Health care demand

Via Mankiw, the above chart is used to make the following claim:

The accompanying chart shows why we have a health care cost problem. Patients have little direct connection in paying for their care. Their role has fallen significantly. Meanwhile, the government's involvement has grown, as has that of the insurance industry.

Because so many Americans rely on an insurance policy or a government program to pay their health care bills, the internal governors that temper the rest of their purchases are turned off. When a visit to the doctor's office or a diagnostic test costs them a mere $10 or $20 co-payment out of pocket — or there is no charge at all — cost has little impact on their decision to see a doctor.

"By not knowing the full costs associated with health care, consumers demand more and 'overuse' it," Kenneth E. Thorpe explained a few years back in Health Affairs.

Americans would be more judicious in seeking health care — they would self-ration — if the right incentives were in place. An effective way to cut overuse and bring down costs would be to encourage through public policy the use of health savings accounts. If consumers used HSAs to pay the full amount for medical care at the point of service rather than letting employer-funded insurance or a government program pay the bills, the demand would fall.

There several issues that come to mind here:

1) If it were not profitable for the insurance companies to offer fixed co-payments then they would not do so. If we believe in the market then we should let insurance companies set the benefits: copayments and deductibles.

2) It is also true that perhaps the insurance companies are succumbing to political pressure to provide cheap medical care. If this were true then we would see insurance companies going out of business or withdrawing from the health insurance market over time. This is not happening (yet).

3) The reason why insurance companies offer these low copayments is to actually encourage the user to use health services. Why? Because if they do not and consumers postpone seeing the doctor the eventual cost of health may be larger than if they had seeked medical help early. There is no hard evidence of this (for now) except that since insurance companies are offering the low copayments then this is one rationale for them doing so.

4) For the same reason, HSAs will not work if instead of using the savings for routine medical care (e.g. checkups) consumers simply use it to avoid taxes and postpone health investments.

5) Economists may argue that insurance is just that - insurance. It should be used for something as predictable as annual physicals or dental care. These expenses ought to come out of the consumers pockets. This savings motive will also raise the personal saving rate of the economy as a whole. However, it is also true that some people tend to underestimate risks just as there are some who overestimate risks. The former group will postpone getting regular care until it becomes too late in which case the costs to the insurer may be high. On the other hand (as usual) there are those who go to the doctor for every possible scratch or itch.

How should we as a society balance these two forces? For those who believe in the market, we would let the market decide? Some insurers may opt to cover routine care and some may not. Eventualy, the weakest insurer will be weeded out. But this method may continue to increase health care costs overall.

If HSAs were mandated (would they?) and deducted the way Social Security contributions are held in a government entity and routine medical care was also mandated (so that a proportion of the savings are "confiscated" if not used for routine care - use it or lose it) then there may be some hope of containing health care costs via HSAs.

On a personal note I have noticed the following:

1) There were at least 2 occasions that had we not had insurance we would not have gone to the doctor for our kids. Once when there was an eye complaint and another was when there was a fever and in both occasions I would simply have waited. There was no harm to waiting (ex post since the doctor confirmed nothing serious) but it could have been possible that there was something serious.

2) However, even with insurance my last physical was about 4 years ago.