• Insurance is redistributive: contraceptives edition

    Via an Avik Roy retweet, last night I read this from Loren Heal:

    My pithy reply deserves some follow-up.

    I really don’t mean to pick on Loren. But his tweet may reflect a widespread misunderstanding, so let me explain.

    If you’re in a hurry, all you really need to know is that health insurance is┬áredistributive. Often people say the healthy subsidize the sick. Slightly more accurately, the below-average utilizers subsidize the above-average ones. This is most obviously true for community rated products, those that charge the same premium to everyone, but it is also true within rating bands for experience-rated products. This is how insurance works. If you don’t use much care, your premium dollars are helping others use more.

    Most of us accept this deal on “there but for the grace of [deity] go I” grounds. Some find this anathema to their libertarian spirit. Some have more nuanced views, such as “I’m cool with it for catastrophic coverage only, but please pay for your own Band-Aids.” ┬áBut I digress …

    Taking contraceptives as a case study, it is very likely that almost no men use covered contraceptives. Same goes for most women above or below child-bearing age. (There are some health conditions that may warrant use even for those not likely to become pregnant.) Since they all pay premiums — and for community-rated products, the very same premiums — the cost of contraceptive coverage under the plan is spread out over many more policyholders than actually consume them.

    The non-users subsidize the users, who clearly benefit with a lower net cost of contraceptives than they would otherwise pay without insurance. Thus, the assertion that nobody saves from insurance coverage of contraceptives is plainly false.

    What Loren could have tweeted is that, in aggregate, the cost of contraceptives is higher under insurance than not. The support for this might be that one is paying the insurance company for more than the cost of the pills or devices. One is paying for claims processing and various other overhead and profit. That, perhaps, inflates the cost by 10-15% or so.

    But even this ignores a benefit of coverage for contraceptives. Insurers can buy in bulk, which itself lowers the cost. The discount can be substantial, offsetting all or most of the insurance loading fee.

    Also, by providing contraceptives with no charge at the point of purchase, more people will use them than would otherwise be the case, which itself increases overall costs. Still, more than half of individuals with coverage won’t be using contraceptives (of the type I presume Loren was tweeting about, which would exclude condoms): all men and many (most?) women not of child-bearing age. So, once again, with the non-users subsidizing the users, the users are getting a good deal, even if there are slightly more of them. Notice I am agreeing that aggregate costs due to increased utilization would be higher, but that is not what Loren tweeted about.

    One more argument I might make is that the cost of contraception is lower than the cost of pregnancy. So, promoting contraception use through coverage reduces everyone’s premium. Apparently, there is some uncertainly about this. Not having time to judge all the evidence for myself, I’ll not make this argument. But that doesn’t mean it is wrong, and especially not at some non-zero copayment level for contraceptives.

    But, back to my main point, in terms of the redistribution from the non-users to the users, what applies to contraceptives applies to coverage of other services. So, generalize at will. On the other hand, in terms of whether it is (or isn’t) clearly cost saving in aggregate (due to prevented pregnancies), what may hold for contraceptives may not hold for other mandated benefits. Generalize at your own risk.

    For all that, one can certainly debate whether insurance should be so generous as to cover contraceptives (or anything) at the zero copay level. I’m not addressing that debate here. See: value-based insurance design. One can also debate whether high-value benefits warrant a mandate. (If they pay for themselves, insurers should already be offering them. In fact, for contraceptives, most do.) Again, I’m not getting into that. Feel free to raise these issues in the comments, but don’t pin a position on me.

    UPDATE: I inserted the paragraph on the increased utilization effect of coverage.


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