In the last diary we defined health care consumers by the way in which they pay for health care and identified three basic groups: (1). People who are members of an employer-sponsored private insurance group and people who directly purchase their own health insurance; (2). People who are members of a government-sponsored insurance plan, primarily Medicare or Medicaid; and (3). People who pay for health care completely on a cash (out-of-pocket) basis, either because they cannot get employer-sponsored or government health insurance, or do not have enough money to purchase their own insurance, or have decided that they do not want or need insurance. There's also a certaoin spill-over between Groups #1 and #3 because most health care requires a private co-pay and many health care procedures may not be covered by insurance. On the other hand, such cash payments are also deductible from the tax bill, do the net cost is, in many cases, smaller than the gross cost.
We do not yet have enough data to analyze differences in behavior between these three populations when they enter the health care market. But everyone seems to agree that the manner in which an individual's health costs are covered does have some important impact on their behavior as health care consumers. So let's at least begin to discuss this issue now.
In the previous diary we analyzed the different ways in which consumers purchase health care (or have surrogates like insurance companies purchase it for them.) But with the exception of severe trauma, which involves only a tiny proportion of all health care delivery, the entire process of consuming and paying for health care services and products is initiated by the decision of the consumer (aka the patient) to make a conscious decision to enter the health care market. So understanding how this market functions must begin with an understanding of what motivates the consumer to enter it.
Back in Part 6 I introduced readers to the whole field of health care economics, inaugurated by a path-breaking article published by Kenneth Arrow in 1963. In this artlcle, cited as the sine qua non of the liberal approach to health care reform, Arrow distinguished between the behavior of health care consumers and consumers of other products and services based on two crucial factors: (1). Health care consumption is unplanned and unpredictable due to the sudden onset of illness, as opposed to consumption of other consumer goods (food, clothing) that is regular and predictable; and (2). the relationship between health care consumer and provider is based on trust, as opposed to other forms of consumer-provider relations in which trust is not expected nor required as an aspect of the relationship. [Note that Arrow also discussed two other factors that impeded market equilibrium in health care - information assymetry and insurance irrationality - but we will leave those two issues to later diaries.]
I do not believe that either of the first two theses are necessarily true, to the degree that Arrow believed them to be true in 1963. I also do not believe that the data I have mined and will publish going forward supports these theses to the degree that some of Arrow's followers continue to subscribe to his basic ideas and approach. But understand thT my intention here is not to rewrite the field of health care economics. Rather, I hope to show that some of the current ideas about health care reform may need to be re-thought given the degree to which the reality of today's health care markets departs from the Arrow-inspired paradigm.
In particular we need to understand the attitudes and motivations of health care consumers. And in that respect, the fact that two-thirds of all Americans have access to the health care market because they are covered either by government-sponsored or employer-sponsored insurance is not only a situation that simply didn't exist when Arrow published his article in 1963, but means that this group of consumers must differ in behavior and expectations from the remaining third who have no insurance either by choice or by circumstance.
We have not yet analyzed data that would show us whether there are behavior differences between insured and uninsured health care consumers, but we can say this. From the time that health care insurance first started to enroll a significant number Americans, beginning in the 1950s with employer-sponsored plans and then in the 1960s with Medicare and Medicaid, there is no question that as more people received coverage, the cost of health care started to rise, both on a per capita basis as well as a percentage of the GDP. In 1950 health care accounted for 4% of the GDP, it now accounts for 18%, and while cash payments for health care were more than 60% of all payments in 1960, they represented only 15% of all payments in 2000. [Data from Relman A Second Opinion] and Kronick, "Valuing Charity," Journal of Health Politics, Policy and Law.]
Ultimately, the questions that must be answered are as follows: Do consumers enter the health care market because of the sudden onset of unpredictable illness, or do they enter this market for other reasons? And if there are other reasons for consuming health care, do these reasons differ depending on how the consumer pays for health care? In other words, do consumers need health care or do they want health care.
Stay tuned and thanks for reading so far.