Health care and house repair are distinct markets, but many of the same economic principles holds true. Virtually everyone property owner has home owner's insurance. And to the best of my knowledge, no employers provides home owner's insurance. The vast majority of these individuals opt for high deductible insurance that in practice only covers catastrophic or serious damage. In other words they choose insurance that would cover serious fire damage, but very few would opt for insurance that covered the cost of a broken window or busted toilet. Why? Because they know that such insurance would require a very high premium. And if they used it for minor repairs, the insurance companies would jack their premiums through the roof.
Let's imagine what would happen if the majority of people chose to utilize home owner's insurance in the manner that they utilize health insurance.
To start off with, if they demanded that their employers provide "affordable home owner's insurance," far fewer individuals would shop around for the most economical insurance plans. And fewer individuals would seek plans that met their unique needs, they would simply accept the packages provided by their employers. The result would be a drop in competition and cost consciousness, which would certainly result in a net increase in the cost of insurance.
And let's imagine if home owner's demanded that their insurance had a low co-payment to "make home repairs more affordable." What would the economic implications be? We know that this would increase aggregate demand for home repairs. For example, I now only address essential repairs, neglecting the cracks on my ceiling and the chipping paint of my porch because of fiscal constraints. But, if there was a co-payment of only $250, I (and most people) would immediately undertake a myriad of non-essential repairs. Anyone who has taken Economics 101 can tell you that an aggregate increase in demand drives up the cost of repairs.
Now, most consumers of home repair services carefully shop around, getting multiple quotes for (let's say) a paint job, which creates competitive pressure that helps control aggregate costs. Now imagine if getting your home painted only entailed a $500 co-payment; what would the economic effects be? To start off very few consumers would waste their time shopping around for the most cost effective painter, which would result in a market wide increase in the cost of painting. And now imagine that you could only choose a painter from a list of craftsmen who were affiliated with your insurance company, the end result would be less competition and less incentives to control costs.
Faced with rising costs, fewer people would be able to afford basic home repair, which would prompt the welfare state to provide free house repair or subsidized home owner's insurance to millions of Americans. This would diminish or eliminate incentives to shop around or limit their home repair to vital procedures, which would only add to the already existing price inflation. Under normal conditions, when prices begin to rise beyond the capacity of consumers, demand drops, which puts pressure on producers to lower costs through innovation, improved organization and even lower profit margins, creating a cost equilibrium. But, state subsidies disables this dynamic, preventing demand from dropping and shielding producers from pressures to lower costs, while maintaining quality.
And while many Americans truly could not afford quality home repair, there would be many others who could afford it, but would succumb to the perverse incentives and choose to rely on the grandiosity of the state. Furthermore, guarantees of home care would allow many individuals to elude the consequences of their irresponsible behavior. Why should I insulate my water pipes; if they burst the government will pay for it? Why I should I routinely change my heating filters; if my furnace burns out, the government will pay for it? And imagine if contractors could not turn away uninsured home owners with these serious repair issues? Repairmen would certainly pass on the cost to responsible, insured home owners. And the government would further pass on the costs in the form of higher taxes on productive citizens. All the while, progressives would blame "greedy repairmen" and "greedy insurance companies" for rising costs and declare the need for "home repair reform." Perhaps this reform could accomplish the noble goal of providing all Americans home owner's insurance, however there is no way that it could curb cost inflation without imposing a regimen of rationing. Any politician who makes the claim that all three goods can simultaneously be reached is a charlatan selling snake oil that we can believe in.
How Free Health Care Got So Expensive
August 19, 2009
By Steven Malanga
Recently I was listening to a radio program in which the host explained that in a few states health insurance policies issued by Blue Cross/Blue Shield were available at extremely reasonable prices, about $100 a month. The very first caller into the program demanded to know exactly what the annual deductible was in plans like this. When the host said $3,000 to $5,000 the caller responded, that isn’t health insurance but catastrophic insurance. It’s too expensive and that’s why we need health care reform from Washington, he continued.
