Insurance, Child Birth and Other Things
In the comments to this post on President Obama’s statement about health care commenter Boyd asks,
I’m curious why you say health insurance shouldn’t pay for child birth, Steve. I haven’t heard this before (I apologize if I haven’t been paying attention).
The classic definition of insurance is to reduce the losses to an individual (or firm) for risks that are large and rare. If the losses are to be expected, then the premium for insurance is going to be pretty much equal to the loss. Think of it this way, suppose you have 100 people and the risk of the loss is $100, but there is only a 0.01 probability of incurring the loss. The premium would be $1 since the expected loss is $100 and there are 100 people purchasing the insurance. Now suppose that the probability is 0.9, the expected losses are going to 90*$100 or $9,000. Now the premium, for the same group of 100 people is $90.
Child birth is not usually something that happens without at least some intention involved. For example, if I were to drive my car recklessly at speeds far in excess of the speed limit and disregarding other traffic laws and my insurance company decides not to cover me for plowing into a tree many people probably wouldn’t be that shocked. If you have sex with no birth control there is a high likelihood that he woman will get pregnant. Quite similar from when you look at the behavior and outcomes from the perspective of insurance as described above.
These days we don’t have insurance anymore but insulation. It is insulation from high costs of health care irrespective of whether or not the costs are associated with events that are high or low probability. Now one can argue that this is a good thing, but I think one has to also admit that it can drive up the cost of health insurance, see the above simple example. Health care these days covers things like child birth, routine check-ups, eye-glasses, prescription for minor illnesses (ear infections in children, antibiotics for bronchitis, etc.), and even in some cases things like Lasik.
I’d argue that we could get some quick reductions in health insurance costs by eliminating these things from coverage. Will it make some people worse off? Sure. But that is the problem we are facing. We can’t grow the world’s food supply in a flower pot and we can’t give everyone all the health care resources they might like. Resources are limited, not infinite and as such there has to be trade offs. The problem is that it is all too common for many people to think that we can have our cake and eat it too when it comes to health care. Why we’ll just reduce administrative costs and spend it on providing resources for child birth. The problem is that doesn’t reduce health care costs or even the rate of growth in health care expenditures. At best it leaves them unchanged, at worst it will accelerate the problem. You’ll often hear these people say, “We spend N times what this country or that country spends!” The implication is, that it is a bad thing. But then they don’t favor simply reducing costs, but reallocating costs in ways they approve.
The end result is that this will ensure that health care expenditures will rise, health insurance will become increasing less affordable, and that we will continue towards the cliff’s edge. Just about every country is in the same boat. They are having problems covering their health care expenditures. France, England, the United States, Germany, Canada are all facing serious health care issues or have very high growth rates for health care expenditures. Merely switching to a different system might slow the process down (or speed it up), it will not solve the problem.
Photo by Flickr user quinn.anya, used under the Creative Commons license.
The point of insurance is both to spread individual risk over time and to spread risk among groups. If one in 100 births requires surgical intervention costing $20,000, and the other 99 births cost $1,000, insurance makes every birth cost $1,190, which spreads the risk around. And when you consider that most women give birth once or few times in their lives, the risk is spread over decades of premiums.
While most families would be devastated by a sudden $20,000 hospital bill, insurance payers can easily afford the additional $1/month that it costs to spread the risk into the pool and over time.
A couple of random thoughts, Steve. First, I believe that rationalizing our system would tend to reduce the cost of healthcare worldwide. The reason for this is that we are a major importer of healthcare services. We import healthcare professionals in substantial numbers from practically every country in the world. We import 500 from Canada alone every year. Presumably, by the normal market processes that means that we’re raising the worldwide wages of healthcare professionals.
Second, according to a much-quoted JAMA study about 30% of total healthcare expenditures can be attributed to insurance administrative costs. Canada’s insurance administrative costs account for about 15% of their healthcare costs so I don’t think it’s unreasonable to believe that we could reduce those costs somewhat here. How much? I don’t know but I sincerely doubt it will go down to the 2 or 3% of costs that some advocates suggest.
