Sunday, January 16, 2011

The Changing Meaning of Medical Insurance, and How 3rd Party Payments Distorted U.S. Medicine

From Milton Friedman's excellent 2001 article "How to Cure Health Care": 

"We have become so accustomed to employer-provided medical care that we regard it as part of the natural order. Yet it is thoroughly illogical. Why single out medical care? Food is more essential to life than medical care. Why not exempt the cost of food from taxes if provided by the employer?

Employer financing of medical care has caused the term insurance to acquire a rather different meaning in medicine than in most other contexts. We generally rely on insurance to protect us against events that are highly unlikely to occur but that involve large losses if they do occur—major catastrophes, not minor, regularly recurring expenses. We insure our houses against loss from fire, not against the cost of having to cut the lawn. We insure our cars against liability to others or major damage, not against having to pay for gasoline. Yet in medicine, it has become common to rely on insurance to pay for regular medical examinations and often for prescriptions.

This is partly a question of the size of the deductible and the copayment, but it goes beyond that. "Without medical insurance" and "without access to medical care" have come to be treated as nearly synonymous. Moreover, the states and the federal government have increasingly specified the coverage of insurance for medical care to a detail not common in other areas. The effect has been to raise the cost of insurance and to limit the options open to individuals. Many, if not most, of the "medically uninsured" are persons who for one reason or another do not have access to employer-provided medical care and are unable or unwilling to pay the cost of the only kinds of insurance contracts available to them.

If the tax exemption for employer-provided medical care and Medicare and Medicaid had never been enacted, the insurance market for medical care would probably have developed as other insurance markets have. The typical form of medical insurance would have been catastrophic insurance (i.e., insurance with a very high deductible)."

From the conclusion:

"The high cost and inequitable character of our medical care system are the direct result of our steady movement toward reliance on third-party payment. A cure requires reversing course, reprivatizing medical care by eliminating most third-party payment, and restoring the role of insurance to providing protection against major medical catastrophes.

The ideal way to do that would be to reverse past actions: repeal the tax exemption of employer-provided medical care; terminate Medicare and Medicaid; deregulate most insurance; and restrict the role of the government, preferably state and local rather than federal, to financing care for the hard cases. However, the vested interests that have grown up around the existing system, and the tyranny of the status quo, clearly make that solution not feasible politically. Yet it is worth stating the ideal as a guide to judging whether proposed incremental changes are in the right direction."

23 Comments:

At 1/16/2011 10:12 PM, Blogger SBVOR said...

"The ideal way to do that would be to reverse past actions: repeal the tax exemption of employer-provided medical care; terminate Medicare and Medicaid; deregulate most insurance; and restrict the role of the government, preferably state and local rather than federal, to financing care for the hard cases."

I would go one step farther and suggest that every level of government completely extricate itself from the business of providing charity of any sort. Nobody is served well by that practice -- least of all those truly in need of the charity.

It will never happen. In fact, none of these suggestions will ever be implemented. The country will continue down the entitlement road to ruin. Sadly, that's human nature. I wish it weren't true. But, it is.

 
At 1/16/2011 11:36 PM, Blogger Benjamin said...

In a free market, most insurance would contain a clause, "If doctors decide further measures will not benefit the patient, they will cease efforts, and move patient out of intensive care into hospice."

You could get insurance that would say, "When patients' next of kin decide no further care is warranted, then care is ceased." That insurance would probably cost many times to first type.

Ironically, it is the right-wing that loses it bowels when ending care is discussed, raising the bogey-man "death panels."

A Republican Congress held a special session, and then "Presdient" Bush jr. cancelled a vacation over the Terri Schiavo fandango in 2005.

You may remember, hubbie wanted her carcass buried, but the right-wing went bananas, and made this a cause celebre. They kept her carcass on feeding tubes for a few more months, but ultimately common sense prevailed, and her body was allowed to die. Her brain had died a decade earlier.

