EconTalk |
Ed Dolan on Employer-Sponsored Health Insurance
Jan 7 2019

health-insurance.jpg Economist Ed Dolan of the Niskanen Center talks about employer-based health insurance with EconTalk host Russ Roberts. Dolan discusses how unusual it is relative to other countries that so many Americans get their health insurance through their employer and the implications of that phenomenon for the structure of the health insurance market. Dolan explores the drawbacks of this structure and makes the case for what he calls Universal Catastrophic Coverage.

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Explore audio transcript, further reading that will help you delve deeper into this week’s episode, and vigorous conversations in the form of our comments section below.


Jan 7 2019 at 11:33am

One thing that seems odd to me when I go to pay in healthcare, is that we don’t pay for the cheap stuff right away and keep track of it until the end of year and just submit the spending if we go over the deductible. Everything is submitted to the insurance company and they say how much we pay and then we pay. So though the cheap stuff could be paid simply out of packet, that’s not how it generally works.

BTW I think this podcast is complemented by the podcast with Robin Hanson ( where he tries to explain how and why we let healthcare get so messed up.

And BTW contrary to what many say, I don’t think the system in other developed countries (except MAYBE Singapore) work very well either.

Ed Dolan
Jan 9 2019 at 10:04am

Floccina: You are right about the complex accounting in deductibles. As it is now, the provider bills $500, the insurance company says they pay $400, so you pay that. (Other insurers might pick a different number.) Now you have used up just $400, not $500 of your deductible. If you were uninsured, or if you didn’t submit the expense, you would pay the $500.

What you have done is paid the insurance company a fee (your premium) to have it act as a bargaining agent to talk down the price. This is cumbersome, unfair, and administratively expensive. Any rationally administered system would have more transparent pricing. Then we could do it as you say, not even run the small stuff through the system until you went over your deductible.

Dr Golabki
Jan 10 2019 at 11:32am



Thank you for this response.


One follow up question. Why is it that private US insurers seems to be so much worse at negotiating down prices compared to public insurers in other countries? One answer is obviously scale, and you noted the many challenges and complexities of the US system. But regardless, as a  pro-market person, a priori I would expect the private system to lead to greater efficiency. After all this is SOME competition between US insurers.


I also had a question about your proposed system of Universal Catastrophic Insurance. In a way this is similar to the old system in the US (pre-Obamacare) in which patients couldn’t be diened critical care, so when a patient couldn’t pay they would go bankrupt and the rest of us would end up footing the bill. I think government insurance is a big improvement on bankruptcy as the backstop, however, one challenge with both approaches is that day-to-day preventive medicine that helps people avoid catastrophic medical events and long hospitals stays are not subsidized and therefore poor and middle class people often don’t stay compliant with important preventative care. This can result in both worse health outcomes and higher costs. I think you alluded to this challenge when discussing that individuals do not always make the right choices, but I wonder if you have thoughts on how this would work in your preferred system?

Ed Dolan
Jan 10 2019 at 3:06pm

Dr. Golabki:

US insurance companies do some bargaining, but I think they are at a disadvantage in that providers are often more concentrated and have better bargaining power.

The provision of “free” emergency care for those who cannot pay is very incomplete. Patients need only be stabilized. There is no provision for, say, a long-term supply of insulin for a diabetic.

With regard to UCC, my recommendation is that it should provide a package of cost-effective preventive services that is exempt from the deductible.

Ajit Kirpekar
Jan 7 2019 at 12:57pm

This is one of the few econ talks where I thought Russ let his emotional spirit overtake the discussion at points. Ed, I think, did his best to reign in this and try to be as normative about it as possible.

Its ironic, since I share a lot of Russ’ outrages at the current system, but then I felt the same way about the farm subsidies podcast where Russ was much more academic about everything.

Incidentally, I don’t think Ed dealt with, what I should call the John Cochrane critique – namely he focused mostly on the demand side of healthcare and its problems due to inelasticity of demand for healthcare services. In reality, supply is as big a problem, if not more so and the outrageous prices is a reflection as much on the choking of supply as it is the inelastic demand.