Third, I believe that a substantial part of our problem here is the bidding war caused by the particular form our public-private hybrid system is structured.
What concerns me about the proposal that President Obama spoke of yesterday is that it doesn’t address any of these structural issues and, consequently, it’s a non-starter. Unless, of course, you believe that the proposal is just a stalking horse for a fully nationalized system. If that’s the objective, let’s debate that, let’s not debate red herrings.
Jeffrey, the percentage of surgical interventions in live births is much, much higher than you’re crediting it for. See here for example.
And according to this article the average cost per vaginal birth is $7,000 while C-sections are something like $16,000.
True. But the problem now is that that $1,190 is spread to everyone, even those that do not intend to have children and are responsible about it.
I actually think that the problem is not really that we don’t have the resources to give everyone good health care. The problem now is that health care is not even close to being subject to market forces, and thus is very inefficient and costly.
If we could completely redesign the system from scratch, we might be able to design something that is free market and affordable, and yet still provides a safety net even to those who made
poor life decisions.
But due to the nature of health care, it will be very challenging, however, even if we could re-design from scratch. Throw in all the entrenched interests, and it seems hopeless.
The first paragraph in my comment was addressed to Jeffrey, not Steve Verdon.
Jeffery,
Your argument is one in favor of covering problematic child births, not all of them. If a problematic child birth is rare and expensive, then by all means cover it. However, you should not be covering the routine. That isn’t insurance it is called insulation. As Anon pointed out it is nothing more than a subsidy from those who aren’t going to or can’t (single males, infertile, etc.) have children to those who are.
Dave,
What I’m curious about is why? Firms that maximize profits also minimize costs at the profit maximizing level of output. As such, these firms are probably not spending that money just out of spite or stupidity…at least not all of it. So is it government regulations, fear of lawsuits, or something else altogether. If it is government regulations then the solution is to change that, not necessarily nationalization of health care.
Steve,
The problem is you don’t know in advance which ones are complicated and which aren’t. Hence, insurance.
Your argument makes as much sense as saying only people who are going to crash should have auto insurance.
Anyway, why was the motivation for this article. To my knowledge birth care is not a major driver of health spending. 30% of our spending on medical care is spent in the last year of life. It seems like you’re focusing on the wrong side of the age scale.
It bears mentioning that if people bore the full costs of childbirth, rather than spreading the risk and payments over time via insurance, the most likely consequence would be a sharp increase in the number of abortions. Just saying…
This is a joke right? You purchase insurance for high risk birth/complications. No complications, no insurance payout, you pay the cost of birth yourself. If there are complications, insurance kicks in. Just like with car insurance.
Read. The. Post. Its right there in the first sentence.
Further you argument is, “Its okay if we waste this money, where we really need to look for cuts is in this other area over here.” Not a very good argument.
Maybe. But if you can’t afford the child birth you probably can’t afford the child either. Yes its expensive, but so are diapers, formula, clothing, diapers, car seats, strollers, diapers, and diapers. Let alone things like saving for college, food, health care, etc.
And all that laundry…I’ve watched the family across the street, they have 4x the kids I have and they are always doing laundry…always. Their detergent bill must be horrendous.
If I understand what you’re saying, Steve, your problem is not so much that health insurance covers childbirth, but that it covers routine, predictable childbirth. I’m guessing that if there were a standard deductible equivalent to the (normed, I suppose) cost of an uncomplicated birth, you’d be okay with that?
I see your point on that, and thanks for the post in response to my question. But Jeffrey brings up a good point: how about elder care, or whatever you want to call it? A goodly percentage of health care costs are consumed by old folks, and the dividing line between routine and catastrophic is hard to define for that cohort. Our wealthiest citizens are part of that group, as are many of our poorest. How do you crack that nut?
I can see why a good healthcare solution isn’t an easy call.