The blunt truth is that unless we learn to pull the plug when warranted, we will have skyrocketing medical bills, as more of our population ages.

We spend about double what socialized Europe spends on health care per capita, and get roughly the same results.

Milton Friedman makes a lot of sense here, but there is also a strong case that some parts of life are exempt from market forces, and health care might be one.

I am uncomfortable with denying health care to a young person just because they have no money.

 
At 1/17/2011 1:18 AM, Blogger SBVOR said...

“The blunt truth is that unless we learn to pull the plug when warranted, we will have skyrocketing medical bills, as more of our population ages.”

“I am uncomfortable with denying health care to a young person just because they have no money.”

Oh, heavens to Betsy! We can’t have you feeling “uncomfortable”! By all means, let’s just flush the whole damn country down the crapper instead!

Or, here’s an idea…
Provide assistance were warranted individual to individual! I do. Why can’t you?

Do you seriously think that bureaucrats presiding over “death panels” will EVER allow ObamaCare to contain costs? First, the entire Ponzi scheme depends upon the clearly unconstitutional health insurance mandate. Once the Supreme Court rules on that, the entire house of cards collapses. Second, have you even begun to contemplate the fraud, waste and abuse? Do you have the foggiest notion why the whole damn Cosa Nostra has turned to Medicare fraud? It’s like taking candy from a freaking baby! NOBODY GIVES A SHIT!

End of life decisions are NOT for federal bureaucrats to make! Health care costs are NOT a collectivist concern (at least they weren’t before that stinking lunatic LBJ signed Medicare and Medicaid into law in 1965). That was -- demonstrably -- the precise moment when we lost all hope of containing deficit spending. And now, you Socialist MORONS think MORE collectivism is the solution to the problems which your collectivist stupidity CREATED?

REALLY? SERIOUSLY?

 
At 1/17/2011 1:24 AM, Blogger SBVOR said...

P.S.) Regarding the last link in my prior comment…

You might want to examine that link when we add some shading to show who controlled Congress and when.

Click here for more details, direct citations, etc.

 
At 1/17/2011 8:32 AM, Blogger juandos said...

"That was -- demonstrably -- the precise moment when we lost all hope of containing deficit spending. And now, you Socialist MORONS think MORE collectivism is the solution to the problems which your collectivist stupidity CREATED?"...

LOL! Very well said!

 
At 1/17/2011 9:29 AM, Blogger Jet Beagle said...

Professor Perry,

I agree that government interference is almost fully to blame for the excessive cost of U.S. medical care. But I do not agree completely with all of the statements in your post by either Milton Friedman or you.

Friedman: "Yet it is thoroughly illogical. Why single out medical care?"

The health insurance industry was promoting employer-provided medical care in the 1930's - before the federal government provided incentives to do so. Why? To overcome the problem of advese selection. By pooling a large company's employees - both older and younger, both fit and unhealthy - the insurance company ensured that its pool of insurees more accurately represented the population at large. That sounds completely logical to me.

 
At 1/17/2011 9:54 AM, Blogger Jet Beagle said...

"Yet in medicine, it has become common to rely on insurance to pay for regular medical examinations and often for prescriptions."

That, by itself, doesn't mean that health insurance is not insurance. Employers and health insurance providers had very good reasons to bundle regular medical treatment with catastrophic medical insurance.

One major reason why employers offer medical insurance and routine care is that they need employees to be on the job as much as possible. As an employer, I know this to be true. Encouraging employees to seek routine physical examinations and to seek routine treatment does two things for employees:

- helps the medical profession catch serious medical conditions in early stages; and

- ensures that other financial obligations do not interfere with so-called "routine" medical care which keeps employees on the job.

The health insurance provider likewise will save money on many illnesses when they are caught in early stages, before they become catastrophic.

In any case, absent government intervention, it seems likely that employers would offer to employees the benefits of group buying power through providing medical insurance. Competition for employees would lead those medical benefits to be comprehensive rather than limited, IMO.

