Montreal, September 15, 2005 • No 158




Bradley Doucet is a writer living in Montreal. He has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness.




"America's health care system is second only to Japan… Canada, Sweden, Great Britain… well, all of Europe. But you can thank your lucky stars we don't live in Paraguay!"


- The Simpsons, Episode 70, 'Homer's Triple Bypass'



by Bradley Doucet


          Contrary to what writers of The Simpsons might think, Canadian health care is far from perfect. Waiting lists are too long, and emergency rooms are overcrowded. If it is true that justice delayed is justice denied, surely the same can be said about delayed medical attention.


          It may seem strange, though, to ask dissatisfied Canadians to look south of the border for inspiration on the health care file. After all, many Americans are also dissatisfied with their own health care system. The media periodically remind us of the forty million Americans (give or take a few million) who are without health insurance at any given time. Leaving aside for the moment the much-needed caveats and qualifiers that should be attached to that scary statistic (see "Two myths about the U.S. health care system"), it's clear the American system has its problems too.

          Nevertheless – and even though it means giving some degree of credit to the current batch of Republicans – it seems as though Health Savings Accounts (HSAs) might just be an idea with merit. Introduced by Congress in 2003, HSAs combine high-deductible insurance for catastrophic events with tax-free savings accounts that can be used to pay for routine health care costs. Some critics, seemingly intent on obfuscating the issues, have gone out of their way to give HSAs a bad rap. On the other hand, boosters like President Bush may be exaggerating the benefits. Still, with more decision-making power in their own hands, it rings true that health consumers will demand both lower costs and improved quality, so maybe Canada should indeed take a cue from the United States and try HSAs.

Moral Hazard

          Not everyone thinks HSAs are a good thing. In a recent New Yorker article entitled "The Moral-Hazard Myth," Malcolm Gladwell writes that HSAs represent everything that is wrong with the American system. Gladwell is the author of the best-selling book The Tipping Point, in which he argues that ideas – good or bad – sometimes take hold very quickly and suddenly, like an epidemic. In the case of HSAs, the idea that has taken hold is that of moral hazard.

          Moral hazard is the seemingly paradoxical effect that insurance can have actually to increase risky or wasteful behaviour. By mitigating the negative consequences of one's risky behaviour, insurance makes that behaviour more attractive – or less unattractive – to some degree. It might sound funny to say that people with, say, house insurance will be less careful about turning off the stove when they leave, but stated in the negative it sounds more credible: people without house insurance will be somewhat more careful about turning off the oven when they leave (all other things being equal) because they have a lot more to lose from a house fire. All insurance has this perverse effect. Of course, the benefits of having house insurance still outweigh the costs of moral hazard.

          The problem, though, is magnified by the fact of third-party payment. If, in addition to not paying the cost of replacing one's belongings, one is not even paying the cost of the insurance itself, this further reduces the negative consequences of risky behaviour. Third-party payment also leads to an increase in wasteful behaviour. When the bill is being paid by someone else, be it taxpayers (as it is for Canadians and for elderly or poor Americans) or employers (as it is for the bulk of Americans and for Canadians in the case of things like dental), we are more likely to demand the Mercedes plan than if we had to pay for it directly from our own pockets.

Two interpretations

          Gladwell does not deny that moral hazard is real and worthy of study by economists. Rather, he suggests that it is wrong to apply it to the concept of health insurance. He writes that the moral hazard argument would make sense "only if we consume health care in the same way that we consume other consumer goods, and to economists like [John] Nyman this is plainly absurd. We go to the doctor grudgingly, only because we're sick." It is true that some people seek medical attention grudgingly, and the effect of this is surely to counter the moral hazard effect, so this argument is at least plausible, on the face of it. The real question is how strong each of the two competing effects is.

"In its own way, the American health care industry is almost as paternalistic as its Canadian counterpart, with predictably poor results."

          Gladwell brings up a study carried out by the RAND Corporation in the 70s, which randomly assigned families to health plans with varying levels of deductibles. Gladwell writes, "As you might expect, the more that people were asked to chip in for their health care the less care they used. The problem was that they cut back equally on both frivolous care and useful care." Dr. David Gratzer, a Toronto physician and the author of Code Blue: Reviving Canada's Health Care System, has a different take on that same study. In a 1997 article on the Canadian and U.S. Health care systems, he writes that the study concluded that "free health care results in costs 40% higher than systems with user fees – but practically no change in health outcomes." Maybe the jury is still out on this one.

