The latest shot fired across the bow of consumer-directed healthcare is Malcolm Gladwell's recent article in the New Yorker. Gladwell argues that the health insurance system in this country is a mess because it is based on the flawed idea of "moral hazard." Consumer-directed healthcare -- specifically Health Savings Accounts -- is little more than an extension of moral hazard.
Some of Gladwell's article seems to substitute ideology for common sense. For example, he writes:
Medicare, too, is based on the social-insurance model, and when Americans with Medicare report themselves to be happier with virtually every aspect of their insurance coverage than people with private insurance (as they do, repeatedly and overwhelmingly), they are referring to the social aspect of their insurance. They aren't getting better care. But they are getting something just as valuable: the security of being insulated against the financial shock of serious illness.
Is it the social insurance aspect that makes Medicare popular? Or is it something more mundane, like the fact that recipients are getting it for free? When people perceive that they are getting something for nothing, chances are good that "something" will do very well in opinion polls.
Like all good missives in favor of universal healthcare, Gladwell begins with a woeful tale of those without insurance. Referring to work by Harvard researchers Susan Starr Sered and Rushika Fernandopulle, he lays out in excruciating detail the travails of people who do not have dental insurance:
Gina, a hairdresser in Idaho, whose husband worked as a freight manager at a chain store, had "a peculiar mannerism of keeping her mouth closed even when speaking." It turned out that she hadn't been able to afford dental care for three years, and one of her front teeth was rotting. Daniel, a construction worker, pulled out his bad teeth with pliers...."Almost every time we asked interviewees what their first priority would be if the president established universal health coverage tomorrow," Sered and Fernandopulle write, "the immediate answer was 'my teeth.'"
Would universal care really result in adequate dental care? One can look at Britain, where the National Health Service (NHS) covers dental care. Running the phrase "NHS dentist" through the search engine at the BBC's website reveals many articles about how bad the NHS dental program is (see here and here for instance). Putting in the term "pulled his own teeth" even reveals an article about a Scarborough man who did his own dental work with pliers after being unable to find an NHS dentist.
It's also worth asking how hard it would be for folks like Gina and Daniel to afford dental care. Calling around to some dentists in Idaho revealed that costs ranged from $117 to $232 for a checkup and $96 to $180 for a tooth extraction. Some offices had payment plans over 3 to 12 months, while others offered credit services through various banks. It's hard to tell exactly what problems the likes of Gina and Daniel face, but lack of universal health insurance isn't one of them.
GLADWELL'S BIGGEST FLAW lies in his argument about moral hazard. Moral hazard is the idea that "insurance can change the behavior of the person being insured." It "has profoundly shaped the way think tanks formulate policy and the way experts argue and the way health insurers structure their plans and the way legislation and regulations have been written." Those concerned with moral hazard, according to Gladwell, argue that universal health insurance in the U.S. would produce "wasteful consumption of medical expenditures." Gladwell dismisses this idea because healthcare is not like other consumer goods: "We go to the doctor only grudgingly, only because we're sick." He also pans HSAs because they "are exactly what you would come up with if you were concerned, above all else, with minimizing moral hazard."
This view of HSAs is limited because Gladwell misdiagnoses the problem. In fact, what more and more think tanks and policymakers are concerned with these days is the "third-party payer" system. Under this system, patients do not pay the health-care provider (doctor, hospital, etc.) directly. Rather, a third party, an insurance company or the government, picks up the tab.
This system is due largely to our ass backwards tax system, which gives employers a tax break if they pay for their employees' health insurance. While this arrangement insulates employees from most of the cost, it also strips them of control and choice. In many cases, especially health maintenance organizations, the employee has to use the doctor or other health-care provider that is part of insurance company's network. He often has to get approval for certain tests or to see a specialist. Not only does the third-party payer system limit an employee's options, it also insulates health-care providers from competition. Instead of competing for customers (patients), doctors and other providers just send their bills to the insurance company.
HSAs are what you would come up with if you wanted to circumvent the third-party payer system. HSAs are designed not only to shift some of the cost to the consumer, but also give him more control and choice with his healthcare dollars. He can use his HSA to purchase whatever healthcare products he deems necessary. With the healthcare consumer having more control and choice, healthcare providers will have to compete for his business. That competition will result in innovation -- that is, healthcare providers will have to find ways to lower costs and improve quality.
This is how healthcare works in areas that are not usually covered by health insurance, like LASIK eye surgery and plastic surgery. Since patients pay for the cost of these out of their own pockets, the providers have to compete and innovate. As a result, prices have declined, while quality has improved. For example, the average price of LASIK per eye was $2,200 in 1998; it had fallen to $1,350 by 2004.
By focusing on the red herring of moral hazard, Gladwell overlooks a major cost-saving device of consumer-directed care: the introduction of more competition into the healthcare market. In the long run, the lower prices brought about by competition may offset whatever cost shifting occurs, thanks to HSAs.
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