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02/13/2005

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TheWinfieldEffect

I'm eager to read the posts, as I don't see much to disagree with.

Adam Langley

"Concern has been expressed that increased demand for drugs may increase their price. That is unlikely. The principal cost of drugs is R&D. The manufacturing cost is slight"

But the cost isn't set by the cost of production and development, but by its value to the person who buys it. Assuming that the drug is under patent protection the cost should rise if people are willing to spend more for it.

If people have $250/year `to spend' then they will be willing to spend more on drugs, so I would expect the cost of drugs to rise.


AGL

Steve Herting

Perhaps, as in the previous discussion on Social Security, privatization could be an alleviating factor for Medicare as well.

Simplistically, private health insurance companies maximize profit by attempting to control several dimensions, among them:

1. The numbers of payers and amounts of their premiums. Increasing market share by marketing and careful adjusting of premiums provides a reliable inflow of cash.
2. The numbers and amounts of payouts. Tightening the outflow is managed by enforcing standards, delaying payouts, negotiating rates with providers, restricting the number of providers and generally restricting outflow.
3. Investing the float between premiums and payouts. The float that is generated in the first two dimensions is put to work in financial markets.
4. Reducing the risk for the client. Here the insurance company attempts to make payouts less likely by teaching preventative care (and reducing payouts).

Perhaps the privatization opportunity for Medicare could be in investing the float, similar to the way private insurance companies invest in the marketplace. There could be a Medicare funding investment board judiciously buying securities and equities with Medicare funds, in a way similar to public and union pension funds investing in equity and security markets. Imagine the impact on markets with this huge influx of funding.

Thanks for the very thought blog.

Phil

However, these temptations to free ride provide an argument for compulsory health insurance rather than, as often argued, for socialized medicine.

What, apart from the name, is the difference between "compulsory health insurance" and "socialized medicine"? (Assuming we're talking about "single payer" schemes like that of Canada, and not "single provider" schemes like Britain's NHS.)

Daniel Chapman

Yes, I thought the same thing, Phil. If everyone is required by the government to purchase health insurance, I assume government-imposed price controls would be necessary to prevent gouging. Wouldn't we have a government controlled health care system at this point?

young and taxed

Can someone please explain how a comprehensive health care insurance market with private insurers would work in the real world? I understand that as a rule of thumb, markets are more efficient when there is greater information available to the participants. Isn't the opposite the case with health insurance in that insurers will use information to cherry pick desirable customers?

If insurance is about pooling resources and thus spreading risk, who is going to insure the riskiest among us? At some point, certain customers will be undesirable to insurers who are in the business of making money. So with a fully private health insurance system, won't there be a group of the uninsurable (at a profit)?

Also, it seems to me that the provision of health care and services is unlike other products in that demand for such is not efficiently satisfied. If one becomes injured or sick, one simply does not shop around, especially one's life is at risk.

RWS

(1) Requiring medical insurance for all, or even catastrophic insurance, is easier said than done. Medicine is critically different from drivers liability insurance, in that driving is considered a privilege, whereas mandatory insurance for all, to abate the free-riding problem, is, well, mandatory. Many, many persons, often though not always indigent, use public transportation, use mopeds, or let others give them a ride when they do the rare traveling outside walking distance. Those that choose to drive without insurance can be jailed for electing to engage in an illegal activity. I do not see how to codify an effective opt-out provision from this requirement. We cannot jail people who refuse to find health insurance. That would not even be constitutional, I would think. Barring that, a lot of people would not get health insurance. Requiring health insurance as part of employment would greatly increase the use of black market labor, part-time positions that are exempt from such a requirement, etc.