Fixing the employer provided subsidy doesn’t solve the regulation that chokes the supply side and we ought to be much more focused on just how regulation has caused this.

Here I think John Cochrane’s simple point rings loudest. Our society doesn’t want to tax and spend overtly on healthcare, so it does it through this convoluted subsidy and regulation system – which then leads to an explosive cost disease. I’d rather scrap the whole system, raise everyone’s taxes and then do a charity care.

Jan 7 2019 at 6:56pm

That’s an interesting comment. I guess you’re referring to the  discussion around cancer treatments and when people choose to opt out? I think that’s the only point where it seemed like things got a bit heated. To be honest, I thought both Russ and Ed did a  great job of seeing the truth in the other sides argument, despite the fact that they both have different solutions in mind.

I agree with the rest of your comment, and I imagine Ed Dolan does too, but like he said there’s only so much you can talk about in an hour long episode

Thomas Schlosser
Jan 7 2019 at 3:19pm

I’m 12 minutes into the podcast and Ed made a comment about increased deductibles not having the desired effect of ‘skin in the game,’ but I don’t think that fully represents the situation. Maybe my scenarios are anecdotal, but it’s all I have, so here it goes… We have 4 children. 1 born under an employer health plan, 1 self-pay, and two under an exchange plan. While my family paid out of pocket the most of all four under the self-pay birth that was the lowest of all four bills as “billed” by the hospital because between cash paid at birth and a payment plan the hospital gave us a discount and then wrote off a portion of the bill even though as I mentioned before it was already the lowest of all four. We have noticed a similar trend in chiropractics, though I know each insurance carrier handles Chiro differently. The same Doctor charges $55 if you pay in cash and $125 if he bills the insurance. Now I understand that at least a percentage of that increase is to cover the administrative expense of billing an insurance company but overall it seems a bit out of whack.

I’m eager to hear the rest of the podcast.

Michael Byrnes
Jan 8 2019 at 7:03am

I thought Dolan’s point on “skin in the game” was that it does lead to patients spending less on health care but that it often does not lead to patients spending more wisely (ie, patients may forego needed health care).

Jan 7 2019 at 7:16pm

Our healthcare system has probably the worst combination of every possible system jammed into one mess. I don’t have much love for it as it produces an incredible amount of inefficiency.

Once again listening to a discussion of healthcare I always get the impression Russ Roberts had a really traumatic experience with a doctor or hospital.

The guest said the insurance market was no long viable because all an individuals diseases could be predicted so that person that was high risk could be disqualified. The quote was “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.” He referenced this same idea later.

To this I say…show your work because actuaries, genetic epidemiologists, and etiological epidemiologists will be shocked to learn we have such a good predictive model of disease. The only thing we have even a reasonable predictive power – which is still pretty bad – is probably the metabolic syndrome and heart disease (outside ultra rare genetic disorders). And we only know that if you are an old smoker who is overweight. If you are young we don’t have a clue. So, the guests statement MIGHT be true for 70 year olds but has very little support for the average working age person seeking healthcare.

“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.”

I don’t expect precise statements about medicine from people outside the field but this is non-sense. PSA has a diagnostic predictive value of prostate cancer for over 95% in some situations. The guest was trying to say that it is not clear if the regular population based use of PSA as a screening tool for prostate cancer reduces population level mortality from prostate cancer. The Europeans did a randomized study and showed that it did. The USA did a sloppy study with crossover of about 30%-50% (don’t remember) and didn’t have the statistical power to resolve although the PSA arm had the higher survival.

There are many organizations that assess the utility of different interventions and their cost effectiveness and insurance companies regularly use them in making decisions about payment. Medicare does as well.

