The End of Mini-Meds is not the End of the World

At EconLog, Dave Henderson notes that today marks the effective date of some provisions of ObamaCare, including the one that makes it difficult to offer insurance with low lifetime limits. So-called mini-med insurance plans are beginning to be phased out. Henderson writes,

The mini-meds cannot promise absolute coverage in the case of catastrophic health problems, and they were never intended to. That’s one problem with such plans. But which is worse: having insurance that doesn’t cover all catastrophic expenses or having no insurance at all?

I’ve been pondering that question, and the truth is, I’m not sure of the answer. I’m no fan of ObamaCare, and as Walter Williams drilled into me, low quality goods are part of the optimal stock of goods. On the other hand, I think a case can be made that banning mini-meds is good policy.

Think about the health coverage we buy as being a bundle of two components. The first component is insulation. At a time of illness, we need not worry about weighing the costs and benefits of medical procedures. We can just focus on the benefits. If a procedure has an expected marginal benefit above zero, we go for it. Someone else picks up the tab.

The second component is pure insurance. This means that we transfer wealth from the states of the world in which we are relatively healthy to the states of the world in which we are relatively sick and need the money more desperately.

Pure insurance is socially valuable, but it always comes packaged with a bit of insulation, which is socially detrimental. Insulation leads to price insensitivity, which, when combined with entry restrictions, leads to overpriced healthcare. It also leads to overconsumption of healthcare. Robin Hanson argues that “we could cut U.S. medical spending in half without substantial net health costs.

Different types of health coverage have different mixes of insulation and pure insurance. Relative to a typical plan, high-deductible policies offer more pure insurance and less insulation. Mini-meds, however, offer more insulation and less pure insurance.

People disagree about how much of a problem health cost insulation is, but it seems to me that it must be a substantial one. Think about a world in which health insurance is banned: what is the price of an MRI in this world? What is the price in our world?

So is it better for people to have mini-med plans or no health coverage at all? The answer might be no coverage at all. If we can’t have laissez-faire, probably the best government-directed healthcare system would be a lot like Singapore’s, in which everyone has a high-deductible plan (high insurance, low insulation). Banning mini-meds brings us closer to Singapore’s system by eliminating coverage that does the opposite (low insurance, high insulation).

15 replies to “The End of Mini-Meds is not the End of the World

  1. Kevin

    Except that the whole point of Obamacare is to ration away insurance while maximizing insulation for everyone.

  2. Jeremy

    I’m excited about organizations such as HelloHealth that offer online doctor visits and only charge a flat rate set by each physician. It is the best option for those like me who choose to have a high deductible, low insulation insurance plan.

  3. Pietro Poggi-Corradini

    Sure, but what if the peace of mind that insulation brings is actually valued by consumers? People do purchase term life insurance for that peace of mind, I guess that might make them act a little bit more carelessly, but is that enough to ban it?

  4. Eli Post author

    Pietro, that’s right, it’s probably not optimal to ban insulation. Some Pigovian tax might be in order. Nevertheless, banning may be closer to the optimum than no Pigovian tax.

  5. apikoros

    Eli, I find myself agreeing with you. This brings up the important question… Should I be worried or should you?

    I agree that insulation is not a desirable feature and I can see a Pigovian tax to disincetivise* it, but I wonder what sort of a tax you would propose? If you have a high-deductible policy, I believe that you are actually giving people an incentive to choose a higher-cost option. Let us say you have a hernia and a $1000 deductible. Solution (a) is a truss for $500; solution (b) is surgical repair for $15,000. As a consumer, the out-of pocket difference between (a) and (b) is $500, and for that you get permanent repair vs. a lifetime of replacements and slipping trusses and… I know which I would choose!

    *yuck! ptui! ptui! I know the word exists but that doesn’t mean I have to like it!

