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02/05/2006

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Michael

Judge Posner,

I believe your comments regarding HSA's as a solution to spiraling health costs are based upon a faulty presmie. In theoretical terms, you are obviously correct that when people do not face the true cost of consuming a given good there will be overconsumption of this good. This is aximoatic. However, you are missing the degree of this overconsumption. In order for HSA's to significantly reduce consumption of health care that status quo needs to be encouraging large numbers of healthy people to essentially overconsume health care. While I am not an expert in this area, my understanding is that most expenditure on health care does not arise from people visiting to doctor too frequently or getting too many unnecessary tests (although this is probably more significant than the first). Instead most of the cost is concentrated among a small subset of the very sick population (i.e. very premature babies, cancer patients, elderly at the end of life, etc.) These people will obviously blow through their saved money and start using the insurance portion of the HSA very quickly. This also suggesta fairly simple empirical test. If most costs were generated by "overconsumption" the total HSA cost (i.e. saving for the high deductible plus the premiums) should be substantially lower than the premium on a traditional insurance policy. Inusrance companies would know that once people bought HSAs they would consume less health care and (preusming a competitive insurance market) competition would force the price down. On the other hand if the bulk of the cost is associated with the small subset of the sick HSA's won't lower costs by much and the premiums would be similar to traditional policies. When I've looked at HSA's I found the costs to be similar (although admitedly this was not a rigorous study). While there may be institutional barriers to HSA's this seems suggestive that the insurance market has already determined that they will not significantly reduce consumption patterns and therefore will not substantially reduce costs.

Matt Wimble

Why does healthcare have to be paid for with either insurance or savings? This in America! Why not borrow the money? Government sponsored healthcare loans (think student loans, FHA, or SBA) would solve several issues. It would address inefficiencies that arise out of issues of moral hazard that occur in any market where the primary means of payment is via insurance. If history is any guide then large amounts of funding can be made available at minimal cost to the taxpayers. I will force individuals to seek out care closer to what is economically optimal, rather than what is recommended by the provider of the service.

--Matt Wimble East Lansing, Mi

David

Judge Posner writes:

"Generally, economists believe that the supply of products and services should be left to the market unless there are significant positive or negative externalities."

This is the problem with Judge Posner's economic theory: he engages not in economics, as the term was classicly understood, but in what is more aptly described as free-market theology. Posner assumes from the outset that the market works best in every aspect of life. However, the economy is more complex than adherents to this theology believe, and that is why their theories are so often far out of the mainstream.

Economics, really, should be the *study* of the economy -- not the preaching of any particular theology. It should be a dispassionate analysis of the costs and benefits of various economic models. A true economist would study the costs and benefits of various health care systems and give the polity the facts on which to make a decision. Ultimately, the structure of our health care system is a political question -- as is the structure of our school system or our transportation system. There are pros and cons to various levels of public involvement in the system. An economist should study those pros and cons and present us -- the voters -- with the facts, so we can elect representatives who champion our views. Economists should not engage in free market theology that makes political judgments in the name of economics.

cal

direct link, what theology is motivating you. Please stick to presenting propositions versus attacking other people.

Joe Merchant

I lean more toward Becker's view of "high deductibles for all" wherein "normal" procedures are priced and competed on a one to one basis for everyone, instead of determined by an insurance cartel. The visibility proposed by Posner would help this process greatly by identifying price gouging institutions for individuals and generally encouraging more fair pricing by the providers.

If the doctor-patient relationship could be mostly handled on a cash-pay basis, there would be tremendous efficiency gain as compared to the present system where most offices employ more people for billing services (insurance verification, coding, billing, re-billing, accounting, etc.) than they do for M.D. level patient care services.