Oh, well I certainly see your point that insurance should cover the extraordinary part of the cost. I have long been beating the drum that it’s stupid for “insurance” to cover everything. I have the same complaint about people who say that insurance should cover the cost of birth control pills. It makes no sense to subscribe to a risk-management program with 20% overhead to pay out the perfectly predictable cost of those prescriptions.
The underlying problem, of course, is that even the basics of health care are now so expensive that most people perceive them all as extraordinary. The insurance companies and the medical care professionals silently conspire to make it all cost as much as possible.
I recently watched this documentary film on the topic of how doctors and hospitals have driven up the cost of giving birth in the USA, and how insurance companies are happy to deliver the dollars.
http://www.thebusinessofbeingborn.com/
Yeah, that might work too.
Ideally people would save for the routine care part of it. But why do that now? If you quailify–i.e. are old enough, it all gets picked up through Medicare. So you’d be better off not saving for it all when you are young and consuming more resources then. Deferring consumption in this matter is something that most people wouldn’t want to do so long as they know Uncle Sam is going to pick up the tab.
Right, because now that we have things like Medicare in place undoing them in a representative democracy is going to f–k all hard to say the least. Even modifying them on a forward going basis isn’t going to be easy and may not be enough.
But unsustainable trends are not sustained and we will either get off the trend on our own (highly unlikely) or we will be yanked off in a very painful manner (most likely). I can easily see the government renegging on the promise to not tax things like IRAs where the contributions are in in post tax dollars (Roth IRAs). Also doing things like suspending patents on drugs to break the temporary monopoly power drug manufacturers have for drugs that make it to market.
Steve, you missed another point. Pregnancy can be a deliberate and foreseeable event, but so can the insurance coverage you choose. Women frequently change coverages or jobs prior to pregnancy to make sure their pregnancy is covered. IIRC preganancy coverage can nearly double the monthly premium for women in their 20s and 30s. So the incentives are for women to change their coverage once they are no longer anticipating children.
Currently the standard tax exemption is $3,650, so what if we doubled it for the first year of life and on evidence that a C-section was performed, quadruple the exemption.
Is that insurance?
Steve what in your opinion equates to being beyond routine, when it comes to childbirth?
I am not completely on board with exempting childbirth-although i think you make a point with the routine. I can’t remember who said it, but I know it wasn’t me, but they said the way medical insurance pays for the routine raises the costs of medical care-it is much what would happen to auto insurance, if auto insurance covered things like oil changes, tire rotations and other general maintanence.
My only disagreement, is that while much of childbirth and prenatal care is routine, there is a fine line from when it moves from the routine, and I would worry that a lot of people would take a pass on the routine care, which might result in a more expensive and riskier childbirth.
No, a subsidy. It basically says, “Here have more kids, we’ll pay for their birth.”
Ahhh, good ol’ moral hazard. And yet people scold me when I say things like gold plating leads to higher use of health care resources.
I don’t know, I’m not an expert in that field. However, I’m sure with the number of births every year there would be data to get some ideas on how such insurance might work.
Those cost however are spread over a decently long timeline, and often are, initially, a shared cost in terms of gifts from friends and relatives. Never mind that there are ways to cut those cost considerably (cloth diapers, making your own baby food, breast feeding).
I agree with your overall premise that health insurance has become insulation, and our family chooses health care options that don’t expect the insurance to cover every dollar, that don’t just carry the lowest deductible, for these reasons. I think if people would learn to responsibly accept some of the costs as their own, we could see a dramatic drop in the cost of health insurance. But we tend to have a long term thinking problem in our culture, and we expect that if we’re paying our insurance premiums, we should always be seeing a zero on our receipts every time we’re getting a prescription or seeing a doctor.
However, simply not treating health insurance as an insulator doesn’t fix the whole issue. Cost of service is still unbearably high in most cases, and childbirth is a good example for that.
