Discretion is the Better Part of Health Care

To people in what I call the health policy establishment, the riddle of modern health care is: Why are health costs rising at twice the rate of growth of income all over the developed world? To me the riddle is: Why isn’t health spending rising even faster?

Any time you offer people discretionary benefits that are free at the point of consumption, they are likely to exercise discretion and enjoy the benefits. Yet that’s what first-dollar health insurance coverage does. It encourages us to think that everything is free, even though we all end up paying through higher premiums and higher taxes.

As a practical matter, once we pay insurance premiums, that money is combined with everyone else’s premiums in a pool. Once the money is in the pool it is no longer “ours.” In fact when we draw from the pool, we are spending everybody’s money. Moreover, the only way to get benefits from the health insurance pool is to spend money on medical care.

I was musing the other day on how many opportunities I have to spend your money:


Anything goes

  • If my wife objects to my snoring at night, I can have my uvula removed. Cost to you and others like you: about $20,000.
  • If my wife and I decide to have another child and we can’t manage it the old fashioned way, there’s always in vitro. Cost to you: another $20,000.
  • If we decide not to have a child, there is always a vasectomy or tubal ligation (free coverage to be mandated by ObamaCare). Cost to you: $1,000-$7,000.
  • If I decide my thinning hair needs to be a bit bushier, there’s Propecia at an annual cost of $842.
  • If my testosterone level isn’t in sync with my idealized vision of my own virility, there is Androgel ($831). Essential for everyone suffering from male menopause I would think.
  • If my cholesterol count is a bit out of whack I can change my diet and exercise; or I can take Lipitor ($2,000).
  • If I over-eat and over-drink and get gout, there’s always Colcrys ($2,000). Surely you wouldn’t deny me relief from joint pain?
  • If my unhealthy diet leads to diabetes, all those costs are yours as well (average annual extra cost = $7,000).

Note that I’ve already spent as much as the cost of a luxury car and I haven’t even gotten around to the normal screenings — general checkup, PSA test, colonoscopy, and a hundred other things. Those will cost you as well.

Then there is the pièce de résistance. All of the above costs and benefits are more or less contemporaneous. But let’s say that over time I abuse my body with alcohol, tobacco, drugs, fatty foods, lack of exercise, etc. I know that you will pay all my medical costs — mainly from first dollar — once I get old enough to qualify for Medicare.

Oh and did I forget to thank you for all this? Sorry. There are so many demands on one’s time.

I know what you are thinking. Some of these choices require doctors to fill out the right forms with the right answers. But that’s a no brainer. One of the most important thing doctors do is exploit reimbursement formulas so that someone else will pay our medical bills.

Not only are all these options discretionary, the benefits are use-it-or-lose-it. Frankly, I would rather have a new car. But that’s not an option. The only way I can get benefits out of my health plan is by spending money on medical care. The only way seniors can get benefits out of Medicare is by spending money on medical care.

Even though these observations are mainly just common sense, they are resisted mightily by the orthodox health policy community.

Isn’t technology supposed to cause higher health care spending? In markets where there are no third-party payers, technology reduces costs (cosmetic surgery, Lasik surgery, etc.). In the third-party payer system, technology increases costs primarily by creating and facilitating new discretionary benefits.

What about greedy doctors? Greedy hospitals? Greedy drug companies? As Adam Smith taught us 200 years ago, the self-interest of producers and sellers generally works to our benefit — unless of course, they are creating and facilitating access to discretionary benefits.

Now if we want to “bend the cost curve,” as the policy wonks are apt to say, there is another role for common sense.  Don’t let people draw from a common insurance pool to pay for their purely discretionary choices. Instead, let them save in special accounts from which they can purchase discretionary care.

For contemporaneous decisions, the mechanism is the Health Savings Account. These accounts should be used for all of the items I listed above plus almost all primary care and almost all diagnostic testing. (The exceptions are those few instances where “the test pays for itself.”)

