When You Have Skin in the Game, it Can Pinch

Just in time for Thanksgiving, the New York Times  has served up a half dozen personal stories of bankruptcies brought on by medical expenses.   This article brings faces to statistics published earlier this year – showing that 61% of personal bankruptcies are associated with medical debt.

What’s the underlying problem here?

For starters, the costs of health care have more than doubled in 7 years – and a routine hospitalization of just a few days is often billed at well over $10,000 – a quarter of all annual income for a family of four at the federal poverty level.   Few can afford to pay medical bills if they are uninsured.

Further, the nature of employer-sponsored health insurance has changed. To cope with the large increases in cost, many employers have shifted substantial costs to their employees. Everyone sees this in higher copayments for office visits and medications – but in addition there is a move toward higher deductibles and more coinsurance. Copayments are fixed fees – whereas coinsurance means that the patient is responsible for a percentage of the allowed bills.   The average amount of hospital coinsurance is 18%.  Even when plans have an out of pocket maximum, certain costs (like out of network costs) do not count toward this maximum. 

For the “average” employee this works out fine, and health savings or health reimbursement accounts can be a great boon for those who are healthy, and those who can afford to put their own funds in tax-advantaged accounts.  But for those with serious illness, coinsurance can be ruinous.   Most of the stories told in the Times today were of those who had insurance – but were startled to find that having insurance did not offer them financial security. 

"Skin in the game" is the phrase used to describe individuals' bearing a substantial share of the cost of health care  - and there is evidence that this helps keep people from consuming too much 'low value' health care.  All insurance creates 'moral hazard,' where people make different demands than they would make if they were paying their own dollars.

On the other hand, we do consume health care differently than other goods and services, and none of the bankruptcies in the NYT article involved discretionary, 'low value' care.  There are many academicians and policymakers who doubt that "moral hazard" is the driving issue in health care inflation. Here's a link to a Malcolm Gladwell 2005 New Yorker article on this topic.

Ironically, the NYT report comes from Tennessee, a state that tried to dramatically expand insurance to its residents in the 1990s through TennCare – a public-private program that included large expansions of Medicaid.  The program was shelved when the state ran short of cash – a cautionary tale of expanding health insurance without adequate funding and appropriate cost control.