TCS Daily

Do We Own Our Ailments?

By Arnold Kling - April 12, 2005 12:00 AM

Ask an economist what is the best type of health insurance, and he or she is likely to respond "catastrophic coverage." Our assumption is that rational consumers should be motivated by risk aversion and low cost. Risk aversion means that they should be concerned about mitigating the impact of severe, expensive illnesses. The low-cost way to do this is with catastrophic health coverage. The most familiar form of catastrophic coverage is health insurance with a high deductible.

Insulation vs. Insurance


In practice, we observe very little catastrophic coverage. Instead, the most widespread form of health care coverage is what I would call insulation, because consumers are insulated from having to pay for health care goods and services, even if they are not for major, expensive illnesses. In the United States, most private health "insurance" provides insulation. Government programs here and elsewhere tend to be much closer to the insulation model than to the catastrophic insurance model.


Why is insulation the predominant model of health care coverage, when economists would predict that catastrophic insurance would best suit consumers' needs? A number of economic explanations have been offered, none of them really satisfying.


One story is that there is a "market failure," allegedly because insurance companies need to screen out high-risk consumers from catastrophic insurance plans. However, this does not explain low consumer demand for catastrophic coverage. Many consumers who could afford catastrophic coverage nonetheless choose to go uninsured. Moreover, if what consumers really wanted were inexpensive catastrophic coverage, and the market failed to provide it, one would think that there would be some incentive for politicians to make catastrophic insurance available from the government. Instead, the insulation model dominates the catastrophic model even more strongly in the political market than in the private sector.


The other story is that government incentives distort the health insurance market. In particular, the tax subsidy for employer-provided coverage can be worth more to a firm that provides insulation than one that merely provides catastrophic insurance. However, in many instances where the tax subsidy is not the determining factor, consumers choose insulation rather than catastrophic coverage. Moreover, if the government is subsidizing something that consumers do not really want, one would think that the subsidy would lack mass appeal.


A Non-Economic Model


In the remainder of this essay, I will step out of my area of presumed competence in economics. That is because I think that a non-economic rationale is required to explain the strong preference that people have for insulation rather than catastrophic insurance.


My hypothesis for why people want insulation from having to pay for health care services is psychological. I believe that people tend to "disown" their ailments. It is not that we deny that we need care (although denial is something that happens as well). It is that we deny that we should need care. Our basic stance is, "I really shouldn't have to undergo treatment X. It's not fair." That style of thinking is what I mean by disownership.


For example, suppose an elderly woman takes a fall and breaks her hip. My prediction is that she will disown her frailty, either by describing her fall as due to her remarkable stupidity or to someone else's terrible carelessness, such as a badly-designed curb. If she were to take ownership of her condition, she might instead acknowledge that she is unsteady and should be walking with a cane.


When you are advised by your doctor to go on a diet, your instinct is to disown the diet. Even though you go on the diet, you feel that you should not have to diet, and you think that it is unfair that you are dieting.


The same emotional reaction ("I shouldn't have to...It's not fair") applies to quitting smoking, giving up a sport for health or safety reasons, getting a routine mammogram or colonoscopy, or just going to the doctor for a regular checkup. We prefer to think of ourselves as healthy and indestructible, and we disown our ailments and frailties.


It is my hypothesis that our squeamishness about paying for health care services reflects this disownership. Who wants to pay for treatment when deep down you believe that it is wrong for you to need it? Yes, you know that you need the treatment, but you disown this need because it seems so unfair. Having a third party pay for the treatment appeals to this desire to disown one's frailty.


The disownership hypothesis helps to explain the emotional appeal of Medicare. For the elderly, the betrayal of one's body is a particularly salient issue, and disownership is a common response. I know several wealthy seniors who will say, quite ludicrously, that they could not do without Medicare. Financially, their claim is preposterous. Emotionally, however, it clearly has validity.


In economic jargon, people get utility out of insulation that goes over and above its economic value. Insulation makes it easier for people to disown their ailments, because having a third party pay for health care helps reinforce the notion that it is unfair that you need treatment in the first place.


Policy Implications


The theory that people get satisfaction from insulation that is over and above its true economic value is troubling for those of us with an interest in health care reform. In order to have a health care finance system that is affordable without strict rationing, then we have to replace the insulation model with the insurance model. This means that more people will have to get over what I call their Mental Illness. If the disownership hypothesis is correct, then the attempt to wean the public off of insulation and toward catastrophic coverage may be more challenging than I had realized. We will have to understand and overcome our desire for disownership of our physical imperfections.


Arnold Kling is the author of Learning Economics.



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