Paying for Healthcare

In tandem with the previous post, now that healthcare is a major macroeconomic policy issue, it’s useful to think about why people won’t pay for their own healthcare, and should the government?

America is a useful example for the rest of the world. We are rich, so more people here can afford healthcare. Yet we also have a somewhat open market in which a lot of people choose not to buy health insurance. Why is that?

Finkelstein, Hendren and Shepard have new research on that. This is a working paper, but given the lead author and topic, I expect it will come out in a top 5 peer reviewed journal in the next year or so.*

People who don’t buy health insurance often make quite clear that they feel it is not a good way to spend their money. Finkelstein et al. don’t look at that. Instead they estimate what people are willing to pay from the choices they make. The result is startling: willingness-to-pay (WTP) is about a quarter of expected health care costs. This is not saying people can’t afford health insurance. Instead, it’s saying that they won’t pay for it even it’s a breakeven proposition for them.

Further, they estimate that even if you subsidize 90% of people’s healthcare costs, 20% of them still would not pay the remaining bit out-of-pocket.

Note that paying large subsidies, but requiring some contribution from the recipient,is a key part of Medicare Part D (prescription drug coverage for seniors), the Obamacare exchanges, and CHIP enrollment (in some states).

They also find that adverse selection is not a big driver of this behavior. Adverse selection is the Republican bugbear that people will not buy insurance because they aren’t sick, but will change their minds when they do become sick. Yes, it happens, but it isn’t a big contributor to unwillingness to pay.

So what is? Uncompensated care: that’s when the patient gets the healthcare first and the provider is never (fully) compensated afterwards. In short, people like free stuff.

Of course, it could be that people don’t have the money (that they are liquidity constrained). But if this were the case we’d see both adverse selection, and a tilt towards buying the cheapest possible plan. But that’s not what people do. When the poor do buy health insurance, they often buy the more expensive option.

There could also be a problem with inertia, inattention, or lack of information. They looked at this too. But new purchases of health insurance behave in precisely the same ways as people won don’t buy insurance. Yet they must have overcome inertia (they changed their choice, inattention (they made a choice), or lack of information (which is available freely to people who are interested in making a choice).

So, the authors are back to people like free stuff.

Yes, there’s also moral hazard (you make less healthy choices once you have insurance, to the tune of about a 25% increase in costs). But that would explain only a fraction of the small WTP.

This is where things get nasty. The scale of uncompensated care is large enough to explain the difference between WTP and costs of insurance. Uncompensated care takes two forms, direct and indirect. Direct care that is uncompensated is what most people view as charity, basically, the free clinic, the county hospital, or a religious organization that provides care. Indirect care is both filing bankruptcy to escape your bills, or just not paying them and waiting for the creditors to give up. Can you imagine the sh**storm if politicians proposed getting rid of those so that poor people would accept their Obamacare subsidies?

But this raises a new policy question. Direct costs of uncompensated care are borne by the whole society, and costs indirect care are borne by significant fractions of society, but in both cases the rich provide most of the funds through taxes or charitable contributions. So is there a better way to connect the sources of funds with the recipients by cutting out the intermediaries? The evidence from the earned income tax credit is that just giving money to the poor and trusting that they’ll make decent choices is awfully efficient at improving welfare.

Again, the public perception of such a policy would be a big problem. Can you imagine: oh, hey, you’re poor, here’s $20K, go buy some health insurance? An awful lot of good choices with that sort of windfall would be cancelled by one bad story on the local news at 6.

So, what are we left with? Progressive style ideas that can get enough support from the middle, like Obamacare requirements with subsidies. Or conservative style ideas like rely on our existing network of charity, free stuff, and high legal costs, cross-subsidized through taxes and charity. Or European style ideas of not posting prices or requiring much payment from anyone at all, and hoping you can cover the expenses on the back end.

Lastly, none of those is helped by people who expound the viewpoint that healthcare is a right. That sounds quite nice, but keep in mind that freedom of speech isn’t something you’re expected to pay for at the local free speech clinic. Healthcare is a valuable service, and it would be nice if the people who benefitted from it were the ones who paid for it. But they don’t wanna’.

To me though, this really means that all the details in Obamacare and Trumpcare are secondary. What a country’s political system needs to figure out is where to draw the borderling between two separate but unequal healthcare systems: one in which people pay essentially nothing, and one in which people pay something extra but expect to get more in return. Obamacare was never really about that borderline, but rather about how we run the former system. So maybe we should have worried about it less.

* I would advise against the mistake of viewing these authors are Republican/conservative hacks. Finkelstein is one of the best economists out there: she was a Marshall scholar (like a Rhodes scholar, but that requires brains and athletics), she’s a full professor at MIT (a top 5 school for decades), and a winner of the John Bates Clark Medal (given to the best economist under 40). And, of course, Boston is not exactly a Republican/conservative stronghold. Oh, and she did her dissertation under Jonathan Gruber, who was one of the main economists that designed Obamacare.

UPDATE: I had the additional thought that one could view these results as supportive of the typical pro-government interpretation. This is that if the government is going to engage in programs that are charitable, for practical purposes they need to eliminate the competition from the private sector to promote uptake.