Intro. [Recording date: December 10, 2018.]
Russ Roberts: My guest is Ed Dolan.... Our topic for today is employer-sponsored health insurance, and we're basing the conversation on a recent essay you've written that we'll link to called "What's Wrong with Employer Sponsored Health Insurance". And let's begin with some basic facts. How important a phenomenon is people getting their health insurance through their employer? How unusual is it compared to, say, other countries?
Ed Dolan: It's very important. In the United States very close to half of all people who have health insurance in the United States get it through their employer. And this is a system that as far as I know is unique in the world. Certainly unique among all other countries: there are no other major countries that I know of that tie health insurance to your job.
Russ Roberts: Which is crazy. Why do you think--I know there are some different theories about it--but why do you think we have this in America?
Ed Dolan: Well, there's a little bit of controversy about that, but the predominant theory is that this was an accidental outcome of a wartime policy during World War II. During WWII there were strict price- and wage-controls to prevent inflation; and there was also a labor shortage since all the men were overseas fighting. And, so, employers who wanted to attract extra workers couldn't raise wages to do it. So they started offering fringe benefits--like, health care being one of the main ones. At first, it was ambiguous whether or not the value of these fringe benefits would be taxed as income for income tax. But, after the War, there was a decision made that they would not be taxed: they would be exempted from taxation, because people didn't want these benefits--the benefit of the income taxation--taken away from them. Since they'd already become widespread. So, that basically just stayed. Then, also after the War, President Truman made a big push to get some kind of national health insurance; but that fell short. And by the time that happened, employer-sponsored health insurance as a tax deductible benefit was so well established that nobody has really challenged it since.
Russ Roberts: There have been some people, I'd say in the last 10 to 20 years, who have pointed out that it's not a very good way to get people to be insured. And, it's ironic, as you point out. Obamacare requires it, or at least makes it expensive not to provide it. What's wrong with it? Why not--isn't that a good thing? What's wrong with having your employer provide your health insurance?
Ed Dolan: Well, it has several defects. One of the ones that gets the most attention is what we call the phenomenon of Job Lock, which is that employer-sponsored health insurance isn't portable. If you change your job or lose your job, you lose your health insurance. If you are a highly paid professional, it's pretty certain that your next new job is going to have it. But if you are working class, and especially if you are a low-paid service worker, you may be stuck if you lose your employer-sponsored health insurance. So, there is a large academic literature, and also a lot of anecdotal evidence that there are a lot of people who have jobs that they don't like, that they would quit if they could do it without losing their insurance. So, that's the Job Lock problem.
Russ Roberts: That is somewhat mitigated by COBRA [Consolidated Omnibus Budget Reconciliation Act--Econlib Ed.], which is an acronym for something--I don't know what it stands for. But COBRA is a requirement that, even when you leave your job, your health insurance is extended for at least a temporary period of time. Correct?
Ed Dolan: COBRA was an attempt to mitigate. Most people regard COBRA as a failure, partly because of its short-term nature, and partly because it's very expensive. Typically, employers pay about 3/4 of the cost of health insurance. The average cost of employer-sponsored health insurance is about $20,000, of which employers pick up about $14,000 as annual costs. And, if you go onto COBRA, you have to pay the whole cost yourself. So, you can imagine the typical working class person going from a premium of out-of-pocket cost of $6000 to $20,000--would find that a pretty big shock.
Russ Roberts: Let's go back to that $20,000 number. And, of course, the payment--when you say the employer pays $14,000 and the employee pays $6,000, that's the money that gets sent in. It's not who really pays it, in the economic sense of what we would call incidence of who the burden falls on. Presumably much of it falls on the worker in the form of lower wages. So, the 6 understates the real cost to you as a worker. The idea, though, being that the 14--that if you paid it--if you got $20,000 in wages, you'd have to pay taxes on. So, it's only--a $20,000 salary increase is only worth, say, something between, I don't know, $13,000 and $15,000 to the average worker. So, better to give that in the form of health insurance where it's not taxable, and both the employer and the employee prefer that. But that's--well, talk about why that's a bad thing. It sounds like a good thing. Which, like you say, most people are--
Ed Dolan: Okay. Yeah. It sounds like it's sort of benign, at first, because you're right that the employee bears, indirectly bears the cost of employer-sponsored health insurance. Because from the employer's point of view, what they're interested in, if they are going to hire you or not, they are interested in the total cost to them--to the company--of hiring you. And the total cost includes wages and fringe benefits, both. There's no question about that. So in that sense, the employee bears the whole burden. But, because it's tax deductible, then, depending on what your tax rate is, you get a better deal by taking part of your insurance in a tax-deductible way. But, that brings up the second real big problem with employer-sponsored health insurance, is that it's quite inequitable. It's not worth much unless you have--it's worth a lot more if you have a high tax bracket. If you are in a high tax bracket. So, if you are a highly paid professional, you get much more bang for your buck therefore. If you are low paid and paying only payroll tax, it's not nearly as good a deal. So, as a result of that, plus the fact that many low-paid workers are not offered that at all, the amount of money you get--the amount of benefit you get--is a lot less. According to some data put out by the Social Security Administration and analysis of that, for workers in the bottom fifth of the income distribution, they get benefits of around $500 a year from employer-sponsored health insurance. While, workers in the top fifth of the income distribution get benefits of about $4500. So, this is definitely a benefit that's very much skewed toward high-skilled, high paid workers.