The guest claims, in the particular case of cancer, that families will drain all their finances to stay alive. Some may do that, but the majority of cancer patients go on hospice care (comfort cares only) far before their insurance would stop paying for additional treatments. I would like to see the evidence for the average or some population numbers because the hospice literature strongly suggests most people reach an acceptance of the trajectory of their disease far before the insurance company cuts them off. Faced with paying their own money I expect many people would weigh the math and might go onto hospice even sooner once the proposed marginal gain for the amount of money became clear to them about some therapies.

Ajit Kirpekar
Jan 7 2019 at 8:51pm

I’m glad you responded with all of your comments. As a data scientist not working in the healthcare field, I was taken aback by the confidence in his statement about the predictive ability for long-term catastrophic outcomes. it seemed quite implausible to me at the time given all of the HIPAA restrictions and the constant complaining of data quality I read in news articles. I also think he made a mistake in assuming that because the prices are so high it would make no sense to ensure a certain subgroup of the population. One of the reasons the prices are so high is because our system is so screwed up. if we did move to a market system or a single-payer system, I doubt the expectation would be the prices wouldn’t come down

I was also pretty surprised with the near-certainty he had that people would be willing to exhaust every dime they had the stay alive even if it meant only a few extra months of living. IveI got the opposite impression,  at some point the dying just stop having the need to fight for every last minute of life, despite the encouragement and often frustration of their kids wishing they would do so. Again I’m not in this field so I had to take his statements on good faith.

Ed Dolan
Jan 9 2019 at 10:14am

Reply to Kevin (and in part, Aljit): On predictability, I think you are mixing up two things. You seem to be looking at predictability from a clinical point of view, and I agree someone with a specific genetic marker or prior treatment will not necessarily develop the condition. Maybe only 8 percent of the population with the marker will develop the condition vs. 4 percent without it. Still, if the condition is costly to treat, that difference in probability can make a big difference to the premium, or the likelihood that the insurer will deny coverage if that is allowed.

Michael McEvoy
Jan 18 2019 at 1:12pm

As Ed Dolan said – there are SO many issues here . And one leads to another . I will only comment on one .

Thanks for your points regarding PSA . I am a primary care doc of 32 yrs . The issues surrounding use of PSA are not nearly so simple as Russ makes them sound to be. Since its introduction in 1986 , I have been intrigued , enthusiastic , reticent , very disappointed , remarkably suprised and finally comfortable with a judicious use of this most common test. My litany of moods approximates a 30yr timeline.

Russ, who I admire greatly , has likely not had to deal with a family extremely angry that a simple blood test was not done . Nor do I expect Russ to have even anticipated that situation. But I have been there .

Charles Hickenlooper
Jan 7 2019 at 7:22pm

Where are the incentives for the health insurance industry to negotiate lower payouts to healthcare providers? It seems to me the more they can “legitimately” pay out in claims, the more they can increase premiums. If their business model is based on (lets say) three to five per cent net profit, then increased healthcare costs helps their investors make more. A company paying out ten billion dollars a year will net a whole lot more than a company paying out half that amount. Everyone benefits within the healthcare network with the obvious exception of those who pay the premiums. I think it used to be, too many years ago, the health insurance business model was to negotiate as low of payouts as possible, but some where along the line they took the path of least resistance from providers and pharmaceutical companies to change that business model to profiting by paying out more and negotiating less. I mean, what doctor, clinic or hospital wants to accept working with the insurance company holding them to minimal pay?

Also, it seems to me, there are no or very little incentives for actual cures of chronic diseases in our health system. The money seems to be made by “managing” illnesses. Don’t pharmaceutical companies make their biggest profits inventing drugs which must be administered for the life of the patients with chronic disorders like high cholesterol, autoimmune diseases, urology problems and the like? Why would they spend fortunes developing drugs that actually cured these diseases? I mean, look what happened when polio was eradicated. Unknown thousands of healthcare jobs were eliminated and I’m guessing the drug industry didn’t fare well either. It seems to me the pharmaceuticals would have been happier to develop drugs that managed polio at an “acceptable” level for patients. And the healthcare community, including the insurance companies, would have been complicit and happy to oblige. I think they learned that managing chronic illnesses is in their best interest.

