Health Insurance vs. Food Insurance

People need food, too

By Nathaniel Givens

Imagine if grocery shopping worked like health insurance.  Let’s call it “food insurance”.

First of all, you’d better hope that you’re not self-employed or unemployed. You see, way back in World War II the United States created strict wage controls as part of the Stabilization Act of 1942. Since employers still wanted to compete for the best employees–even in wartime–they had to get creative. Instead of offering higher salaries (which was now illegal), they began to offer fringe benefits. The most important of these was healthcare insurance. Let’s pretend that food insurance started in the same way. That would mean that, today, if you get your food insurance through an employer-provided plan you not only get a nice tax advantage on your own premiums, but you can also rely on the employer to pay some of your costs as a matter of traditional expectations. But if you’re self-employed, you not only lose the tax-advantage, but also the ability to get the lower rates that come with buying insurance for bigger groups.

Now let’s imagine what actually shopping for groceries would look like. Theoretically, insurance is about risk management. That’s why you can insure your car against unfortunate accidents, but not against the need for an oil change. This is also one reason why life insurance policies don’t cover suicide: your death has nothing to do with risk management if you choose to die. So health insurance, which covers not only accidents but also routine care and sometimes elective procedures too, is not at all like real insurance. So let’s say food insurance isn’t either. Instead, your food insurance qualifies you to a specified number of visits to your local food provider. If you visit in-network food providers you pay only a small copay, but if you visit out-of-network food providers, you pay a higher copay. (If you have emergency munchies and need fast food, you pay an even higher copay to get prepared meals handed to you at a drive thru.)

The important thing, however, is that you don’t actually pay for your food on a per-item basis. In fact, you don’t even know what it costs. When you walk into your primary foodcare provider, all of the items are there on the shelves, but there are no prices. That’s because the cost of your shopping trip is already covered by your foodcare insurance. It’s the whole reason that you have it. So you would get your shopping cart and go down the aisles, putting as much food as you felt you needed into your cart. To make this example realistic, however, let’s assume that you can’t resell any of the food.

Do you think that people would get more or less food in the food insurance scenario vs. in the real world, where we pay for everything item-by-item?

They’d probably get much more in the food insurance scenario. This idea is called “overutilization“, and it might be one reason that American healthcare costs are so high. It’s a pretty simple idea, however, and I’d be wasting our time if I had created this whole food insurance scenario just to talk about that. The reality, however, is that the problems of food insurance are much, much more severe than just overutilization. After all, since I assumed people can’t resell the food what I would expect is just a large degree of carelessness. No one has any incentive to just clean out the shelves and take everything home.

But let’s look at things from the perspective of the foodcare providers. Folks like Kraft or Heinz who actually create the goods that you can “buy” at a foodcare provider. They know that when you walk into the store you’re not going to see any price tags. So what incentive do they have to compete with each other to offer you the best value? Since you never see prices, you have no idea how to make a value decision. So they have no incentive to compete with each other. Competition, which is the idea that in order to get your dollars suppliers have to offer you the best goods at the best price, goes away. And this means that providers have almost no incentive to be efficient.

In the real world, food production is incredibly competitive. Grocery stores often survive on razor-thin profit margins, and the competition by competing brands can be extremely fierce. All of this causes the providers to keep costs as low as they possibly can while also keeping value as high as they possibly can. If you want some idea of what that looks like in the medical industry, look for medical products and services that people actually pay for. Things like LASIK, for example. From Forbes:

Fifteen years ago, a precursor to LASIK called Radial Keratotomy (RK) cost about $8,000. It was done by a surgeon wielding a knife—hopefully, a well-rested one who didn’t think you looked like his ex-wife. Typically, the surgeon did one eye, sent the patient away for six weeks, then did the other—to decrease risk of infection.

Today, LASIK is done with a computer-guided laser. The entire thing takes 10 minutes, which includes about 60 seconds in aggregate of laser-in-eyeball time. I took a 3 hour nap and woke with perfect vision.

One might presume, ignoring the huge value of not having a sleepy surgeon aim a sharp object at your cornea, inflation alone would make LASIK now cost a little over $11,000. (Inflation has averaged 2.4% since 1997.) Except I don’t mind telling you it cost $3,800—less than half the 1997 cost with a much shorter recovery time and lower risk of human error.

