Perverse Incentives

In a rational world, deductibles and copayments serve an economic purpose.  Where it is appropriate and desirable for patients to make choices (e.g., primary care, small-dollar services), out-of-pocket cost sharing allows patients to bear some or all of the costs and reap some or all of the benefits of the choices they make.  Where patient choice is not appropriate or desirable (e.g., on a hospital gurney, large-dollar services), we would not expect to see cost sharing.  At least these are the principles that govern other insurance markets. 

Yet in the market for health insurance, those principles are increasingly being turned upside down.  In the small group market a typical plan covers primary care visits from the first dollar, but imposes high deductibles and copayments for inpatient hospital care.  And whereas tiered pricing for drugs once encouraged generics over more expensive brand names, today tiered pricing is being used to impose thousands of dollars of cost on patients who must take expensive drugs with no generic substitutes.  (See The New York Times article.) 

Welcome to the irrational world of health insurance, where normal market forces have been systematically suppressed and no one ever faces a real price for everything.  State and federal regulations have made it illegal to charge employees premiums that reflect their individual expected health care costs or to deny them employment for health reasons.  But in outlawing discrimination, politicians have not outlawed self interest. 

The brutal reality: In today's market, employers and insurers have every incentive to attract the healthy and avoid the sick.  And since it's illegal to do that directly, many are doing it indirectly by choosing health plans that appeal to the healthy and repel the sick.  The implicit message for people with health problems imbedded in many health plans is: "We don't want you in the first place and should you enroll (by some mistake) we hope you will quickly go elsewhere." 

Ironically, there is only one product in the insurance marketplace that by law must limit the out-of-pocket exposure of the chronically ill.  That product is Health Savings Accounts!!! 

But haven't we been told over and over again that HSA plans are bad for the sick and only good for the healthy?  Yes.  The battle against the syllogism is unending. 

Comments (5)

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  1. William Duncan says:

    Right on John! Thank you!

  2. DoctorSh says:

    An Open Letter from America's Physicians John Goodman: There is a movement among docs for change. Below is a copy of an Open Letter to America from physicians that are presently getting signed from physicians across the country. In 3 days over 1500 signed, and the majority have not yet seen the letter. We are hoping for a more direct patient-doctor relationship without the middlemen, but find it hard in this third party nightmare of a system. I have been following your blog recently and would like your opinion on our letter. ————————————————- Dear Fellow Americans, For decades the United States has led the world in healthcare. We have enjoyed the finest hospitals, medical schools, research, technology, and resources. Unfortunately, our healthcare system has lost focus to the point where patient well-being is placed after politics, profits, and special interests. Healthcare costs are on the rise and patients have lost their freedom of choice. These trends are hurting our economy and compromising the doctor-patient relationship. As a result, it has become difficult for physicians to deliver the best possible care. Our heavily fragmented healthcare system has made it very difficult for you, the American public, to get the care you need. As your physicians, we want to partner with you to address the critical defects of the system as outlined below: You are paying a lot for healthcare and not receiving enough in return. Your insurance premiums continue to increase while your healthcare options are dwindling. Gatekeepers, insurance networks, and restrictive regulations limit your choice of doctors and your access to care. You have been made dependent on complicated and expensive health insurance plans. Employers are forced to take money out of your paycheck to purchase health coverage. If you lose your job, you are left with no safety net and the money you have paid for health coverage vanishes. The time you spend with your physician has become remarkably brief due to regulatory hurdles requiring doctors to spend more time on documentation than with you. We believe the following factors have made our current healthcare system unsustainable: The insurance industry's undue authority and oppressive control over healthcare processes Excessive and misguided government regulation The practice of defensive medicine in response to a harmful and costly legal environment We, the physicians of the United States, will no longer remain silent. We will not tolerate a healthcare system where those without medical expertise or genuine interest in our patients' health have absolute control. This letter is merely a summary of the most important problems in our current system. We believe that by partnering with the public we can start to demand real change and formulate practical solutions. We invite you, our patients, friends, neighbors, and employers to unite with us at this important time in the history of healthcare in the United States. Together, we can guarantee our nation a healthier tomorrow. Please talk to your doctor about this letter and visit… for more information. Respectfully, The Undersigned U.S. Physicians

  3. Charlotte says:

    Great post, John. FYI, I’ve been sending your blog to a friend who is an insider in the McCain campaign.

  4. David Wilson says:

    Thank you. Good work.

  5. […] period picture young, healthy families — never people with costly illnesses. And some plans discriminate against sicker enrollees to keep costs down for healthier […]