Russ Roberts: Of course, the other part of it, which I don't think you talk about in your article, but for me has always been the--an equally important problem with this system--is that, when you are spending other people's money, you spend it less carefully. And so, when I'm getting a $20,000--or, a better way to say it; that's problem Number One. Problem Number Two is that when other people pay for what I have, I want more of it. So, I want a bigger health plan than I would normally have if I had to pay for it myself. And we say--you say tax deductible. It's really tax exempt. Right? So, I get that, in that $20,000 plan that I get, say, $14,000 is "paid by the employer"; $6,000 is out of pocket by me. But the truth is, is that the whole cost of it, I'm spared, say, $5,000 of it in taxes, at a 25% tax rate. And, as a result I want a bigger plan than I would have if I had to pay for the whole thing myself. So, we've subsidized the generosity of health insurance in America over the last so-many years. And that encourages more generous coverage; which encourages more use of the health care system; which encourages higher prices; which encourages people to pay for things they don't necessarily value as much as they cost.
Ed Dolan: Um. Yes and no. This is a problem. But there's two things I would say about that. Number One is that this problem of third-party payment is not by any means unique to employer-sponsored insurance. That's true of any insurance, whatever its source--
Russ Roberts: correct--
Ed Dolan: But more importantly, that's offset to a considerable degree by the fact that the deductibles required for employer-sponsored health insurance have been going up very rapidly.
Russ Roberts: I've noticed that. Why is that?
Ed Dolan: For example, here I'm just looking at some data here, between 2013 and 2018, the percentage of workers that had a deductible of $1000 or more went up from 29% to 48%. So, high-deductible policies are becoming almost the norm in employer-sponsored health insurance. And that does take away this, sometimes they call, what you say, the skin-in-the-game argument: If you have skin in the game, that is, if you are spending your own money, you spend less of it. I'd like to come back to that skin-in-the-game argument, by the way, because spending less and spending more wisely turn out to be not quite the same. But that would be a bit of a digression at the moment. Maybe we can come back to that later.
Russ Roberts: The other point I want to mention--well, a couple of things I want to mention. One is, we talked about this in an episode with Mark Warshawsky: When you have this attractiveness of deductible health care insurance payments, you lower observed compensation. Which is crazy, but true. That, your full compensation is often not what you remember. You tend to look at your take-home pay, or your pre-tax income; but you don't always account for the fact, and the data don't always measure your in-kind benefits in the form of either health care insurance or subsidies that you get for that. Which--their change is how you perceive your economic progress and wellbeing. And as we've devoted more and more resources to health care in the United States, that becomes increasingly important. That's one thing I want to mention. The other thing I want to mention is--and this, I just have to say this, Ed, because it drives me nuts--this whole conversation is going to be about insurance. Most of what we care about, though, is health care. There is an issue of insurance: there's riskiness, and there's worries about catastrophic costs which we'll talk about later. But the truth is, I really don't care whether people have health insurance. I worry that they have health care. I worry that they are taken care of when they get sick or have trauma. So, our focus on insurance I think is a bizarre public policy phenomenon.
Ed Dolan: Yeah. You are right about that. What we are worried about is access to health care. Not whether you receive health care, because, you know, a lot of people have--more than half the population has almost no contact with the health care system from one year to the other because they are healthy. But, it's important even for healthy people to have access for peace of mind and so on. But yeah, you are right about that. But let me wind back. What was the first part of your comment?
Russ Roberts: The first part of my comment was about compensation--our perception of compensation is distorted.
Ed Dolan: Right. Compensation. You are absolutely right on that. The fact that people get a substantial part of their compensation in the form of fringe benefits, which health insurance is the largest one, does distort--it distorts information on how pay has changed over time. I was just reading an article--as a matter of fact, it was an article in this morning's Washington Post, op/ed by Robert Samuelson, where he emphasizes that--he's talking about this doctrine of wage stagnation, the fact that lower paid workers haven't gotten a raise in 30 years. And he says that, he points out that whether or not that's true depends a lot on whether you include fringe benefits. And he includes some links to some interesting empirical studies of that. So that's very much true. Of course, there's also an argument about the cost of health care in general. And you say, your employer is spending more in health insurance; but, is the value of the health insurance to you increasing as rapidly as the cost of the health insurance to your employer? That's a different question, a more controversial question.
