Talk about a vicious cycle. The above chart (from must-read healthcare blogger Avik Roy) comes as close as anything I’ve seen to explaining in a picture what is wrong with the American healthcare system. It shows how government policy creates a dysfunctional healthcare market by insulating consumers from the true cost of their healthcare decisions, raising demand/overconsumption of high-end services/costs, prompting more government intervention (like Obamacare) … and more insulation. Rinse and repeat. Here is Arnold Kling on “insulation”:
The health coverage most Americans have is what I call “insulation,” not insurance. Rather than insuring them against risk, most families’ health plans insulate them from paying for most health care bills, large and small. Real insurance, such as fire insurance, provides protection against rare, severe risk. Real insurance is characterized by:
– low premiums
– infrequent claims
– large claims
American health insurance—including employer-provided insurance and Medicare—is the opposite. Families typically are paid claims several times per year, often for small amounts. Premiums are high—the cost of providing insulation often exceeds $10,000 per year per family. However, most families pay these premiums only indirectly, through taxes and reduced take-home pay from employers.
For health care providers, insulation is a bonanza. Because consumers are not spending their own money, they accept doctors’ recommendations for services without questioning them and without concern for cost. Faced with an insured patient, a health care provider is like a restaurant catering to convention-goers with unlimited expense accounts. The customer will gladly take the most high-end recommendation and not worry about the price.
Consumers are happy as well. Insulation relieves the patient of the stress of making decisions about treatment. The patient also does not have to worry about shopping around for the best price.
The problem with insulation is that it is not a sustainable form of health care finance. Individuals, employers, and government are all under stress. Families that are in the individual insurance market face sticker shock when they confront health insurance premiums. Many choose to remain uninsured. Employers are finding health care expenses an increasing burden. A noticeable gap has arisen in the past twenty years between the growth of total employee compensation and the growth of wages. Take-home pay is stagnant or shrinking, as much of the growth in compensation is diverted to health care.
Insulation leads people to over-consume health care services. Americans make extravagant use of services that have high costs and low benefits. Many studies that compare groups with similar conditions show that those with the largest levels of health care spending fare no better in terms of outcomes than those that spend less.