(2) My brother and I (Im a law clerk, and hes a medical student) were talking about this yesterday. One of the big problems with moving towards universal care is how to define the parameters for health care to which all would now be entitled under the requirements. The same problem exists with the minimum wage and any other market control. Those in the health care field understandably feel a strict, fiduciary duty to their patients to stop at nothing to cure them, so far as they can. That belief can translate into an inflated belief in the efficient amount of health care, such that everyone becomes entitled to the latest and greatest medicines. That entitlement, in turn, would facilitate a major growth in the supply of wonder treatments. Such inefficiency may already exist, as we see in the extraordinary cost of the last six months of life or so. Until we see health care as more of a commodity instead of a right, these costs will continue to spiral upward. Regrettably, making it into an entitlement would feed that problem, and the public choice problem of health care providers wanting to see the government support/subsidize these fancy treatments would create inefficiently high levels of care. No one wants to make those choices, and yet they will have to be made somehow, or we could easily cripple our economy in the coming century. Health care as 15% of GDP already strikes me as incredibly high.

RWS

Regarding the economically confusing low deductible phenomenon: I believe there is a good economic rationale for it. A low initial deductible encourages people to visit the doctor with little up-front cost. Encouraging that visit constitutes a powerful cost-reducing mechanism, because it helps catch medical problems early, before they fester. Preventive medicine is perhaps the best cost-saving possibility on the platter today, by far. A close friend who is a physician recently told me that he thought there should be an obesity tax or some sort of extra cost for health insurance for the obese, given that obesity complicates just about every health treatment he does, resulting in greatly increased cost. Same with smoking and other such poor behaviors.

Im a good example of the problem with a high deductible. We federal government employees have access to GEHA, which allows a very high deductible for the lowest cost plan. I was ecstatic. Armed with my microeconomics textbook, I triumphantly chose that and bragged about it to my economics major buddy. Well, now I have a small problem that may be neurological in my knee that I have not had checked out in six months. Brother tells me Im crazy, because it could become a major, major problem. I keep putting it off, because I know in the back of my mind that Ill have to pay for the whole visit.

Hence the donut coverage: encourage initial visits to keep costs down for irrational people like myself, but require out-of-pocket for potential treatments to prevent people from stocking up on anything the doc might prescribe without regard to cost. Then, have the coverage go up again for catastrophic health costs. Btw, I just scheduled an appointment about the above.

Corey

"What, apart from the name, is the difference between "compulsory health insurance" and "socialized medicine"? "

In compulsory health insurance, 3% of the GDP is funneled through the market via private corporations, with all waste and private profit taking labeled as a transaction cost. Contractarians preach the religion of free will, and the CEO of Pfizer buys a helicopter.

In socialized medicine, 2% of the GDP is taxed and spent directly on provider benefits, with costs controled by the administrative agencies, and no profit taking. The CEO of Pfizer only gets a limo, but his employees can afford to take the drugs manufactured, and no HMO hassles them about their claims. The extra 1% of GDP is spent on drug research or schools.

David

Judge Posner has some interesting proposals, but I have a few questions:

1. If we abolish medicare, would private insurers really agree to cover the elderly? I would guess that the premiums would be astronomical, or the coverage would be minimal, or both. Probably the only way to make meaningful private health insurance truly affordable for the elderly would be to legislatively cap the rates and require insurers to offer coverage. But then, that raises the question whether a government-run program would be more efficient. A private system does not necessarily work better than a public system, depending upon the problem and the goal. For instance, administrative costs for health care in the U.S. consume about 30-40% of total spending. In single-payer systems, the figure is closer to 3%, I believe. I don't know the overhead costs of Medicare, but I assume they are less than those of private insurers. That savings alone might make it worthwhile.

2. If our goal is to reduce the cost of our health care system, some other reforms might have more of an effect:

First, there is not truly a free market in medical services. Patients do not know the cost of health care or drugs up front, have no access to information regarding the quality of doctors, and cannot truly make informed choices. This is a recipe for gouging. If patients could compare the costs of doctors, hospitals and drugs (perhaps online), and could research quality control information as well, we could have a truly competitive market. Doctors, hospitals, and drug companies might be forced into bidding wars as a result, but isn't that the free market? Price should be negotiated up front, as is true with every other contract for goods and services. Of course, subsequent discoveries may increase the price of treatment, but that can be negotiated up front as well.

Second, patents of drugs arguably last too long and are awarded for drugs that are not innovative. Thus, drug companies can overcharge for too many years. The R&D costs are not nearly as high as companies claim. Simply put, Pfizer, BMS, etc. make too much money at the expense of ordinary patients.

