Shostack + Friends Blog Archive


Why Is Private Health Insurance Such A Disaster?

Why cannot markets allocate this function to the least cost decider? Why does the usual solution — intermediation — appear to be working so badly?

Asks Tyler Cowen over at Marginal Revolution. I believe that a large part of the problem comes from a side effect of the employer subsidy. Because health insurers are selling to the employers, because their customers are the large employers, they are not motivated to keep happy the folks getting medical treatment. (Who may not even be employees, but their employees’ family.)

To use an analogy, what if your employer selected your phone plans? (Oh, wait, they often do, and cell phone customer service reflects that.) What if your employer chose what kind of car you drove?

4 comments on "Why Is Private Health Insurance Such A Disaster?"

  • Justin says:

    I think there’s another aspect. if you suddenly need this service you’ve been paying for, and only then find out how crappy the service is, it’s pretty much too late to do anything about it — because at that stage you’re needing urgent medical attention, possibly in pain, and delaying action is the last thing you’d want to do at that point.

  • adam says:

    That’s a good point!
    I think you get to that issue of bad care through the insurer’s knowledge that switching out later is hard, or having your friends and family switch is hard. But this makes the problem much worse. I can really stay with my bad cell company. As the saying goes, it won’t kill me.

  • Scott Blake says:

    If crappy customer service is the issue you have, perhaps it isn’t the major buying criterion. Think of, for example, airlines. Most have amazingly bad customer service. Why? Because people buy the cheapest ticket they can (not quite always, but sufficiently close as to be nearly there). Not enough people select their air carrier based on service, they select almost solely on price. Perhaps the same is true of health insurers. Given a choice, will consumer select on service or on the lowest out-of-pocket costs?
    Monopoly (or local monopoly) could be another explanation, but there are certainly cases to indicate that it isn’t the only factor. Long distance carriers, for example. Again people choose on price, not service, and so service is essentially equally bad across the board as all providers strive to the lowest cost.
    Blame the profit motive in combination with consumers seeking lowest price and you have a formula for crappy service.

  • adam says:

    I would be happy to pay more for better service, and do, for example with financial products. As far as I know, no one markets a cell phone plan on that basis.

    There are clearly markets for luxury goods, and upscale versions of cheaper products. Cars, computers, and televisions all exhbiit this behavior. That airlines and phone companies haven’t been able to consistently deliver isn’t the profit motive’s fault.

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