Greaney on Markets & Medicine

A recent study concluded that John McCain’s proposed health reform, which includes “the elimination of the income tax preference for employer-sponsored insurance,” “would cause twenty million Americans to lose such coverage.” It’s hard to imagine how such a prescription could be so counterproductive. Luckily, Thomas L. Greaney, Director of St. Louis University’s Center for Health Law Studies, explains in clear terms the myopia of now-modish market-driven reforms:

The conservative prescription [for health care is straightforward:]: Take away the tax subsidies, reduce the role of insurers and employers and place decisions in the hands of you, the consumer. Give families health savings accounts so they have — as the gambling-sports cliche du jour puts it — “skin in the game.” And once we improve information technology so they can shop for the best and cheapest care: Voila! Problems solved.

Unfortunately, a host of pesky facts interfere with that rosy scenario: 1) Most cost inflation is caused by advanced medical technology and therapies that are used by a relatively small number of people: the very sick and the very old, who often are one and the same. 2) Shopping at the point of care is unrealistic in many, if not most, costly episodes. Your physician does not and cannot know the full costs of treatments when she makes a diagnosis or referral. 3) And very few of us, sorry to say, know enough about the benefits, costs and risks of alternatives to make informed decisions, even if we were provided with computerized data.

Particularly troubling to me is the McCain plan’s reliance on the individual market for health insurance, given the demonstrated inefficiencies of such nongroup plans. As the study cited above notes:

Administrative expenses are twice as high in nongroup markets as in group markets. The costs are higher because insurers in this market spend considerable resources on medical underwriting [i.e., avoiding covering sick people], and economies of scale are lost. It is much more expensive to sell insurance to millions of individuals one individual at a time than it is to sell to a much smaller number of employer groups, each comprising thousands of employees. For a typical family that moves from group to individual coverage, therefore, the move to nongroup insurance will raise premiums for an identical policy by more than $2,000 per year. Shifting people into the nongroup market would not save money for most Americans. Rather, it would lead to increased spending on administrative costs and a decrease in the portion of health spending that actually goes to providing care.

One reason that nongroup plans appear less costly is that they offer less coverage. The typical deductible in nongroup plans is about $2,750, compared to about $1,000 for group policies. Coinsurance rates average 26 percent in nongroup plans, compared to 20 percent in a typical employer-based plan. For plans with copayments, the average copayment in the nongroup market is between $30 and $40 per doctor visit, well above that of group plans. Many services are not covered at all. Thus, much of the apparent savings from shifting to nongroup coverage would be offset by higher out-of-pocket costs for care.

In other words: there’s no such thing as a free lunch.

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