Russ Roberts: Yeah--the employer--I've been thinking about this a lot lately. Obviously, the employer has an incentive to try to line those up. The employer doesn't want to give you something you don't value. They'd rather give you the money and let you spend it yourself. Even if it's tax deductible or tax exempt. If you don't value it, that's not good compensation. So, they don't want to do that. But the fact that there's this disconnect--it's hard to describe it accurately. I'll just put it this way: I've always assumed that health insurance companies--as you point out, any time you have a third party payment, these issues of moral hazard and care of how you spend your money come into play, whether it's subsidized by Federal tax policy or not. So, if I have insurance, I have an incentive to use it because it's paid for by somebody else. The insurance knows that; and they try to make sure that it's money well spent: that the things I ask for insurance to cover are good for my health, and not just self-indulgence, say, and certainly not an example of fraud on the part of my medical provider. But I've started to wonder about whether that's a very good system. In particular, say, a new treatment we've been talking about, pharmaceutical pricing on the program a little bit recently and I expect to do it some more--a new drug gets developed that extends life by 3 months. It's expected length is 3 months. It's a version of a patented drug that is now about to go off patent. So, the comparison is between a generic and a patented drug. The patented drug extends life 3 months more; and it's 50 times more expensive. Who wants that? Well, most people don't want it if they had to pay it out of their--well, they wouldn't almost certainly, if they had to pay it out of their pocket. They don't want their kids to pay for it, either, if they have any care or love for their kids. Usually, I think they'd say, 'I don't want them to pay for that.' And I would think the insurance company wouldn't want to pay for it. But the legal nexus of getting the best care, and then also the question of: Let's say they approve it as a covered drug and they raise their premiums? Now, is there going to be the care taken--I mean, it's really a complex system. Who is monitoring that to make sure that the insurance company is agreeing to things that are really of value? And the answer is the employer, to some extent. There's competition among the insurance companies, but not so much. So, anyway, I worry about all these things as driving up the price of health care and not getting our money's worth.
Ed Dolan: You're absolutely right to worry about those things. And, you're certainly right to say it's a very complex problem. If we want--a couple of remarks I'd make. First of all, if we want to stick to the problem of employer-sponsored coverage, people that study these things more carefully than I do--that is, people who are actually in the industry--say that employers have a reputation for not doing these things very well. Yes, of course they should have an incentive to monitor their insurance companies and make sure they are only paying for things of value. But, in practice, employers themselves don't have the expertise to do that--number one. So, they rely on middlemen. They go to--there's a whole industry of facilitators that stand between employers and the insurance companies. So, unless you are a really, really big employer--General Motors or something like that--if you have a couple hundred or a few hundred employees, to provide your insurance you go to one of these middlemen and you contract with them to manage your health insurance; and then they in turn go out and shop among actual health care insurance companies to select a package that they think will be beneficial for you. And they take a fee of maybe 10% of the whole thing; and then the insurance company, in turn, goes out and bargains with the providers. So, right away, employer-sponsored coverage includes an extra level of middlemen and extra separation between the person who is actually spending the money and the person who is making the decisions on things--you say, on whether a new drug actually has a reasonable benefit. You may have seen in the news: there was a recent case in which 3 really big companies--Amazon, J.P. Morgan, and Berkshire Hathaway--joined forces to establish a new health care company that would manage benefits for, I don't know, several hundred thousand employees of these three companies. And supposedly the stock prices of traditional insurers fell on this news. But, again, there's some skepticism as to whether or not this will really work. As one commentator said: Just because you know an industry is under-performing and you have a lot of money to solve the problem doesn't mean you have a successful strategy. So, anyhow, yeah: That is a problem. It's a specific problem with employer-sponsored insurance. But it's a more general problem, also, because insurance companies themselves, although we think of them as big, powerful giants--and some of them are very big and powerful--they actually are in an inferior bargaining position relative to health care providers. And so, even if as an insurance company you make your best efforts to provide the most cost-effective care, it's hard for the insurance companies to do it because very often the providers are more concentrated. For example, hospitals are a very important category of providers. And even in middle-sized or large cities, you've only got one or two hospitals to deal with. And, as you probably have read, there's a trend toward consolidation and concentration in hospitals. So, even where there's good will--and I'm not saying insurance companies always have good will--even when they do have good will, they're not necessarily in a very strong bargaining position.
