Health Care Costs

Brad DeLong says:

Two of the big things wrong with our health care system are (i) the enormous financial incentives HMOs and insurance companies have to figure out some way not to cover sick people, and (ii) cost shifting--the fact that those who buy insurance have to pay not only their own routine costs and their own catastrophic costs but the catastropic costs of others and the uninsured as well. The first means that--often--those who need health care the most have a hard time getting it. The second means that--often--those who could afford or would buy insurance if it were priced at its fair actuarial value don't because of this cost shifting.

Let's look at the first problem. After the fact, insurance companies have an incentive to figure out how to deny coverage. But this is true of all insurance policies. It's always a battle of incentives: When you are buying insurance, you have an incentive to pay as little as possible and to hide any risk. After some incident has already happened, you have every incentive to make the insurance company pay as much as possible.

And the opposite is true on their end. Every insurance company has an incentive to figure out how to argue that the car accident was really the other driver's fault, or how to argue that the death was really a suicide, or that the policy didn't cover acts of terrorism, or whatever. In many instances, of course, it is absolutely clear that the insurance company is required to pay. But in any case where there is room for doubt, the insurance company always has an incentive to try to avoid payment.

The thing that's important is the size of the incentive. There's a greater incentive to dispute a $100,000 heart surgery than a $100 checkup. And there's a greater incentive to dispute over cancer treatment than over a fender bender.

So it might indeed be a good idea to do as DeLong says in endorsing Kerry's idea, which is to have the federal government pay for most medical costs over $50,000.

On the other hand, this act in itself would create incentives. The thing to notice that is the federal government would only pay 75% of the bills above that amount. That's presumably so as to discourage the "moral hazard" problem wherein the insured person can demand more than is necessary or useful because he or she isn't paying the bill.

But will medical establishments create a 25% "discount" such that anyone can get the most expensive treatment paid for by the government? Many medical costs are incurred in keeping elderly people alive at a point when they might have died naturally. Not that I discount this; my own grandparents lived to their 80s, and I was immensely happy to have known them that long.

But they eventually died anyway. Indeed, all elderly people will die. Heck, all of us are going to die at some point. And the longer people are kept alive through artificial and expensive means, the more money it will cost. It sounds cold and cruel, but somebody has to make a choice that for certain patients, the treatment just isn't worth the money.

Don't believe it? As I've said, everyone dies. No amount of money, no style of insurance, will prevent that. So do we spend a trillion dollars keeping one person alive for a few months longer? No. How about a billion? No again. How about a million? Well, with medical treatment as expensive as it is these days, I wouldn't be surprised if this were the cost for a few people. But what if it was everyone in society being artificially kept alive for a few more months before death? There isn't enough money to spend a million on each person (that would be 280,000,000,000,000 dollars for everyone alive now). So there has to be some number where a rational person (not affected by sentimental involvement) would say, "Sorry, this person is going to die anyhow, and society doesn't have enough money to spend this much on every person."


So how would it affect incentives if hospitals and doctors figure out how to run up the bill keeping elderly people alive for that extra 3 months or 6 months?