If you go to dinner with a large group of strangers and you know that the bill will be split evenly, aren't you more likely to order pricier dishes and drinks than you would order if you, and you alone, were responsible for picking up your full tab?Don Boudreaux is talking largely about socialized medical programs like Medicare and Medicaid, but it applies with equal force to private health care plans.
The answer is surely "yes." Let's say that you'd be content to order the pork chop priced at $15, but would get even greater enjoyment from ordering the rack of lamb priced at $25. If you alone were responsible for your tab, you'd order the lamb only if it is worth to you at least the extra $10 that it costs. So suppose that you value the lamb by only $8 more than you value the pork chop. In that case, you'd order the pork chop. You wouldn't spend an extra $10 to get extra satisfaction worth only $8.
But if the bill is evenly shared among, say, 10 diners (yourself and nine others), then if you order the lamb, your share of the higher bill will be only $1. That's $10 split evenly 10 ways. You'll order the lamb.
You might think that this sharing arrangement is good. After all, in this example, the cost to you of getting something you valued more (the lamb rather than the pork chop) was reduced. It became sensible for you to order the lamb.
Look more deeply, though. What happened is that society (here, the 10 diners) was led to supply something that wasn't worth its cost. The lamb was worth to you only an additional $8, but to make it available to you, society spent $10. Ten dollars were used to raise the welfare of society by only $8. (You're a member of society, so any improvement in your welfare counts as an improvement in the welfare of society.) That's a waste of $2.
You are better off, but the group is worse off.
Now look even more deeply. Everyone at the table faces the same incentives that you face. You're not the only person who will order excessively costly dishes and drinks. Everyone will. The entire table over-consumes. The total bill is higher -- even your share is higher -- than it would have been had the bill not been split evenly. Resources are wasted.
Such sharing of our medical-care bill takes place now on a massive scale. It is impossible to see how expanding this sharing will reduce the bill.
In private health plans, the healthy subsidize the sick, which is fine, in so far as it goes. But when the true cost of health care is hidden by low co-pays for routine visits, there is no incentive for us to limit our consumption or make smarter choices.
In a true insurance example you have the liability sections on your car insurance. If you drive safely, avoid accidents, don't speed, etc., you get a smaller insurance payment. If you drive a safe car, you get a discount. The idea is that if you make choices that decreases your insurance needs, you get the benefit of not having to pay for expensive insurance. (It is not a perfect system since you do have to have some coverage for the uninsured driver).
But with health insurance, because other people are footing the bill for your health care, there is no incentive to take steps to make yourself healthier. For example, I don't smoke, do drugs or engage in risky sports like motorcycle racing. But if I have a co-worker who does, he and I pay the exact same price for health insurance. Thus, there is little incentive (other than personal) or benefit (other than personal) for living a healthier life. I don't begrudge people who smoke, drink or race motorcycles (one hopes they aren't drinking and racing), for those are their personal choices. My problem is that I don't want to pay for their health care.
but because there are no incentives or benefits in any health care scenario, we as a society tend to over use. If you want to end overuse, start making it worth people's while to limit both their consumption (a refund on your premium if you make no more than X number of visits to your doctor in a year) and for choosing healthier living, i.e. discounts for non-smokers or refunds no matter what plan you are on.