I owe my health to the Company Store

We are told that, prior to the current enlightened age, one of the ways that evil corporations would rip off their workers was the Company Store. Instead of giving you money, they’d operate a Company Store and give you goods. Problem was, without real money, you couldn’t go to a competing store that might give you a better deal unless you switched jobs. You’d have to put up with whatever inferior, overpriced merchandise they felt like stocking.

Kind of a bummer, right? It’s a good thing that our Corporate Overlords saw the light and quit that nonsense.

Or did they?

The Company Store isn’t gone, it’s just been reduced in scope. Now the Company Store mainly offers health insurance and retirement investments. But, in the areas where the Company Store reigns supreme, the same problems keep cropping up.

You can’t switch health plans without switching jobs. The insurance company’s customers is your employer, not you. The insurance company doesn’t have any reason to keep you happy (it just has to keep you from getting so unhappy you’ll switch jobs in order to get rid of its policy), and it shows every time you have to deal with it.

Oddly enough, while its customer service is busy treating you like the non-customer you are, the plan itself winds up paying for things that make no sense whatsoever from an insurance standpoint. This is because a company insurance plan functions partly as a tax-dodge to spend pre-tax dollars on routine maintenance that it would never make sense to buy actual insurance for. If not for tax rules, you would never buy an insurance policy that covers routine checkups you know with absolute certainty that you’re going to get; you know you’re going to end up paying the full cost of the checkups plus a markup for the insurance company.

Also, since company health plans must offer the same rate to every worker, your company gets hit with the cost differential when it brings in older or less healthy workers. Giving companies a direct financial incentive to engage in age discrimination doesn’t strike me as an especially good idea. Setting things up so that their costs, and their profits, are affected by unhealthy things you do in your off time is also just asking for trouble.

And, since all policies must cover the same things, you get stuck buying coverages you don’t want, and can’t specify coverages you do want. Lawmakers have also taken to piling on coverages that must be included in all group plans, such as birth control pills (!).

And, of course, it would be nice if periods of unemployment had no impact on your health insurance other than by way of your ability to pay the premium. Business creation would be more common if getting off of someone else’s payroll didn’t impact your health plan.

Now we’re told that the only way that we can get employers out of the loop is to bring government into the loop. Apparently, individuals can’t just buy healthcare on their own, someone (either the employer or the government) has to “give” it to them (with their own money, of course).

This is, of course, nonsense. The standard objections to individual insurance purchases are:

1. Young people wouldn’t buy insurance because they’re generally healthy, so everyone else would pay more.

First, young people would indeed forego single-rate health insurance, for the eminently sensible reason that they would be getting ripped off. If everyone pays the same rate, people with a lower risk end up paying the same amount of money for less insurance; such people, understandably, aren’t especially eager to do that.

Free market insurance would group people based on risk factors, and come up with a rate for each group. People with fewer risks would pay less than people with more risks. No one would be getting ripped off. Younger people would be charged significantly less, and be accordingly more likely to sign up. Not only that, with people charged accoring to their risk group, the presence or absence of members of other risk groups would have little or no effect on the rates they pay. You get lumped in with people with roughly the same risk factors as you, and pay according to the insurance company’s expected payout plus a competitively limited markup; the fact that there aren’t any 20 year olds paying a completely different rate doesn’t change either your risk factors or the markup charged. (There are differences based on total number of policyholders, which impact the degree to which efficiencies of scale can operate, but there aren’t significant differences based on the risk profiles of the policyholders.)

2. High risk people couldn’t get insurance.

Without price controls, high risk people would be able to get insurance. They’d simply be charged higher rates. That’s good in that people pay the costs of self-destructive behavior, but bad in that they also pay the costs of being born with health problems. Overall costs would go down, since people would be discouraged from unhealthy habits by having to pay for the increased risk out of their own pocket. As a bonus, those who support various nanny-state prohibitions, sin-taxes, and restrictions on the grounds that people left alone to do their own unhealthy thing drive up healthcare costs for everyone else would no longer have such grounds to support them.

3. Some people wouldn’t be able to afford health insurance.

Some people can’t afford lots of things. That’s what charity is for.

3a. Some middle class people with high risk factors wouldn’t be able to afford health insurance.