What about long term. Is there a way to compel people to save while they are young in order to pay for medical expenses in old age that are directly related to their own life-style choices?

It’s an intriguing thought. But I don’t know quite how to do it. I invite your suggestions.

Comments (22)

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  1. Ken says:

    Great post, John. You rarely disappoint.

  2. Mike Ainslie says:

    There are easy and hard ways to fix this. The easy is to give patients their money- what they’ve paid into the system and have them buy their own insurance and fund their own HSA. The hard part of this is to have the gov’t give up the control they have over these patients. When Obamacare fails perhaps patients will realize this, but I doubt it, there will just be another federal alphabet soup of a great idea on paper, but a lousy idea in practice. Anyone for the good ship Medical Care parked about 200 miles off Miami with free helicopter service and great, but not free medical care?

  3. Larry C. says:

    I think Lipitor is going generic in January. Of course, I guess you could stick the rest of us with the cost of the brand drug anyway.

  4. Scott Ringold says:

    John, I’m just old enough to remember when medical insurance contracts would only pay for items that fell under the category of “necessary to diagnose or treat an injury or illness”. That would exclude most of your items above as well as a few more(birth control pills, etc.)

  5. Tom H. says:

    Mike, the Obama Care way is to make everything free and then let government ration care by deciding who gets what by bureaucratic decision making.

  6. John Goodman says:

    @ Scott

    Ah, for the good old days.

  7. Jay W says:

    My fix is a tough sell, but it would open up a true marketplace. Revoke the antitrust exemption that allows “group insurance” through employers. If an employer wants to provide health benefits, or an employee negotiates for health benefits, the benefit would come in the form of a contribution (or a “match” to use the 401k model) to the employee’s HSA. All premiums and pre-deductible costs would be paid by the insured. Can you imagine the level of service and lower costs that would chase all these new individual health insurance policies? Insurers would have to actually compete for business instead of getting these huge annual renewals without actually having to work for them. And the insured would be directly involved in paying for their health care, and start shopping for the best policy, prices, level of service, doctors, you name it. Comments?

  8. Bob Blandford says:

    Great post. A central element of my approach to health care is to require people to pay from their wages into their own HSA.


  9. Jim Morrison says:

    I find this one of your least-serious posts. Some of your examples of “abuse” are just plain silly. Do you not know that gout, for instance, is not a result of over-eating and drinking, but is related to the level of uric acid in the blood stream, often generated by the healthiest of foods like spinach and asparagus? Many people have congenital kidney disease and their kidneys do not remove the purines, which results in gout. Do you really believe that diet and exercise alone will eliminate high cholesterol?

    I think your fundamental problem is an inherent dislike of health insurance; it must be ideological.

    By the way, the only way to get benefits from the fire insurance on your home is to have a fire. What do you recommend?

  10. Joe Barnett says:

    Jim: In many areas, home insurers won’t cover a wood shingle roof and give a discount for a hail-resistant roof. But shouldn’t all roofs be insured equally, at the same premium cost, since there’s no greater incentive for a spark to ignite a wood shingle roof than a composite tile roof, and hail falls on wood and slate roofs equally?

