How Economists Really View Health Insurance
Arnold Kling, Tech Central Station
Economists support the idea of health insurance. However, many of us believe that policies that pay for all health care services are not real health insurance. Insurance should protect people against catastrophic loss, but it should not insulate them from the cost of all health care. As an economist, I believe that the law of demand applies in health care. I believe that if patients are insulated from the cost of health care, then they will err on the side of obtaining unnecessary CT scans, MRI’s, and visits to specialists. They also will “err” on the side of obtaining useful preventive care.
Is there such a thing as a class-action libel suit? In his much-discussed recent article in The New Yorker, Malcolm Gladwell made malicious, false, and defamatory statements about the economics profession.
Gladwell blames economists for the fact that millions of people lack health insurance. However, like most economists, I support everyone obtaining insurance against catastrophic health care costs. In fact, this is one area where I have thrown my libertarian principles out the window and advocated mandatory catastrophic coverage.
The main point of Malcolm Gladwell’s article is that he believes that comprehensive health coverage is better than catastrophic insurance. He believes that without comprehensive coverage, people will undertake too little preventive health care, such as routine dental cleaning. This may or may not be correct. But the reason that economists disagree with Gladwell on this point has nothing to do with the concept of “moral hazard.” In fact, “moral hazard” means that insurance companies would want to try to encourage more preventive care.
Gladwell’s article is confused and distorted. Here, I will attempt to set things straight.
Two Issues Regarding Health Insurance
Gladwell’s primary confusion, which is deliberate on his part, is between two issues regarding health insurance.
- 1. Should everyone have health insurance?
2. Should health insurance be catastrophic or comprehensive?
Catastrophic health insurance is a high-deductible policy that pays benefits only if someone suffers from a very expensive illness. It does not pay for smaller items, such as routine doctor visits, vision care, or for low-cost treatment of minor illnesses and injuries. In contrast, comprehensive coverage pays for all services from all health care providers, whether for major illnesses or not.
On issue (2), many economists favor catastrophic coverage as opposed to comprehensive coverage. Gladwell confounds this with issue (1), and accuses economists of opposing the idea that everyone should have health insurance. I have never seen an economist confuse these two issues. I have never seen an economist who was opposed to the whole idea of health insurance, which is what Gladwell implies.
Moral Hazard vs. The Law of Demand
Gladwell mixes up two economic concepts. One concept is moral hazard. The other concept is the law of demand.
The law of demand states that if you reduce the price of a good or service, then people consume more of it. Comprehensive health care coverage reduces the price that people pay for routine health care. The law of demand states that this will increase people’s use of it.
Gladwell quotes Uwe Reinhardt, a well-known health care economist who occasionally gets carried away with his own rhetoric, as effectively denying that the law of demand applies in health care.
- Uwe Reinhardt says. “You always hear that the demand for health care is unlimited. This is just not true. People who are very well insured, who are very rich, do you see them check into the hospital because it’s free? Do people really like to go to the doctor? Do they check into the hospital instead of playing golf?”
In the very next paragraph, Gladwell cites a famous study which showed that the law of demand applies to health care, and in fact people do spend less on health care if they have to pay for it themselves. Gladwell writes, “As you might expect, the more that people were asked to chip in for their health care the less health care they used.”
In fact, if the law of demand did not apply to health care, then everyone would obtain whatever health care they needed, regardless of cost, and regardless of whether or not they had insurance. Frankly, I believe that even Uwe Reinhardt would, if pressed, agree that the law of demand applies to health care.
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