The “Consumer Choice” Fraud

I’m such a public radio groupie that David Kestenbaum and Chana Joffe-Walt are minor idols of mine. I get excited on the very occasional occasions when David calls to ask me a question, and Chana . . . well, if I were in my twenties and single, I would probably have a crush on her. So I was disappointed to listen through their recent Planet Money episode on health care, waiting for them to tell the other side of the story, but finally being left to yell at my radio. (No, I don’t actually yell at inanimate objects, but you know what I mean.)

David and Chana use the metaphor of an all-you-can-eat buffet to illustrate the well-known problem in health care that end consumers don’t bear anything near the full costs of their choices, which ordinarily leads to overconsumption. One problem with our health care system is high costs, so it’s common to blame high costs on the all-you-can-eat buffet.

Planet Money hosted the usual version of this debate. David Goldhill argued that, since Americans spend $1.7 million on health insurance in their lifetimes (I’m not sure what that number is, since it’s clearly not out-of-pocket premiums, but maybe it includes the full value of Medicare policies), they should basically be given the $1.7 million instead and forced to make their own health care choices; this, he claims, would increase quality. (He didn’t say, at least on the air, that it would reduce costs, but most people favoring this approach think it will.) Richard Kirsch argued that this is nuts, because people have little to no ability to make good health care choices given the vast information gap between them and their doctors, and the likely outcome is that people will skimp on necessary care and end up paying more later in their lives. I’m in the Kirsch camp – I think the information problem is so great that people would either blindly do what their doctors say, or they would skimp on health care expenses in ways that are likely to hurt them* – but that’s not the point here.

No, the missing element in this story – not only on Planet Money, but almost every time it is told – is distribution. Any health care system in any advanced democracy plays a redistributive function. Let’s start with an example.

Goldhill’s $1.7 million figure ignores the fact that different people get different amounts of health insurance benefits over their lifetimes. His idea is that instead of having your premiums paid for by your employer, you should get the cash instead and put it in some form of health savings account. If you have a serious illness when you are young, he says you should be able to get an advance on your future benefits. (Just who would give you that advance was unclear on the radio, but I’ll assume he has a solution.) But what if you are a twenty-something waiting tables and you currently get zero health insurance paid for you? Then you would be getting zero cash instead of your “employer benefits,” your health savings account would include zero, and there is no reason to be sure it will ever include more than zero. (I guess when you’re 65 you’ll get Medicare, but who says you’ll live until 65?) So to make something like Goldhill’s system work, you have to start off by guaranteeing every person some large amount of money over the course of his life to pay for health care.

Let’s say we’ve gotten over that problem and somehow everyone has access to $1.7 million over the course of his lifetime. Then you have the even bigger problem of variance in outcomes. Some people will incur $250,000 in actual health care costs; others will incur $5 million. Simply having $1.7 million handed to you doesn’t protect you against risk. Goldhill suggests buying a policy with a $50,000 annual deductible and paying the rest out of your health savings account. But the fact remains that for many people, the health savings account will run out; actuarially speaking, if $1.7 million is the average and other things do not change, then exactly half of all people will run out of money.

This just illustrates that a core function of any health insurance scheme is redistribution. People start out in different economic circumstances, and they suffer different fates in their lives. Without redistribution in some form, the ones who are poor and get sick will simply not be able to afford health care. Cashing out their employer health benefits and giving them “choice” won’t change that – especially if they don’t have employer health benefits to begin with. Yes, insurance can play a redistributive role on its own, but it only works if poor people can afford to buy insurance that will cover them against serious illness. And once they have that insurance, then the price signals so beloved of conservatives won’t function anymore. The problem is really very simple: for price signals to work, you have to be willing to let consumers run out of money, since no one can predict his future health care needs. And then they die.

So what really frustrates me about this whole “consumer choice” fraud is the premise it begins with. It starts out by framing health care as a problem of consumer incentives – health care is too cheap. This is a factually accurate framing that leads you to a dead end (unless you think people who underestimate their future sickness should die). I think the right way to frame this issue is with this question: Given a poor person and a rich person who have the same potentially fatal disease, should both of them live, or only one?

* Goldhill argues that consumers don’t have to be medical experts because as long as some people are, that will ensure that the market rewards quality, and therefore only quality providers will remain in the market. This may address the quality issue, but I don’t see how it helps consumers decide whether or not they need an MRI when they have a potential diagnosis they don’t understand.