 
At 1/17/2011 9:55 AM, Blogger Jet Beagle said...

Sorry for not realizing that all the statements in this comment were those of Milton Friedman and not Professor Perry.

 
At 1/17/2011 10:00 AM, Blogger Jet Beagle said...

Third party payment is not the reason for excessive health care costs. Absent government intervention, the health insurance industry would easily be able to control health care costs. The exact amount of benefits to be covered are generally spelled out in detail in polcies. But, of course, our elected officials have consistently interfered with the relationship between insuror and insuree. They do so by mandates, by price setting, and by threats.

 
At 1/17/2011 10:52 AM, Blogger juandos said...

"The health insurance industry was promoting employer-provided medical care in the 1930's..."...

Well jet beagle you do bring up a valid point but do you know just how widespread that push was?

I do remember when Nixon did his little 'wage & price' freeze back in the early seventies and most side benefits such as health care coverage didn't fall under that freeze umbrella, hence companies used insurance as a lure to hire employees...

It was widely pushed...

 
At 1/17/2011 11:25 AM, Blogger Jet Beagle said...

juandos,

The medical insurance insurance was in its infancy in the 1930s, but grew steadily through the decade. By 1941, about 15 million Americans were covered by health insurance plans. Source: Economic History Association

Here's what the Economics History Association says about the beginnings of employer-provided health insurance:

"... commercial insurance companies were reluctant to even offer health insurance early in the century. As previously mentioned, they feared that they would not be able to overcome problems relating to adverse selection, so that offering health insurance would not be profitable. The success of Blue Cross and Blue Shield showed just how easily adverse selection problems could be overcome: by focusing on providing health insurance only to groups of employed workers."

 
At 1/17/2011 12:02 PM, Blogger SBVOR said...

Dr. Perry,

I have frequently cited the very article you link to as an excellent example demonstrating the cause of and cure for our health care mess. When doing so, I always offer a second citation:

Why Are Health Costs Rising?

Specifically, I cite the first paragraph from that source:

“Prices for medical services have been rising faster than prices of other goods and services for as long as anyone can remember. But not all health care prices are rising. Although health care inflation is robust for those services paid by third-party insurance, prices are rising only moderately for services patients buy directly. For example, the real (inflation-adjusted) price of cosmetic surgery fell over the past decade - despite a huge increase in demand and considerable innovation.”

So…
One of the few areas of health care where free markets are operating and the government has NOT meddled is NOT reflecting the disaster we see throughout EVERY area of health care where the government has meddled and where free markets are NOT operating.

Gee…
I wonder if that holds true anywhere else? The cost of higher education? The housing disaster?

ANYTIME politicians set out to make ANYTHING more “affordable”, you can rest assured that the costs will skyrocket (and disaster will soon follow).

 
At 1/17/2011 12:10 PM, Blogger SBVOR said...

Jet Beagle,

Quoting the link provided by Dr. Perry:

“During World War II, the government financed much wartime spending by printing money while, at the same time, imposing wage and price controls. The resulting repressed inflation produced shortages of many goods and services, including labor. Firms competing to acquire labor at government-controlled wages started to offer medical care as a fringe benefit.”

FDR’s wage & price controls made it literally illegal for employers to pay a competitive wage. Employers found a way around the federal tyranny -- health insurance benefits. And, that was the moment when we lost all hope of containing health care costs.

 
At 1/17/2011 2:28 PM, Blogger Junkyard_hawg1985 said...

Another free-market example of health care: Aspirin.

Aspirin was discovered by a non-U.S. private company (Bayer) and not the government. It is not distributed by the government, but by private companies. Finally, it is sold at private businesses at a direct cost to the consumer. For this drug that reduces pain, reduces fever, and reduces my chances for a heart attack, I pay 0.5 cents/pill getting the Kroger Value brand (200 ct bottle for $1.00). If it bothers my stomach, I can upgrade to a coated tablet that costs 1 cents/pill. It is my choice.