Again, that’s what charity is for. The only difference is, today group plans are required to subsidize them at the expense of lower-risk policyholders in the same company, so the subsidy is hidden. Doesn’t mean it’s not there. Same deal applies if we get saddled with National Health Care.

When an employer doesn’t feel like subsidizing your sky-high health coverage costs, then it won’t hire you. Then you’ll not only have sky-high health insurance costs, you’ll also be unemployed. I’d much rather have sky-high health insurance costs and a job, thank you very much. I’d especially rather that my employer has no reason to care one way or the other what my health insurance costs are. If he doesn’t see my health insurance bill, he’s doesn’t have a reason to worry about my leisure activities.

The point is, under any one-rate-fits-all scheme, some people will subsidize other people, but the subsidized people won’t have to admit to themselves that they’re being subsidized since they’re paying the one rate just like everyone else.

4. Everyone will see their costs rise as they get older, and eventually have trouble paying them.

If younger people don’t subsidize older people, then younger people will pay less than they do now. Later on in life, they’ll pay more. Over a lifetime, it’ll even out. There’s a way to deal with that situation – it’s called “savings”.

5. If insurance companies don’t pay for checkups, people won’t get them and costs will rise. They won’t be able to pay for checkups, since their policyholders can then switch policies and some other insurance company would reap the benefit.

Of course free market insurance companies wouldn’t pay for regular checkups. Insurance is to cover the possibility that an expense might happen, not act as a middleman to pay for expenses that will definitely happen. But the insurance company would charge lower rates to people that had gotten their checkups and preventative medicine (usually out of their own pocket); whether the individual sees a net savings out of the deal is determined by whether that preventative medicine actually does pay for itself in lowered expected medical bills. (If it doesn’t, then that preventative medicine does not pay for itself, and failure to get it reduces, rather than boosts, overall costs.)

6. If a genetic test is developed that can show that you’re definitely going to get disease X, you won’t be able to get insurance to cover it anymore.

Yeah, and satellites that pick up that hurricane barreling toward the coast are preventing you from getting homeowners’ insurance. There’s no getting around the fact that “risk” is a function of how much prior knowledge you have. When your known risk shoots upward based on new knowledge, you either eat the cost or you get subsizied. Hiding that subsidy in a group health care plan or a National Health Care plan doesn’t make it go away.

Now if there were a way you could get insurance before taking such a test, and pay the rate based on the risk that’s based on that level of knowledge, you’d be golden. Given sufficient deterrent against insurance fraud, and sufficient demand, this would be offered in a free market.

Of course I don’t see any reason to assume that we’ll develop very many genetic tests that determine that you’ll definitely get some disease or other. Of those, very few will tell you exactly when you’ll get the disease; your chances of getting it during any given policy period will usually still be very much lower than 100%.

11 thoughts on “I owe my health to the Company Store”

  1. I’ll second David’s opinion. WOW. This was indeed a very impressive post and it looks like you’ve covered many obvious objections. I’d guess you’ve either argued this proposal before or you put yourself in the shoes of a critic.

    I like that it is a very rational approach that ties price signaling to behavior. Very true to libertarian principles.

    Now, being completely serious, but in a light hearted way :) Would you be interested in presenting a plan that actually has a snowball’s chance in hell of being implemented. :)

    Right now the US spends more on public health care per capita than Canada spends on all of its citizens. What happens when there isn’t enough charity for uninsured people? I’m just asking. Does the hospital kick them out? If it does, that’s fine with me, it’s just that your plan doesn’t account for that scenario. Will the public be OK with that?

    Don’t you find it odd that CEOs are now starting to call for gov’t funding of health care?

    Most people seem to believe that a plan has to be completely free market or completely socialistic. I’d be interested in how you could keep a plan as free-market oriented as possible while still getting the population to accept it because they don’t want to see kids and grandmas kicked to the curb because there is no charity for them.

    How about tax changes? How about mandatory savings? I don’t think it’s wise to count on people being rational and actually saving money for emergencies. Just look at census statistics for savings rates. Americans suck at saving money. Remember the days when you were urged to save 6 months salary? Who does that these days? It’s more like they’re carrying 6 months salary of credit card debt.

    Anyways, any thoughts?

  2. Oh, one point.

    Of course I don’t see any reason to assume that we’ll develop very many genetic tests that determine that you’ll definitely get some disease or other.

