The Limited Benefits of First Dollar Health Care Coverage

I hadn't realized, when I wrote yesterday's post, how many people are emotionally invested in first dollar coverage.  To the extent that we're worried about health insurance coverage, I thought that most of us were agreed that we were talking about the benefits of catastrophic coverage, not this insane scheme we have in the US where catastrophic insurance for the kinds of risks most people can't finance comes bundled with first-dollar coverage for ordinary treatment of the sort that most people used to pay for out of pocket.

Color me chastened.  So let me expressly stake out some more controversial ground on health care policy:  for most people, first-dollar coverage is probably not a significant driver of health.  If most people paid for normal care for everyday ailments out of pocket, I don't think there would be much effect on aggregate national health.  What benefit there is from first-dollar coverage comes from covering low-income people with chronic conditions, at least as I understand the literature. 

Which is not, to me, all that surprising.  Insulin and checking blood sugar saves the lives of diabetics, and as a result, most people will find the money they need to pay for supplies, so that compliance problems are driven more by the pain-in-the-ass factor than the price.  But if you're severely income constrained, you'll chose eating, rent, or shoes over testing strips.  I don't think it's an accident that natural experiments involving Medicaid expansions or terminations tend to find relatively large effects.

What first dollar coverage for the affluent does is drive costs.  Take the recent kerfuffle over mammograms. Mammograms are very uncomfortable, and of course, you don't want to shoot any more radiation into yourself than necessary, so women should have been excited by the news that you probably don't need one until you're fifty.  Instead they were outraged.  Since this was about spending other peoples' money, naturally we want the right to spend as much of it as possible, even if it's not very useful. 

Now, maybe the recommendations were wrong--but if that's the case, in a world without ample first-dollar coverage, you'd simply discuss that with your doctor, not write the damn newspaper. 

This is hardly the only example.  I doubt it's coincidental that the health care markets where people pay their own way are the ones where there are more real efforts at cost control, like plastic surgery, fertility, and vision care.  (I recently heard a local fertility clinic on the radio offering a money-back guarantee if they take your case!)  With all the layers in between consumers and the providers in the ordinary market, the natural battle between consumers seeking better value and producers seeking higher prices is terribly distorted in ways that don't make us healthier.

I think that the argument for catastrophic coverage is much stronger for a variety of reasons, which is why I'd like to see the government pick up the tab for expenses that total more than 15% or 20% of annual income.  There's certainly also a case for providing basic care and treatment for certain chronic conditions to the poor, though even in that case, I'd like to see us at least try to handle the problem with a combination of catastrophic insurance, and better income supports.  But if that failed--and it might--I'd absolutely support public provisions of those sorts of treatments to lower income Americans, along with no-brainers like prenatal and infant care.

But for the vast swathes of the middle classes? No, I really don't think that having extraordinarily generous benefits that insulate them from almost all the cost of their medical treatments is improving either our health, or the nation's financial condition. In fact, I think it's the very reason that ordinary treatments are so inflated that they've become "unaffordable".  Call me cynical, or an ideologue.  But I think we'd be better off with markets in every day care, and insurance for the catastrophic stuff that individuals really can't afford.

I should note, however, that very smart health care economists like David Cutler disagree with me.  Cutler notes that compliance rates with many chronic diseases are very low.  For example, majority of people given hypertension drugs discontinue them within a year, because the drugs have side effects, and the hypertension doesn't . . . until you have a stroke.  His reasonable point is that with compliance so low already, we should be trying to eliminate any possible difficulties.  This is worth considering, but I'm not sure that this is necessarily the best way to achieve these goals, nor the most cost effective one.  What would happen if we took all the money we're plowing into the middle class, and invested heavily in a visting nurse's service?  I know that I was a lot more religious about monitoring my peak flows when the nice nurse from the insurance company called to badger me.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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