Russ Roberts: Well, I've probably told this story before, but--I went in once to a doctor to find out whether I wanted to spend time with--to change doctors to this person. And we chatted for 5 or 10 minutes--I made an appointment with him; we chatted for 5 or 10 minutes. And then he said, 'Well, let's do some kind of test.' I forget what it was. And it was just a sham. He just wanted to be able to bill this 30 minutes to insurance so that he would not lose money from chatting with me. If he had said to me, 'I'd like to check up'--if I had said to him I want to find out whether I want to switch doctors to you, he said, 'Well, it will cost you $100, or $250 for my time to find out,' I probably would have said, 'Maybe I need to look at some more recommendations or references.' But instead he did a bogus test--I was incredibly uncomfortable, because I knew he was just using it to scam the--it wasn't literally bogus: he did the test. But, that kind of thing--and afterwards I wondered whether I should say anything about it. I didn't switch to him. But that kind of thing, it must happen "all the time." The ability of an insurance company to monitor the performance of the thousands of doctors that are, you know, on the ground is minimal. And as a result, there are all kinds of things that become, I think, culturally acceptable to bill for. And others that aren't, because that would be ridiculous, or embarrassing or unethical. But, there's got to be creep in that experience: that more and more things are like--I mean, if you ever look at your bill after you've had an exam or a treatment or some kind of experience in the hospital or in the dental office, the things that they claim to have done to you--the categories--they've checked all the boxes and filled in all the blanks. But if you were paying for it out of your own pocket, or if the insurance company had somebody alongside you at each of these experiences, it couldn't happen that way.
Ed Dolan: Yes. Well, we're getting into some really big issues in the whole health care system, here. A couple of comments I'd make on your experience there, which is very common. Number One, yes; often these tests are offered in, we might say, bad faith by the doctors, perhaps because they know that an office visit itself is going to be billed pretty low, so they want a little extra money on the side; and they may have a financial interest in the company doing the test, and so forth. There's another side to the coin, though, which is that when you ask doctors about this, they tell you that some of this excess testing is consumer-driven. That if people go to their doctor and they want these tests. And example is the so-called PSA [prostate-specific antigen] test for prostate cancer, which has been found to be practically worthless as a diagnostic tool. But when men go in to their doctors for a check, they ask for this. They say, 'Well, maybe it's not very good, but shouldn't you do it? I'm worried about this.' So, you got that.
Russ Roberts: Yeah. We've talked about that before, the evidence on it.
Ed Dolan: But it is a problem. One widely-recommended solution is to move away from fee-for-service medicine toward bundled payments, so-called, or sometimes called value-based care, where you pay for a whole package. If we're getting into personal anecdotes: A couple of years ago I had shoulder surgery, and I went to an excellent hospital in Seattle called Swedish Hospital. And I asked them up front: I said, 'How much is this going to cost me?' And I expected them not to be able to say, because that's often the case; because they are going to bill you for every saline bag and so forth. Somewhat to my surprise, Swedish Hospital, the receptionist whom I asked this of said, 'Oh, that will cost you' and then she gave me a number in the low--it was a high number--the low 7 figures. But, that was it. And that was the only thing that my insurance company was ever billed for--was that single lump-sum payment. More of that--
Russ Roberts: Well, there is a new phenomenon--
Ed Dolan: more of that would help control the type of things you're--[?] encouraged these unnecessary tests and overpriced sale on bags and things like that.
Russ Roberts: Yeah. There is--but, and some of them--I don't mean to suggest that it's fraud: literal fraud, like a lot for the saline back. A lot of times it's just an extra test. It's also a legal environment that encourages doctors to be more "thorough." My mom went to get some checkup after a heart procedure, and they gave her an EKG [electrocardiogram], and I said, 'Mom, why did they do that?' 'Well, they always do that when I go in.' 'You just had one three days before, when you had the surgery,' or when it was. 'Oh, yeah. They're just routine.' You know, and routine means: Yeah, there it goes, just check that box, that billing. And I'm thinking, 'That's not in your interest, and it is in theirs. So, just say no.'
Ed Dolan: Let me ask you a question. How did you even dream of the possibility of a thorough discussion of these issues in an hour?
Russ Roberts: Well, for our listeners who've heard dozens of hours on this before, this just enhances what we've already talked about.
Ed Dolan: Yeah, no. For one, it's a very complicated system that has so many different problems that a discussion of one inevitably leads to a discussion of another.
Russ Roberts: For sure. And we had an episode, which I'll recommend to listeners who may have missed it, with Christy Ford Chapin on the evolution of the health care system in the United States and some of the things that were done before the large role of government, which--it always drives me nuts when people say, 'You can't have a market-based health care system: look how bad our system is.' As if we have a market-based health system. We don't. The market force is in it, but it's heavily dominated by government in all kinds of subtle and not-so-subtle ways.
Ed Dolan: Yeah. Well, you know--I don't know how long you want to stick strictly to the employer--
Russ Roberts: You can talk about whatever you want, Ed. Go for it.
Ed Dolan: the employer-based health care system, but this broader question of, 'To what extent is it possible to have a market-based health care system?' is one that I've thought about, worried a lot about at the Niskanen Center. And, a position I've sort of come down to is that you should have a market-based health care system to the greatest extent possible; but it's clear that a 100% market-based health care system is not possible. And that's true for two reasons. And both of them have to do in one way or another with the insurability of health care. The first problem is that health care spending is very, very asymmetrically distributed, and it goes by basically a--some people call it the 80-20 rule, that 20% of people account for 80% of health care spending; and in fact the top 1% account for about 10% of health care spending. So, the result of that is that there are a lot of people for whom it is true that their health care spending needs exceed their income. In fact, exceed their entire lifetime income in a certain number of cases. Now, of course, it's also true that if your house burns down, the cost of rebuilding your house exceeds your income; and we solve that through insurance. But, health care needs are increasingly uninsurable, because in order to be insurable, a risk has to be fortuitous--it has to be due to random chance. But an increasing number of health care risks are predictable on the basis of pre-existing conditions or things that are determined, testing that's determined before you are born. So, we have this combination of catastrophic risks--which are risks that exceed your ability to pay, sometimes even on a lifetime basis, not just on current income--and we have uninsurability. Between those two, they mean that if we try to have a purely market-based health care system, some people are not going to have access to treatment for serious health care needs. So we have to find some solution to that, which we've been working on.