 
At 1/17/2011 2:41 PM, Blogger Jet Beagle said...

SBVOR,

I realize that government policy encouraged employers to offer and organized labor to bargain for health insurance. My point was that employer-provided health insurance was growing before WWII.

I tried to post a link to the website of the Economic History Association, where the history of health insurance is discussed. but I was unable to do so.

 
At 1/17/2011 2:48 PM, Blogger Jet Beagle said...

SBVOR,

I see no reason why employer-provided health insurance should prevent cost control. As long as insurors are able to define what is covered - and employers agree to pay for that coverage - insurors can control costs. The problem is that government does not allow insurors to define what is covered.

Even so, I do not agree that employer-provided health insurance is responsible for the huge increase in medical costs. Rather, it is tax-funded Medicare and Medicaid which have driven up medical costs. And that is true for both Medicare and Medicaid recipients and for others as well. The demand for medical services - unrestrained in the case of the government programs - is what caused prices to rise.

 
At 1/17/2011 4:40 PM, Blogger Ron H. said...

Jet Beagle said...

"Sorry for not realizing that all the statements in this comment were those of Milton Friedman and not Professor Perry."

I suppose it's possible Prof Perry could take that as a compliment.

 
At 1/17/2011 4:48 PM, Blogger Ron H. said...

"I am uncomfortable with denying health care to a young person just because they have no money."

You're "uncomfortable", are you?

Benji, Do you mean "health care" or "medical treatment"?

Would you feel the same if the words "food", "shelter", or "clothing", were substituted for "health care"?

You are welcome to spend YOUR money any way you wish, including on "health care" for others, but please don't suggest stealing money from me for that purpose.

 
At 1/17/2011 5:59 PM, Blogger SBVOR said...

Jet Beagle sez:

"I do not agree that employer-provided health insurance is responsible for the huge increase in medical costs. Rather, it is tax-funded Medicare and Medicaid which have driven up medical costs."

It's both...
Medicare & Medicaid are the more egregious factors. But, the link offered by Dr. Perry clearly explains why it is all of the above (and what can be done to correct it).

 
At 1/17/2011 6:22 PM, Blogger Jet Beagle said...

SBVOR:"the link offered by Dr. Perry clearly explains why it is all of the above"

I imagine that some who comment here would think it blasphemy for me to disagree with Milton Friedman. But I do disagree with his conclusion here:

"If the employer pays for the employee’s medical care, the expenditure is treated as a tax-deductible expense for the employer and is not included as part of the employee’s income subject to income tax. That strong incentive explains why most consumers get their medical care through their employers or their spouses’ or their parents’ employer"

IMO, most of us would still get medical insurance from our employer even if the tax treatment were the same. Here's why:

- medium and large employers enjoy superior buying power;

- economies of scale in the shopping process, meaning that large employers can dedicate highly-informed buyers full time to the search for packages most desired by employees;

- insurance companies see employer groups as a means for eliminating adverse selection;

- employers have a vested interest in keeping employees healthy, and will want to ensure they have coverage.

My argument is that the tax incentive of employer-provided health insurance is one of several strong incentives. Friedman seems to ignore the others.

 
At 1/17/2011 7:34 PM, Blogger sethstorm said...

I would go one step farther and suggest that every level of government completely extricate itself from the business of providing charity of any sort. Nobody is served well by that practice -- least of all those truly in need of the charity.

Except for the part where government is able to provide:

1) Better advantages of scale.
2) Uniformly provided assistance.

 
At 1/17/2011 9:20 PM, Blogger SBVOR said...

This comment has been removed by the author.

 
At 1/17/2011 9:24 PM, Blogger SBVOR said...

SethStorm sez:

"government is able to provide:

1) Better advantages of scale.
2) Uniformly provided assistance.”


Only in the fantasy world of government employees and other so-called "Progressives".

The reality is more like this:

The Mafia, et al play taxpayers for chumps.

 

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