  6. Eli Post author

    apikoros, a high-deductible policy gives people an incentive to choose the cheaper option. Let’s say the deductible in your scenario is $500. Then everyone selects (b). Raise the deductible to $1000; some people start to select (a). Raise the deductible to $5000; even more people select (a). As the deductible goes up, more people select (a).

    It’s important to recognize that the less expensive solution is not necessarily socially optimal. If (b) is 30 times better than (a), then it’s not a problem if people select (b). The ideal system induces people to select (b) if and only if it is 30 times or more better than (a). To do that, you need a high deductible. If the problem is that the deductible is not sufficient to do that, you just need a higher deductible.

  7. apikoros

    Oh, hell! and then I go and misspell it! Probably Freudian.

    Seriously, I wonder if much of the demand for insulation isn’t fear. If people were confident that treatment decisions were made on a medical, rather than a financial basis, then demand for low margin treatments would drop.

    An additional objection I have to mini-meds is that in catastrophic cases they transfer risk from the individual to society. A comatose motorcycle rider with a mini-med policy will transfer all of their cost of treatment beyond the paltry limits of their policy to society at large. We can continue to sweep it under the “admin overhead” rug implicitly as we do now, acknowledge that this happens explicitly and work do divide the burden by banning mini-meds and requiring all policies to provide catastrophic coverage, or just shoot the injured by the side of the road.

  8. apikoros

    But Eli, where would you put the deductible? Seriously, back in ethics class I always got heartburn when the prof preferred rule-based rather than act-based systems. You can put a tax/deductible where ever you want, to force whatever outcome you desire. The problem comes when someone asks, “Exactly what outcome do you desire? Where would you put the bar?” I’d live with a modest tax/deductible (say $20-$100) to keep people from coming in to the emergency room for a band-aid, but beyond that I want a doctor to tell me what I need. In the truss/surgery example I used above, for example, I don’t think that I know enough about medicine to know which is appropriate. For non-medical people, a hernia is, at most, a twice in a lifetime event. Non-doctors just don’t have the necessary qualifications to make an informed decision. I believe that is why the demand for insulation exists and why full coverage will reduce demand for it.

  9. Eli Post author

    I’m just guessing, but I think the socially optimal deductible is probably around $5000/year per person. You pay the first $5000 of your health expenses out of pocket. The insurance company picks up everything after that. Because 95% of people are paying out of pocket, prices are clearly listed. Because insurance companies don’t want you to get to $5000, they prenegotiate low prices.

  10. apikoros

    Interesting. I think you are first-order close to a reasonable estimate, but I think I might well go looking at some health stats to see what they look like. You’ve piqued my interest :-)

    BTW… do you know that I will, starting next Friday, have much more time for personal interests and research? I will then become (officially) part of Alan Simpson’s biggest fan club… the retirees! Whee! Garcon! More cat food for me!

  11. apikoros

    I tried that at one point. Not pretty… I’m just too angry. The screaming is no prettier in print than in person, sorry to say.

  12. Eli Post author

    OK, so we need to look at all the effects. First, it does not follow that 2/3 of health care would paid out-of-pocket. Let’s suppose (for the moment) that most people have zero health care spending and some fraction of people have $1 million of health care spending, such that the average spending is $7290. In this case, 0.5% of health care spending is out-of-pocket, even with a $5000 deductible. I’m not claiming that these are the actual figures, of course, only that you can’t take $7290 and conclude that most spending would be out of pocket.

    Second, the $5000 deductible would put downward pressure on prices, lowering total healthcare spending. This means both that fewer people would hit the deductible limit and that average spending ($7290) would go down. If the out-of-pocket fraction of expenditures goes down for these reasons, I don’t see this as a problem.

    Third, remember that high-deductible policies cost much less up front than low-deductible policies. If you take the cost savings from this change and subtract it from average out-of-pocket expenses, I’m not sure that the net out-of-pocket fraction of expenditures would go up significantly.

    I stick, therefore, with my rough desire for widespread high deductibles on the order of $5000.

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