And there lies one of the problems with the health insurance reform debate. State government mandates and favorable tax treatment in Washington have so distorted the market for health insurance that a generation of Americans now look on medical coverage as something very different from other kinds of insurance that we buy. While we will pay several hundred bucks out of our own pockets to have a plumber come repair a leaky pipe, we’ll balk at deductibles and a $50 co-pay for a doctor’s visit. We’ve been schooled in this attitude by politicians who have mandated that health insurance do things that we’d never expect from other kinds of insurance, and by consumer advocates who will demand our legislators do something about a health insurance company that doesn’t cover some optional procedure that has nothing to do with life and death.
It’s worth keeping these differences between types of insurance in mind now that it’s becoming clear that a solid majority of Americans do not want health reform that involves an even more expansive role for government. That’s why the so-called ‘public option’ of a government health insurance entity competing with private insurance is rapidly losing favor in Washington. That’s good because a public option won’t restore sanity to the health insurance market. What will, is getting get rid of the rules, mandates and tax exemptions that treat health insurance different from other coverages.
Consider auto insurance, which is typically required of us by states, and home insurance, which mortgage lenders demand. Both give us protection from financial ruin at more reasonable prices than health insurance because our options are greater and the scope of the coverage narrower. When we buy home insurance we are essentially purchasing security against a catastrophic event that could cost us our investment in our home and possibly ruin us financially. We don’t expect this insurance to cover everything that goes wrong on the property. Instead, we accept that we will pay out of our own pockets the tradesmen who come and install our new water heater, fix our electrical short-circuits and repave our driveway. Many of us haven’t gotten a health care bill in years equal to what we paid the plumber for his last visit because the cost of a home insurance policy that covered every leak and crumbling piece of pavement would be prohibitive.
There are significant other ways that government mandates treat health insurance differently, at great cost to all of us. Consider this scenario: You don’t have home insurance and a big storm comes through and knocks over a tree into your roof. You can’t just phone up an insurer, buy coverage and then submit a claim, even if you face financial ruin by not having the coverage. But that’s more or less what you can do in health insurance under so-called guaranteed issue rules, in which someone who hasn’t purchased insurance and gets sick can’t be turned down for coverage. Needless to say, states that have guaranteed issued, like New Jersey and New York, have the highest health insurance premiums in the country because healthy people know they can run the risk of not buying insurance until they get sick. Insanely, the health reform package now on the table in Washington would create a federal version of guaranteed issue.
In auto insurance, some states have given us our own private version of tort reform to keep premium prices low. In these states, a driver can opt out of the litigation lottery when he purchases auto insurance by promising not to sue for pain and suffering if he’s hit and injured by another driver. By doing this a policy holder can save hundreds of dollars a year on premiums. And yet for some reason the same option, that is, allowing us to buy a health insurance policy where we agree not to sue a health provider for pain and suffering if a treatment goes wrong, is not available, even though I imagine the cost savings would be enormous.
Government regulators also require us to buy so much more health insurance. In auto coverage, for instance, states will generally mandate that we have certain minimum coverage to compensate anyone we may crash into, but otherwise regulators will leave us alone to decide which options (towing, collision) we want to buy. By contrast, states will require buyers of individual and small group health policies to load up on mandatory coverage, including options that many people don’t want to pay for, like fertility treatments. Politicians will often claim that they demand these coverages because they are looking out for our own good, but that’s a difficult case to make persuasively when mandates help make insurance unaffordable for many people.
Still, now that the public mood is turning away from health reform that involves significant new government initiatives, a few voices are starting to argue for an alternate system which gets back to treating health insurance like other forms of coverage. In a much discussed piece in the Wall Street Journal, Whole Foods CEO John Mackey explained how his company was able to offer coverage to its retail employees with a high yearly deductible ($2,500) that protects employees from steep health care bills but also encourages employees to spend their own health dollars wisely. In an industry where many workers don’t have health insurance and profit margins at many businesses are small, Whole Foods has been able to provide coverage using the same model that Blue Cross/Blue Shield plans offer individuals in a few states. Yet the company has been threatened with boycotts for suggesting that health reform should follow the same sensible model.
A few states are also leading the way. Washington State has rescinded guaranteed issue rules. Colorado, Georgia, New Hampshire and Nevada are among the states which allow the kind of high-deductible policies I described in the first paragraph for individuals needing coverage.
There’s resistance, of course, mostly from politicians and advocates who keep trying to convince us that somehow it’s un-American to have to pay a health care bill out of our own pocket. But the reality is that until we take more control of buying our own health care, our insurance costs will continue to spiral upward.