You're going to pay, either way.

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Insurance May Not Save Lives, But It Saves Money

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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Five years ago, just as Congress was preparing to pass Obamacare, I wrote a piece for The Atlantic that triggered an immense amount of displeasure. An advocate had pronounced that "hundreds of thousands" of people would die if the law did not pass, because they would remain uninsured. I pointed out that we didn't actually know how many lives would be saved by an expansion of health coverage. In fact, given the data we did have, we could not rule out the possibility that more coverage would have no effect on health whatsoever.

This was met with a great deal of anger and frustration. Could there be anything more intuitively obvious than the supposition that giving people health insurance would allow them to access medical care, and thereby save their lives? Well, yes. It's probably much more intuitively obvious that the sun goes around the earth. And then we got telescopes and better astronomical models, and that turned out not to be true.

Not that I am claiming that this time-honored belief has been disproved, or will be. All I did was point out that the studies on the topic were sort of a mess, with no solid consensus. However, then we got the greatest of rarities in this area of social science: a randomized controlled trial of the effects of offering people Medicaid. And -- drum roll, please -- we found out that there is no statistically significant impact on any of the key health measures studied. That mirrored the only other randomized controlled trial that had ever been done on the effects of health insurance, plus some observational studies, such as one that looked at the effect that the creation of Medicare had on the mortality of senior citizens. So far, the actual effect on health doesn't seem to be large enough to detect even with a very large, very well-designed trial. Intriguing, right? Also: The financial impact of giving people health insurance seems to be pretty large, at least for the cash-strapped poor and elderly.

I wrote about one of the Oregon follow-on studies a little while back, which tries to use these findings about health effects to estimate how much Medicaid beneficiaries actually benefit from the program. Ezra Klein just weighed in on this finding, and while there are a lot of takeaways from his post, my biggest surprise is that a major liberal pundit is grappling with the possibility that the health benefits of insuring people may be smaller than Obamacare's architects initially thought. The predictable reflex would have been to try to punch holes in the study or highlight results that didn't reach statistical significance (a criticism that, as Jim Manzi pointed out, would actually hurt rather than help the drive for universal insurance).

So it seems worth asking: If we assume that the results of the Medicaid study are broadly correct, what sort of a national health-care policy would that support? There's still room to contest whether the results are right; liberal wonks have hardly embraced them. But let's explore what health policy should look like if they are correct.

People who got Medicaid coverage reported substantially less financial stress, and they were happier, which we assume is because people like having health insurance. Objective measures of things like hypertension, cholesterol and diabetes control, however, showed no significant change. Obviously, these are only three diseases. But they are also the diseases we would expect health insurance to have the biggest effect upon: chronic, treatable conditions that benefit from regular doctor visits. Maybe we'd get better results if we measured cancer or some other major killer -- but most of those diseases are concentrated among seniors, so the effect is unlikely to be that big. In other words, the financial benefit is very clear, the health benefit much less so.

We shouldn't minimize the financial benefit, however. Medical bankruptcy is nowhere near half of all bankruptcies, but it is not trivial, either. And the addition of financial stress to a serious illness is certainly not trivial. Medical expenses really are different from other kinds of public policy programs, because they can be so wildly variable; 99 families out of 100 would be better off if you gave them cash instead of insurance, but the 100th will be hit by an expense that they could never realistically pay.

And that is what insurance is really for. As a health-care economist pointed out to me when the Oregon results came out, they were not actually all that surprising. Insurance is a financial product. It handles financial problems very well. We don't expect car insurance to make us better drivers, or homeowner's insurance to keep our house from burning down. Sure, insurance may change some behavior on the margins. But the direction of that change is not necessarily clear: Do you drive more safely to keep your rates down, or take more chances, because someone else will pay the bill if you damage another car? And whatever changes insurance produces are probably pretty marginal. Mostly what insurance does is protect us from financial ruin ... and thereby, let us sleep a little easier at night.

The question, then, is "What program would you design if you wanted to give people the benefits that we know insurance confers?" One model might be something like the national flood insurance program, except that almost everyone hates it, because it's expensive, inadequately funded and encourages people to build houses on flood plains. Or perhaps we could look at the FDIC, which insures banks, while tightly regulating their every move to make sure that it's very hard for them to do anything unsafe, and ... never mind, that's creepy. We don't need an FDIC making sure we take 10,000 steps a day.

You will call me immodest, but I'd suggest that the best model is exactly the one I suggested when health-care reform was being debated: Get rid of all of our government's existing health insurance programs and make the government the insurer of last resort for all medical expenses above 15-20 percent of adjusted gross income. Allow very generous tax-free savings in health savings accounts that can be passed on to heirs, but spent only on medical expenses. Make the deductible percentage lower, or provide some sort of subsidized gap insurance, for people with very low incomes. 

It's absolutely progressive: Warren Buffet pays his full medical bills, while low-income families pay very little, and folks in between can choose to self-insure out of savings. It creates something like a normal market to exert pressure on health costs, because people are spending their own money on treatment, not someone else's. It obviates the need for a massive government price-setting apparatus, which means we can put our regulatory muscle into researching comparative effectiveness of treatments and transparency efforts to inform consumers about which providers and treatments offer better outcomes. And I think it might even be politically attractive because it's largely voluntary. No one's forced to get rid of their employer health benefit; it's just that there's now a more attractive option that will encourage employees to demand cash or health savings account contributions instead of insurance coverage. Insurers can continue to sell insurance, if anyone wants to buy, or insure the gaps, safe in the knowledge that their losses are limited. It will be expensive, of course. But the government already spends a fantastic amount providing health insurance and subsidizing employer policies; we've got a big pot of cash to move into a more rational, market-oriented system.

The biggest issue we have to fight is that people really, really don't like markets in health care, even when they're protected from catastrophic loss. Bureaucrats and wonks view themselves as having a vital role in pushing buttons and pulling levers until our vast health-care apparatus spits out the right results. Consumers don't like paying directly for their own health care, no matter how many times you explain that they are already paying for it, just in the form of taxes and premiums rather than a doctor's bill. Oregon might point us toward a focus on financial protection rather than "making people healthier" or "saving lives." But we humans would much rather think about saving lives than about minimizing financial risk.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net