The Advantages of 'Substandard' Health Plans

Stanford economist Edward Lazear, who chaired
George W. Bush’s Council of Economic Advisers from 2006 to 2009,

explains why one man’s “substandard” health plan is another’s
optimal coverage:

Plans that exclude the president’s “core” benefits may be
exactly what is desired for those in good health with the means to
cover their limited every-day and predictable medical
expenses….

Just as it would be a bad idea to require that all cars come
with power windows, power locks, and automatic transmissions, it is
also unwise to order citizens to buy health care that includes
maternity benefits or other care. 

Some may have no intention of having children.  

Others may not want to devote the time required to take
advantage of the preventive care that is covered.

Still others may be skeptical of the effectiveness of mental
health care….

The fact that a health care plan does not include all the
benefits of other plans does not imply that it is “substandard.”
Instead, the [Affordable Care Act] replaces plans that cater to
needs of a particular consumer with those cluttered with bells and
whistles that may be of little value.  

Lazear also notes that generous coverage contributes to health
care inflation by encouraging overconsumption: When someone else is
picking up the tab, consumers do not worry much about the price. In
fact, because the health care market is dominated by third-party
payments, patients typically do not even know the price before they
decide whether to “purchase” a particular medical service. The
other day The New York Times published an op-ed piece
in which Peter Ubel, a professor of medicine at Duke University,

proposed a radical idea: What if doctors deigned to tell
patients, before asking them to approve a procedure or course of
treatment, how much it will cost them? Ubel argues that doctors
should “discuss out-of-pocket costs with patients just as they
discuss any side effects.”

That is eminently sensible, except that doctors may have no idea
how much the services they offer will cost the patient or his
insurer, because the answer depends on carrier-specific
negotiations, the details of the patient’s policy, and his prior
covered expenses. Patients may not find out how much a treatment
costs until months after they buy it, when they get an “explanation
of benefits” in the mail. Even then the answser may not be final,
because there is room for dispute about exactly what is covered.
Furthermore, out-of-pocket costs may be negotiable, since hospitals
are accustomed to receiving only partial payment of the bills they
issue (and presumably inflate them with that in mind). The upshot
is price signals that are late and faint, if not utterly obscured.

The major exceptions are medical services, such as dental care,
vision correction, and plastic surgery, that consumers typically
buy with their own money. You can easily get a price quote for a
tooth implant, Lasik surgery, or a nose job. It is almost
impossible to get a clear idea of how much an MRI or a
tonsillectomy will cost. In my experience, such questions usually
elicit blank stares, as if they’ve never been asked before. Imagine
how well the car repair market would function if customers had no
way of knowing how much a new transmission would cost until months
after agreeing to buy one.

Obamacare, Lazear notes, compounds this problem by requiring
people to buy more coverage than they would otherwise choose:

Health economists, notably Daniel Kessler at Stanford, have
demonstrated that the failure by the consumer to pay for health
care on the margin induces high and in many cases over
usage.  

Plans that have low co-pays, first-dollar coverage, and insure
routine predictable health care events induce high and excessive
use of care.

By contrast, those like catastrophic care plans that do not
insure the routine and cover only unpredictable high cost events
induce consumers to behave more efficiently. 

Banning such “substandard” plans makes no sense from a
cost-control perspective. Last month I
compared Obamacare’s minimum coverage requirements to the
federal ban on incandescent light bulbs, which likewise overrides
consumers’ assessments of their own interests. But while the light
bulb requirement was defended in the name of efficiency, Obamacare
mandates inefficiency.