Russ Roberts: Well, let me disagree a little bit. Or at least point out something I think people often forget. I know you don't forget it, but people often do. Which is that, if the price of something exceeds everybody's income, that thing won't exist. It will only exist if we decide to subsidize it; and we might decide to, because it's so wonderful and so glorious. We've had episodes on pharmaceutical pricing: Many pharmaceutical treatments now for cancer and other illnesses are in the 7-figures per year--say, $100,000 per year or more. And 'Well, of course, who could afford that without insurance?' Very few. Which is why it wouldn't be $100,000 if somebody else weren't paying for it. We have this crazy system right now where pharmaceuticals--pharmaceutical companies--which I'm big fans of, by the way, for their innovation; they do wonderful things. But the current system incentivizes them to reach into the pockets of taxpayers to fund--well, all kinds of good things, which we get benefits from--but their worth is unclear. Meaning: if a drug costs a million dollars even if no one can pay for it, that's not the market price. There's sort of a market in that the government doesn't intervene in how it's priced unless it gets really outrageous. But, we have this crazy world right now where they can raise the price 10, 20% on existing drugs; and if they have a case to be made for its efficacy, or even if not--even if it's just a good drug that's working--I mean, it doesn't have to be getting better--they can pass that price on through Medicare, Medicaid; and through insurance companies are going to also pass on those premiums. Now, I want to make it clear: They are a very small part of the total burden; and they save money, too. So, it's not the biggest problem that our health care system has in terms of cost versus value. But it is an example of why the current system is nuts. The same thing is true of the hospital system, which you mentioned earlier. The hospital system, which is uncompetitive--partly because we've given existing hospitals the ludicrous ability in many states to restrain competitors from entering their market--which is just--it just drives me crazy. Literally: They can sign off and veto the arrival of a new hospital. So, strangely enough, they get more and more expensive. Much of that is not paid for by you or me the patient. It's paid for by the taxpayer, or the premiums imposed over a large sea of employees. That's a crazy system.
Ed Dolan: Yeah, it is a crazy system. I'm not quite sure where you're going with this, though, because the arguments you make and the facts you point to are often used by advocates of single-payer health care. Because, they point out that countries, other countries have systems for dealing with these, let's say, getting to some of the--let's say we just limit ourselves not to countries with national health care systems like United Kingdom, but to countries that have private health care systems with government payers, like Netherlands or Switzerland or Germany; or you have private insurance companies and private providers, but government is paying the larger share of health care costs directly instead of indirectly through employer mandates and stuff. So, if you go to those countries you find out that they are faced with these same problems; and what they have is they have professional associations that analyze treatment to see whether they are worthwhile. They'll look at a new cancer drug and evaluate it in terms of what people who study these things called QALYs--Quality Adjusted Life Years. And they'll say, 'Okay, here's this new drug. How much is it worth paying for? How many quality-adjusted life years does it offer compared to the old drug?' And they'll put a cut-off; and they just won't pay for it, or they won't pay more than a certain amount. We don't have those restraints in the United States. You would think that in the abstract that insurance companies ought to insist on not paying for drugs that don't give you the benefits; but that's not true. In our government sector notoriously in Medicare, we don't have any effective controls over this. So, it's something that somebody has to do. Somebody has to be able to look at this. And you can't expect the consumer to make this choice because obviously when you are faced with cancer, you are going to grasp at any straw no matter how expensive it is. Somebody has to say no.
Russ Roberts: Well, I actually don't agree with that. I don't think you'd grasp at any straw. You wouldn't impoverish your children. And one of the great things about our system is you don't have to face that ethical dilemma.
Ed Dolan: Stop right there. That's false.
Russ Roberts: Why?
Ed Dolan: And your children--and people do this. You say you won't impoverish your spouse, you won't impoverish your children; you'll just die. That is true of some people, but it's not true of all people. People burn up their entire inheritances, leave their wives in penury, because they want to get some last, desperate-hope treatment. It's a tough area to expect people to be rational decision-makers. Let me just go back, if I could, to go off at a right angle here.
Russ Roberts: Yeah; go ahead.