Third, our system of employer-based insurance makes no sense. Workers, especially private-sector workers, are at the mercy of their companies, because insurance is prohibitively expensive to purchase on the private market. Companies increasingly hire temps, "part time" workers, or "independent contractors," because they do not have to provide health benefits to those categories of workers. This fact, more than free riding, is the reason for our 40 million uninsured. We should end employer-based health insurance. Large purchasing alliances should be allowed to negotiate with insurers, preferably across state lines, to obtain reasonable rates. Consumers should all have the option of joining or forming alliances. Health insurance should be portable and should be required to cover "pre-existing conditions" (as I think it now is, largely). This would reduce the cost of insurance, make our system more sane, and reduce the number of transient uninsured. By doing so, it would also reduce the number of uninsured who must be treated at public expense.

Fourth, Medicare and Medicaid should adopt the managed care model (PPOs and HMOs) that pervades the rest of our health care system. It is a more efficient system of rationing care. However, with managed care, a strong "patient's bill of rights" is necessary to ensure that patients are not denied coverage for needed care.

With those reforms, I think that we could make the system more sane and drastically cut costs. The more intrusive remedies of socialized medicine -- which I dislike, because it limits choice -- or mandatory insurance would be unnecessary. Hopefully.

One final note: of course, any system of medical insurance will result in the healthy subsidizing the unhealthy. There is nothing wrong with that. Standing behind the veil of ignorance, none of us know what our medical needs might be. It is unjust to force people to risk bankruptcy from the twist of medical fate.

Corey

OK, 7.8 machines per million eh? Well, Finland, another country with socialized medicine, has 15 per million. Iceland has the most with 16.5!

So, if Canada uses its machines twice as often as those crazy Icelanders, we get...

THE EXACT SAME EFFECT

Better go drum up another statistic. How about asking how many MRI machines they have in Compton or Watts. Or better yet, how many people living there have any kind of health insurance at all. (I don't know if you have priced MRIs without insurance coverage, but trust me, you aren't getting one.)

Or, look at me, I've got an Engineering degree and 7 years experience. I'm in school working on a JD, but guess what, I can't afford health insurance. I just borrowed $30,000 for one year of school, and I am not borrowing another $1000 from Sallie Mae and giving it to Blue Cross for a plan that pays 50% after a $1000 deductible. So yeah Posner, I'm a "free rider!" Those thousands of dollars I paid over 7 years without ever filing a claim... that doesn't count, it is gone with the wind of my last layoff. I wish I knew who's heart bypass I paid for.

Go ahead, make me buy insurance. No one wants to be a free rider, emergency room care is horrible to deal with. Someone had better give me a job though, because you can't get blood from a stone.

I know, Posner can give us all jobs, and then we can get on the nice 100% coverage Federal health plan too! Soon we will feel so secure in our good health care, all the world will look like ungracious free riders to us too. Its all so easy when you have money! Why can't you all just have enough money? You must be irresponsible. Wait in line with the rest of the irresponsible charity cases. What, are you crying? Responsible people don't cry!

John Kelsey

I know at least a few people who have been free riders on the system involuntarily--people with existing health conditions who at some point couldn't get health insurance at a price they could come up with. My dad was one for awhile, before he went back to work after retirement. As a diabetic smoker with high blood pressure, nobody wanted to write him a policy at all. (Maybe nobody bothers quoting rates as high as would be reasonable for someone with his health conditions.)

--John

Nick

Corey, bitter much?

I think it's worth noting that in socialized health care systems such as in the EU, health care comes much, much slower than in the US, to the point where sometimes patients wait up to two years for a ride in the MRI or investigative surgery.

That isn't to say that such a system is without advantages; but it has severe flaws of its own, too.

David

John - I don't think your father should be classified as a "free rider," since he tried to get health insurance but failed. Rather, he should be considered a victim of the current system - an example of why many people support universal coverage. If an insurer were forced to cover him for the same rate as anybody else, then perhaps the insurer would lose in his case, but the system would save overall, because managed care is less expensive than acute care at emergency rooms.

