Thursday, November 03, 2005

South Africa , or what we could become

I know there's been a lot of talk on Consumer Directed Health Care (CHDC) on this site lately. I'm going to continue on that meme today, because there's some fundamental issues worth considering if we're going to continue down that road (we're already on it, you can be sure of that).

David Adler over at The New Republic has an interesting piece on Consumer-directed health care in South Africa. Basically about half of the country's privately-insured are enrolled in high deductible plans. But the introduction of HDHPs (high deductible health plans) has had some unanticipated side-effects:
The result was an unprecedented restructuring of the insurance market. The young and healthy migrated to the new consumer-driven plans and away from traditional employer-based schemes. Meanwhile, the old and infirm were left in traditional insurance schemes.
That seems like a predictable response, right? Is it really such a big deal to have insurance segmented in this way?

The answer is, absolutely. Health insurance in the U.S. went through a massive restructuring after commercial insurers switched to experience rating and drowned Blue Cross in the 1950's. Blue Cross had offered moderately priced health plans to all workers through community rating, but other commercial insurers could offer cheaper plans to select groups of individuals through experience rating. The inevitable result was that all the young and strapping moved over to cheaper plans while the old and infirm had to stay with Blue Cross. Stuck with a bunch of high-cost patients, Blue Cross had no choice but to switch to experience rating as well. Which they did.

Now South Africa has experienced the same thing, except this time it was brought on by HDHPs. It's reasonable to believe the same could happen here as well as more and more people enroll in HDHPs. If that's the case, all these plans are going to do is cause a fundamental restructing of health insurance as more and more people are sectioned off according to their health status. Again.

And what's worse?
At a macroeconomic level, however, there is less cause for celebration. Private health care costs have hardly been contained. In fact, the opposite is the case. Between 1996 and 2001, the cost of specialty care increased 43 percent, and the cost of hospital care rose 65 percent. This represents a marked increase from the inflation rates for the five years prior. There have also been substantial increases in plans' administrative costs.

It's a temporary fix. Look at the graph again. Why, after forty years of trying these different private market solutions, should we believe it's going to be any different this time?

Especially when another country has proved exactly what we fear.


At 11/03/2005 8:14 PM, Blogger StealthBadger said...

This is a disconnect that I have a lot of trouble with when speaking to the few Republican friends I have left. In all of history, the more the society is centered on the profit motive, the faster that profit becomes the overwhelmingly dominant motive.

Why this in and of itself doesn't make people run screaming from our current insurance structure is absolutely beyond me (let alone things like privatized utilities).

At 11/06/2005 5:44 AM, Anonymous Martin said...


I think some of what you are seeing is that different interest groups are considered about different types of inefficiencies in the health care market. HDHPs do, arguably, solve the moral hazard problem by making consumers accountable for their health care spending. Yet, as you alluded to, it results in a fragmentation of the health care financing system becuase fundamentally it is no longer true insurance. It has morphed into some sort of catastrophic illness insurance plan or a reinsurance plan. On a separate thread, this creates adverse selection issues since the risk pools for HDHPs and conventional insurance plans are no longer comparable.

The historical tension has always been between believes in adverse selection as a problem and beleivers in moral hazard as a problem. I think we all agree that both phenomena can be real problems, but there is significant disagreement as to the extent that either of these two phenomena are problems. If you beleive that moral hazard is a really big deal (though there is a dearth of evidence supporting this point) then HDHPs make a lot of sense, but, as Uwe Reinhardt pointed out: people don't check themselves into the hospital for the weekend.

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