I don’t see Medicare for all solving this dilemma because of the crony capitalism already in vogue with current healthcare powers. Nor do I see a free market healthcare system incentivizing the profiteers to do the right thing.

Am I being too cynical about our health care system? Is there a workable solution? Am I  wrong in my suppositions?

Jan 9 2019 at 11:06am

“Am I being too cynical about our health care system?”


“Is there a workable solution?”


“Am I wrong in my suppositions?”

Yes and No.  You are right that incentives exist for insurance providers and medication companies to operate in ways that are not consistent with their customers’ interests, but that depends on who you consider the customer. Confusion is expected when trades involve three or more parties. To wit when there is more than one customer to a single trade, conflicts of interest are inevitable.

In addition, there are far more and far larger incentive traps than those you listed, not the least of which is that “health insurance” as we know it is not actually insurance. But there is a simple solution for all of them, even the ones you didn’t list and even the ones you don’t know about. Competition. Which speaks directly to the only truly incorrect sentence in your whole post—the last one. A free market healthcare system absolutely does incentivize profiteers to “do the right thing.” What’s more, a free market healthcare system would also reduce—nearly—all transactions to two party trades. Because multi-party trades are less efficient, slower, more complex, and therefore more expensive. And nobody would pay more to get less if given the choice and paying for that choice. It’s the lack of choice–the lack of competition–and the insecure application of property rights that explains the present system failure and predicts even worse outcomes under a single payer system.

Gregg Tavares
Jan 8 2019 at 4:34am

I’m not so sure this statement is true

there are no other major countries that I know of that tie health insurance to your job.

In Japan companies pay your health insurance. The government offers optional health insurance that covers 70% of the cost. Your job will pay for that AND add supplementary insurance to cover the other 30%. If you lose your job you lose your health insurance. If you want health insurance, usually starting with the government health insurance, you go down to city hall and enroll. They look at the salary you made and decide what you pay. I made about $60k in 2003 when I quit my job and had no savings. I went to the city hall and was told it would be $300 a month for health insurance.

So it’s not true that you don’t lose your insurance if you lose your job outside the USA

That said, if you manage to hang on for a year and have no income the next year the price will drop to around $15 a month.

2 random other comments

Japan’s requirements to become a doctor are much much lower than the USA. Almost all western foreigners here have horror stories about the quack doctors they’ve dealt with.
The Japanese government does set prices which seems to keep the costs down.

Ed Dolan
Jan 9 2019 at 10:29am

Greg: Yes, as quoted, I guess you could say this bald statement is an overstatment. It is true that there are other countries in which the employer “pays” part of the premium. (I put that in quotes because most economists think the employer share largely gets passed along to the employee through lower wages, since the employer is going to look only at total compensation costs).

It is my impression that other countries that bill part of the premium to employers make greater efforts to mitigate the problems of job lock and inequality than does the US. For example, you describe getting coverage after you lose your job as “just going down to city hall.” In the US, it is not that easy for a job loser to get on Medicaid. Going to the ACA exchange may mean not only high cost but also a change of your network of doctors, the treatments you get, the drugs your new coverage will pay for and so on. What we are looking for is not the formality of who pays the bill, but rather, portability and equity.

