Why Is There No Car Care Crisis?
(A version of this Health Alert was published by RealClearPolicy.)
Our health care is in “crisis.” We seem to have achieved the remarkable result of spending too much money while not ensuring access for enough people. Every politician says so, and most citizens agree. Indeed, no presidential candidate can be viewed as credible without proposing a health reform “plan.”
Hillary Clinton has sworn to protect and uphold the Affordable Care Act against all right-wing conspirators; Bernie Sanders has long advocated a government-monopoly, single-payer system; and Republican contenders will continue to roll out plans to “repeal and replace Obamacare” that will immediately come under attack by conservatives and libertarians as “Obamacare-lite.”
Let’s put the crisis in perspective. According to actuaries at the federal government, spending on health care per person in 2014 was $9,176. Yet according to the American Automobile Association (AAA), the average cost of operating and maintaining an average sedan in 2014 was $8,876 — almost exactly the same as health spending. Of course, not everyone owns a car, but most of us do. According to IHS Automotive, an industry research firm, 253 million cars traveled America’s roads last year. According to the Census Bureau, there were 239 million of us aged 18 through 84; that’s slightly more than one car per person in prime driving years.
There are more similarities between health care and car ownership than you might think. We can go for many years with predictable spending on both cars and medical care until — out of the blue — something terrible happens. For that reason, we value insurance for both.
But there’s a key difference as well. Car insurance, while not a trivial expense, is a relatively small share of the total cost of owning a car. According to the AAA, the average premium was $1,023, just under 12 percent of the total cost of ownership. Even excluding depreciation, insurance is just one-fifth of the total cost. In other words, we do not expect auto insurers to pay claims for most of the cost of operating and maintaining a car.
Health care is completely the opposite. Of that $9,176 per person, only $1,082 was directly out-of-pocket as opposed to third-party payments. And much of the political culture insists that even that is too much. The Commonwealth Fund, a respected policy research group, insists that households spending 10 percent or more of their income out-of-pocket on health care are “underinsured.”
Insurance adds administrative costs and bureaucratic interference. Historically, much of the cost has been disguised by our employers’ paying most of the premium — something they do because the government encourages it through tax breaks. Left to our own devices, we would never buy coverage for every single medical expense. The status quo leads to ever-increasing government control to ensure that our dollars go to insurers instead of doctors directly.
This explains why every single penny of billions of dollars of Obamacare tax credits goes to health insurers instead of to individuals. The federal government mandates us to buy overly expensive health insurance – actually too much health insurance – which requires its beneficiaries to become dependent on government to afford it! Access to health care gets more confusing and constrained, and the state wags its finger at us to eat more fruits and vegetables in the vain hope that this will eliminate our need to use the byzantine health system with which it has confounded us.
Obamacare was a significant tightening of the government’s grip, but it won’t be the last as long as we accept that insurance should control our access to health care.
This is an interesting example. I checked the U.S. Bureau of Labor Statistics (BLS) and its figures are pretty close to these from independent organizations. According to the BLS, transportation spending was $9,073 per consumer unit in 2014. Of this, insurance was $1,112 and gasoline and oil was $2,468.
As for the Commonwealth Foundation worrying that people may spend more than 10% of their incomes out of pocket; individuals spend their income on many things less important. The BLS claims their units of observation (i.e. consumer units) earned nearly $67,000 before taxes in 2014. Yet, they spent $6,759 annually on food, of which 41% ($2,787) was on food away from home. Americans spent $2,727 on entertainment and $1,786 on apparel. Thus, it doesn’t appear that Americans are incapable of financing those living expenses they value.
I don’t think the comparison between the average annual cost of owning and operating a car and average per capita spending on healthcare is particularly good or informative.
Most of the costs of owning and operating a car are predictable. Whether you buy a car for cash or finance part of the cost, you know what your outlay is either up front or per month and the number of years of monthly payments in the case of a car loan. Insurance premiums are predictable. Gasoline costs are largely predictable based on expected miles driven though the cost per gallon can vary somewhat. The only cost that is not predictable is for unscheduled maintenance and repairs.
People buy car insurance to protect against not just collision damage from an accident but liability for injuries to themselves and others as well as others’ property damage. Finally, when the car is old and unreliable and too expensive to keep repairing, it can simply be junked. There is little here that needs to be insured against.
