Overcharged by Charles Silver

Author:Charles Silver
Language: eng
Format: epub
Publisher: Cato Institute
Published: 2018-05-31T16:00:00+00:00

THE EVIL GENIUS OF INSURANCE: MAKE HEALTH CARE CHEAP AT THE POINT OF SALE

It’s easy to see why insurance stimulates demand. At the point of sale, people don’t spend their own money. This makes medical services seem cheap or even free, so people naturally want more of them. And, just as naturally, they care very little about the total cost of the services they use.

The average price of a total knee replacement is about $31,000.14 That’s about what you’d pay for a new Audi Q3, a small luxury crossover SUV. But the average patient who undergoes a knee replacement pays less than 10 percent of the total, say, $3,000. The rest is covered by insurance. If the same arrangement existed in the auto market—call it “new car insurance”—you could buy a $31,000 Audi Q3 for $3,000. So you’d happily take one—or maybe several—even if you would never pay $31,000 out-of-pocket for this particular car.

Insurance generates demand for medical treatments in the same way. You pay a monthly premium over which you have little control, often because the dollars are withheld from your salary. And, once that money is spent on insurance, it isn’t coming back, whether or not you actually use any health care. However, you do get to decide whether to have knee replacement surgery or not. The evil genius of health insurance is that, at the point of delivery, it encourages patients to overconsume by making medical services seem cheap. Financially, your knee replacement surgery is the equivalent of a $3,000 Audi Q3. Even if you would never spend $31,000 of your own money on a knee replacement, as long as you value the benefits of the procedure more than $3,000—which is far less than its actual cost—you will willingly go under the knife. And the price stays high because few consumers shop for bargains or refuse knee surgery because of the price.

What’s true for you is also true for the millions of other people who carry insurance. You get to buy an Audi Q3 for $3,000 and so do they. Over time, the country will be flooded with new Audis and all of these new Audi owners will impoverish each other. Premiums will have to rise, because the money to pay for all the new Audis has to come from somewhere. Finally, as insurance-driven demand for Audis increases, Audi will increase its prices and aggregate spending will go through the roof.

The problem just described exemplifies what social scientists call a “prisoners’ dilemma.” Millions of people do something—here, buy insurance that heavily subsidizes medical services at the point of sale—that they think will make each of them better off. But collectively they wind up worse off than they would have been if they had each paid for their own health care. Without insurance, the only people who would have had knee surgery would have been those willing to pay $31,000 for it, just as in real life, the only people who buy Audi Q3s are those willing to part with the same amount of cash.

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