  11. Dr. Bob Kramer says:


    Rising healthcare costs is a multifaceted situation. One is that is not physician reimbursement, but more the present greed of the insurance industry and the pharmaceutical industry. Also the problem is not reimbursement but there has been a free fall for hospital care, as there is no hospital stay that can figure
    out actual cost to have a hospitalized individual on a fee for service basis. All the hospitals include in a bill an added amount for charity or medicare costs. Hospitals want to have a double digit profit, so that the folks on Wall Street, the pharmaceutical and insurance industries keep all their investors happy. Hence the $5 aspirin or a $50 bedpan charge. The free ride has to be stopped, and the success of any of the prior 3 industries should not and must not be the reimbursement charge for outrageous charges. I have been in the hospital frequently for the past 2 years, and every EOB reflects billed charges, approved charges, medicare charges, and finally what the insurance guys will pay…80% of what the medicare charges approves. That is why patients want the best and latest diagnostic equipment, and the fear of malpractice fees will cost, etc,etc.
    So what are the reasons for the cost of health care?
    1) Sense of entitlement
    2) Don’t want to pay anything
    3) Need to revise and change the whole system for physician fees
    4) STOP basing cost rather than quality of care as the driver
    5) More stringent malpractice claims both for the doctors and litigant relief
    6) Have delivery of medical performance trusted ONLY to impartial physicians, not by government, legal, or vendors whose only interest is to have a big increase in revenue to satisfy those with a vested interest in profits rather than in providing the best care.
    7) Stop making time the true driver of care; there should be some way that doctors be judged not by how fast they can see a patient, but what the disposition of the reason was.
    8) Adopt Kramer’s rule of six (again) Do the right thing to the right patient for the right reason, in the right place by the right physician at the right cost. I doubt that this can ever become the rule rather than the exception. Our dysfunctional economic structure cannot be the way we look at health care,,,but look at the legal, banking, investment, and the business world; all have the same greed as the driving way they do business, and people don’t die by poor performance, but in health care…they do.

    Well, I will get off my high horse, and continue to try to see some of my wishes come true. But until we put honesty and integrity in place in EVERY aspect of out society, I don’t think we can expect health care to be the first horse out of the starting gate. Let me know if you want more. I don’t think your somewhat simplistic about how to cure the healthcare problems, IT WILL NEVER BE ACHIEVED BY KEEPING THE ECONOMIC METRIC AT THE TOP OF THE LIST.

    Dr Bob Kramer

  12. Ron Bachman says:

    The battle cry should be “Maximize Insurance and Minimize 3rd Party Reimbursements.” Sounds like a contradiction? No, it is a call for expanded HSAs or other legislated tax advantaged medical savings vehicles for all, including Medicare and Medicaid.

  13. Michael F Miltich MD says:

    FYI: I take off uvulas in the office, local only, using a LASER for less than $500. Would be glad to see you John! Snoring (without apnea) is considered a non-medical condition, and any treatment for snoring is not covered by most insurances.

  14. Jack Towarnicky says:

    John, you concluded by asking: “What about long term. Is there a way to compel people to save while they are young in order to pay for medical expenses in old age that are directly related to their own life-style choices? It’s an intriguing thought. But I don’t know quite how to do it. I invite your suggestions.”

    I don’t think it can be done – don’t want/need the structure/enforcement that would be required to achieve compliance … too close to “single payer”, too much opportunity for abuse, a cure potentially worse than the disease.

    That said, here are some thoughts…

    To change medical/lifestyle risks people take, a behavioral economist would suggest you have two basic choices – create favorable financial incentives/rewards for making the right choices (avoiding lifestyle-related medical conditions (smoking, obesity, etc.) and avoiding lifestyle-related risky behaviors (hang gliding, etc.)), or create negative financial penalties to reduce coverage/increase point of purchase cost sharing for medical costs that result from people who make the wrong lifestyle choices.

    Both would be coupled with changes that raise the level of coverage for preventive/wellness services and concurrently eliminate lifestyle-related medical treatments (viagara, in-vitro, cosmetic surgery, etc.) beyond services sourced/paid by individuals.

    I’ve a lot of corporate benefits/wellness program design experience. I believe a third option works best – a combination of both positive and negative financial incentives, coupled with peer pressure & social norming. I know you have concerns about the current adminstration and their behavioral economics bent – but – I also know you favor the incentives, positive and negative, in a well-designed Health Savings Account and High Deductible Health Plan combination. Certainly, the use of a HDHP/HSA combination gets at the issue of discretionary benefits that are free at the point of consumption.

    In terms of changing to healthier behaviors, a HDHP/HSA is probably not enough. Getting people to sacrifice today (forego that pizza, get some exercise, etc.) is “priced” too high in the American psyche because of the hyperbolic discounting of future gains from wellness. Can’t tell you how many times I’ve almost thrown up when wellness company “professionals” assert that “10,000+ studies” confirm a positive return on wellness investments – many citing results of 3:1 up to 6:1 or more. Most can’t even confirm correlation, let alone causation.