Kent J. Lyon
Jan 8 2019 at 12:27pm

Only brief comments are made about bundling for reimbursement. No comment is included regarding the fact that much of medical care delivery is done now by ACOs (Accountable Care Organizations) who are evaluated on the basis of quality measures (HEDIS), which are many. Adherence to these quality measures, which may have little to do with quality of care or patient need or interest, is reward, such that Medicare reimbursement, if one achieves a 5 star rating, per capita reimbursement is dramatically increased. Plan administrators are focused on meeting HEDIS measures, which may preclude attention to needs of individual patients.  Further, Medicare in particular ties captivated reimbursement in such plans to burden of disease, as defined by number of overall diagnoses the patient has. A higher number of diagnoses results in a higher captivated reimbursement for that patient, regardless of the care provided. The game that has been afoot for a long time is that of padding the diagnosis list of patients with as many legitimate diagnoses as possible, and making appropriate, though brief, annotations in the Electronic medical record to justify the diagnosis and the added reimbursement that comes with the diagnosis. There are many rather minor diagnoses that, contrary to what one would expect from a medical care standpoint, add significantly to reimbursement, whether such diagnoses require any treatment or not. As practitioners, we are periodically encourage by administrators (and there are specialists hired to ferret out such reimbursement bonanza diagnoses) to look for specific minor diagnoses that significantly increase reimbursement. Quite a game. One that Dr. Roberts and Dolan appear to not to be aware of, or at least fail to address in this discussion. Such games tend to increase the cynicism of practitioners such as myself, particularly when they distract from addressing acute problems at hand.

Rick Leslie
Jan 9 2019 at 12:03am

Ever hear something and can’t get it out of your head. I hate to ask really dumb trivial questions but Mr Dolan said “A couple of years ago I had shoulder surgery … and then she gave me a number in the low–it was a high number–the low 7 figures.” Seven figures is a million, no? What can you do to a shoulder that costs over a million dollars?

Todd Kreider
Jan 9 2019 at 9:14am

Funny, I wondered the same thing. I wondered if maybe he got a new heart while being under for shoulder surgery.

Ed Dolan
Jan 9 2019 at 10:32am

Oops! Make that FIVE figures, as in a few tens of thousands of dollars.

Doug Iliff
Jan 9 2019 at 12:25pm

Regarding Russ’s trial run with a new doctor, which is probably a bigger issue with listeners than the future of American health care, which won’t be fixed in my lifetime:

Good primary care physicians develop their “bedside manner,” which often means learning to “code switch.”  I take care of citizens ranging from CEOs to truck drivers to residents of the rescue mission, and I don’t talk to them the same way.

Maybe the new doc thought Russ was some beltway schlepper; had he known he was speaking to an economist, the message might have been “Look, Dr. Roberts, you’re renting my scarce office time; how much do you want to spend to assess my competence and caring personality?”

That’s not to excuse ordering an unnecessary test or procedure in order to drive up the bill– a very common, and reprehensible, practice in my profession which I often see in consults with certain specialists, whom I try to avoid in the future.  Serial EKGs on old folks is a good example.  PSAs are more problematic.  Most specialty societies have joined the “Choosing Wisely” program, which attempts to educate us about unnecessary testing, and the United States Preventive Services Task Force makes clear recommendations on many common decisions.

How to choose a new physician?  Best idea is to get a recommendation from a trusted, sensible, non-hypochondriacal friend.


Jan 9 2019 at 4:14pm

At around 35 minutes Russ talks about how a drug that costs $100k wouldn’t cost $100k if not for insurance. Does this also mean that the increased concentration of payers that insurance companies represent also funds more specialisation? I mean this on the basis that the number of people who can find a $100k drug themselves is very small, but the market of insured people whose insurance companies will fund it is much larger – surely that has an impact on what drugs are developed.

Jan 11 2019 at 2:51pm

As a cost conscious physician who strives hard to deliver high-quality care to complex patients, I paid close attention to this episode and found it interesting.  I have a few random, non-linear comments.

Nothing irritates me more (assuming i heard correctly) than when people claim that physicians order X, Y, Z test and will therefore get some type of additional reimbursement just for ordering it.  Please correct me if i misheard.

As much as I like Russ and EconTalk- he would be a nightmare to have as a patient!  Not because he is necessarily wrong but he would require a great amount of time and energy- that would hard to “code” properly😬.  My particular field, however, lends itself very well to old-fashioned paternalism.

