Health Insurance: catastrophic versus insular?

Arnold Kling and Bryan Caplan are the two authors of EconLog, a very informative economics blog. Kling published an interesting essay in Tech Central Station entitled Do We Own Our Ailments.

Kling argues that on the balance, most consumers would prefer what he calls "insular" coverage in favor of so-called "catastrophic" insurance. Insular coverage pays all or part of all medical expenses. The down side to such coverage is much higher premiums. An HMO with minimal or nonexistent co-payments would be an example of such a health plan. MediCal (and to a lesser extent Medicare) as practiced in my state would be another example.

Catastrophic insurance only pays for major medical expenses such as a hospitalization and includes policies with very high deductables for most expenses. Relatively minor expenses such as prescriptions or office visits may be paid in whole by the patient.

Kling argues that in preferring insular coverage over catastropic, consumers are in effect opting for the more irrational alternative. Let's ignore the fact that presumably, insurance companies underwrite the risk of both types in such a way to promote similar rates of return for each (and therefor similar rates of return for the patient). I might agree that for healthy patients, insular coverage doesn't make economic sense although patients opt for it.

Patient's remarkable unwillingness to pay for the slightest out-of-pocket expense is striking though. I've seen it first hand in many situations. I've noted that although patients know full well that they have a nominal co-payment for an office visit, remarkably, they show up with no cash on hand and no credit card. Patients seem to have a way of knowing that most offices will simply say "bring it next time" and just write it off. People have an amazing aversion to paying even five dollars to see a doctor.

On the other hand, even nominal co-payments will discourage frivolous appointments. At one group I worked at, one of our managed care insurers unilaterally decided that their subscribers would have no co-payment for an office visit. They simply announced this on their television commercials without telling the medical groups. We were literally overwhelmed by patients requesting appointments (for largely ridiculous reasons). Utilization went way up.

I've seen wealthy patients complain that they had to spend hours and days on the phone with their insurer to get them to provide a twenty dollar bedside commode without charge.

Kling argues that a preference for insular over catastrophic insurance doesn't make economic sense because of the higher premiums and that there are "noneconomic" principles at work here. He develops a theory that patients fail to "take ownership" in their diseases. It is this denial of illness that causes them to be resistant to paying anything for their healthcare. He gives the following example:

"Suppose an elderly woman takes a fall and breaks her hip. My prediction is that she will disown her frailty, either by describing her fall as due to her remarkable stupidity or to someone else's terrible carelessness, such as a badly-designed curb. If she were to take ownership of her condition, she might instead acknowledge that she is unsteady and should be walking with a cane."

Presumably she would also be more willing to pay lower premiums in exchange for having to pay for that cane out-of-pocket as well. His conclusion:

"It is my hypothesis that our squeamishness about paying for health care services reflects this disownership. Who wants to pay for treatment when deep down you believe that it is wrong for you to need it? Yes, you know that you need the treatment, but you disown this need because it seems so unfair. Having a third party pay for the treatment appeals to this desire to disown one's frailty."

While I agree that there may be some truth to his argument, I think that it's really simpler than that. When an employer or the government pays the premiums, patients will be singularly unconcerned about the cost of premiums. However, the greater their own responsibility in paying those premiums, the more likely they are to take a high deductible, catastrophic health plan (though they'll grumble bitterly that they can't afford good insurance). In fact, if the premiums are high enough, they'll take the ultimate catastrophic plan: no insurance at all.

The issue isn't so much ownership in their ailments, it's the perception that someone else is paying the bill (employer or government).

So yes, I do agree that patients do have a unique disdain for paying medical expenses. This disdain may be in part explainable by failure to take ownership of their disease and thereby lead to noneconomic-based decisions. On the other hand, this irrational decision making tends to dissolve when there is no third party payer.

I also think this goes the other way as well: When doctors know that their patient is going to be stuck with the whole bill, we tend to provide more cost-effective care.

I think there's a lesson here. To bring down utilization (and therefore costs) from both the patient and the doctor side, one can require more direct patient out-of-pocket contributions.