Yes, We Need Real Insurance … Real Social Insurance

I’m glad Arnold Kling wrote this essay — and the book on its which it is based. Not only is he smart, provocative, and an unusually clear writer. He has also focused on what I would argue is the single most important debate in health care policy today: the definition of “real” insurance.

Kling’s definition is one that most health care industry executives, along with most conservatives I know, share. As he puts it, real insurance “provides protection against rare, severe risk” — the kind that generates “infrequent claims” and, as a result, “low premiums.” In the context of health, he goes on to explain, “real insurance would pay for treatments that are unavoidable, prohibitively expensive, or for illnesses that occur relatively rarely.”

But that’s not the way health insurance works nowadays. Health insurance subsidizes a lot more than just the occasional, unpredictable medical crisis. It also pays for the routine and the predictable.

This isn’t “insurance,” Kling warns us. It’s “insulation.” And that makes it fundamentally unsustainable.

I’m tempted just to grant the rhetorical part of his argument. Frankly, I could care less whether we call health coverage “insurance,” “insulation,” or something else entirely. But I do care about how insurance works. And I have a different take on it.

Let’s start with King’s analysis of why “insulation” inflates medical spending. As an example of the kind of routine care that such traditional health insurance subsidizes — but allegedly shouldn’t — Kling cites strep throat tests for kids and regular eye care. Later, he talks about an unnecessary MRI a doctor ordered up for him.

I have no doubt that, as the now-famous Rand studies of health care demonstrated decades ago, generous insurance has encouraged many a useless strep test. (“Kid has a sore throat? Sure, go ahead and swab…”) But strep tests for healthy kids isn’t the reason American health care is so expensive. Neither is routine eye care or even MRIs from over-enthusiastic neurologists.

It’s a cliché of health care policy, but an important one, that some 80 percent of the money we spend on health care every year covers treatment for 20 percent of the people. So if you want to make health care a more sustainable expense by spending less, then you’ll have to find the savings there.

I gather that, anecdotes aside, Kling understands this. Indeed, probably his most well-argued point is that we’ve become accustomed to what he calls “premium medicine” — namely, all the high-tech goodies and expensive surgeries that medical science can create. And we throw them at patients willy-nilly, even if — and sometimes especially if — they’re near the end of life.

In retrospect, not all of this spending makes sense. Some of it is flat-out unnecessary or wasteful. It doesn’t improve health or even longevity. Some of it does contribute to better outcomes, but only at an extraordinarily higher expense.

Still, it’s one thing to recognize waste exists, particularly if you have the luxury of looking at medical care after-the-fact. It’s quite another thing to squeeze out that waste, particularly if you have to do it in real time.

We have precious little evidence to believe that people can distinguish good care from bad care. (Kling quotes Harvard economist David Cutler making this point, and I couldn’t agree more.) And particularly in the case of the people who are most price-sensitive — that is, the poor — there’s every reason to think they will do precisely the opposite and make the worst possible kinds of choices. Suddenly sensitized to higher medical costs, they’ll cut back on the kinds of routine, preventative measures that would ward off future medical calamities, thereby inviting not just bigger health problems but, over the long run, higher costs. (By the way, the Rand experiments suggested this, too.)

Citing this objection, Kling asserts, as the defenders of his approach often do, that people can become more intelligent shoppers in time, with more information. It’s a lovely idea, but one that seems highly dubious — particularly if you’ve ever had the experience of trying to read up on a condition via WebMD or wade your way through hospital quality ratings. The available information is useful, certainly, and someday it could be a great tool for consumer decision-making. But it’s hard to imagine we’ll reach that point anytime in the next few years. Even the experts themselves disagree on exactly what measures are the most useful, or how to interpret them.

I also think Kling is a little breezy about the economic impact of changing insurance as he suggests. And here, too, I think his writing is typical of what I often hear from the right. Kling agrees that government assistance should be available to the very poor — which, in his book, he defines as people at 100 percent of the poverty line. After that, he says, he’d prefer people take high-deductible policies — ideally, if I understand him correctly, policies that exposed people to $5,000 in out-of-pocket expenses each year.

But I wonder if Kling grasps what it’s like to live on $20,000 a year, which is the poverty line for a family of four. Once you’ve paid for rent, groceries, clothes, and utilities, there’s not much left — certainly not enough to pay off $5,000 in treatments for an ongoing medical condition. And even people making well above the poverty line would struggle to meet this sort of deductible. As scholars like Elizabeth Warren and Jacob Hacker have shown, it can take just one ailment — or one accident — to completely ruin even some middle-class families financially.

Maybe Kling is sympathetic to people who end up in such circumstances. (He certainly seems like an decent fellow.) But his definition of insurance doesn’t leave room for helping out these people financially — except in the most extreme cases — because it doesn’t fit his definition of what insurance should do.

After all, these large expenses are most crippling to families when they are part of a chronic, ongoing illness. And the expenses from such illnesses are highly predictable. Diabetics, for example, can count on spending thousands every year. (And that’s assuming they don’t end up with severe complications.) If insurance is meant only to prevent unexpected, unpreventable expenses, it has no business covering those bills.

