Health Insurance

Why not shop around?

In a blog post (“Sicko Sticko Shock“), Marc Cooper discusses his recent hospital bill for a heart procedure of “moderate complexity.” He finds that the amount billed was $116,749. However, the procedure was much cheaper for Mr. Cooper since he had Blue Cross insurance. “In a column lateral to the “amount billed” I then find the “amount allowed” i.e. the amount that Blue Cross is actually willing to pay the hospital. That amount: $4730, or less than 4% of the total charge.” Further the $4730 was paid for entirely by his insurance company. Mr. Cooper wonders how he could have paid the $100,000 if he wasn’t insured. He concludes that “the system is absurd, insulting and inhuman.”

The Coyote Blog states (“You better shop around“) that the conclusion shouldn’t be that the current health care system should be scrapped, but instead that “we should find a way to have individuals experience both the cost and benefits of care, because only they can make these tradeoffs for themselves and shop around for better options.” The Coyote Blog makes the following analogy:

Sure, this [hospital bill] looks like a rip-off. But if you went in to buy a car, concerned only with the quality of the car, and never asked the price and then got a bill for $100,000 a few weeks later, would you be surprised? Would anyone give you sympathy if you complained you paid $100,000 for the car but admitted you never asked what the price was? So this is a dead-obvious outcome from the health care system we have, where no one has the incentive to shop.

This is of course the moral hazard trade off with insurance. People buy insurance because they are risk averse and fear an extremely medical care…or care repairs…or home repairs…or in whatever other areas people buy insurance. When one buys insurance, however, there is the moral hazard problem that people will not shop around for a better deal, they may not take as many precautions to protect their health if they know their insurer will pay for treatment. However, insurance is economically optimal when people are risk averse. Finding the correct balance between insuring people against losses while minimizing moral hazard is a delicate and difficult matter to resolve empirically–especially in the health care setting with so much asymmetric information and uncertainty.