Health Savings Accounts

          Gladwell is not only denying that moral hazard makes people wastefully overconsume health care. He himself is concerned with the exact opposite problem: the plight of the uninsured, who are at risk of getting too little health care, not too much. He peppers his article with anecdotes of sorry individuals whose teeth have rotted out, and one guy whose broken hand bone was never fixed. These stories are disturbing, but they merely point to a problem, not to a solution.

          It is true that some Americans have few options: the working poor are sometimes not poor enough to qualify for subsidized health insurance but not wealthy enough to afford private insurance. In giving short shrift to HSAs, though, Gladwell dismisses a tool that could help address this very problem, because if HSAs can in fact help rein in soaring costs without compromising quality (and maybe even improving it), that will make health insurance less expensive, which would be especially good for the working poor.

          To be fair, Gladwell does give an accurate description of the way HSAs work – high-deductible insurance for catastrophic events combined with tax-free savings accounts for routine health care costs – but the discussion that follows leaves a lot to be desired. He focuses on the distinction between social insurance (in which the healthy and the sick pay roughly the same amount) and actuarial insurance (in which those who engage in riskier behaviour or have a pre-existing medical condition will pay more). HSAs "represent the final, irrevocable step in the actuarial direction," he writes dramatically, but while HSAs may be actuarial, this is hardly their defining characteristic.

          Worse, Gladwell writes that Americans with Medicare (a social-insurance model) are getting "the security of being insulated against the financial shock of serious illness." This is seriously misleading, for it implies that people with private insurance are not being insulated against that very same shock.

Spreading Risk

          The purpose of insurance is to spread risk around. Gladwell writes that the basic question we should be asking ourselves is "Do you think that this kind of redistribution of risk is a good idea?" but this question is beside the point. Of course it's a good idea, which is why HSAs apply only to routine costs, with the high-deductible insurance continuing to spread risk, just like every form of insurance. What makes HSAs different is that they make explicit the difference between routine and risky behaviour. There is no such thing as the risk of having to get one's teeth cleaned. Insurance that claims to redistribute this "risk" is not insurance; it is simply income redistribution that dares not speak its name. To fight against HSAs is to fight to preserve this income redistribution, which is a position Gladwell and others are free to defend, but to do so in the name of preserving risk redistribution is a logical fallacy known as a "bait and switch," and it is either disingenuous or seriously confused.

          There are so many options one can consider when thinking about health care systems: funding (paid for by taxpayers, employers, or individuals); deductibles (zero, low or high); coverage (including routine costs or limited to actual risks); social-insurance model or actuarial model. In his enthusiasm for universally taxpayer-funded, zero-deductible, cover-every-routine-cost, everyone-pays-the-same health insurance, Gladwell has made it harder, not easier, for us to clarify the various aspects of the debate.

Why Not Try Freedom Instead?

          HSAs might help control costs and raise quality, but even Dr. Gratzer, who thinks they're a good idea, doesn't think they can do it alone. Writing in the Spring 2005 issue of The Public Interest (see "What ails health care"), he points out that while Americans think of health care as largely untouched by government, "In fact, the opposite is true – health care is riddled with laws and regulations that govern financing, billing, and basic practice." It is in fact the laws in some states mandating extravagant options (like acupuncture) and forbidding interstate competition that make health insurance prohibitively expensive for many Americans. In its own way, the American health care industry is almost as paternalistic as its Canadian counterpart, with predictably poor results.

          Instead of trying to decide here and now whether HSAs are a good idea, why not allow them to compete with other forms of insurance in the open market? If one is clearly better than the others, it should be easy to convince people to choose it. If it is not clear, some will choose one and some another and a great market experiment will tell us the answer soon enough. But this is just what a single, monolithic, government-controlled monopoly does not allow: innovation, competition, the rewarding of good ideas.

          In fact, Malcolm Gladwell specifically warns against the dire consequences of "making" people choose insurance plans that suit their needs: the sick will end up paying more than the healthy. "The days when the healthy twenty-five-year-old subsidizes the sixty-year-old with heart disease or diabetes are coming to an end," he predicts ominously. At least in this sentence, it is clear that the redistribution of risk is not what is being advocated.

          It is no small wonder that Gladwell dislikes the current American health care system. It's a mess. But he wants to hand over the whole damn industry to the very people responsible for messing it up. As usual, government intervention has caused problems that beget more government intervention. Instead of invoking the power of government to enforce one single vision of how things should work, let's give people back the power of choice, and see what rises to the top.