But some of us have a slightly broader definition of “unexpected, unpreventable.” While misfortune can take the form of a physical injury or the onset of a sudden disease — the types of calamities that Kling concedes are worthy of insurance protection — misfortune can also take the form of genetic and economic bad luck, which, as any public health specialist will tell you, can result in a lifetime of high medcial bills. Insurance can protect against these risks, too — by subsidizing at least some basic medical care and mitigating the financial penalty from even predictable expenses. There’s even a name for this concept. It’s called “social insurance.”

Of course, our efforts to provide social insurance here in the U.S. have not been so successful, at least in health care, as anybody who reads the papers knows. Costs keep going up but quality doesn’t; meanwhile, more and more people find themselves without insurance and, as a result, with no way to pay their medical bills.

In both his essay and his book, Kling cites these problems as proof that my kind of insurance — i.e., social insurance — isn’t sustainable. But that’s simply not the case in other countries, where they manage to provide social insurance for medical expenses — and, in many cases, to do it well. They give everybody coverage. Then they find a way to pay for it, typically through some combination of taxes and “premiums.”

These countries can’t escape human nature: There’s always a tension between how little people expect to pay and how much they expect to get in return. But the universal health care systems have mechanisms for solving this. Some ration care explicitly. Some manage supply, through budgeting and regulation of hospitals. Some regulate fees to doctors. Some even vary co-payments to discourage frivolous care.

These efforts reduce premium care, in much the way Kling suggests, but they do so without exposing their citizens to the kind of severe financial hardship Americans experience all the time. And while each country uses a different combination of policies, producing an array of results, in general they do as well if not better than the U.S. on most health outcome indicators (a point Kling concedes, to his credit).

It’s true that, as their populations age, countries with universal health care — much like ours — will find it the challenge of financing health care more difficult. But because these countries already spend less than we do, they’ll have more room to accommodate such increases. (This isn’t just a product of their supply controls and rationing, by the way; particularly in the more generous countries, it may have more to do with the fact that they don’t have insurance companies competing to ditch the sickest patients.)

Precisely because these other countries have more control over the health care market than the U.S. does, they’ll be able to adjust the trade-offs between cost and services gradually, over time. In other words, contrary to Kling’s assertion, these countries have traditional health insurance systems actually seem quite sustainable — not to mention pretty darn good from the standpoint of the citizen who needs medical care.

Would Americans tolerate such a system here? Conventional wisdom says “no,” in good part because — thanks to years of propaganda — Americans have come to associate universal health care with the waiting lines and relatively low availability of technology that’s more characteristic of Britain and Canada than some of the other countries with universal health care. But I think most Americans would probably be perfectly happy in a system like the French, German, Japanese, or Swiss have — if only they knew how those systems really worked.

Of course, you also need a big government, with big taxes, to run these kinds of systems. And maybe that is what Kling really finds objectionable, on either moral or other practical grounds. That’s fine. In fact, on that point I suspect he’d get many if not most Americans to agree — at least at first blush. But that’s a rather different argument than the one he’s making — one I’d be happy to take up later in our exchange.

Also from This Issue

Lead Essay

  • Insulation vs. Insurance by Arnold Kling

    In this month’s lead essay, Cato Institute adjunct scholar Arnold Kling draws from his book, Crisis of Abundance, to argue that the health coverage most Americans enjoy is not insurance at all, but what he calls “insulation.” “The problem with insulation,” Kling argues, “is that it is not a sustainable form of health care finance… Insulation leads people to over-consume health care services. Americans make extravagant use of services that have high costs and low benefits.” Kling explains how real health insurance would work, and how it would help solve the crisis in health care, and explores how we could transistion to a system over time institutionally and culturally in order to resolve the inconsistent demand for insulation and affordable, effective care.

Response Essays

  • Abundance Is Insulated from a Crisis—For Now by Matthew Holt

    According to health care strategist Matthew Holt, Arnold Kling is correct that consumer insulation from the costs of “premium medicine” is partly responsible for the rising cost of health care, but Holt dissents from Kling’s solution. Holt examines what he takes to be the three main strategies for dealing with “the insulation and overuse of medical care in the U.S.”: a nationalized “single payer system; a system of “managed competition”; and “individual consumer control of spending at the point of service.” Holt argues that the latter two options face deep problems, and that a nationalized single-payer system “is the likeliest outcome in perhaps a decade or so,” even it is not politically feasible at present. “Kling has provided a decent analysis,” Holt argues, “but has proposed a solution that both ignores the political and cultural realities of the health care system, and probably wouldn’t even work in theory.”

  • Unhealthy Subsidies by Clark C. Havighurst

    Clark C. Havighurst agrees with Kling’s “diagnosis of what’s wrong with health care” in the U.S. “as far as it goes.” Havighurst goes further and digs into the reasons the U.S. health system “has evolved into an entitlement program under which everyone expects nothing less than the very best that ‘modern medicine’ has to offer.” Havighurst lays the blame at the feet of the government’s choice to subsidize the purchase of health care by “excluding the cost of employer-sponsored coverage from employees’ taxable wages and income” and lucidly details three different mechanisms by which the tax subsidy insulates workers, consumers, and voters from the costs of health care. Havighurst proposes that “something approaching [liberals’] goal of universal health coverage could be achieved by ending the current tax subsidy and offering refundable tax credits of, say, $6000 to families that spend at least that amount in health plan premiums or contributions to a health savings account.”

The Conversation