Persistence and the Market for Health Insurance

Have you ever read an article in which the writer compares the incomes of the top 1% to the bottom 99% over the last decade, say? Or the comparison might contrast the top 10% to the bottom 90%?

The problem: the author is encouraging you to think that the people in the top 1% at the beginning of the decade are the same people who are in the top 1% at the end of the decade. But they aren’t. People move in and out of this category with surprising frequency. Yet if they aren’t the same people, what’s the point of the comparison?

Have you ever read an article in which the writer compares the incomes of the top 1% to the bottom 99% over the last decade, say? Or the comparison might contrast the top 10% to the bottom 90%?

The problem: the author is encouraging you to think that the people in the top 1% at the beginning of the decade are the same people who are in the top 1% at the end of the decade. But they aren’t. People move in and out of this category with surprising frequency. Yet if they aren’t the same people, what’s the point of the comparison?

A similar thing happens in health care. I frequently see writers say that a small number of people spend most of the health care dollars. True. But the small number this year are not the same people as the small number last year, or the year before.

As in the case of the income comparisons, readers can be misled into thinking that our health care problems boil down to how to take care of a small number of people. Not so.

“My momma always said life is like a box of chocolates…
You never know what you’re gonna get.”

– Forrest Gump

 A new study by the Agency for Healthcare Research and Quality shows how much fluidity there is among the categories of patients that spend the most health care dollars:

• In 2008, 1% of the population accounted for about one-fifth of all health care spending. Yet the following year, 80% of these patients dropped out of the top 1% category.
• The top 5% of the population accounted for nearly half of all health care spending. Yet 62% of these patients dropped out of this category the following year.
• Although the top 10% spent 64% of all health care dollars, the following year fewer than half of these patients were still in this category.
• At the other end of the spectrum, the bottom half of the population spent only 3% of health care dollars. Yet one of every four of these patients moved to the top half the following year.

Here is something else that’s interesting:

• The top 10% are spending almost two-thirds of all health care dollars in any one year.
• Of those who remained in this category for both years, 43% were elderly.
• Another 40% were under 18 years of age.

In other words, the persistently sick tend to be young or old. Among the adult, nonelderly population who were in the top 10% the first year, almost three of every four were in the bottom 75% of spenders the second year.

Why is this important? If a small number of people spent most of the health care money and they were the same people year after year, there would not be much point in having a real market for health insurance.

Consider fire insurance. This makes sense only if fires are largely unpredictable and could happen to any homeowner. But suppose that the small percent of home owners who experience a fire in any one year are the very same people who experience a fire every year. In such a world, fire insurance would not be very practical.

The same thing is true in health care.

Most people in health policy view health insurance as just a way to pay medical bills. In fact, I am probably one of the very few people you interact with who believes in real health insurance and who believes there is a social need for it. I am also one of the very few people you interact with who believes we need a real market for health risks in order to determine what is the best way to insure against them and to determine what is the best way to partition insurance products between self-insurance and third-party insurance.

It’s always nice to have one’s view of the world confirmed by the evidence.