If childbirth were to not be insulated, we would see a dramatic shift in not only demographics, but also in dependance on aid programs (and I agree, a high uptick in abortions). Without that insulation, certainly wiser people will refrain from having multiple children, if at all, but plenty of people will have accidental pregnancies, or simply not consider the whole situation and are likely to live off assistance programs eventually after being buried under these debts.
Also, if we’re thinking about the risk/loss of insurance companies, we cannot forget the massive discounts insurance companies are given by the hospitals for services, that you and I would never see. This is insulation for the insurance companies.
To put the cost of child birth in perspective, I think it’s worth considering that the USDA reports that households making less than $45,800 spend roughly $8,000 per child per year. In households making more than $77,100, they spend roughly $17,000 per child per year.
If $7,000 per delivery is a lot of money, then certainly $8,000 per kid per year is at least as concerning. Perhaps all health care insurance should reimburse the cost of raising a child until they reach 18?
Steve-You do realize that private insurance almost always pays better for the same procedure than Medicare or Medicaid. HMO’s made some efforts to reduce procedures, but they have mostly gone away. Private insurers are no more likely to hold procedures in check than Medicare/Medicaid. Well, actually Medicaid is probably the best since they just refuse to pay for stuff on some random, inexplicable basis. The big increase in Medicaid is coming from nursing home care.
I do not see how you provide for really expensive stuff like trauma care and preemies, without some kind of insurance. OTOH, once you have insurance, it will inevitably drive up costs if left to the market. Why shouldn’t hospitals, doctors, nurses and salespeople try to make as much money as possible? That is what people do in a free market.
The problem with health care. well one major problem, is that both sides are not free to walk away.
Since I didn’t see it mentioned, we pay a premium for childbirth coverage, if you don’t pay it and have a child you pay for the childbirth yourself. If this child birth avoidance on insurance is a such a good idea I would like to see you apply it to gay men who practice unsafe sex with multiple partners seeing as they generate insurance problems with the various vd’s they pass around. They pay for insurance and then engage in extremely dangerous behavior which can result in extremely expensive insurance outlays. Or would that be too non-pc for everyone. Since you want to pick on personal actions that result in insurance outlays, next we can go after motorcycle riders, then sky divers, then rock climbers, then people over 40 who continue to try to play baseball/basketball/rock climbing (pick a sport) and wind up hurt. MPW
“What I’m curious about is why? Firms that maximize profits also minimize costs at the profit maximizing level of output.”
The greatest observation of the thread. I’m always fascinated. Those (lefties) who claim private enterprise to be dirty, greedy profit seeking pigs (and I’m not implicating DS here; he just posed a question) never seem to recognize the implication of their assertion: those pigs will minimize costs in pursuit of profit!
Duh.
And that is bad because……………?
So firms don’t minimize costs while trying to maximize profits, okay then.
Health care costs are so high for the same reason people like to stick it to insurance companies – people want something for nothing and, ESPECIALLY, if they feel like because of some payment – ANY PAYMENT – on their part, they are entitled to excess. I think you’re view is extremely idealistic but correct – expectations need to be reset. But, while I also agree that personal responsibility needs to increase, the horse of high costs have already left the barn. Meaning, costs won’t magically go down overnight if you change who has to pay for what. And no one will stand for people going bankrupt for having a kid without complications. (but they could chose not to have kids! …yeah, right) So, what will happen is what’s happened in every other industrial nation – these costs will be spread out across more people (tax payers) and service will change. For some that will be a good thing – free access to regular care. For others who need special care, it will suffer. But, heck, we have people now not doing things they need to have done because of costs – rationing is happening already, but by individuals due to cost, not providers due to resources.
I can’t argue with what you’re saying – you are right. But, there is no way to effectively implement what you’re talking about given where we are now. Subsidized health care will only grow because demand for it is high. And resource issues will shift from individuals to providers.
Of course, I could be completely wrong :-}
A good friend is rescuing a small insurance company now and his experiences with AIG and some of the other large carriers would be evidence that insurance companies don’t try very hard to minimize costs or they are mind bogglingly incompetent at it, maybe both.