Ed Dolan: There's another topic we've talked about which complicates the situation for providing market-based health care, and that is this thing you say, 'Well, if people are spending their own money, they spend it more wisely.' But, there's not very much empirical evidence that supports that. There certainly is empirical evidence, and it's been very widely studied--there's quite a large literature on this--studying how people respond to high-deductible health care. And there is--it's definitely true that when people have high deductibles, they spend less on health care. What is not at all clear is whether they spend more wisely. And most studies conclude that people are about equally likely to cut back on their consumption of unnecessary, frivolous care, and to cut back on cost-effective, preventive care or on treatments that really work because it makes them--they do things that are unwise in their health care spending. So, consumers don't seem to choose as wisely in the health care world as they do in the supermarket. That's just a complicating factor. Because, that means that some of the apparently-obvious solutions like high deductibles and, you know, Health Savings Accounts [HSAs], and so forth are not perfect.
Russ Roberts: I agree with all of that. And I didn't mean to imply that everybody would spare their children or their spouse. It's certainly the case that many people don't.
Ed Dolan: It's their children, their spouse, often who are urging them to try these things--
Russ Roberts: Want them to spend the money. Yeah, I know.
Ed Dolan: 'Don't give up, Pa!'
Russ Roberts: Yeah. Yeah. No, that's true, too.
Ed Dolan: Identified it [?].
Russ Roberts: Yeah. Well, one reason I think people don't react so rationally is obviously the emotional burden of death, mortality. That does make it hard to make decisions. Although the knowledge a man's going be hung in a fortnight concentrates the mind wonderfully. At least that's what Samuel Johnson thought. Of course, the other thing is we're not in practice. We don't have a lot of practice at making these kinds of decisions. We've evolved into a culture of trusting doctors as shamans and wizards and always looking out for us. There's a certain paternalism or nanny-statism, maternalism, to that relationship that I think is extremely unhealthy for adults. But it's certainly true that we struggle to make wise decisions. I wonder if that would be as true if we lived in a world where we had to make them more often. But, that's just an unanswerable question.
Russ Roberts: Let's turn to an idea that you've proposed in this article we've been talking about, which is Universal Catastrophic Coverage. Actually, before we do that, one thing we haven't talked about that we need to, which is: If I'm not going to get employer-sponsored health insurance, what are my options? How hard is it to buy insurance as a self-employed person? I don't know the answer to that.
Ed Dolan: I do. Because I've spent most of my career in self-employment. And, before I reached Medicare age or before the ACA [Affordable Care Act] came along, I depended entirely on individual health care insurance. I am very fortunate--in fact, my wife and I have both been very healthy. Even so, toward the end of that period, the early 2000s when I was relying on that system, it became the prices for the policies I was paying--and these were essentially perfect health records--were rising rapidly. People who study those things say if we went back to pre-ACA, that the individual--if we simply abolish the ACA as some people recommend--the market for individual health insurance would perhaps no longer exist. That it would simply be recognized as an essentially uninsurable risk, for individuals. It's still insurable to some degree for group policies.
Russ Roberts: So, is the problem simply that you can't be pooled together with other people for the insurance company to spread the risk across healthy and unhealthy people?
Ed Dolan: Yes. Basically. It's the increasing predictability of health care risk, so that--insurance companies are only willing to insure healthy people.
Russ Roberts: So, let's move to the Universal Catastrophic Coverage idea. How would that work, and why do you think it's a good idea?
Ed Dolan: Our philosophy--my philosophy, which is shared by many people at Niskanen Center--is that we promote a paradoxical-seeming idea, an oxymoronic idea, even, called the Free Market Welfare State, which is that we think that government does have an obligation or a useful purpose to serve--maybe I won't even say an obligation--in providing a robust social safety net; but that that ought to be made--that it ought not to displace the market to any greater degree than necessary. Which means that we are always looking for compromise solutions which don't completely eliminate either the market or the government from solution to difficult problems. And, in the health care area one way of doing that is to try to use a market-based health care system to solve the problems that it can solve. And one way to define the problems that it can solve is it can solve problems that are non-catastrophic. That, people should pay for their own health care to the extent that they are able to, financially able to; that the government should protect them only from financially ruinous health care spending. And when I say, 'They should,' that's for two reasons: it's both in a philosophical sense that the government is there only to do things that can't be done in any other way; and secondly because if we do them through the market it's not only philosophically better: there's a practical sense that is more efficient and works better. So, the way that we try to separate these things out is to say--one way to separate these things out is through the principle of Universal Catastrophic Coverage, the basis of which is that everybody has a backstop health care policy that covers, that operates with an income-based deductible, so that you never have to pay more than a certain percentage of your income. Low-income people might face--people below the poverty line might face no deductible at all, as is the case under Medicaid. High-income people would not only face high deductibles, but they might face very high deductibles: If you make a million dollars, your deductible under your government-sponsored universal health care policy might be $100,000 a year, so that it would exclude all but a very, very few people. This system, if we used a system that was based on 10% or 15% out-of-pocket maximum as a definition of catastrophic, people in the middle class would end up probably paying a comparable share of their income to what they pay now under employer-financed insurance or ACA policies.