Also, there is nothing inherent to “healthcare” that mandates extreme complexity (or expense).  Insurance companies and government have created this monster- and now we are calling on the creators to fix it?  I’m a little surprised that when the guest proposed his solution, Russ didn’t restate his frequent political comment about not questioning a system but rather lamenting- “(we just need OUR guy/ideas).  Universal Catastrophic coverage is a reasonable solution, as long as citizens could save or even invest their proposed deductible funds in the form of a tax-advantaged health-savings account.


Maybe a simple or stupid observation but isn’t healthcare expense (just like higher education cost) just classic inflation???  Increase the money supply- prices go up.  Yet, we keep feeding the beast and wonder why it gets hungrier…

Ed Dolan
Jan 12 2019 at 8:25am

John — Thanks for your useful comments, with which I largely agree. Especially:

“There is nothing inherent to “healthcare” that mandates extreme complexity (or expense).  Insurance companies and government have created this monster- and now we are calling on the creators to fix it?”

With regard to insurance companies, I can see why plans like Sanders’ want to eliminate them entirely. I have some sympathy with that view. However, it is probably more pragmatic to preserve some role for “tame” insurance companies like the Dutch have.

With regard to asking government to fix a problem that government has created — that is the great conundrum of classical liberal social policy. I have not seen any plausible “free market” solution to health care that meets the kind of minimalist need for social insurance that classical liberals like Friedrich Hayek saw a need for, yet when government is so strongly influenced by those who have gamed the current system to their advantage, how can we expect it ever to change?

Rather than give in to a counsel of despair, however, I have tried to propose a compromise that might attract a broad enough coalition to bring some modicum of rationality and simplicity to our broken system.

Maurice Strauss
Jan 11 2019 at 4:49pm

Dear Mr. Dolan

I would like to tell you that in Brazil there is also company paid health insurance so your statement about no other country is not true. Please don’t generalize, the US is no longer the same giant as it once was. Brazil has a lot of problems but we have a free government healthcare system for all people. It may be deficient but this morning, I had to have a small surgery on my finger from a splinter and I did not have to pay a cent for that care.
I wish you success, but please do your research before making generalizations.

Maurice Strauss
American English teacher and translator living in Brazil since 1980.

Jan 12 2019 at 2:11am

As an international student born and grew up in Asia, I still can’t believe that I can’t find a dentist through my HMO health insurance plan, nor can I find a therapist. While I pay for my insurance plan every month, the time and effort spent getting a doctor is so unbelievably long and huge. I have been reading Victor Fuchs’ book and wonder about how lack of information about care options impacts the supply of healthcare.

Jan 14 2019 at 4:34pm

Dear Mr. Dolan,

I work in the health insurance industry as an independent sales broker and I have a vested interest in my income and structure of health care.  I am very experienced is how people understand their insurance and healthcare while gaining an often intimate view into their health and financial lives.  Through them, I see how pharmacuetical companies, insurance companies, hospitals, doctors, and equipment manufacturers “get” money through a combination of complex regulation and subsidy.  I see how they react to incentives.  All that said, I have basically been talking to anyone who would listen to my rants over the years that what we need is essentially exactly what you proposed, with a few caveats you may or may not agree with.

