Health Insurance an Irrational World, Thanks to Government

Published July 1, 2008

In a rational world, deductibles and copayments serve an economic purpose.

Where it is appropriate and desirable for patients to make choices, as in primary care and small-dollar services, out-of-pocket cost-sharing allows patients to bear some or all of the costs and reap some or all of the benefits of the choices they make.

Where patient choice is not appropriate or desirable, as when one is lying on a hospital gurney or dealing with large-dollar services, we would not expect to see cost-sharing.

At least, these are the principles that govern other insurance markets.

‘Irrational World’

In the health insurance market, however, those principles are increasingly being turned upside down as a result of government interference and providers’ attempts to cope with it.

In the small group market, for example, a typical plan covers primary care visits from the first dollar but imposes high deductibles and copayments for inpatient hospital care. And whereas tiered pricing for drugs once encouraged use of generics over more expensive brand names, today tiered pricing is being used to impose thousands of dollars of costs on patients who must take expensive drugs with no generic substitutes.

Welcome to the irrational world of health insurance, where normal market forces have been systematically suppressed and no one ever faces a real price for everything.

State and federal regulations have made it illegal to charge employees premiums that reflect their individual expected health care costs or to deny them employment for health reasons. But in outlawing discrimination, politicians have not outlawed self-interest.

Contradictory Government Policies

The brutal reality: In today’s market, employers and insurers have every incentive to attract the healthy and avoid the sick. And since it’s illegal to do that directly, many are doing it indirectly by choosing health plans that appeal to the healthy and repel the sick.

The implicit message many health plans send to people with health problems is, “We don’t want you, and if you should enroll (by some mistake), we hope you will quickly go elsewhere.”

Ironically, there is only one product in the insurance marketplace that by law must limit the out-of-pocket exposure of the chronically ill. That product is health savings accounts (HSAs)!

But haven’t we been told over and over again that HSA plans are bad for the sick and good only for the healthy? Yes. The battle against the syllogism is unending.

John C. Goodman ([email protected]) is president of the National Center for Policy Analysis. His health care blog is at