Russ Roberts: And the idea would be that this would be given to you by government and covered by taxes for the part that wasn't covered by the deductible?
Ed Dolan: Yeah. Right now, if you look at where health care money comes from, the government sponsors, the government pays for about half of the national health care bill. Almost exactly half. Employers pay another 20% of that, which, to my way of thinking is largely also should be counted as part of the, as part of the government's share, since the employer mandate is essentially a tax in kind on employers and then indirectly a tax in kind on workers. So, you take this 50-20-30 spread; and so we're looking at the 30% share that households now get. So, a starting point for discussion of this problem would be, say, 'Let's maintain this balance between the government's share and the private share--maintain the household's share as a constant.' The 30% happens to be just about the average for OECD [Organisation for Economic Co-operation and Development] countries. If we maintain that as constant, what can we buy for that? What we can buy for that without raising anybody's tax bill is we can buy a policy that would cover catastrophic needs of the whole population under some configuration of Universal Catastrophic Coverage. So, that would be essentially what you might call a budget-neutral or revenue-neutral version. Then, by tweaking features of the Universal Catastrophic principle--that is, by raising the out-of-pocket maximum by raising the low-income cutoff below which people get first-dollar coverage by adding maybe in income-based premium in addition to the out-of-pocket cost: by manipulating all of these things we could adjust upward or downward any of the three components--the government, the employer, or the household's share of spending.
Russ Roberts: You know, that strikes me as a huge improvement relative to the current system. It would be a radical transformation, right? If we went to a market-based--the argument you are making implicitly is, if I'm understanding it correctly, is: you don't buy insurance for oil changes; you don't buy insurance for physicals and things that are expected. What you buy insurance for is unexpected risk, unexpected events that you can't anticipate or reduce the chances of. And, for that, people would like to have--they don't want to be bankrupted by those things, you don't sleep well at night. So you need some kind of system. And I don't have any problem with encouraging a market in that kind of universal coverage, and subsidizing--again, this would be so much better than what we do now--subsidizing poor people or [?] to rich people to pay for that privately-provided insurance coverage for catastrophic risks. The advantage of that over the current system is that a private entity, assuming there was competition--if there was no competition it doesn't help. But if there's competition, you'll at least have someone with an incentive to reduce innovation that is not productive and encourage innovation that is productive. I think the biggest--you talked earlier about that my argument was pushing toward a single payer. That's true. Really expensive health care, one of the arguments that you can conclude from that is that you should have a government that negotiates price that takes into account efficacy and so on. I don't think that works very well. I do want to encourage listeners to listen to the Vincent Rajkumar episode where he talks about qualities[?] and other ways of getting a fair price. I just think that's a Kafka-esque way to get there from here. It would be much better to have a more market-based system. And if I understand what you are saying correctly, this could help us get there.
Ed Dolan: Yes. It could. And, what it gets us is a system in which--you have part of the system running on a market basis and part running on not-a-market basis. But, in a sense, to the extent that you believe that the people who are spending their own money on health care spend more wisely, not everybody spends more wisely. And not everybody would be spending their own money in the system. But it's sort of like what happens--I use an analogy of what happens in the supermarket. In the supermarket, not everybody spends their money wisely. A lot of people pull stuff off the shelf without looking at the price stickers, or without reading the nutritional labels. But some people do. And the people that run the store know that a certain significant part of their clientele do watch the prices, do clip the coupons, and so forth. And even a minority of people putting market pressure on the providers has some beneficial effect on the efficiency of the system and helps curb some of the more obvious abuses.
Russ Roberts: Yeah; of course, when you have the crazy, hybrid patchwork system we have--and we haven't talked about the state-level restrictions on health care insurance, which some people argue add to the cost because it's hard to have a national health care insurance company: each state has their own rules and regulations. You know, when you have this crazy, patchwork system it's incredibly inefficient, to the point where there are providers out there now who run a cash-only business for surgery. They post prices, just the real world--just like the supermarket. They say, 'You want a knee? Here's the cost. You want a gall bladder taken out? Here's the cost.' And my impression is they are quite inexpensive. They're not cheap: they're quite inexpensive relative to the other system, either because of competition or complexity or paperwork--I don't know if anyone has studied this. But, do you have any thoughts on that?