    So, seems to me that a system that would be most effective in changing behavior would require some sort of a cumulative, running total of spend, using periodic reconciliation/true-up (rewards for healthy living/avoiding expense (perhaps a dollop of interest?), and penalties (lower coverage, higher contributions, etc.) for risky behaviors/incurring expense). That is, you need to accelerate the rewards/penalties into the short term to make them seem cost-effective to Americans.

    I’d be concerned about how some might abuse the data and information, so, maybe a start focused solely on Medicare and Social Security, cumulatively what you paid in, adjusted by some sort of nominal interest rate, with a running total of your investment into the system… reduced by any benefit payouts. If nothing else, this would be beneficial for those who want to discuss entitlement reform … because my experience in talking with retirees is that they believe they fully financed the benefits they are receiving (that there would be plenty of money had Congress/President Bush not frittered it away on wars, etc.)

    We could use the existing annual Social Security benefit statement; augmented by new data on SS payouts/Medicare spend. If that is a success, without widespread privacy violations, perhaps we can move to a different model which would involve those who source coverage through the private sector – incorporating a comparable model into corporate wellness programs.

    Since no one would support consolidating all medical spend into a single system, perhaps you might accept a beta using some sort of a national, notational HSA … leveraging another behavioral economics concept (social norming). You create a national data base where companies post de-identified associate (and dependent) cumulative results to build a data base. In response, the corporate wellness program would receive a table of scores reflecting demographic/geographic data splits by, say, deciles – data that can be incorporated into the corporate wellness program as a benchmark. This would require also a more standardized Health Assessment tool (forwaring on only the the health score). So, Americans can measure not only their financial results, but also clinical improvements. Kind of like a credit bureau… Over time, some academic may be able to find a correlation between improving health assessment scores and reduced spend … or not.

    To get employers on board, we would need to leverage electronic medical record requirements/regulations with some sort of a secure/approved process designed to overcome the exposures under ADA, ADAAA, GINA, HIPAA, etc. – and to overcome limitations under those laws/regulations that preclude mandated wellness program participation.

    After a few years/a decade of experience, the database exists, we have time series data, and we’re primed to start thinking about moving from the notional to the nominal. After more years/decades, perhaps we can move from the nominal to real incentives/penalties – where each person owns her own experience, cumulatively, for life for behavioral/lifestyle expenses.

    As with other wellness-related programs, you will see changes in behavior and clinimal improvements in health, sometimes seemingly overnight. However, typically you won’t see positive financial results that clearly establish a correlation for maybe 10 or more years. Not sure I’ve ever seen documented causality where a wellness program (implemented without concurrent benefit changes) actually “bent the health care cost curve”.

    Looking back on this note, it is still a bridge too far, too much potential for abuse, even if limited to medicare and social security in the public sphere.

    But you asked. I tried to create something like this as part of one employer’s “informed enrollment” & total rewards strategies. Failed miserably.


  15. Bob Blandford says:

    If everyone had an HSA and there were a free market in health insurance, then insurance companies would be free to lower premiums for adherence to healthy life styles.

    Those that did not do so might run out of HSA money to pay premiums and, if otherwise poor, would fall into a safety net. They would not want to do that because the net would, for example, make payments at the level of the lowest-cost providers; and would not cover many treatments … such as uvula removal. 🙂