There is still the need for "major medical" coverage in some form, I have always liked the loan form of insurance proposed by Matt Wimble above. Instead of paying premiums, the young are free to save or squander their meager early earnings. When an "insurable" event occurs, it gets paid for and the "insured" simply pays back the cost like they would a mortgage or other long term commitment. The incentive for avoiding accidents is greatly increased, and the entire insurance industry can be liquidated and used to fund and administrate the loan pool for this program... There is a small problem with end-of-life care, and truly catostrophic events would be too large for most to pay back, but as Posner wishes above, these could be covered by a mandatory tax pool for all....

anaxanagorenas

Dear David,

I am not sure that quoting Prof. Posner as saying ("Generally, economists believe that the supply of products and services should be left to the market unless there are significant positive or negative externalities.") and later asserting that "Prof. Posner assumes from the outset that the market works best in every aspect of life" makes much sense, if any.

If Prof. Posner is a free-market theologian, then why did he feel compelled to write about Theories of Regulation? Who forced him to assess the limits and merits of "capture" theory?

It is important to make an effort to leave rhetoric and ideology behind. For Prof. Posner and most other sensible economists, the market is only a tool or lens with which we can examine issues and formalize our intuition. Theories of markets as well as the modern trend of seeing markets as a set of assumptions are simply another way of trying to disentangle the puzzle that is politics. Certainly one may disagree to the extent to which markets may used to understand human phenomena, but it is different to accuse those who use the tool of markets of being "free-market theologians".
I trust you understand what I am saying. You would not level that same accusation at Stigler, Peltzman, Sheshinski when they use First Order Conditions to characterize a solution, now would you? Let us answer with temperance.

anaxanagorenas

Richard Mason

RP: people who don't have insurance don't get the best (and most expensive) treatment

RP: once an expensive new technology is developed, it is impossible for the government (or insurers for that matter) to refuse to make it available to charity patients

These two propositions appear to be contradictory!

I think it is the second proposition that is, roughly speaking, true, and the first proposition is generally untrue. People without insurance can and do receive the best established treatments. But they may face ruinous bills and/or bankruptcy afterwards.

Robert

Observation: why automatically accept the idea of a third party payor system, i.e., I get sick and you, as the insurance company, pay (in whole or in part) for it? Under such a system there is no incentive for me to stay healthy or, should I become sick, to seek the best value for my health care dollar. Any responses?

Elton

What healthcare needs is more technological innovation, but of the incremental, 'continuous improvement' type of innovation, to reduce costs and improve quality in the same way the computer and automotive industries have innovated in the last 20 years.

I've been thinking this a lot lately -- the current medical environment encourages companies to innovate expensive new treatments and devices, but there is only piecemeal price pressure to drive the cost of existing techonology down. The benefit of putting more spending decisions in the hands of the consumers is that many will naturally comparison-shop for treatments and provide incentive for medical providers to compete on price.

cllam

Judge Posner:

You list many great ideas. Any free market solution, however, must address the problem of the medical profession monopoly. Doctors are members of a government sanctioned guild system that controls supply and pricing of the delivered product. High barriers to entry and a self policing industry are a recipe for high prices.

Adam Smith said it best:
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."

Lab_FROG

One idea to lower healthcare costs would be to encourage people to spend more on it, at the early stage. Frog was surprised that neither Becker nor Posner suggested ways for policy to directly encourage preventive healthcare such as annual physicals and semi-annual teeth-cleanings, for example. Essentially citizens could be given a small healthcare voucher on their birthday that expires on their next birthday. This would make preventive healthcare ìfreeî and thus should encourage it, and it is cheaper to treat most medical conditions early on. Tax credits are also an idea but having a piece of paper or a debit card is physical and more likely to influence human behavior for behavioral reasons. Of course this voucher could also be used for more serious health problems as well, thus holding down the fees charged by health providers.

N.E.Hatfield

Why is it when it comes to health care and its delivery we always look at the symptoms and not the causes of the problem? Everything I've read so far is nothing more than a finacial quick fix or patch on an already obviously broken system.
When it comes to the US in terms of medical care, it has the finest medicine in the world, but the worst delivery system that escalates costs disproportionately.

What is really needed is a radical rethink of the entire system and to toss out the obsolescent and non-working system onto the scrap heap of history.

