Monday, December 31, 2007

Pogo on Health Care: Yes, The Enemy Is Us

This was kind of fun. It pays to read the Thursday paper if you’re short of column ideas. The column by Austin Hill to which I’m responding is here, at least for about 10 days.


East Valley Tribune, Dec. 30, 2007

It’s said a conservative is a liberal who’s been mugged, and a liberal is a conservative who’s been indicted. But after Austin Hill’s column last week describing his “adventures” in the health insurance market, it shouldn’t require an indictment to make conservatives rethink their ideology. Trying to buy individual health coverage should suffice.

How did the “free market” treat Hill? Not particularly well, he admitted. But what Hill didn’t acknowledge, while complaining about corporate bureaucracy, waste, and having coverage he can’t afford to use keeping him from getting care he needs, is that he’s part of the problem.


Hill demonstrates why individuals, acting rationally, help make a “free market” in health care impractical, expensive, and inefficient. Hill’s first rational-for-him-but-bad-for-the-system move was using an insurance agent. (Hiring an agent, says Hill, is acting “all by yourself.”)

Hill didn’t use the Web or compare ads, much less read actual policies. An Internet-savvy video and satellite radio personality and published author didn’t feel capable and instead relied on someone employed by (and owing a duty to) the seller.

Unless sellers are forced to compete openly and transparently, they won’t, and consumers will lack knowledge and have to rely on intermediaries with inherent conflicts of interest. (That’s worked so well on Wall Street.)

Second, as the headline to Hill’s column noted, buying health insurance is “trickier” than buying a used car -- the classic example of a market dysfunction called “asymmetrical information.” The seller knows far more about the car than the buyer, who recognizes that the seller wouldn’t sell the car if continued ownership made economic sense.

So with health insurance; you know more about your health than the insurer possibly can, so sellers must protect themselves. Insurers recognize people only buy insurance if they think they’ll spend more in health care than the annual premiums.

Hill proved this point; he was eager to buy coverage so he could see a doctor for a serious sinus problem. (His agent warned him not to go until his coverage was “confirmed.” So he didn’t.)

This market dysfunction is called “adverse selection” because people who buy insurance are in a better position to know if they’ll need insurance. Those folks cost more to insure, which increases premiums, makes more people self-insure (or buy cheaper, catastrophic-only policies), which drives up premiums more, making more people leave the pool -- the “death spiral.”

Hill also found the free market to be a take-it-or-leave it proposition. He got an initial price quote, but once he decided to purchase, he got a higher “counteroffer.”

The term upset Hill, because “counteroffer” implies negotiation, and there wasn’t any; the insurer just decided to charge more. But legally, Hill had no choice; the original quote was subject to change, and it did. And it didn’t matter, because he bought the policy anyway -- because he was primarily concerned about price.

That’s another reason why Hill, acting in his self-interest, helps make the market dysfunctional. If buyers only care about price, then that’s how sellers compete. Insurers have no incentive to invest in anything with a longer-term payoff, such as wellness, prevention, or information technology. Consumers make those investments worthless by moving to a cheaper policy before any possible savings could develop.


None of these fundamental problems has anything to do with the private sector’s greater administrative costs and their own perverse incentives -- or that surveys show Americans most satisfied with health coverage are those on Big-Government-run Medicare.

Even if the insurance companies were Mother Teresa incarnate, the market would be dysfunctional dealing with price-sensitive, symptom-hiding, and self-interested consumers like Hill. The only reason why the U.S. system hasn’t totally collapsed is because we’re paying twice per capita as every other advanced industrialized country.

Hill, who usually has more answers than you’ve got questions, ended his column by asking “somebody” to develop a private-sector solution. Well, there isn’t one, not with consumers like us. Begging somebody running for president, or “we the people,” to think of a solution that doesn’t exist won’t cut it. It’s true in health care, too: Hope is not a plan.

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