The barriers to entry are high enough in the industry that competition has not been a strong driver so we get the worst of both worlds. Add to this relatively little elasticity in demand and insurance companies can increase price to increase profits and, well cost cutting is hard and if you can just pass those costs on, well…
Nothing like a good night sleep to bring things into focus. A careful read of Steve Verdon’s arguments in this, and other posts, point to the fact that he is a cogent apologist as to why universal government sponsored health insurance should be instituted. Why? Let me tell you the ways…
His central argument is that health insurance should be reserved for catastrophic illness, and he advances pregnancy as a model. Uncomplicated pregnancy cost X amount, complicated pregnancy costs Y amount, and these costs have to be meet. Exclude uncomplicated pregnancy from the insurance pool, and presto, the health insurance rates for the rest of us will go down. Thus in answer to Jeffrey W. Baker (May 12, 2009 | 12:42 pm) we have this:
Thus, health insurance has absolutely nothing to do with Health Care, other than to pay the bills. Ah yes, something else, to make money for their shareholders, and of course for the salaries of the management class at these concerns.
The beauty of Steve Verdon’s approach is that insurance companies are the primary entity, the health of the population is a secondary concern. After all, potential “customers†that may interfere with profits are simply excluded. Adverse effects on the population the Insurance Companies serve in the proposed model is not an issue.
My old bud Alex Knapp (May 12, 2009 | 12:49 pm) correctly points out excluding childbirth from insurance coverage would lead to an increase in abortions. It is estimated by the Guttmacher Institute that 30% of abortions are motivated by economic reasons. It certainly would lead to a drop in prenatal care, which assuredly would lead to an increase in complicated pregnancies. There are reasons why we rank so low among OECD countries in infant mortality. Steve Verdon’s suggestions may make us a heavy hitter is this desirable health care index.
But then, as long as Insurance Companies profits and managerial salaries are preserved, what happens to rest of the great unwashed is of no concern. In an elegant study Health Affairs (peer reviewed journal), David U. Himmelstein and his colleagues demonstrated the economic toll that inadequate health insurance imposes on folks. From their abstract:
The primary source for the USA Today article quoted by Dave Schuler ( May 12, 2009 | 12:10 pm) can be found here. At 118 pages it will make your printer groan, but a quick read of the Executive Summery may crystallize the thinking of some readers thinking.
Various correspondents have referred to the OECD study titled “Health Care Reform in the United States†which in pdf form can be found here. A fragment from the abstract may tickle some curiosity among the readership:
Why on a careful read of the OECD study even Dave Schuler may find some data pointing to structural problems in the United States Health Care delivery system.
First, unrepresentative sample. You have AIG, which isn’t a cost issue, but a fundamental misunderstanding of the risks in the markets they were vested in…at the very least. As for the small failing insurance company…well yeah…the company is failing. I would expect them to be “doing it wrong” since they are failing.
What barriers? I’m not saying they aren’t there, but I’d be curious as to what you see as being barriers? Maybe there isn’t much competition in the insurance markets, but even monopolists have an incentive to reduce costs (since it is part of maximizing profits). So I guess before I go with this view I’d like to see something backing it up.
There will be little elasticity for health care that is life saving. However, other health care services….I’m thinking this argument doesn’t hold.
I have been getting more or less daily updates on what is going on and cannot talk much about specifics for legal reasons.
That said AIG is just the largest of the carriers that are not or are entirely incompetently minimizing costs. This is separate from their investing failures.
One simple example involves billing. An automated system (or really any effective system) to keep track of what is owed would I think be essential in minimizing costs. AIG has virtually no idea what is owed from whom and when. If a bill is missed they are as likely as not to miss it, on the other hand they repeatedly rebill for things that have been paid for over a year. The only thing that has lead to improvement in this particular arena is for him to e-mail five different people within the company detailing the transaction whenever a payment is sent in or a policy changed. This has made the problem smaller but it still persists. If they were not in such a dominant position he would not give them any business. This is but one example of many, most of which I cannot share and it is not solely the province of AIG (they are simply among the worst).
