Harold Pollack has a great piece at the Wonkblog about certain Republican proposals for Medicaid reform (for those who need a refresher, Medicaid is the U.S. government program that provides health insurance to very low income individuals).
Pollack cites conservative pundit Ross Douthat, who makes the following point:
[C]omprehensive health insurance is, at its heart, a deeply wasteful use of resources: Modern people, and especially modern Americans, are much more likely to overconsume health care than to underconsume it…
Douthat’s idea isn’t that there should be no government dollars going toward healthcare for the poor and elderly. Instead, he thinks that, since the marginal person consumes too much healthcare, then we should reform Medicaid (and Medicare) to shift away from a comprehensive, defined benefit insurance plan to something to help those who have medical catastrophes but not provide “comprehensive” care–I am guessing that would include most preventative and routine healthcare. He wants a government program that does not encourage healthcare over-consumption at the margin.
You’ll notice that I emphasized at the margin. The concept of margin analysis is one of the most insightful in the field of economics. You can think of “margin” as “what you get for one more.” If you’re studying for a test, when you decide if you should study for one more hour, you think about the benefit of extra hour, that’s marginal thinking. When it comes to health policy, the question Douthat is trying to answer is, “what is the benefit of one more dollar’s worth of health insurance? Does that extra dollar encourage overconsumption of healthcare?”
It’s wonderful analysis, but for that sort of analysis to work (especially for budgetary analyses), enough people have to have enough effect “at the margin” for the change to make a difference. Pollack puts it this way:
Economic intuition suggests that Harold Pollack and Ross Douthat alike would use care more efficiently if we had more skin in the game, if we were less comprehensively insured. Sure enough, non-poor participants in the RAND Health Insurance Experiment used roughly one-third less care when they were enrolled in something akin to a catastrophic plan than did their counterparts who were enrolled in more generous plans. Despite their reduced service use, participants in the catastrophic plan also appeared, on average, to be just as healthy. Such findings provide a powerful argument for catastrophic plans.
The RAND study is a gold standard in the health policy area, and they found that people tend to use less healthcare when they have less health insurance, with no negative health impact. This outcome strongly suggests that the employer-based health insurance tax deduction is very wrong-headed (at least at its current). We as a society are subsidizing people to overconsume healthcare, and, guess what? They are overconsuming.
So, that sort of solution should work with Medicaid, too. Right? Not so fast. There isn’t that much cost savings to wring out of most Medicaid beneficiaries through cost sharing incentives (e.g., increasing the amount of money Medicaid beneficiaries pay out of pocket). How could that be? Well, similar to most health care markets, a small share of people make up the lion’s share of the cost (these are people with multiple conditions, often accompanied by other mental illness). That is very true for Medicaid. Pollack created the following graph of the cumulative cost of care by the cumulative percentage of beneficiaries for Illinois:
Pollack notes that 71% of Illinois Medicaid beneficiaries account for 10% of the total expenditures (the average was $564 per person). The top 3.2% account for more than 50% of the overall expenditures, averaging more than $30,000 per person.
What that means is, any plan to increase cost sharing will likely financially crush those in the top (i.e., those actually causing the cost problem), while not reducing overall expenditures by that much. How much will you save per beneficiary by encouraging them to spend less? There’s just not a lot of room to cut when you’re only spending $564 per person.
Of course, this is only for Illoinois. but from what I’ve seen, this is pretty representative of the nation overall. Increased cost sharing makes sense for me and for the people reading this blog. You will probably use less healthcare, without much (if any) negative health impact. If you were a Medicaid recipient, you’d save the government money (though, you would also have already cost the government way, way more than the average Medicaid beneficiary).
But the average Medicaid beneficiary doesn’t have that much room to cut, even if the incentive works and they reduce their healthcare use. There’s just not enough room at the margin from $500 to $0, and even those who are at the margin won’t give the government a large average cost savings.
Do read the Pollack piece in full.
A Fitting Uncertainty 