RWS

Judge Posner's comment, here and in the SS discussion, about the way of seeing people as almost more like three or four people (youth person, young adult, middle age adult, senior citizen) that do not really think for the succeeding "person," pertains to the person's father above. That is a common phenomenon. Regrettably, lifetime health insurance products are not sufficiently demanded. That is what needs to happen--people need to buy their own health insurance plan that protects them as they age, and start when they are young and can get coverage.

The above 4-part person has a very high discount rate and therefore does not save that much for the future. Alternatively, one could say this is a market failure due to imperfect information, where Young Adult just does not know what the true health care forecast for himself will be.

One very appropriate solution to this problem is to attack it at its root, not the branches. A required course in the details of lifetime personal finance, such as the types of problems needing insurance and the economics of optimal saving and investing, taught in high school, would be *valuable* preventive medicine.

David

I'm all for teaching people life skills such as money management, how to save, and how to obtain health coverage. But a lifetime policy strikes me as problematic. Can many young people afford such a policy? Can they be sure that the company will be around all their lives? What if they move to another city, state, or country? What if they want to change policies because another one is better; will they be locked in, therefore destroying choice (and with it competition), which is the raison d'etre of a free market?

If we're going to require "life" policies, we may as well have government-run health insurance. The private sector just adds another layer of bureaucracy, and a lifetime policy eliminates choice, so why bother with the free market? The gov't can offer the same options more reliably and efficiently. Not that I support a single-payer system, I don't, but if we're going to destroy the market anyway, why bother with the extra trouble of private insurance?

David

I'm all for teaching people life skills such as money management, how to save, and how to obtain health coverage. But a lifetime policy strikes me as problematic. Can many young people afford such a policy? Can they be sure that the company will be around all their lives? What if they move to another city, state, or country? What if they want to change policies because another one is better; will they be locked in, therefore destroying choice (and with it competition), which is the raison d'etre of a free market?

If we're going to require "life" policies, we may as well have government-run health insurance. The private sector just adds another layer of bureaucracy, and a lifetime policy eliminates choice, so why bother with the free market? The gov't can offer the same options more reliably and efficiently. Not that I support a single-payer system, I don't, but if we're going to destroy the market anyway, why bother with the extra trouble of private insurance?

Bill

Thank you again Judge Posner for your reasoned analysis that defies conservative/liberal categorization.

I'd be very interested to read your responses to David's point on employment based insurance, though I suspect I could find your views elsewhere with a little effort.

doug

i don't understand.

You say that people want to feel like they are getting what they pay for, so they won't tolerate high deductibles. In a private system however, like magic, they won't care about getting what they pay for, so all of a sudden people will demand higher deductibles. This, of course, is the classic "liberal" mistake of thinking that people are stupid and can't make decisions for themselves (like picking politicians who will act in their interests).

RWS

David:

I don't think lifetime health insurance plans are anti-market. That is somewhat similar to Clinton's initiatives in the 90s to make health insurance more portable. Can't remember what the exact mechanism that got passed does, but that's part of it. It decouples health insurance from the labor circumstance and avoids the problem of companies not hiring full-time to avoid paying benefits. Even today, a major reason for the so-called jobless recovery appears to be the high cost of health benefits for hiring new workers.

Regarding if a company goes belly-up 20 years down the line, I asked just that question to my life insurance agent when getting a policy a few months ago. He stated that, here in NC, insurance co. bankruptcy is protected by a required reinsurance pool to which all licensed insurers contribute to bail out a defaulting company. That, to me, sounds like an efficient way to lower transactions costs & the problem of the bankruptcy stay.

I think whole life insurance is a product that can easily be crafted by the market. I researched my life insurance company carefully to see that it had an excellent long-term reputation, then went with a good one. The desire for a good reputation checks part of the bilateral monopoly problem. Second, my premiums start low and rise slowly as my ability to pay increases. For whole life insurance/annuity policies, starting early is the way to go. Same with health insurance.