That’s what competition gets you, especially in an industry where innovation and technology reign: lower costs for better products. This is what, if we had food insurance, we wouldn’t have. And that changes the picture dramatically. Now instead of just worrying about people taking home a few bananas they might not really be able to eat, you realize that the entire economic machine that is geared towards low costs and high value depends on prices. And, if you’ve got food insurance, there are no prices.

Sound like an exaggeration? NPR covered a really simple research project: have an undergraduate call up a bunch of hospitals and pretend that she was shopping around for her grandmother to have a hip replaced. Say that you can pay the costs out of pocket (so no insurance), and ask what the lowest, everything-included price of a hip replacement would be. The results?

Getting an answer wasn’t easy. Of the top 20 hospitals, only 9, or 45 percent, provided a bundled price that included fees for both the doctors and the facilities.

But that response looks terrific compared with how the other hospitals did. The researchers were able to get a bundled price estimate from only 10, or about 10 percent, of the other 102 hospitals they queried.

So out of 122 hospitals, 19 would actually give a price quote. This is like walking into a foodcare provider and not only are there no prices on the food items, but even if you track down a manager and ask for the price then 90% of the time you won’t get an answer. But of course, this study was conducted by trained researchers. They did a little extra work and tried to find the prices by tracking down the individual doctor groups who worked at the hospital (sort of like giving up on the manager of the foodservice provider and calling Kraft directly). Even based on this approach, however, they could only find prices for about 60% of the hospitals.

But even that actually sounds better than it really is, however, because the price range varied from $11,100 to over $125,000.  Imagine asking how much a single box of mac-n-cheese costs and half the time getting the answer “dunno” and the other half the time getting anything from $0.40 to $4.15.

Now, just because consumers don’t know how much the items cost doesn’t mean that nobody does. Back in food insurance world, the food insurance companies would work out deals with the foodservice providers (the grocery stores) and the foodservice suppliers (the growers and manufactures) to try and get good prices. So there is some competitive pressure, and that’s why we have healthcare at all. If it wasn’t for the secret negotiations between insurance providers and medical suppliers, we’d be stuck using nothing but leeches and prayers.

A lot of folks have a visceral antipathy towards involving markets in the provision of medical goods and services because people need medical goods and services. But people need food, too. The reality is that if your goal is to get the most good food to the most people, there is no better system than the free market. And the free market relies on the price system to spread information throughout the entire economy so that everyone from the producers to the middlemen to the retailers to the customers know the relative values of all the goods and services available. In food insurance world that price system isn’t entirely non-existent, but it is warped and crippled. The result is that, with significantly less competitive pressure, we get inefficient, lower-value results than we could otherwise.

My point is not that we should get rid of healthcare insurance entirely. My point is that there are very specific things that are very wrong with our current system. In order of the food insurance example:

1.     It’s bizarrely and unjustifiably linked to employment by accidental history and a dumb tax code.

2.   It’s not really insurance at all. It’s actually more like a legally-sanctioned version of Sam’s Club or Costco where having a good job with a big employer is the membership ticket.

3.   There is over-utilization and a lack of competitive pressure because the people actually buying the healthcare don’t have any idea what the price is.

These are all things we can fix, and some of the answers are not even that politically far-fetched. One of the simplest is an HSA, or Health Savings Account. Technically, an HSA is basically just a bank account you can funnel money into from your paycheck without it being taxed. Then, you’re only allowed to take the money back out for health expenses. But, in practice, HSAs are usually paired with high-deductible health care plans. A high-deductible plan means that you are responsible for the first few thousand dollars of medical costs every year before your insurance coverage kicks in. (You do get coverage for routine care, however.) So people use the  money from their HSA to pay for their own medical expenses without taking a tax hit. Most importantly, however, it means that people actually have a reason to call and ask about prices. If your doctor says “Hey, you should get an MRI” and you have an HSA, then it makes all the sense in the world to call a few places first and ask “Hey, how much do you charge for an MRI?” Maybe a lot of them will tell you “you’ll find out when you get the bill”, but that will encourage you to go to a place that does give you a price, and that gives you a good price. Hello, competitive pressure!

The thing about HSAs is that they lessen the tax-code impact (although, unfortunately, by adding rather than reducing complexity), they function more like real insurance, and they start to introduce competitive pressure. They aren’t a perfect solution by any means, but they are a great step in the right direction. Unfortunately, their very existence is threatened by Obamacare which, while it doesn’t eliminate them yet, is poised to do so eventually. This is one concrete example of a legitimate free-market complaint about Obamacare. There are others, of course, but I’ll leave those for another post.