  16. Beverly Gossage says:

    I agree. My tenure in the health insurance industry as an independent broker has confirmed what I learned nine years ago.
    1) Changing the federal tax code to give the tax deduction for health insurance to the insured is the best and easiest reform that will put the consumer closer to the cost of health insurance and health care.
    2) Your employer doesn’t pay for your premium, you do anyway. Would you rather have that compensation less the tax benefit given to you in salary? Then you can spend as you see fit, including shopping for a portable insurance policy.
    3) But won’t business owners want the tax deduction? They can just add that health insurance premium amount to salary (less tax deduction) and it’s a wash to the employer. Plus they save in HR costs and hassles over health insurance issues.
    4) Small business owners dropping group coverage has caused hundreds of thousands of employees to discover private, portable policies. Competition and a growing risk pool in this market place have made the rates even more affordable. Those businesses still manage to compete on salary alone. Amazing!
    5)When allowed to fully purchase their own plan, most consumers gravitate toward the HDHP/HSA. As more people have these plans, there will be more of a demand for pricing transparency and a greater incentive to become and stay healthy.
    6)During a transition period, the small percentage of employees who developed severe conditions while trapped in the employer-sponsored plans must shop in the high risk pool. But in time, as everyone purchased a private policy,one need not worry about a job loss or job change causing a loss in coverage. There would be large pools of insureds.
    7)The low risk young people who earn lower salaries will pay less for their policies and later in life as their premiums rise due to higher risk, they will likely earn more and would have an incentive to save in their HSA to pay for those claims(and premiums–see Cannon’s big HSA concept).
    8)Medicaid/SCHIP folks can receive vouchers to buy health insurance and funds in a savings vehicle that can only be used for medical expenses. Medicaid is dispensing funds, not negotiating provider fees or paying claims. Much like food stamps are given out. The govt. doesn’t negotiate the price of milk and eggs with the grocery chains, causing the rest of us to pay more.
    9) Most brokers and insurance companies want to protect employer-sponsored insurance because it is easier to insure 30 folks with one plan at one annual renewal than work with 30 individuals.

  17. Virginia says:

    How about this: give young people a score based on percent of salary saved for future health expenses. Use the score to calculate their income tax for the year (high savers get lower tax rates), and then promise them priority access to doctors in old age (assuming medicare still exists).

  18. Jack Towarnicky says:

    I’m all for true market-based exchanges, however, I disagree with your proposed change to the tax code.

    OK with me to use a “portable” insurance policy, if that is what the participant wants, however, employer-sponsored coverage already has that option (but may lose it due to health reform).

    Employers also have all the tools/options necessary to encourage use of HDHP/HSA options, by:
    (1) Setting effective defaults, coverage and HSA contributions,
    (2) Using flexible benefits pricing for all health options,
    (3) Experience rating each option so that the worker’s prices reflect the likely value achieved in a HDHP and other options reflect the selection from inadequate point of purchase costs sharing.

    Many employers are already there – moving quickly to a “defined contribution” method. Unfortunately, without a mandate, too many employers have not acted … because many employees are on the “crack pipe” of 3rd party, low point of purchase coverage … where they don’t know and don’t care about the cost or its impact on their wages.

    Unfortunately, the change you propose will raise the cost of coverage by subjecting the funding to employment taxes (company and employee paid) – so it is not a wash to the employer. Similarly, because of state and local income taxes, it is not a wash to the worker either. Even in Texas, with low/no state/local income taxes, it would reduce take home pay – and the amount available to use to purchase coverage. No chance of a neutral result … once the feds understand this is a “revenue” opportunity.

    All surveys confirm small employers drop coverage primarily for one reason – cost. That is, even a HDHP/HSA is often beyond their reach. With PPACA, and the new maximum deductible of $2,000/$4,000 in the small group market, even fewer will be able to afford even HDHP coverage. And, keep an eye on how HHS defines minimum essential coverage to avoid the “pay or play” penalty… they just might make it impossible for the HDHP/HSA combination (see today’s WSJ editorial page).

    More effective than a high risk pool would be a privately managed stop loss program – with federal oversight. All would buy in, say at a $50,000/person attachment point – spreading the risk among all Americans – as it is inappropriate for individuals and employers to be saddled with open ended, unlimited coverage (no lifetime/annual maximums as mandated by PPACA), because, at some point, this is not a manageable expense for employers or individuals – a universal pool (with appropriate point of purchase cost sharing) is needed.

