Wednesday, April 13, 2005

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.


Blogger Henry Stern, LUTCF, CBC said...

Where to begin?

Assume that your employer pays for your groceries. Are you going to eat steak or chicken every night?

Assume further that your employer pays for your gasoline. Are you going to fill up with premium or the cheap stuff?

I agree that the problem is, to a limited extent, ownership, but it's more complicated than that.

For the past 15 or so years, consumers have been sold (or provided thru their employers) plans with low (or no) out-of-pocket. $15 office co-pays, $10 rx's, you name it. So it costs $50 to hit the ER for a 100 degree temp, or a cut finger. Or the brand name costs $10. Who wouldn't go there?

Yes, CDHC (Consumer Driven Health Care) is the new buzzword, along with HDHP (High Deductible Health Plans). And I read every day, in industry journals, how these plans are poised to "take off," and corner the market.

Won't happen.


Because we (and here I mean agents and carriers) have done too good a job selling low OOP plans. And, because carriers still don't price these high deductible plans in such a way as to drive consumers to them.

I'd be glad to discuss this further, but I'm concerned about monpolizing your comments section. ;-))

Let me end (for now) with this: layering the risk.

April 13, 2005 9:34 PM  
Blogger Henry Stern, LUTCF, CBC said...

Okay, one more thing, because the other buzzword is HSA (Health Savings Accounts).

I've been selling MSA and HSA for almost 15 years now. But this is to a select, and very cost-conscious market (cost-conscious does NOT mean "looking for the cheapest deal"). I have NEVER lost such a client to another agent.


And almost all of them have $$ in their accounts.

Correlation? Yes.

April 13, 2005 9:37 PM  
Blogger The Medicine Man said...

Henry, if you want to give us a detailed analysis and don't want to do it in my comments section, put it in your blog and I'll link to it.


April 14, 2005 9:03 AM  
Blogger Henry Stern, LUTCF, CBC said...

That's a great suggestion, and I'll work on it...

I hope I didn't sound prissy, I just didn't want to hog your space. I've been dealing with this issue a LOT lately, and so this post really got my juices flowing.

I've really enjoyed reading your blog; I have several physicians in the family (and close friends), and I've sent them all links here, because I think they'll be able to relate.

April 14, 2005 9:41 AM  
Blogger The Medicine Man said...

I didn't think that at all. I just wanted to encourage you to write about it given that you're an expert on the topic.

I look forward to reading it.


April 14, 2005 10:27 AM  
Blogger Bob Vineyard said...

Man have you hit a nerve with me!

Yes, there is a lack of "ownership" as is true with any freebie. When I was a kid and would ask my parents a question, the common response was "look it up".

Of course I suspected it was because they did not KNOW the answer, and of course I was absolutely CONVINCED they did not know by the time adolescence hit. The lesson in looking it up is OWNERSHIP. Rather than asking, I found the answer and I OWNED it.

Employers are much to blame for pushing HMO type plans with low copays which DO encourage over-utilization. And employees of generous employers become accustomed to calculating a monthly profit & loss by comparing the benefit they receive from their fringe plan vs the weekly payroll deduction. I do have clients (formerly covered by employer plans) that considered it a challenge to see how many doctor & dental visits they could squeeze in every month to equal or exceed their deduction.

One blaring example of over-utilization caused by low copays is the cost of Rx. In the "old" days meds covered under a health plan were subject to an annual deductible of $100 - $200 before they were reimbursed 80 cents on the dollar.

I did say this was the old days . . .

Under these old fashioned plans Rx costs made up less than 10% of total claims paid. When copay plans were introduced suddenly Rx claims virtually doubled to around 18% of total claims paid and they have remained at that level for a number of years. In some plans Rx accounts for almost $1 out of every $4 in reimbursed claims.

The low copays are a factor. So is the rush to consumer the latest "designer" drug patients see on TV.

Those who pay the premiums have a choice and it rarely makes economic sense to purchase the low copay plans. Coverage becomes affordable for most once the benefits rise above the burn level for carriers. That translates into a $2000 deductible or higher in todays market.

April 14, 2005 10:44 AM  
Anonymous Anonymous said...

40 hours times minimum wage ($7.00?) equals $280 a week
52 weeks times $280 equals $14,560.
$2000 equals 14% of pre-tax income.

Could any low income wage earner afford that and still provide housing, food, clothing and transportation and savings?? No, they can't and so they postpone healthcare because they cannot afford the deductible or the co-pay. They end up sicker and with more long term chronic illnesses.

I don't know the answer but I don't think higher co-pays and increased deductibles solves the problem.

April 14, 2005 6:59 PM  
Blogger Henry Stern, LUTCF, CBC said...

Katie, while I admire your compassion, it is misplaced here:

According to U.S. Census Bureau data, fully 85% of minimum wage employees either live with their parents or another relative, live alone, or have a working spouse. Just 15% are sole earners in families with children, and each of these sole earners has access to supplemental income through Earned Income Tax Credit.

Further, those making such a low wage, if in fact that is the only source of revenue, are eligible for MedicAid, and thus "free" healthcare.

They are not the folks we're discussing here.

April 14, 2005 9:21 PM  
Blogger Bob Vineyard said...

Piggybacking on what hgstern said, minimum wage earners generally pay no income taxes. If they have taxes deducted from their pay (and few do) they get it all back and then some via EIC. A married couple with 2 children can earn up to $34,458 and pay NO income taxes. Families earning less than $34,458 can get back every penny paid in federal taxes PLUS up to $4300 MORE in the form of a check from Uncle Sam.

