket leads to (as you speculate) less use of "preventative" or "early stage" medicine/treatment. This would ultimately cause treatable conditions to escalate to a much more damaging (expensive and health-wise) situation.

If I was designing an insurance company, I would look hard at Kaiser's philosophy and focus on making sure people STAY healthy rather than avoid/defer treatment. Ultimately, take the annual premium and give it back in the form of (a limited number of) annual free physicals, routine checkups and the like. Then I would say having a "donut hole" (above the routine, below a high deductible) of patient-pay might be okay. Obviously this is a very simple design, but the framework is there.

The other thing to think about is how the life insurance space works. Life insurance is different from (nearly) all other forms of insurance in that the life insurance company 1) knows what its payout will be and 2) knows that it cannot be avoided (death).

They have created many products and hybrids that help people deal with the cost of the insurance AND still provide the Insureds the coverage they desire. Maybe a taking best practices from life insurers, auto insurers, etc and applying it to health may yield something?