People Skimp On Medicine When They Pay Out of Pocket? Good!

I’d like to see healthcare policy move in the direction where customers face a larger share of the costs of their healthcare and third-party payers a smaller share. Everyone should have catastrophic coverage to cover very expensive surgeries and diagnoses for costly long-term medical conditions, but should pay out of pocket for routine doctor’s appointments and the occasional prescription.  

Some people object to this by saying that individuals might skimp on appropriate healthcare when faced directly with the bill. I suppose the rationale goes something like: having a third party pay pre-commits the individual to fill that prescription, or make that appointment with the specialist. When they skimp, they just create larger health costs down the line. There might be some limited cases where this kind of inappropriate skimping happens, but most skimping will likely be socially optimal and will not create a much larger long-term cost. Contrary to popular belief, people just don't get any healthier when you throw lots of free medicine at them. This suggests that those extra screenings and doctor visits that people get (when their use of healthcare is subsidized by third parties) don't actually help, at least on net.

Consider an old man who, based on the best possible assessment of his health, is near the end of his life. Say he has an equal chance of dying in each of the next five years. (The probability of his death is uniformly distributed over the next five years. He expects to live another 2.5 years. Not that the details matter, but I'm specifying my exact meaning for statistics buffs.) He’s considering getting an elective hip replacement to improve his mobility for his remaining years. Alternatively, he could forego the surgery and bequeath an additional $20,000 to his children and grandchildren. I want this man to directly face the costs and benefits of this decision and choose for himself. The “third-party payments all around” people want to shield him from the cost of his surgery. In either system the dilemma is the same: use scarce resources on a man who will likely die soon or save those resources for the next generation. It’s not obvious to me that we do this man a favor by shielding him from the cost of his decision.

In fact, we can imagine a society of a million such old men in a million such roughly-similar families. It’s possible that each one strongly prefers the bequest to the surgery. Say they all value the surgery at $10,000 but value the bequest at the full $20,000. In the third-party payment world where they are shielded from the cost, they will all get the surgery (as long as their out-of-pocket costs are less than the $10,000). More plausibly, imagine a world where they all have different preferences.  Some prefer the bequest, but some prefer the surgery (valuing it at, say, $30,000). In a world of first-party payments for elective surgeries, they can all get their way.

I think there are a lot of other examples of people seeking health care where the cost exceeds the benefit, and much of this can be blamed on the third-party payer nature of our system. The mother who takes her kid to the doctor every time the kid gets a cold (perhaps insisting on antibiotics, which are useless against viruses). The terminal cancer patient who opts for extremely expensive yet speculative Hail Mary treatments at the end of his life. The family that opts for an expensive orthodic helmet for their infant, not because of medical necessity but rather because the threshold for treatment changed in recent years (but enough about me). The old man who opts for aggressive prostate cancer treatment over an elevated PSA score. There is quite a lot of waste here. It’s always hard to identify medicine that is completely useless, but many of these things have extremely low value given the cost. If the patients directly faced these costs, they’d forego a lot of unnecessary treatments. And that would be a good thing. Sure, you could find the occasional sob story of someone who has foregone a recommended cancer screening and dies because his cancer isn't treated in time. But you have to balance that with all the unnecessary anxiety for all the false positive screens, all the treatments for cancers that would never have been a problem, and all the unnecessary treatments that degrade quality of life without affecting survival rates. 

Some people muddy the waters here by talking about “affordability”. That is a different issue entirely. It’s true that some medicine is very expensive and also has a large and easily measurable benefit. For a fraction of the population, this medicine might genuinely be “unaffordable,” as in their income cannot cover the costs of these procedures no matter how they finance it. For these kinds of cases, some kind of third-party payment (be it private insurance, government insurance, or some kind of charity) will have to step in to cover the cost. But if we’re talking about most people, most of the time, facing medical decisions that arise over the course of a typical life, affordability isn’t an issue. A typical household can easily afford insurance for sudden catastrophic costs and can afford to save money over a lifetime to finance the occasional surgery or end-of-life treatment. Let’s have a market-based insurance and healthcare system that works for the typical person, and perhaps tack on government support and charity for the hard cases where “affordability” becomes an issue.

Afterthought: I think that private insurance can solve the problem of people skimping on medicine in ways that produce large long-term costs. (“I could have paid an extra $5 for the medicine that wouldn't have destroyed my liver. Now I need to shell out $100,000 for a new liver, plus related care. Oops!”) If insurance policies are written for much longer coverage terms, or are sold in combination with a life insurance policy, the company will have an incentive to keep you healthy, using the best analytics and medical information available. Such a company will shell out $100 for a doctor’s visit or routine screening if it will save more than $100 in future health costs. It is sometimes implied that the insurers have an incentive to just say “no” to any and all claims just to save money. Obviously this isn’t true if “saving” a dollar today means losing five dollars tomorrow. Private insurers with very long policy terms will pay for some preventative care, but only if it’s worth the cost. And of course people can always shell out some of their own money to augment private insurance if they want preventative care that doesn’t pay for itself. (If you want medicine that will make you even healthier than your insurer's "profit-maximizing" health level, you can still buy it.)

At any rate, let's be clear which problem we're trying to solve and adopt a policy to fix that specific problem. If it's "affordability", let's admit this is only a problem for a subset of the population and specifically address them. If it's an irrational tendency to skimp on medicine, let's subsidize specific treatments that people skimp on, or allow a more robust market for health insurance with longer policy terms so that my scenario in the previous paragraph will work. If the "problem" is that people are just uncomfortable paying out of pocket and would rather pay a larger amount through a third party, let's not placate them with public policy. If the problem is that people are "buying" too much unnecessary medicine of low value, make them face the actual price and that problem will solve itself.