John Cogan on Improving the Health Care System

Episode Summary

Executive Summary: John Cogan argues that U.S. health care is distorted by third-party payments, tax subsidies for employer insurance, and heavy regulation, all of which weaken price sensitivity and encourage overconsumption of low-value care. He cites the RAND experiment, state mandates, and ERISA as evidence that reform should level the tax playing field, expand competition, and reduce incentives for costly, unnecessary care.

Main Topics: Third-party payment and distorted incentives (Priority: 5/5): Most medical care is paid by employers, insurers, or government, so patients do not bear full costs and consume more routine care than they otherwise would. Tax exclusion for employer-sponsored insurance (Priority: 5/5): The tax code favors insurance purchased through employers over direct, out-of-pocket spending, pushing people toward low-deductible, high-coverage plans and raising total costs. RAND health insurance experiment (Priority: 5/5): The RAND study is used to show that lower cost-sharing increases utilization, but for most people does not improve health outcomes, implying much spending is low-value. Regulation, mandates, and state insurance rules (Priority: 4/5): State benefit mandates and premium controls raise insurance costs, reduce competition, and can price people and small firms out of coverage. Employer-based insurance and ERISA (Priority: 4/5): A federal pension law created a self-insurance option for large employers, shifting power away from state regulation and unintentionally fueling more state-level mandates. Policy reforms and market-based solutions (Priority: 5/5): Cogan recommends leveling the tax treatment of insurance and out-of-pocket spending, expanding federal interstate insurance competition, and relying more on market incentives.

Key Arguments: Health care is not fundamentally different from other goods; what makes it seem special is that consumers often do not pay directly for it. When consumers use third-party money, they have weaker incentives to shop for value, so low-value care expands. Health care technology has often become more expensive rather than cheaper because insurers and patients do not demand cost-reducing innovation. Insurance coverage for routine care should be less generous; catastrophic, unpredictable costs are the best case for insurance. The RAND experiment showed higher cost-sharing reduced utilization substantially without worsening health outcomes for most participants. The tax exclusion for employer-paid insurance is a major driver of high premiums and excessive coverage, estimated to account for about 20% of insurance costs. State mandates for specific benefits and providers increase premiums for everyone, even those who do not want the added coverage. Premium controls in the small-group market can push healthy firms out of the market, worsening risk pools and raising costs further. The uninsured do use care, but their net cost burden on the private system is relatively small compared with the political attention it receives. A federal market for insurance could increase competition and reduce state-level regulatory capture, especially by allowing small employers and individuals access to broader pools.

Data Points: Share of medical spending paid directly by individuals: about 1/6 (roughly 16 cents on the dollar) - Cogan says most health care is paid by employers, insurers, or government rather than out of pocket. Employer purchase of private health insurance policies: 9 out of 10 - He says most privately purchased insurance policies are obtained through employers. Estimated effect of tax exclusion on insurance costs: 20% - He cites economists’ modal estimate that the tax code accounts for about one-fifth of higher insurance costs. Number of health insurance mandates across states: 1,500 - He notes that state laws collectively impose many benefit and provider mandates on insurers. California mandate cost increase for women age 30-34: 50% - He says maternity-benefit requirements can raise premiums substantially for women in this age group. Estimated increase in California insurance costs from regulation: 25% to 30% - He states overregulation in California can raise insurance costs by this amount. People without insurance during the year: 40 million - He cites the number of Americans who go without insurance at some point during the year. Societal spending on health care for the uninsured: $100 billion per year - He summarizes a Health Affairs paper estimating total spending on the uninsured. Government charity care spending for the uninsured: about $40 billion per year - He breaks out public spending on charity care, clinics, and special payments. Private burden imposed by the uninsured: $5 billion to $10 billion per year - He says this is the residual cost after accounting for direct spending and government support. Uninsured share of private insurance costs: less than 1% to as much as 4% - He argues the uninsured are a relatively small driver of private insurance costs. Stanford emergency room collections cited: about 50 cents on the dollar - Russ Roberts mentions a Stanford ER experience to illustrate uncompensated emergency care. Age range mentioned for maternity mandate example: women aged 30 to 34 - Used to show how specific mandates can disproportionately raise premiums for certain groups.

Pivotal Quotes: "nobody spends somebody else's money as wisely as they spend their own." — John Cogan: Used to explain why third-party payment leads to overuse and inefficient consumption. "The tax code alone accounts for 20% of the higher costs of insurance." — John Cogan: Cogan describes the tax exclusion for employer-sponsored insurance as a major source of inflated costs. "You have managed to unite the AFL and the Chamber of Commerce." — Congressman Jack Brooks (as quoted by Cogan): Cogan recounts a Reagan-era proposal to cap the tax exclusion for employer-sponsored insurance.

Implications: The conversation argues for lowering insurance distortions, expanding consumer price sensitivity, and increasing competition. If adopted, reform could reduce premiums and overuse without harming health outcomes for most people.