End of the Free Lunch Charade

Mitt Romney promised his state a health care free lunch, and everyone believed him.  So much so that other states are copying his plan.  Well, the charade is ending:

Last year, then-Gov. Mitt Romney made headlines by signing legislation
to cover all the state's uninsured. . . Romney suggested that annual
premiums for a single worker might total $2,400. But when insurance
companies recently provided real estimates, the cost was much higher:

Arnold Kling cries "I told you so."    And, I did too.

Low-deductible health care insurance (Massachusetts does not allow, by law, any other kind) is nuts, but it is what everyone is used to.  For some reason, people have a huge aversion to paying for medical costs directly, even if it is demonstrably cheaper.  Samuelson gets at this in his article when he says:

For decades, Americans have treated health care as if it exists in a
separate economic and political world: When people need care, they
should get it; costs should remain out of sight

Let us take a quick example.  Let's say that the average family generates $1000 in medical costs in a normal year, that is, without any major hospitalizations.  This would mean that if I got an insurance policy with a $1000 deductible, my coverage should be (relatively) cheap, since I am only really insurance against catastrophes -- I am effectively paying my normal annual costs out of pocket.

Now let's say I switch to a zero deductible. The premiums are going to have to be at least a thousand dollars higher a year.  And, in fact, they are likely to be more, given markups and administrative costs.  And that extra $1000+ will now be unavoidable to me, whereas I might have managed my own out of pocket spending lower if I am paying the bills.  Paying for a health care plan that covers one's normal annual medical costs is a dead loss.  There is no free lunch  (except for tax -- historically, medical costs payed by the employer were tax deductible, whereas costs paid out of your own pocket were not, which is one reason our health care market is structured in such a silly manner).

A while back, I switched from a $500 deductible plan to a $3500 deductible plan (I pay for my own health care).  You know how much I save in annual premiums?  $3000!  Talk about the biggest no-brainer ever.  Even if my annual health care spending was $3500, this would still be a break-even decision.  But since my actual spending in a normal year is probably $1000-$1500  (depending mainly on whether my wife or I get sent for some weird test) this was a huge financial gain.  And remember, this decision would not have been available to me in Massachusetts, because they do not allow high-deductible health insurance.  For some reason we are all caught up in this paradigm that health care expenses remain out of sight.  Even my wife, the Harvard MBA  (but from Massachusetts!) took some time to get comfortable with the concept of paying medical expenses out of pocket -- you're not supposed to do that, that's what insurance is for!


  1. Richard Nikoley:

    I have recently had experiences of this same sort, personally and in my company, coming to realize that if everyone paid out of pocket except for the catastrophic incidents, costs would probably come down. I blogged about it a couple of weeks ago.


  2. Doug Murray:

    People don't want insurance against risk, they want cost subsidies. And that's what Mitt gave them. Here in Florida we just solved a similar problem with hurricane insurance by having excess costs shouldered by the taxpayers. Brilliant.

    At least we can opt for higher deductibles, which a lot of folks were against.

  3. Kyle Bennett:

    I recently went in for an infected finger, it had to be lanced, and I was given an antibiotic. I went to the "Urgent Care" (I had a doctor appointment for the next day, but that evening the pain became umbearable). I asked them the price of the visit and they said something like $350. I toook out my credit card and told them to put it on that, and they said "Oh, if your paying now, it's only $157." Add the $40 prescription, and it's still way under a single-month premium for one of those comprehensive plans.

    Anything that pays for things you know are going to happen (checkups, etc.), or things that are statistically nearly certain over some period of time (the occasional minor repair), is not insurance, it's socialized medicine. The rates for high-deductable catastrophic insurance are remarkably low.

  4. markm:

    One factor is that, if I understand correctly, the feds make employer health insurance payments 100% tax-deductible. If you pay out-of-pocket, you cannot deduct that from income unless you itemize deductions, and IIRC even then you can only deduct amounts above a certain percentage of your income.

    Just recently, they've provided a way to pay with your own money but still have small amounts deductible: the HSA. Originally, you lost any money left over at the end of the year, but with the new ones my employer started last year, unused money just keeps building up in the account, I get interest on it, and I can roll it into a retirement plan in the end. It eliminates the moral hazard that's inherent in having insurance pay for routine and predictable expenses, and that has done so much to inflate medical costs. However, I'm still paying someone else to pay the doctor, so there are still administration charges on top of the actual cost.

    The bad news: If I read the rules right, you must buy high-deductible insurance to qualify for an HSA, so Taxachusetts residents are out of luck. I'm wondering why anyone but welfare recipients still lives in that state.

  5. Jeffrey Tarter:

    I'd love to pay for the small stuff myself, but I've noticed that the quoted price for most medical procedures--the price I'd be charged, presumably--is often two to three times higher than the negotiated price that insurance companies pay. Like Kyle, I'd expect a discount for saving my doctors the overhead of processing an insurance claim. But as far as I can tell, that's not what happens, except perhaps for simple emergency procedures.