Prescription Drugs and Medicare Reform--Posner

In 2003 Congress created a prescription-drug benefit program for persons enrolled in Medicare. It was estimated at the time that the program would cost the government $40 billion a year; a recent re-estimation, adding $30 billion a year, New York Times, has elicited proposals to curtail the benefit. Given Medicare, I do not think that there is a principled objection to including a prescription-drug benefit in it. Suppose Medicare were limited to hospital treatment. Then critics would say, that�s absurd�it will only impel people to get hospital treatment that would cost society (though not the patient) less in a non-hospital setting. It is similarly questionable to exclude prescription drugs from Medicare coverage. Drugs are substitutes for other forms of medical treatment in many situations; therefore excluding them from coverage will induce people to seek other forms of treatment that may cost society more to provide. This means, by the way, that in calculating the net social cost of the prescription-drug benefit, the cost of other treatments for which drugs, with their cost to the patient reduced by the Medicare subsidy, will substitute should be subtracted. 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; and therefore an increase in output brought about by increased demand should, if anything, reduce average cost and hence, given competition, price. The real issue is not the prescription-drug benefit but the overall cost of Medicare; currently (that is, without the prescription-drug benefit) that cost is running at almost $300 billion a year, which is about 3 percent of GDP. As a matter of economic principle (and I think social justice as well), Medicare should be abolished. Then the principal government medical-payment program would be Medicaid, a means-based system of social insurance that is part of the safety net for the indigent. Were Medicare abolished, the nonpoor would finance health care in their old age by buying health insurance when they were young. Insurance companies would sell policies with generous deductible and copayment provisions in order to discourage frivolous expenditures on health care and induce careful shopping among health-care providers. The nonpoor could be required to purchase health insurance in order to prevent them from free riding on family or charitable institutions in the event they needed a medical treatment that they could not afford to pay for. People who had chronic illnesses or other conditions that would deter medical insurers from writing insurance for them at affordable rates might be placed in �assigned risk� pools, as in the case of high-risk drivers, and allowed to buy insurance at rates only moderately higher than those charged healthy people; this would amount to a modest subsidy of the unhealthy by the healthy. Economists are puzzled by the very low deductibles in Medicare (including the prescription-drug benefit�the annual deductible is only $250). Almost everyone can pay the first few hundred dollars of a medical bill; it is the huge bills that people need insurance against in order to preserve their standard of living in the face of such a bill. But government will not tolerate high deductibles when it is paying for medical care, because the higher the deductible the fewer the claims, and the fewer the claims the less sense people have that they are benefiting from the system. They pay in taxes and premiums but rarely get a return and so rarely are reminded of the government�s generosity to them. People are quite happy to pay fire-insurance premiums their whole life without ever filing a claim, but politicians believe that the public will not support a government insurance program�and be grateful to the politicians for it�unless the program produces frequent payouts. If Medicare were abolished, the insurance that replaced it would be cheaper because it probably would feature higher deductibles; it is true that low deductibles are common in many forms of private insurance, such as automobile collision insurance, but I think it would be different in the case of health insurance simply because private health insurance for the elderly, with no Medicare crutch, would be very costly. The premiums would be much lower with high deductibles. I do not think, however, that total expenditures on medical care would decline markedly if Medicare were abolished. The reason is the enormous value that the vast majority of people place on longevity, good health, and freedom from pain and other physical discomfort. (And, given this value, why shouldn�t people who can afford to pay for it be required to do so rather than be subsidized by the taxpayer?) Pursuing a theme in my posting on social security, young people may be unwilling to pay for health insurance that will cover their expenses generously when they are old. But when they reach old age they will demand treatment whether they have insurance or not, and no one who has a serious medical condition is refused treatment in this country although he or she may have to settle for less-than-cutting-edge treatment in a public hospital. To prevent this free riding, a scheme of compulsory health insurance would have to require generous coverage in old age; and so aggregate health costs might not be much lower than under the present system, although with higher deductibles and copayments there would be some reduction. The explanation usually offered for the fact that a substantial fraction of the population has no health insurance is that these are unfortunate people who cannot afford health insurance. A better explanation is free riding. A person who has no assets lacks a compelling reason to buy medical insurance; he will be able to obtain medical treatment free of charge, as a charity patient. A person who does have assets but is young and healthy may prefer to gamble on not incurring large medical bills, rather than to subsidize the older and less healthy by being placed in the same insurance pool with them. However, these temptations to free ride provide an argument for compulsory health insurance rather than, as often argued, for socialized medicine. The cost of Medicare (or private substitutes) will continue to rise in relative as well as absolute terms. The reason is that advances in medicine increase longevity and with it the number of years in which a person is likely to require expensive medical treatment. It would thus be desirable from a cost standpoint if medical research could be reoriented from extending the lifespan of the elderly to making the elderly healthier. It would incidentally reduce the cost of social security, because workers who become totally disabled before they reach retirement age become immediately entitled to social security. This will become an increasing problem as the normal age of social security entitlement rises from 65 to 67 pursuant to legislation passed by Congress in 1983. But of course benefits must be considered as well as costs. If people value additional years of elderly life at more than the cost of the extension, the cost may be worthwhile, though it doesn�t follow that it should be subsidized. Young people find it strange that such a large fraction of overall medical expenses is incurred in the last few months of life�that is, by people who are dying. (Last-year-of-life medical care accounts for 26 percent of Medicare expenditures and 22 percent of all medical expenditures. PubMed. ) Having nothing to look forward to, why are they willing to spend so much on a meager extension of life? There are several reasons. One is that a good deal of end-of-life medical care is devoted to reducing suffering rather than to extending life. Another reason is uncertainty as to whether one is really dying. Another is that the (private) cost of care, however extensive, is negligible for persons who are covered by both Medicare and private �medigap� insurance that pays for the copayments that Medicare requires. Still another reason for the heavy loading of medical expenses at the end of life is that for people who do not have a strong bequest motive, the opportunity cost of money spent in their last period of life is negligible because they will not be able to spend any money saved during that period.

