The face that launched a thousand co-pays... Source: Megan McArdle
The face that launched a thousand co-pays... Source: Megan McArdle

Last February, on Valentine’s Day, the Official Blog Spouse and I took custody of an eight-week-old bullmastiff puppy named Fitzgerald. The first thing we did was to drive him home from Indiana and install him in the Stately McSuderman McMansion. The second thing we did was to buy him pet health insurance.

"Now wait a minute,” longtime readers will say, “haven’t you spent a lot of time arguing that health insurance doesn’t necessarily make us any healthier? Weren’t you the one who wrote that comprehensive, soup-to-nuts insurance isn’t insurance at all, but a spectacularly inefficient payment plan?”

Well, yes. Let me explain.

For starters, we didn’t get Fitzgerald comprehensive, soup-to-nuts coverage. As far as I know, no such thing exists for dogs. What we got him was a basic, high-deductible policy that costs $60 a month. The deductible is $1,000 per condition, not per year; after the first $1,000, everything is covered. There is no coverage for basic services like annual vet exams, vaccinations, heartworm, or whatever.

On the other hand, there is coverage for things like chemotherapy and kidney transplants; this isn’t a ripoff. It’s insurance that covers some very expensive health conditions with no lifetime caps; they’ll even give us hydrotherapy if he turns out to have hip dysplasia. We view the insurance as very cheap for the price. Especially when you consider the education it’s given me in how to think about health care.

The first thing I asked myself, when we got the price quotes, is why it’s so cheap. The answer seems to be twofold. First, a lot of medical interventions just can’t be done to dogs. Fitzgerald was in a litter with a lot of preemies. We met one of the sickly ones, a really sweet puppy with a heart condition that sapped his energy. He’d start for you, get halfway across the floor, and have to rest while his brothers and sisters bumbled over him, and your heart broke along with his. The breeder was taking him to Purdue to see if it was a simple valve problem that could be fixed. It turned out that it wasn’t. I think everyone who got a puppy from that litter cried when we heard that little puppy had to be put down.

The puppy’s heart problem was something that could be fixed -- in humans. But to fix it, you need a heart-lung machine. Those don’t exist for dogs. Ditto expensive neonatal intensive care units; the breeder had a human incubator that she used for the puppies, and that’s pretty advanced. In fact, pet health insurance generally won’t cover a puppy until they’re eight weeks old. Costs are low compared with human health insurance because the frontier medicine, like complex heart surgery and intensive interventions on premature babies, not only doesn’t get done, but can’t get done.

The second reason insurance is so cheap is that people are reluctant to torture their pets for a scant chance at keeping them alive. Oh, sure, people do chemo on their dogs that they later regret. But most of them don’t keep doing it for years. When your pet is suffering relentlessly, you let them go. Especially since there is no elaborate government-funded system of pet nursing homes where someone can provide extended 24-hour care for a dog that can no longer walk or go to the bathroom by themselves. Since most people can’t quit their jobs to care for a sick cat, and wouldn’t want to put their cat through that year of misery anyway, much of the expensive “end-of-life care” we hear about falls out of the health insurance system.

So pet health insurance is cheap in part because we don’t try as hard to keep our pets alive, because we don’t have as much fancy and expensive equipment to do so, and because we don’t provide nursing home coverage or neonatal care -- the two most expensive periods -- for sick pets. We still do a lot of very expensive things to them, from MRIs to joint replacements. But eventually, we stop. So insurance coverage remains affordable.

But does that make it a good buy? After all, insurance companies have to pay out less in claims than they take in in premiums; otherwise, they’d go broke. So why are we paying $600 a year for pet insurance?

One possibility is that we have what economists call “asymmetric information” about our dog -- we know he’s likely to be sicker than other dogs, so we’re trying to take advantage of the insurance company by enrolling him. But that’s not the case. We enrolled him at 8 weeks, before we knew much of anything about him, except that he was brain-meltingly adorable.

A more plausible explanation is that we’re protecting ourselves from financial catastrophe. Here’s how I explained why insurance is still a good deal, even though you should, statistically, expect to pay in more than you get out:

“In some sense, then, the expected value of your insurance premium is negative.

“But insurance does make everyone better off, because it covers very large costs that most people would have trouble paying. Even most really good savers would have a hard time replacing the value of their house, or paying off a $250,000 judgement for an auto accident. The expected value of those incidents is very, very negative -- more than just the value of the cash, you have to factor in the horror of being homeless or bankrupt. When you factor in the homelessness, the bankruptcy, and so forth, the slighly negative expected financial value is more than outweighed by the positive value of being protected against personal catastrophe. Not to mention the peace of mind one gets from not having to worry about homelessness, etc.

“This is the magic of risk pooling. But notice that it's the catastrophe which makes insurance a good deal. You wouldn't get much value from buying 'grocery insurance.' At best, you'd be paying an extra administrative fee to route your routine expenses through an insurer, rather than paying them directly. At worst, you'll end up with bills skyrocketing as all sorts of perverse incentives appear. After all, if the insurer is paying all your grocery claims, why not load up on filet mignon instead of ground turkey?”

But actually, that’s not it either. We’re reasonably thrifty, and capable of saving enough to cover whatever health care might benefit him. So why are we buying the insurance?

So we don’t have to choose.

When the vet tells me that my dog has cancer, I don’t want to be comparing another two years of Fitzgerald’s life to the cost of a new patio, or whatever else we might spend the money on. I don’t want financial considerations to enter into it. I want to be thinking about only one thing: Will Fitzgerald will be better off with treatment, or is it time to let our pal go?

Well, actually, I don’t want to think about it. I’m kind of tearing up as I write this. But I certainly don’t want to be thinking about anything else, like whether it’s worth it to spend $5,000 for a shot at an extra year of life. I’m not saying I wouldn't be willing to spend the money -- we spent about that on back surgery for my last bullmastiff, and he had another four years to enjoy it, and I’m glad I did it. But I don’t want to think about whether I want to spend it.

That’s why pet insurance is a bargain. It means that you never have to weigh your pet’s life against your bank balance.

That’s also, of course, what we want from human health insurance. That’s why there is a constant push -- from both consumers, and governments -- to include ever more treatments, to push deductibles and copays lower, to include free birth control and wellness visits and so forth. We are horrified at the thought of having to make a personal, financial choice about whether a treatment is worth it.

Oh, there are distributional questions too -- some people couldn't afford much treatment on their low-wage jobs. But I’m talking about the insurance offered the middle class, who can afford acupuncture and chiropractic ... and even experimental chemotherapy, if they’re given enough years to save. Almost by definition, the middle class has to be able to afford the treatments that they’re using, because the middle class is where we get most of the insurance premiums and tax revenue to pay for the treatments they’re using. Cost insulation is not to protect them from costs they can’t afford; it’s to protect them from decisions they’d rather not make.

And if they were dogs, this might work. But no one suggests that we put Grandma to sleep when she goes off her food and can’t chase a ball any more. (Nor should they.) All that dazzling, expensive medical capability gets used, and expanded, and used even more, because it’s no one’s job to consider the price. Which is why ultimately, when it comes to human health care, there is no escaping the need to make some painful decisions.