Healthcare costs, by contrast are highly unpredictable, and often very expensive. Some people may incur little or no healthcare costs for years on end if they are young and healthy. Even those folks, however, could be badly hurt in a car accident, sports injury, fight or crime or be diagnosed with cancer.
While I think most people should be able to pay for routine primary care out-of-pocket and high deductible health insurance plans are considerably less expensive than low deductible plans, most healthcare costs are above the deductible and virtually all hospital based care is expensive, including outpatient care. The same is true for long term custodial care and kidney dialysis. Very sick people can incur extremely high costs and we don’t just “junk” them because it costs a lot of money to keep them alive.
The bottom line is that most car operating and ownership costs are predictable and most healthcare costs aren’t predictable. The comparison between the cost of and need for car insurance vs. health insurance is like comparing apples and oranges.
Granted, cars wear out as a function of miles driven to some degree. Every few years people have to decide whether they are willing to pay for a new car or are willing to drive it until the wheels fall off (paying extra for repairs instead of new car payments). But they are still budgeting for cars and paying to have one. The primary difference in health care is that our bodies mostly run fine until late middle age and then the upkeep becomes high. If people were depositing payments into an account and maintaining high-deductible insurance, the cost of care would not be much more of a problem than the cost of budgeting for cars. It only becomes a problem when people want to free-ride for 40 years and then complain health care spending puts a dent in their lifestyle.
In a perfect world, high deductible health plans might be the norm, the premiums would be paid with after tax dollars like all other types of insurance we buy and people would build savings not only for retirement and paying for the kids’ college education but also to handle what I call the curve balls and vicissitudes of life including small healthcare expenses. They shouldn’t need a separate healthcare account and they shouldn’t need or have a tax preference.
I read recently that a surprisingly large percentage of the population couldn’t handle a surprise bill of as little as $400 for a car repair, medical bill, home repair or some other unanticipated expense without putting it on a credit card. While I can understand that in the case of low income people who are always living on the edge financially, for the middle class and upper middle class, I think the fundamental problem is that their lifestyle expectations exceed their ability to finance them. Maybe our expectations should become more realistic.
That is good criticism. However, there is no economic argument against a health insurance policy that would pay up to a fixed dollar amount and if the “repair” cost more it would not pay. It’s just that most of us find that revolting.
But imagine if people had a choice? Imagine if Medicare told a cancer patient: It will cost us one million dollars to treat you and we are 90 percent certain you will die within six months anyway. How about we give you $500,000, you sign away any claim to medical treatment, and you can do whatever you like with the cash?
How do you think that would go over with the voters?
It probably won’t go over very well with a lot of people because they refuse to put a price on human life though we do it implicitly all the time in all sorts of ways.
In other countries, part of the social contract / compact is that people don’t impose unreasonable costs and expectations on their fellow citizens. We shouldn’t either. If you can self-pay, that’s fine.
If I wouldn’t spend my own money on marginally useful or futile care at the end of life even if I could easily afford to, I don’t think I should spend taxpayer or insurer money either.
i think it would be very difficult to manage the emotional and qualitative aspects of making the offer in the first place. How objective will the prognosis and estimated cost be? How objectively will the determination be made of how long an individual can expect to live? I don’t question the science exists. I do question how the science would be applied when real administrative people face real patients’ dying needs.
I also think the question is not so much whether voters would accept the idea, as whether beneficiaries would accept the idea – especially if the arrangement is truly voluntary.
(Parenthetically, it seems to me that some people who refuse to place a price on human life are basically saying “when it comes to my medical care, money is no object – when it’s your money”.)
Don’t forget that, as matters stand, eunthanasia is becoming more common. Isn’t it reasonable that more terminally-I’ll people would accept a significant monetary offer in lieu of insurance? That brings me back to my first concern noted above.
That’s much of the problem. People have a hard time putting a price on human life because it’s not their money paying for someone else’s extra 6 months of miserable existence while on a $50,000 per month cancer treatment. They don’t want there to be limits when it’s their miserable existence either.
The idea that society cannot put a price on life is partly to blame for where we are today. Many people might have to accept the inevitable if it meant borrowing $300,000 that their heirs would have to pay off. The same might be true if it meant taking $300,000 of family savings and spending it. (As an aside, the cost of therapy wouldn’t be $300,000 if people had to make these decisions. But, then again, it might not exist at all.)