Comments

[Nicholas]

I think that this discussion is rather academic in nature, but not because I think there is no problem. The reality of the situation is that Medicare isn't going anywhere. Why? Simple, most young people do not vote and most seniors do. Seniors, in general, do not like the idea of Medicare privatization, which can be seen in virtually every poll out ther. In fact, there *actually* was an attempt to make a step towards privatization of Medicare in the late 80's. It's kinda funny, but the result was a veritable insurgancy of old folks, taking to the streets, armed with canes, umbrellas, and pocketbooks when the representatives next returned to their home districts. Needless to say, that law was reversed as soon as congress next met. So, looking at it from a purely political perspective, any politician worth their salt isn't going to touch privatization with a 10 foot pole. This can be easily seen in the already growing rebellion within the Republican party regarding SS privatization. Clearly, they see the writing on the wall. Despite the last election being as contentious as it has been in at least 30 years, the youth vote was still terribly lacking while the senior vote was strong as ever. Since there are no term limits, it is generally favorable for the incumbant to do what he/she needs to do to retain their seats. So rather then debating as to whether it should be privatized, we need to start trying to think of how to fix it within the context of the current arrangement.

[Chesthairshire]

Mr. Posner writes:
"Economists are puzzled by the very low deductibles in Medicare (including the prescription-drug benefit�the annual deductible is only $250)".................

My understanding is that the low deductible is a political response to Congress' desire to achieve large buy-in. The premium cost is $420 for Part D and congress wanted as many Medicare recipients as possible to pay the premium. If the deductible is too high, they risk adverse selection - only the really sick enroll in Part D, they benefit immensely and the economics of the plan are even worse on a per user basis.

[Anonymous]

مركز تحميل

[Anonymous]

بنت الزلفي

[Anonymous]

Thank you, you always get to all new and used it
شات صوتي

[Anonymous]

اعزائي ياليت الرد علي واعطائي الايميل لايتم الاتفاق مع الشخص لآ اريد تذكره الله يطولي بعمركم لاني اريد اشرح له كل شي بطريقه مباشره وليس بتذكره لانها تستغرق وقت طوويل فى ياليت اعطائي بريد الشخص هذا لايتم الاتفاق معاه على كل شي وتعديل على السكريبت

اتمنى عدم التاخير في الموضوع الله يطولي بعمركم

وايضآ اخواني ياليت تنقلون السكريبت كامل الا الموقع الرئيسي ووضع رابط السكريبت بشكل هذا

www.t7b.com/dlil

وانتم قلتو انه راح تنقلونه بعد اسبوع واليوم صار له اسبوع من تركيب السكريبت فى ياليت نقل السكريبت كامل
وبنتظاركم بخصوص الموضوع هذا

وياليت عدم التاخير الله يجزاكم خير . .

[Anonymous]

Thank you, you always get to all new and used it
شات

دردشة

[Anonymous]

شات مصر
--
دردشة مصرية

[Anonymous]

دردشة
___
صور

[Anonymous]

Hey. Anxiety is the dizziness of freedom.
I am from Liberia and now teach English, give true I wrote the following sentence: "Bargains on new and used small refrigerators freezers major appliances for sale cheap, buy small refrigerators freezers major appliances at discount."

Thank you very much :(. Adonia.

[Anonymous]

Great work, webmaster, nice design!

[Anonymous]

Perfect work!

[Anonymous]

دردشة الشلة

دردشة تعب قلبي

[Anonymous]

thanks to tell me that,i think thats ao usefully----
tiffanys
links of london

[Anonymous]

Beautiful site!

[Anonymous]

شات الخليج

الشلة

[Anonymous]

دردشة الشلة

دردشة الرياض

[Anonymous]

دردشة برق

دردشة الخليج

[Anonymous]

Incredible site!

[Anonymous]

It is the coolest site, keep so!

[Anonymous]

Great. Now i can say thank you!

[Anonymous]

I want to say - thank you for this!

[Anonymous]

Perfect work!

[Anonymous]

Perfect work!

[Anonymous]

Incredible site!