Deductibles need to be calculated based on assets as well.  Perhaps viewing income over a 5-year period gives the catastrophic insurer a reason to count some assets and adjust the deductible to a societally fair level.  This avoids gaming the system.
Deductibles need to be monthly, not annual.  This makes them both financially affordable and reloadable to keep beneficiaries with skin in the game.
Deductibles need to be paid FIRST to the castastrophic insurer (whether private or public), and must not be allowed to be waived by health care providers, or subsidized by pharmaceutical companies, as they currently routinely do.
Likewise, insurance companies may not be allowed to insure the deductible.  Many Medicare beneficiaries love that they can do this, but it increases the cost to everyone.
Deductibles need to be rightsized, and as you suggest 10% is a great place to start.  In my experience, it’s very close to a mild pain point for people, without inducing major life problems.  Chronicly ill people learn to adjust permenantly to essentially a 10% drop in income.
The catastrophic insurer (public or private) needs to set payments to medical providers for outcome based care. Example 1, payment for full prenatal care and birth of a newborn instead of for every procedure.  Example 2, montly payment for chronic care of type 1 diabetic, not for every administered test and office visit.  Example 3, as a hybrid, both surgery and follow-up care for kidney transplant for donor and/or recipient for a given period of time.
Pharmaceuticals, equipment suppliers, and some services must prove efficiency AND efficacy of their products and services.  Value life extending years, not just in clinical trials but the real world, needs to be the upper bound of cost society is willing to pay (example: Hepatitis C drug), set by the catastrophic insurer.  Cost plus small margin (example: vitamins) is the lower bound in a hyper competitive market, or perhaps temporarily lower, set by the free market.  This is perhaps a huge incentive to redirect investment in the free market to better bang-for-your buck outcomes.  Humanity benefits by speeding up useful innovation while de-emphasizing the rest.
If private insurance were allowed to take the role of catastrophic payer as an option with public subsidy, the beneficiary needs to complete a full actuarial examination, far more than what is allowed by any insurance company for any other product.  This avoids the problem of assymetric information.  Otherwise, insurance companies will simply create products to “pick off” the most profitable beneficiaries (whether they be the healthiest or sickest), creating differing risk pools that lead to increased profit by the insurer and cost to the entire system.
For hospitals, payment for excess unused capacity for emergency care must be factored into the system.  Perhaps a combination of payments from the CDC, FEMA, Department of Defense, and Homeland Security.  All have vested interests in flexible capacity that may differ across the nation.
Medicare’s payment for teaching hospitals is perhaps better accomplished by the NIH or another agency.  Perhaps even by a trade association that current professionals must be members of in order to be licensed to practice.
While this may seem to be off-topic, how this program is financed is very important.  Since we all share the cost of care for all, curbing unhealthy behavior needs to be a priority through regulation and taxation.  Currently neither goes far enough.  Income and payroll taxes need to be reduced in favor of taxing pollution, unhealthy habits, and risky activities.  Perhaps employers pay a tax for their safety record.  Regulation is a better fit for other problems (example: seat belts in cars).  It need not be anywhere close to perfect.  Curbing unhealthy behavior through taxation provides an easy return.

Don Crawford
Feb 2 2019 at 12:35pm

“Deductibles need to be monthly, not annual.  This makes them both financially affordable and re-loadable to keep beneficiaries with skin in the game.”

I like that idea.  Makes it clear that you’re really looking at a serious problem, because it all happened in the same month, and is most likely one problem, not just a lot of doctor visits that could have been avoided.

The problem with the current system of deductibles is that it puts the insurance company in charge of what are “approved” medical expenses making the patient responsible for figuring out what will be counted and what won’t.  So the doctor and the patient have to run everything through the complex system to see what will count towards the deductible.   Also, the issue of what is “allowed” being counted towards the deductible and nobody knowing what will end up being allowed.

I wonder about the possibility of a per-illness system of deductibles like a per-accident deductible in car insurance.  Would that be possible or easier for the system to manage?


Brandon Hull
Jan 14 2019 at 6:05pm

As a ~30 year VC/PE investor/student of the ‘applied’ healthcare economy, I like the concept of a national catastrophic health plan with the proviso (Which Ed mentions) that we deal soberly with the rationing problem as do some of the more sophisticated European programs.  Ed said ‘we don’t have anything like this in the US,’ but that’s not quite right: CMS for years now has used cost/benefit as a component of Medicare reimbursement.  Also, a little remembered sideshow of the ACA was the creation of the “Patient Centered Outcomes Research Institute.”  While the ACA as public policy was really about expanding access, not controlling cost, the PCORI was most certainly a placeholder for future rationing based on cost-benefit.

However, to Ed’s point, Americans really do not like the idea of rationed care, which is why our system persists in doing it offstage.  Sara Palin’s ‘Death Panels’ sobriquet was political genius although it set back sane discussion of rationing (and end of life care) by 20 years.