Maybe a better analogy is if the government forced people to set aside $1 million over their lifetimes to pay for “no-limits” socialized medicine. If people really understood they were accepting a much lower standard of living, they would probably trade a lower health care entitlement in return for a better life while young (at least up until their health malady turned serious, then it would be too late to change their mine, but that’s probably still a optimal outcome.)
Devon, insurance is much different than a health care delivery system. People may still buy inexpensive health insurance in life insurance. A 30-year-old female can purchase $1 million in life insurance that will pay 95% of the benefit or $950,000 for a critical illness like cancer for just $50 a month. But instead the taxpayer is paying $41,000 a year for Miami government workers family health insurance. What a scam. A 30-year-old couple with 2 children could go to the Exchange and get coverage for $500 a month. But the Think Tank people have always said that Group Insurance is less expensive. But Devon if you get too sick to work the NCPA health insurance will be TERMINATED. I told you that over 10 years ago.
Imagine taking a sailboat around the world or heading off to climb Everest or busing around South America and still paying $9000 per year too keep your car garaged, insured, oiled and gassed up. That’s the way Obamacare, Medicare and Medicaid work. If you travel overseas, you are still obligated to pay Obamacare premiums or a fine and neither Obamacare nor Medicare is available to you.
Devon, your comments about people free-riding the insurance system for forty years are interesting.
You suggest a world where insurance companies could raise their rates as a customer got older, but it would not matter because the customer would have a health savings account they could use to help pay those premiums.
Young people would face very low premiums, and they could invest their savings for future needs.
In theory this would leave senior citizens much less dependent on government.
How we might get to such a system is an enormous challenge.
Many Americans and nearly all Europeans are focused on more of a social insurance model. i.e., you pay your own Medicare taxes when you are young, and your heirs pay their own Medicare taxes when you get old, and that is all the ‘savings’ anybody needs. Health care is paid for by taxing a percentage of everybody’s wages.
The social insurance model is not all bad. It removes the free-riding and just bad luck that makes people nervous about the voluntary-savings model. Social insurance rescues the millions of persons who might have to use up their health savings account, or have long periods of low income when they cannot add to a health savings account, etc.
This sounds similar to the life insurance choice between expensive ordinary life insurance which has an investment component and is quite expensive vs. term insurance which has no investment component and is dirt cheap if you’re young and healthy. Lots of financial advisors will suggest that people “buy term and invest the difference.” If you die young, you’re dependents will get a pot of money to help sustain their lifestyle thanks to insurance which you were able to acquire for a low price. If you don’t and you had the discipline to invest the difference and you made a good salary in a professional career and you lived well within your means and you saved a reasonable amount of money and invested it wisely, you probably won’t need life insurance when you’re old by which time it will be very expensive for the same coverage that young healthy people can buy for next to nothing.
I continue to suggest that health savings accounts are grossly oversold with or without a tax preference. They can help pay for relatively inexpensive primary care visits and a blood test or imaging test here and there especially if you can get them at an inexpensive lab or imaging center with help from price transparency, which often doesn’t exist, to allow you to find those places instead of going to the expensive hospital or hospital owned facility that the referring doctor sends you to.
They won’t come close to paying for expensive cancer treatment or heart surgery plus lifelong medications or organ transplants or MS or RA or kidney dialysis, not to mention wildly expensive conditions like Gaucher’s disease of cystic fibrosis for which specialty drugs cost $300,000 per year! All health savings accounts really do is enable people to buy a higher deductible insurance plan than they otherwise would have for a lower insurance premium. That saves money for the individual on the health insurance premium but it probably doesn’t save much money for the healthcare system. It just shifts responsibility for paying for basic care from the insurer to the patient though there may also be some minor reduction in utilization for the simple stuff that will often resolve itself after a couple of days.
One big reason that there is not a car care crisis is that the price system is allowed to operate. Another reason is that the debate is driven by anecdotes about the poor person who has cancer and his cost of treatment. Effectively, extreme cases have veto power over a reasonable alternative that would suit the vast majority of consumers. Better to put the high cost cases into an assigned risk pool and let most handle health care like car insurance.
I had forgotten this old post about the pre-existing condition problem -http://healthblog.ncpathinktank.org/how-big-is-the-pre-existing-condition-problem/