Patient Power

Health care costs and health insurance

Direct-purchase insurance is when the patient buys it directly from the insurance company, rather than through an employer. How can this help bring down the cost of medical care?  Linda Gorman explains in her latest article at the Library of Economics and Liberty:

Direct-purchase coverage is owned by an individual. Premiums are based on the costs that an insurer expects a particular individual will generate in the future. People with low health risk, where risk is shorthand for expected future expenditure, pay less in premiums. Because premiums in the direct-purchase market are paid with after-tax dollars, individuals know exactly what their coverage costs. Because paying for health care with insurance coverage is more expensive than paying cash, people who buy direct-purchase coverage are more likely to insure against large costs, relying on out-of-pocket cash to cover routine expenses.

Because employer-related coverage is tax advantaged, employer plans generally follow the more expensive route of insuring even low-cost routine care. Employees “pay” the bulk of their employer-provided group health premium in the form of lower wages. Their artificially low out-of-pocket costs insulate them from the true cost of health care. This increases the demand for health care. According to Manning et al., data from the RAND Health Insurance Experiment show that the higher out-of-pocket payment characteristic of direct-purchase plans “reduces expenditures 31 percent relative to zero out-of-pocket price.”8

[Health economists Mark] Pauly and [Bradley] Herring report that direct-purchase insureds who had medical expenses about 4 times that of other people enjoyed premiums that were only 1.6 times as high. People who buy a policy and become ill have a strong incentive to continue paying. This may explain why age and sex were generally better predictors of direct-purchase premiums than chronic conditions.¹¹ Marquis et al. concur, reporting that the individual direct-purchase market is “an important source of long-term coverage for many who purchase it” and that “there is substantial pooling” that “increases over time because people who become sick can continue coverage without new underwriting.”¹²

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