    Are you kidding! Genetic testing is already huge, and research into various genetic diseases is a growth area. Insurance companies are already using this technology, and will rely on it to exclude even more people. Heck, people are already using this in In-Vitro Fertilization during the Pre-Implantation Screening process, where they fertilize a number of eggs, test each egg for about 75 diseases right now, and implant the best fertilized egg.

    In 5 years or so, a 20 year old guy will know, as will his insurance company, that he’ll have a 45% chance of getting colon cancer, or MS, or diabetes, or whatever by the time that they’re 45, 65% by 60 years of age, and 92% by the time they’re 75 years old. Or some such numbers. They can work out probabilities through actuarial tables. That’s really going to play havoc with insurability, for companies will be practicing lasering. A 25%-50% probability by the age of 40 is not trivial and will impact on insurability at age 25 or so.

  3. I think the the post is good too, but the comments have a good oiint to make.

    Only by combining risks do you make insurance feasible, if the insurer knows too much about the future in your specific then things break down.

    i.e. The affordability of insurance is predicated on group statistical knowability of the individual unknowability.

    Someone is always subsidizing someone else.

    Perhaps it points towards useful government intervention where your taxes are considered a premium over a group life policy which includes us all. Prevention of financial wrack and ruin for those who are not genetically blessed or are simply old.


  4. I’m well aware that having everyone pull their own weight, or at least have the decency to do their own begging rather than have a middleman hit up unwilling strangers, is unlikely in the near future.

    But if we’re going to have subsidies, can we at least refrain from trashing all the price signals in the medical industry in a misguided effort to hide those subsidies? And can we limit those subsidies to a minority of the population that really needs them?

    “Now, being completely serious, but in a light hearted way :) Would you be interested in presenting a plan that actually has a snowball’s chance in hell of being implemented. :)”

    Let Medicaid or whatever openly subsidize people who really need it, and the public might buy it. The only other alternative on offer is National Health Care, and I would hope that that is even less palatable to the electorate. But maybe I’m too optimistic.

    Anyway, since I’m not running for anything, I might as well propose plans that actually work, and make things better, rather than limiting myself to things that merely sound good.

  5. In order to free market health insurance to work, it will have to be tied to a whole bunch of other reforms too.

    1. Free market reforms in prescription drugs. The fact that prescription drugs are so expensive is tied directly to the fact that most idiot consumers think their co-pay is the total cost.

    2. Legal reforms – if I’m paying out of pocket I’d prefer the doctors not feel compelled to recommend an MRI for a toothache just to cover their asses against a future lawsuit.

    I think realistically, what we might hope for is some sort of free market reform with the taxpayers subsidizing catastrophic care. Nobody who is genetically high risk for cancer (not referring to smokers here), or has diabetes, is going to be able to afford the premiums if their risk is driving the cost.

  6. A few related thoughts:
    I’m glad to see someone talk about what a complicated arrangement employer sponsored health care is.
    It’s interesting how health care as an uneven compensation issue appears to be either MIA or an unspoken 3rd rail.
    Should a single person doing the same work as an employee iwth a family have some equation to get to the same level of compensation? I should add that I think part of the problem in our health care system is the fact that many people have extensive coverage from employers and are by and large insulated from the true costs of health care. I have an individual plan w/o prescription coverage that I myself pay for. When a doctor gives me a prescription, I point out that I pay out of pocket. Invariably, I get “Oh..(writes on separate paper)..try this. It’s over the counter and 1/4 the price. Use the prescription if it doesn’t work.” Now, my folks who have almost complete coverage don’t ask for alternatives. In between college and employment, I was briefly without ANY coverage. That’s when I learned a 5 minute glance by a doctor hwo exited the room while I talked to him cost me over $90(in 1989 $) Another time, a second doctor was called into the room and I was billed for an “extended” visit. I had no idea the meter was in overtime. This was for a visit that could be proven to be unhelpful. My father “chatted” with them and they dropped the bill.
    The point is, I think we have to start thinking of medicine as fee for service instead of some pious, untouchable profession. And I don’t think costs will ever be reigned in until most people have knowledge of what it costs.
    Further, the current debate on gay marriage is at least partially fueled by the intertwining of health care and employee/family coverage. The controversial issue is portrayed as who should have access to the benefits as currently structured when the unspoken question is/could be whether the current arrangement itself is flawed. In our fair city of Madison, for example, I hear benefits might be extended to live-in “partners” of any orientation. Oh, yes..brilliant. Needless to say, I will never be elected ;)