Anyhow, in summary, I like the idea.  We decided long ago as a country that some level of basic care was a universal entitlement, but we do it today in a patchwork form of Medicare, expanded Medicaid, the Reagan era ‘EMTALA’ rules, state programs etc.  It’s crazy as Russ points out, not to distinguish between stochastic, insurable events (extreme premature baby delivery) and normal, predictable human medical costs (a healthy vaginal delivery of a newborn)

Please continue the great discussions on healthcare!

Wade Baker
Jan 14 2019 at 11:15pm

i run a small family business in western Pennsylvania. We have employed and insured about 150-200 families for over 30 years. The government has made a mess of health insurance.

Im about 1/2 through this podcast and enjoying it.

William Swansen
Jan 15 2019 at 10:47pm

Say we get rid of employer sponsored health insurance and we all just get thrown in a national pool.   Would the 20k my employer “spends” on my insurance become taxable income?  Wouldn’t  all that extra revenue make a single payer system work?  And isnt this “benefit” just a huge tax break for corporations?   Or if we make a private market at least it’s a huge pool of people vs the 100million self employed or unemployed.

What about turning the hospital system into a public private utility?

Chris Sales
Jan 17 2019 at 9:25pm

Several comments, in no order:

I admit to being old, but when I was young no one I knew had the kind of health insurance deemed minimally acceptable by ACA. Most people had so-called “major medical” coverage (deemed “predatory” by ACA) but paid for other costs out of pocket, going into debt if/as necessary. I don’t recall that the streets were full of dying people. (Tax-deductible health savings accounts would certainly be a useful addition to this approach..)

2. Wouldn’t Universal Catastrophic Coverage encourage and subsidize both exorbitant pricing and increased use of the kinds of so-called “heroic” end-of-life treatments that, for the most part, seem to prolong suffering without adding significantly to lifespan? How would such a system avoid the problems of: a) defining the dollar level for catastrophy by how much tax can be squeezed out of taxpayers; b) endless rounds of tax-the-rich skewing of coverage versus contributi0n; and c) facing the day virtually always achieved by national health care systems when the expense exceeds the funding, leaving only the option to ration care or fund it through debt?

3. With regard to the need/value of an organization to assess and approve – or not – treatments, the federal government (which as Mr. Dolan stated pays 50% of U.S. medical costs) certainly has both the leverage and vested interest to do this. If the government (through whatever existing or new office is appropriate) simply states that Medicare, Medicaid, and health insurance for government employees will not reimburse for disapproved treatments, private insurers would have the legal cover necessary to take the same position.

4. To fund his Universal Catastrophic Coverage, Mr. Dolan treated employer expenses to be government-provided, hiding behind Justice Roberts’ doily that employer-funded medical care is a tax. Remove the employer mandate (as has already been done with the individual mandate) and it is transparently clear – as Russ stated – that employers pay for insurance (and other benefits) with money they’d happily have paid directly to employees. It’s not provided by the government in any meaningful sense.

5. Mr. Dolan stated that individuals don’t seem to make the best choices even when they have skin in the game. Isn’t that largely because they have no access to the necessary information to make the best decisions? Couldn’t the government require – or simply get out of the way so the market can require and provide – comparative, competitive information on cost of service, quality of service, outcome-based service, etc? (Accumulating, analyzing, and advising people on this data could be a new service industry. Or providers of “major medical” insurance might include this service in their policies as a measure to reduce the number of people making insurance claims.

Jan 27 2019 at 8:00am

On the point about patients making poor decisions about health care spending, I strongly suspect that the overall psychological state of very unwell patients has a lot to do with this. It doesn’t matter if you have skin in the game or not, it is very difficult to make rational decisions when you are receiving myriad different treatments, possibly in a lot of pain, and more than likely pretty heavily medicated.

Also, is there any research on the extent to which legality of euthanasia influences the ‘spending’ decisions of the terminally ill?


Comments are closed.


EconTalk Extra, conversation starters for this podcast episode:

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TimePodcast Episode Highlights

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.

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