Palooka

RWS,

The problem is that potential payout is known for life insurance (you buy a $100,000 or $500,000 policy), while it is highly inflationary in the case of health insurance (who is to say how much it will cost to have a heart surgery in 30 years, or who knows what treatments, such as nanotechnology, will cost when they become available). Because of this variability, companies face additional obstacles in providing long-term health insurance like you describe.

RWS

Excellent point, though a government entitlement plan faces the same uncertainties in designing and funding, and without the efficiency-enhancing aspects of the market for insurance. To an extent, choosing an insurance company is a bit like entering the market for optimal government. The insurance companies would compete for citizens (customers) based on a track record. The customer chooses the insurance company knowing that there will always be a tension between cost of the plan and the generosity of the insurance fiduciary. The same thing exists with disability insurance. I looked into the companys standards for what constitutes disabilities and whether there is an appeal process before going with themand that is a life-time fiduciary insurance contract, too. Getting disability insurance early pays off big time, rather than later, too.

This option has to be weighed against the government option, where many of the same problems arise, though with often greater inefficiency and greater potential to veer away from optimal coverage and innovation in the insurance product.

Speaking of the market for optimal claim processing/optimal government... a very interesting and well-researched article on the competition for optimal rules in the various British court systems, with many new findings on the subject: Todd Zywicki, The Rise and Fall of Efficiency in the Common Law, 97 Nw. U.L. Rev. 1551.

Palooka

RWS,

My skepticism of socialized medicine runs deep, but it doesn't entail the same unknowns as your lifetime health insurance plan does. It's true that unexpected inflation could put pressure on government-run health care plans, but that is something which can be addressed when it arises (through raising taxes, for example). But the feasbility of life-long health care plans that you describe requires, I think, the insurer to have reasonable expectations about future costs, while government-run programs only require adjustment once costs and available funding change. In other words, the insurer must have confidence in their ability to predict future costs and probabilities. The ability to predict future costs is much easier with life insurance than it is with health insurance. Uncertainty about future costs will lead to higher premiums, or the unwillingness of insurers to engage in the practice at all. My point, I think, is that because of the great uncertainty here, free market solutions of the kind you describe seem infeasible.

I am not an expert on insurance, but one of the reasons I suspect life insurance is cheaper when purchased younger is that your early premiums act as investment for future payouts (as well as spreading out the costs of later, higher risk periods over more years). Perhaps some of this effect could be captured with medical savings accounts--allowing one to save for future health problems. Maybe the government could pool these funds to protect individuals from catastrophic losses, but the benefit of investment would remain. Of course, older persons would have to be excluded to avoid the Ponzi scheme attributes of SS.

Palooka

An addendum to my last comment:

Thinking about this a bit more, let me compare to pension plans.

I think your plan is definitely feasible if it were a defined contribution health plan. That is, people pay in X dollars each year, hope it grows to a large amount over time, and then they can use those dollars for future health problems. If they run out of money, then they run out of money.

I do not think your plan is feasible if it would be a defined benefit plan. This is for the reason I have already written about--uncertainty. I don't think a company can predict future costs well enough to guarantee any set benefits in the realm of health insurance.

Tim Harford

Singapore has a system of catastrophe insurance, coupled with some redistribution and a system of compulsory medical savings accounts. Seems to work well for them: their key healthcare outcomes are just as good as those in the United States (according to the World Health Organization) but the total cost of the system is less than what the US system spends on administration alone - around $1000 per person.

Some commentators have expressed their distrust of 'socialised medicine', but the distrust seems based more on ideology than experience or evidence. Yes, we know that well-functioning markets produce better results than a command economy. Health-care markets don't function well (for well-established reasons) so the argument against socialised medicine needs to rest less on theory and more on evidence.

It's worth bearing in mind that the British system costs around two thirds less than the American system; healthcare is largely free at the point of use for anyone who walks into a doctor's surgery, but the government spending required to support the system is less than that in the United States. My own experience as a Brit moving to the United States was that the extra money was being spent on paperwork, defensive medicine and luxury rooms which I could have paid for myself had I wanted them. The British system was faster, smoother and used the latest cost-saving diagnostic technology. To my surprise (and in an unscientific sample of one) the 'socialised' British system started to look pretty good by comparison.

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