  7. I will also add the strange pseudo private arrangement of health care seems to limit cost savings that could be accrued via nation-wide organizations. Yes, there is your Blue Cross but, in general, HC seems to be very regional, if not city by city. (If I could sign a friend of mine a few states away up for my plan, he’d be very happy.) The inevitable redundancy and cost of administrating the various plans has been an argument for nationalizing HC. But who do you figure has lower paper shuffling costs..Sears or the gov’t? Which has incentives to keep costs down while satisfying customers? Am I wrong to lower the ideal of HC to that of a chain store? Ask someone in a (sustainable)nationlized plan.

  8. As said above, Healthcare in America is a strange 3rd party arrangement that is an accidental by-product of employers trying to get around wage and price controls during WWII.

    3rd party payer arrangements leave everybody uhappy:

    The payer (actually the payer is the consumer, but since he doesn’t pay directly or have any clue how much he is actually paying, he isn’t technically the payer) recieves no benefit from the service whatsoever. So it’s every motivation is to pay as little as possible, and demand as little service as possible.

    The consumer doesn’ty have a clue how much they actually pay for the service. To them, other than a small co-pay, they think that what they are receiving is free. So they are motivated to get as much of it as they can. When they don’t, they are unhappy. When they have to pay more ofr something that was “free” they are unhappy.

    The Service Provider is paid by an organization that only cares about cost, and services a consumer who wants the highest quality and quantity. They also must deal with lawsuits if they don’t take enough precausions, but are threatened with non-payment by the payer if they do so.

    None of these problems is fixed by a government solution by the way. All that is substituted is a payer with zero accountability.

    Some combination of the above prescriptions is probably a good idea, but here’s the probolem: In order to get people to actually pay for the health care they now tink is free, there will have to be some sort of eye opening catastrphe to change the mentality. Unfortunately, these types of catastrophies have historically been used as excuses for vast new government powers.

    That’s why government rarely recedes, but always advances. In good times nobody wants to mess with a good situation and in catastrophies….we all know what happens.

  9. An excellent post. One of the policy problems that my group deals with is the Clinton and Bush administrations’ policy of using the antitrust laws to impose soft price controls on physicians. Basically, the DOJ and FTC made up a policy that says physicians can’t join together to negotiate contracts with HMOs (which are, mind you, aggregate purchasing groups for consumers). The physicians are “price fixin” according to the government. Physicians may join together, however, if they engage in “clinical integration” or “risk sharing”.

    The problem is, the policy never says how much integration or risk sharing must take place. The result is about 10,000 physicians have been prosecuted, not for intentionally violating the law, but for entering into deals they thought met the standards, only to be told by the FTC or DOJ after the fact that it wasn’t. Now these groups are required to clear all of their business practices with a government lawyer, and nobodoy still knows what the policy allows or doesn’t.

    Here’s the upshot: When a third-party payer makes an offer to a group of doctors, there’s two legal options: Accept the contract, even if it’s for below-market prices, or reject the contract and reject an antitrust prosecution for “price fixing”.

  10. Two issues with the post on health insurance:

    First, insurance is by definition a “pooling of risks”. Insurance companies have actuaries, so the cost are pretty well known up front. If an employee is felt to be worth having, because of what he or she knows and can do, then they are worth the sum of the costs such as health insurance; and if not, then the employer has an obvious action to take. It’s really a part of the employer’s choice. Also, if the employer values a stable workforce, the employees also value an exceptional employer who won’t make simplistic choices about employment based only upon who is cheaper to insure.

    Second, it astonishes me that the writer states that no insurance company would willingly pay for checkups, etc. it is obviously cost effective to find and treat an incipient problem before it becomes a more expensive medical proposition, not even to consider the perhaps avoidable loss of a valued employee to the enterprise. I have a car. Oil changes and tuneups do cost money, but not as much money as engine “transplants” or automotive trajedies tracable to unattended mechanical failure. I am happy to pay for oil changes and diagnostic work on my valued asset.

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