    You are absolutely correct about the lower cost and ease of administration in the employer-sponsored plan marketplace. Losing that efficiency would raise expenses, increase selection and trigger new levels of underwriting activity.

  19. ralph says:

    great post John

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  22. wanda j. jones says:

    John–An excellent topic worthy of a book, exploring all the motivations of various players. Some thoughts:

    1. Have insurers offer “mutual policies” so that the pool that proved less costly than expected could see a nice dividend, or more benefits of their choice.
    2. Have HSA pools put their funds in a credit union where the members could recruit their own primary care staff, and do volunteer work with each other to cut the cost of home care, or fitness activities, or to operate support groups on key lifestyle changes, especially weight loss. And, if they used a debit card, they could choose physicians who give discounts for cash.
    3. Have all policies include coverage for “distance medicine,” and physician contact by e-mail, as that would save heaps of time and give enrollees access to medical specialists from beyond their immediate health system.
    4. A very valuable service of all insurers would be to
    both orient new enrollees to the health system and how it works, but outline expectations of the enrollee for healthy living. The enrollees would be put through an evaluation, then given a life plan recommending what they could do to improve their health. And offer financial incentives for completing the life plan. Weight loss, smoking, etc.
    5. Have a portion of the premium for all plans go to fund nursing programs, as there is such a terrific shortage that there will not be enough nurses to staff hospitals and clinics, much less take over doctors’ work in community health centers. The present shortage is behind the inordinate growth in nursing salaries, which, in turn, raises the cost of hospitals, and premiums. Nurses in hospitals make $140K a year starting salary, more than if they were teachers in nursing school. If enrollees give themselves some clout, they could lobby their regional healthcare system to again offer nursing education, which is now centered in universities and colleges.

    6. Since there will ALWAYS be people who are not up to the task of choosing and managing their own health insurance, ordering meds, reading labels, or complying with instructions, there will ALWAYS need to be non-appointment medicine, which is what ER’s offer. So, we should fall back on a pattern that many of the uninsured and insured public knows how to use, and simply require that hospitals with ERs also have a primary care clinic. I recommended this to St Vincent Medical Center in Portland in 1969, and it has flourished.
    7. Then, when the activated enrollees are feeling their collaborating power, they should press for legislation that would reverse a host of mandates that favor some group or other while raising costs of everyone’s policy. (2-day length of stay in the hospital for a normal delivery?)
    8. Finally, begin to rely more on the Internet, where a vast vat of knowledge is growing daily like yeast on steroids. Just about any symptoms or disease can be described and information found, often with self-care tools. The ultimate cost-savings methods are to “PULL HEALTHCARE WORK DOWN THE ACUITY PYRAMID, so that Tertiary (life-saving, by sub-specialists) work becomes Secondary, Secondary (symptom reduction by specialists or non-life-threatening conditions) becomes Primary (short-term curable illnesses and management of basic risks) and Primary care migrates to the family and individual.
    9. Eliminate all the protective laws that prevent new, more efficient and acceptable medical businesses from arising, as when doctors lobby the state to forbid payment of mini-clinics for Medicaid patients.
    10. My last top ten is to recognize that underlying a great deal of illness is unhappiness and stress. In particular, people with little education, job stress, and family dysfunction tend to acquire diseases because the immune system is depressed. As communities, reducing fear from crime, risks from out of control teens with no jobs, discovering new ways to employ marginal people, fostering stable families that support each other during hard times, and keeping down the rate of unplanned pregnancies, would pay off in reduced healthcare costs. Of course, we would have to give up some of our prejudices about people who are “not us.”

    I did not mean to write so much, but I’m glad I did–I did not know what I was going to say before I did.

    Thanks, other commenters–I can see that you know how important costs are and how narrow are our ideas about them. Let’s start a healthcare movement of positive activists, not complainers…

    Wanda Jones
    New Century Healthcare Institute