Discretion is the Better Part of Health Care

To people in what I call the health policy establishment, the riddle of modern health care is: Why are health costs rising at twice the rate of growth of income all over the developed world? To me the riddle is: Why isn’t health spending rising even faster?

Any time you offer people discretionary benefits that are free at the point of consumption, they are likely to exercise discretion and enjoy the benefits. Yet that’s what first-dollar health insurance coverage does. It encourages us to think that everything is free, even though we all end up paying through higher premiums and higher taxes.

As a practical matter, once we pay insurance premiums, that money is combined with everyone else’s premiums in a pool. Once the money is in the pool it is no longer “ours.” In fact when we draw from the pool, we are spending everybody’s money. Moreover, the only way to get benefits from the health insurance pool is to spend money on medical care.

I was musing the other day on how many opportunities I have to spend your money:

Anything goes

If my wife objects to my snoring at night, I can have my uvula removed. Cost to you and others like you: about $20,000.
If my wife and I decide to have another child and we can’t manage it the old fashioned way, there’s always in vitro. Cost to you: another $20,000.
If we decide not to have a child, there is always a vasectomy or tubal ligation (free coverage to be mandated by ObamaCare). Cost to you: $1,000-$7,000.
If I decide my thinning hair needs to be a bit bushier, there’s Propecia at an annual cost of $842.
If my testosterone level isn’t in sync with my idealized vision of my own virility, there is Androgel ($831). Essential for everyone suffering from male menopause I would think.
If my cholesterol count is a bit out of whack I can change my diet and exercise; or I can take Lipitor ($2,000).
If I over-eat and over-drink and get gout, there’s always Colcrys ($2,000). Surely you wouldn’t deny me relief from joint pain?
If my unhealthy diet leads to diabetes, all those costs are yours as well (average annual extra cost = $7,000).

Note that I’ve already spent as much as the cost of a luxury car and I haven’t even gotten around to the normal screenings — general checkup, PSA test, colonoscopy, and a hundred other things. Those will cost you as well.

Then there is the pièce de résistance. All of the above costs and benefits are more or less contemporaneous. But let’s say that over time I abuse my body with alcohol, tobacco, drugs, fatty foods, lack of exercise, etc. I know that you will pay all my medical costs — mainly from first dollar — once I get old enough to qualify for Medicare.

Oh and did I forget to thank you for all this? Sorry. There are so many demands on one’s time.

I know what you are thinking. Some of these choices require doctors to fill out the right forms with the right answers. But that’s a no brainer. One of the most important thing doctors do is exploit reimbursement formulas so that someone else will pay our medical bills.

Not only are all these options discretionary, the benefits are use-it-or-lose-it. Frankly, I would rather have a new car. But that’s not an option. The only way I can get benefits out of my health plan is by spending money on medical care. The only way seniors can get benefits out of Medicare is by spending money on medical care.

Even though these observations are mainly just common sense, they are resisted mightily by the orthodox health policy community.

Isn’t technology supposed to cause higher health care spending? In markets where there are no third-party payers, technology reduces costs (cosmetic surgery, Lasik surgery, etc.). In the third-party payer system, technology increases costs primarily by creating and facilitating new discretionary benefits.

What about greedy doctors? Greedy hospitals? Greedy drug companies? As Adam Smith taught us 200 years ago, the self-interest of producers and sellers generally works to our benefit — unless of course, they are creating and facilitating access to discretionary benefits.

Now if we want to “bend the cost curve,” as the policy wonks are apt to say, there is another role for common sense. Don’t let people draw from a common insurance pool to pay for their purely discretionary choices. Instead, let them save in special accounts from which they can purchase discretionary care.

For contemporaneous decisions, the mechanism is the Health Savings Account. These accounts should be used for all of the items I listed above plus almost all primary care and almost all diagnostic testing. (The exceptions are those few instances where “the test pays for itself.”)

What about long term. Is there a way to compel people to save while they are young in order to pay for medical expenses in old age that are directly related to their own life-style choices?

It’s an intriguing thought. But I don’t know quite how to do it. I invite your suggestions.