In college I worked with a fellow who worked 2 full time jobs and one part time job to support his family . . . and at the same time was enrolled in nursing school.

Most "low wage earners" who fail to qualify for public assistance do so because they EARN TOO MUCH MONEY.

The problem is not so much a matter of affordability as it is a willingness to "be a man" (or woman) and take responsibility for your choices and actions. The majority of people who end up in bankruptcy court do so because of poor money management skills, not circumstances beyond their control. About half the bankruptcies are triggered by a medical crisis that could have been avoided with proper planning and money management.

April 15, 2005 2:55 AM  
Blogger Bob Vineyard said...

OK, I should have looked this up before completing my post . . .

Here is a handy estimator for low wage earners giving an idea of how much the EIC is worth.


April 15, 2005 3:02 AM  
Blogger Henry Stern, LUTCF, CBC said...


I've posted my take on this over at InsureBlog.

Thanx for the opportunity to be a part of this discussion!

April 15, 2005 8:29 AM  
Anonymous Anonymous said...

Is this discussion only about certain groups or classes of people who have insurance or does it cover categories of all health insurance, co-pays and deductibles?
Is this only theoretical discussion about ways to decrease the utilization and costs of healthcare?

April 15, 2005 11:48 AM  
Blogger Henry Stern, LUTCF, CBC said...

It's a free Internet ;-)) so you can probably discuss anything you want, subject to Dr Ford's final say-so (it's HIS blog, after all).

But the subject at hand is how to rein in costs of (medical) insurance, which is a different discussion than the one on which you've embarked.

If you have a blog, that would probably be a great topic to tackle. If you don't, why not?

Have a great weekend!

April 15, 2005 12:44 PM  
Blogger Bob Vineyard said...

Katie -

The subject of the post is a contrast in cat coverage vs full or "insular" coverage. In that utilization is a factor in most claims submitted, when you decrease utilization (at the carrier level) you can indeed hold down premiums.

The movement is more towards "consumer choice" plans which puts many of the monetary decisions about health care squarely where it should be . . . with the consumer of services. Low copays encourage (over)utilization which does not mean "better" care, it simply means MORE care. And more care comes with a price.

Quick example . . .

Had a discussion this week with a lady seeking relief from COBRA premiums over $900 per month for her and hubby (no kids). She even complained that the plan didnt cover everything and mentioned $15 Rx copays.

Seems she and hubby have a range of problems, some chronic, some "questionable". All totaled they take 5 meds between them at a monthly (retail) cost of close to $500. Her copay share is $75, IN ADDITION to COBRA premiums.

I encouraged her to give consideration to a more affordable plan at $250 per month and using a combination of mailorder & generics to reduce her Rx cost to less than $200 per month.

She became indignant that I would even suggest she ask her doc for less expensive medicine. Note, I was not suggesting less EFFECTIVE meds, just less expensive.

Guess she will be content to pay over $1000 per month (COBRA & Rx copay) rather than looking at more affordable, and just as effective alternatives.

April 15, 2005 12:48 PM  
Anonymous Anonymous said...

If, for whatever reason, many consumers behave irrationally when it comes to obtaining coverage, is increasing consumer choice the solution to driving down costs?

I think the discussion above overlooks a few other factors why may consumers favor insular coverage as opposed to catastrophic coverage:

(1) most people are very risk averse when it comes to their health, and they like the security of knowing (or at least thinking) that "everything" will be covered by their insurance plan;

(2) many consumers have a difficult time understanding and making sense of the different types plans and their variations--thus, people tend to err on the side of (perceived) caution;

(3) the prestige factor--my sense is that a "good" (i.e., insular) health insurance policy is an expected perk for some jobs; this was probably why the lady in the story above chafed at the notion of taking generic drugs

(4) insular insurance fits more closely with familiar notions of what "insurance" is supposed to be--something more along the lines of global coverage.

Anyway, just a few random thoughts...

April 17, 2005 9:54 PM  
Blogger Unknown said...

Great conversation here by Hank, Bob and others.

I deal with this all day long. It fascinates me the way people see the role they have in paying for their own healthcare.

In general I work with each of my clients to understand insurance and how what most people are wanting is not really insurance but free or minimal cost healthcare.

Everyday I hear people say "I am paying XXXX dollars and I am not getting anything for it" I usually ask them if they would like to visit the hospital and see some people that are getting something for it. I ask them to think about their auto insurance and homeowners insurance. That is something they understand. It is insurance. It covers risks, in general risks that we do not want to have happen.

The idea is to help them get perspective on their own way of seeing things. It seems so simple but people have profound berakthroughs as they begin to see the way they see healthcare and insurance. The question then becomes "How would you like your healthcare and then what way of paying for it makes sense to you?" I suggest to them that if they are paying the premiums and they do not have an employer sponsored plan then they are either insuring themself or providing and paying for their own employee healthcare benefit plan.

Employee healthcare benefits are a form of compensation. That is a very important concept for a person to get. Interestingly, many people do not get this. It is like a light came for them when the get it. Once they realize that, then talking about plans becomes much more sane.

This has become a tangled mess in the minds of most people. It seems to setoff a kind of insanity. I must have it, I deserve it, but I can't pay for it, why should I have to pay for it anyway and you evil companies are taking my money and not giving it back. Crazy.

July 13, 2009 4:37 PM  
Anonymous Jenny said...

It is true that certain section of people think there would be complete coverage in health insurance but there are certain clause and conditions

September 12, 2010 10:35 PM  

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