When Health Insurance Makes Healthcare More Expensive

My beloved dentist Dr. M retired after 45 years (see Staying In Your Job After Financial Independence). A new dentist who only graduated dental school 3 years ago took over (bought?) his practice. I met this new dentist in a routine cleaning-and-exam appointment last month.

The new dentist was very friendly. After a thorough exam, he recommended that I get a night guard to prevent damages from night time grinding or clenching. Because I have some gum recession, he also recommended gum line fillings for 5 teeth. These issues never came up before with Dr. M. The gum recessions had been there for many years. Dr. M told me if the teeth were sensitive he could desensitize them but otherwise I didn’t have to do anything.

I understand different medical professionals have different treatment approaches. I’m not saying the new dentist must be wrong but this interaction also revealed how health insurance affects our healthcare consumption and how our healthcare decisions affect health insurance.

Among different branches of healthcare, dental services are very transparent in prices. You get a treatment plan with itemized prices up front. If you have insurance, the amount covered by insurance will be estimated quite accurately. You don’t get into a situation where the doctor recommends something but nobody can tell you how much it will cost until you actually do it. You know up front what your out-of-pocket cost will be. You then decide whether to proceed. If all healthcare works like dental services we will have much less headache.

As usual, the dental office gave me an itemized treatment plan with my expected out-of-pocket cost. I was reminded that my dental insurance covers 80% for the treatments. If I don’t have dental insurance, I probably wouldn’t go for those treatments because they look like marginal value to me. But at 80% off? Yes?

And that’s a problem.

Before I buy insurance, I wouldn’t pay for treatments that offer only marginal value. After I buy insurance, I have a strong incentive to go for those treatments because I already paid for insurance and the incremental costs to me are substantially lower (80% off!). If I don’t get the treatments I still pay the same insurance premium.

When insurance pays for those treatments of marginal value, the costs are just included in the premiums. Health insurance gets expensive because health insurance covers expensive treatments. Treatments are expensive because once you have health insurance you don’t care how expensive the treatments are. After you satisfy the annual deductible, additional services cost substantially less. After you blow past your out-of-pocket maximum, everything is free!

Dental insurance actually has the least problem because it usually has a low annual cap. My dental insurance pays maximum $2,000/year. This problem is much more pronounced in medical insurance. I have seen many ads for devices that prominently mention they are covered by Medicare. As in the popular saying, “Why rob a bank? Because the money is there!” billing insurance through price-insensitive consumers is a game simply because the money is there.

After my dental appointment I discovered I could download audiobooks from my public library with the Libby app. I listened to the audiobook Catastrophic Care: Why Everything We Think We Know about Health Care Is Wrong by David Goldhill. It made me re-think a lot about healthcare and health insurance. The author gave a very good analysis of what’s going on from a microeconomics angle. It challenged many assertions I used to assume to be true.

Some highlights from the book:

1. We give healthcare a pass and treat it as if it’s on its own island where the economic laws for everything else don’t apply.

We talk about healthcare cost not healthcare prices, accepting the cost for what it is. We talk about healthcare benefits, thinking someone else is paying for us, when we collectively must pay everything for everyone.

2. We think health insurance is the only way to cover healthcare.

We have true catastrophic risks in healthcare (getting cancer, serious injury, …) and we have expected expenses (child birth, non-catastrophic illness, …), but we use a single tool — health insurance — to handle both. Outside healthcare we use insurance for unpredictable catastrophic risks and we use saving and borrowing for expected expenses.

3. We think healthcare is the best way to achieve good health.

Education, income, diet, exercise, etc. all affect health but the government earmarks huge spending only on healthcare. Through Medicare, Medicaid, and tax subsidies for health insurance, citizens become the conduit to funnel money to the healthcare industry. Spending on healthcare crowds out spending on other things that improve people’s lives.

4. Let consumers drive their healthcare spending.

Collectively we already spend a lot of money on health insurance, including Medicare and Medicaid. Expanding health insurance only makes healthcare more expensive. If we just give the money to people and let people drive their healthcare spending, we might achieve better results at a much lower cost.

Before you read the book or listen to the audiobook, you can also watch this interview of the author by Malcolm Gladwell.

David Goldhill’s suggested policy solutions may be politically infeasible at the moment but I like his economic analysis of why healthcare and health insurance are so expensive. Before public policies change, consider getting the least expensive insurance and saving the difference for out of pocket expenses. As I discovered recently, it’s less expensive to pay my doctor out of pocket than paying the extra insurance premium to have her in-network.

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Author: Harry Sit

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