Ed Dolan: Yes. Yeah, I know a little bit about these cash-based services, and they are not always even for procedures as extensive as a knee replacement, but even more minor things like doctors visits or, you know, getting your flu shot, or whatever. I think that things like cash-based clinics would flourish in the system of Universal Catastrophic Care. The other thing is that without going all the way to a single-payer system, which I'm not an enthusiastic of, if you mean by that a single system that pays everybody's health care for everything, like the [Bernie--Econlib Ed.] Sanders Medicare for All system. But a single payer in the sense of administratively simplification of the system would be a big benefit, because the United States has unusually high administrative costs for health care, which somehow, because we have 6 or 7 different health care systems, and we have Medicaid, Medicare, VA [Veterans Administration], ACA, employer-sponsored, and so forth. Another thing you mentioned that I think that would be improved under Universal Catastrophic Care would be the issue of portability, which is a big problem. And portability shows up in employer-sponsored compensation, employer-sponsored insurance in the phenomenon of Job Lock. Also true, you mentioned the diversity of systems among states. It also puts restraints on inter-state mobility. It used to be that people that defended the U.S. economy relative to, say, the European economy would say, 'Well, one of the great things about the American economy is that we have this single market for everything throughout the whole country; so we have this marvelous mobility of resources within this enormous economy on 300 million people and $3 trillion dollars.' We are losing that mobility, because health care is locking people into a single state: these programs you can't transfer from one state to another. And the data there, if you look at data on the interstate mobility of the labor market, it's plunging all over the place.
Russ Roberts: Yeah, we've talked about on this program before, that some of it's the fact that rents in urban environments have risen dramatically; it's very hard to move--
Ed Dolan: Occupational licensing--
Russ Roberts: Yeah. There's a lot of barriers that are sort of below the radar that are really interesting, and sad to me. I agree with you, though: We've lost a lot of the dynamism. At least, the data says we have. Maybe people just don't like to move as much as they used to. I find that very hard to believe. I think something else has changed, and these are some of the things that--
Ed Dolan: Listen, I have a son-in-law who is a college professor, in Michigan. And he has looked for jobs, responded to job offers in other states that look attractive to him. And in every case, he's eventually had to give up on that idea of moving to a better job because of health insurance problems, because they have a special-needs child who is getting some health assistance from the state of Michigan. And that's non-portable. No other state--they can't move to another state, because they would, at best have a long waiting period to get coverage for this child's condition.
Russ Roberts: Yeah. That's not ideal. And, as we're suggesting. There are a lot of factors interacting here. It's hard to know the magnitudes of any of them. But they are all reducing the flow of people. Goods flow pretty freely across state borders, but people don't so much any more, and that's probably not a good thing.
Russ Roberts: Let's close with the political reality that your ideal system, my ideal system, which would include a large role for private philanthropic efforts, which I consider part of the market, but some people don't. Some people mean 'market' to mean profit-based. I think that's not the right way to think about it. I think we should think about voluntary systems versus top-down, coercive ones. But, the political realities are so complicated. You know, you point out at the beginning of your article that most people are happy with their employer-provided healthcare. And I'm thinking, 'Well, sure they are. Somebody else is--a third of it is paid for by somebody else. Who wouldn't like that?'
Ed Dolan: Well, actually, a large part of the reason people are happy with it is because they are healthy. So they haven't used it.
Russ Roberts: Right. That's my ideal insurance, the one I haven't used. There's a paradox. But, yeah, if you're not going to use it--if someone else is paying for it, it's even better. What do you see as realistic or optimistic signs on the horizon that some change might happen? I see the system as so complicated that I often despair of any, of marginal improvement. And marginal improvement is complicated because it's not obvious that it's always a step in the right direction, given that complexity. I like to think that technology is going to help do a bit of an end-around, and maybe Amazon, that Amazon, J.P. Morgan, Berkshire Hathaway innovation will leverage technology in a way that's innovative. And that's something they do know a little bit about, at least. What are your thoughts on that?
Ed Dolan: Well, the political situation--you can look at it as either half full or half empty. There are some discouraging things about it. And the biggest discouragement is something I call Reinhardt's Law, which is named after the late Uwe Reinhardt, one of the leading health economists in the country. And he used to say over and over again in different words that the problem is that every dollar of health care waste is a dollar of income for some health care provider. And the health care providers, as a result, have such an army of lobbyists that it's hard to get anything done. So, that is discouraging. However, I've gotten some encouragement in the Universal, trying to promote Universal Catastrophic Care. One of the things that I find encouraging is the fact that this idea has been equally well received on the Left and the Right. I've published descriptions of this system in American Conservative, Washington Examiner, conservative outlets like this--I've published descriptions of it in the New York Times and on Fox and other more liberal outlets. And it gets good feedback in both cases. So, I think it's an idea that has some--at least on a philosophical or conceptual level has some actual, across-the-aisle appeal. Niskanen Center has good contacts on Capitol Hill, and they get, at least at the staffer level, some good feedback on this concept as well. Secondly, Universal Catastrophic Care is not any single plan in the detailed sense that, for example, the Sanders Medicare for All plan is. It's a set of--it's an approach to solving the problems. A set of parameters. But, depending on your politics and your philosophy and your empirical beliefs about how people respond to incentives, you can vary these parameters widely to achieve some different objective, whether it's budget neutrality or whether it's how you spread the burden between healthy and sick people, or what's the maximum percentage of people you can expose to a personal incentive. You can vary the formula to fit your needs there. So, I think it's--although there are barriers to do anything in politics--that the barriers may be lower for this than some more radical solutions.