The largest, is money for the necessary trust. Beyond that there is a maze of regulations (most necessary). In order to sell insurance you more or less have to be sponsored in to get through that maze. Additionally it is a relationship business and relationships often enough trump cost.
Insurance is an oligopoly so that incentive is reduced. Cutting costs can be difficult, particularly within the system as it currently exists. The people in middle to upper management mostly came up through sales and there view of how to run the company comes from that limited perspective.
Notice it was a relative statement. There is considerably less elasticity in the health care market than in a typical market (cars or consumer electronics for example). There is considerable elasticity in demand for some things (lasic, non-reconstructive plastic surgery, etc.). There is much less elasticity as procedures are more involved in general health and well being. Overuse is largely in marginal cases. Improper use results for a number of reasons including people going to the emergency room or worse family physicians sending people to the emergency room for non-emergencies.
Actually they ran reasonably well for quite a long period of incredibly inept management. Later even more egregious ineptitude and some other factors brought the company to the brink.
Steve Verdon (May 13, 2009 | 10:45 am) just a few simple questions which can might help all of us understand your position:
Pssst: you do not have to read the OECD study I have quoted, but this certainly will be of interest to you.
Regarding,
AIG, I’m sorry anonymous sourcing of vague statements aren’t that persuasive. I don’t think that whatever cost inefficiencies are part of the AIG operation are a significant factor in the amount of money that has been lost. And it is still an unrepresentative sample, and without more information (which you can’t share) it is hard to tell if these problems are isolated, somewhat frequent or the norm.
The first really isn’t a barrier to entry, IMO, since all that requires is what most other business ventures require: a sound business plan, some entrepenurial skill, and potential for profits. Regulations on the other hand are usually the result of government. Which is where you see most barriers to entry.
Oligopolies can be as competitive as a competive market (Bertrand/price competition vs. Cournot/quantity competition). And again, profit maximization in any setting entails cost minimization at the profit maximizing level of output.
This is a factor but not the only factor by a long shot.
Our Paul,
That would be fitting with the definition of insurance.
No. But I also don’t think government generated taxes shoudl be transferrd to insurance companies, and I see this as a form of rent seeking and a failure of activist government–i.e. the type of government both Obama and Bush favor, although in different ways.
This is a very large question that would require a very lengthy reply, so not going to answer it here. My general position though, is that I’d prefer a market based mechanism so that we can get whatever cost minimization mechanisms come with the market vs. government where such mechanisms are dubious at best. That doesn’t mean there is no role for government, I just don’t see any government run program that does it right.
Fair enough.
Am I misunderstanding the term barrier to entry? Is it not possible for a required initial investment to be a barrier to entry regardless of size?
Certainly not and that was not the point I was trying to make. AIG and other insurers and brokers for insurers found a cash cow that required little competence to milk. Most of the managers came out of sales and were/are content to do things the way they had been done. The only real innovation was in their financial instruments wing, so maybe we should be thankful that the insurance side lacks innovation. I know it is anecdotal, so take it how you will.
In theory certainly, but all too often it doesn’t seem to work out that way.
Certainly only one relatively small factor among many.
BTW Do you have any figures on the cost of overuse of medical care by people covered by employer paid health insurance? It seems that if there is actual evidence that universal care will artificially increase demand that is where you would find it and my googling skills didn’t turn up any.
Thank you for your prompt reply Steve (May 13, 2009 | 03:41 pm). I have a busy day tomorrow starting early in the morning so I cannot comment at the present time. Rest assured that if the topic comes up again, I will be there…
Pssst: I am a slow thinker, and slow writer. That is why I have this dreadful tendency the cluster my arguments around data, and ponderous texts which substantiate their arguments with references. Sigh, maybe I ought to lighten up!