Lab_FROG

An aside: humans are odd creatures to Frog. There are so few comments on healthcare reform, a very big ticket policy, while so many on small ticket policies like the death-penalty. The same can be said about the Evolution versus Intelligent Design debate while there is so little interest in requiring students to learn the theories of microeconomics that have been scientifically proven beyond a reasonable doubt versus the disproved speculations of socialists, which is directly related to the biology debate. Frog suspects that it has to do with the costs-benefits intuitive analysis of supporting ones most valued non-genetic ways of life versus those that are simply more pragmatic.

N.E.Hatfield

"Microeconomics Scientifically Proven"? What altar of Ideological Purity have you been sacraficed on? I'm a Pragmatic Pluralist. I dont care what end of the ideological spectrum a solution comes from, just so long as it works in the publics and the commonwealths interest.

Lab_FROG

The aside continued (sorry):
Economists use a scientific method in which they look at prior data and proved theory, create mathematical models to explain some social phenomenon, and test these models against future data sets and the other models seeking to explain the same phenomenon. It is the same scientific method mostly used by astronomers and evolutionary biologists. While short-term macroeconomics (what most people think of when they think of economics) has no proven models, microeconomics has many theories proven beyond a reasonable doubt.

Richard Mason

Robert: why automatically accept the idea of a third party payor system, i.e., I get sick and you, as the insurance company, pay (in whole or in part) for it?

Robert, apart from the general reasons that one would want to use insurance for anything (auto insurance, home insurance), a special point in favor of a third party health payor is that individual patients having a health catastrophe are hardly in a fair bargaining position or equipped to make rational decisions.

When your child has cancer, you are not going to be a hard-nosed negotiator with an eye on eliminating needless expenses. The hospital can charge you whatever they like and you will agree to pay.

c&d

Posner writes,
The frequent complaint that 15 percent of GDP is "too much" to spend on health care is superficial.
That sounds like a reasonable argument. We desire more, better healthcare and are willing to pay for it. Nothing wrong with that.

But then he writes,
Another would be to reduce federal funding of medical R&D. This measure . . . would have the effect of slowing the rate of technological advance in the medical industry.
Now he thinks we would be better off not being able to purchase more, better healthcare: contradicting his earlier comment. As if this were a good thing!

Then why not retroactively implement this technology-limiting policy and ban expensive treatments? A CAT scan might diagnose your problem? Too bad, we want to keep cost down by arbitrarily limiting healthcare technology.

Posner would reduce everyone's welfare so that he doesn't have to shoulder the burden of the wretched "charity patients." And I was led to believe that the "problem of the free-riding patient" is not "very serious."

Posner also fails to address the real reason why people believe 15% of GDP is too high: because other wealthy countries have universal systems with many indicators showing better health outcomes while spending 10% (or less) of GDP (and they have smaller GDP/capita).

andy

There's plenty of free riding in our healthcare system without picking on the uninsured. Isn't Medicare a free ride to the extent that its payments to a beneficiary exceed any actuarially legitimate amount of "premiums" paid? Isn't the new Medicare drug benefit just a free ride for its beneficiaries? And what about Medicare benefits for the non-working wives of workers? And isn't the proportion of a physician's income due to the monopoly he's been handed a free ride?
There is no free market in healthcare. When one considers the degree to which the state and federal government are involved in regulating the provision of medical care, one must conclude that it is not just the vagaries of the marketplace that result in millions of uninsured, it is GOVERNMENT POLICY that 15% of Americans go without insurance so that the rest can be pampered. The uninsured are essentially being told that they are "free riders" because they didn't bother to play a game that is so thoroughly rigged against them.

Lab_FROG

Frog does not currently have health insurance, and does not consider the "system" against him, unless you count short-term natural law effects. Perhaps Frog has been captured and brain washed by evil imperialistsí capitalists. Frog is young and healthy and the current government distortions in the healthcare market create incentives for such types to go uninsured. We are not oppressed. We are rational like frogs, meaning we are responding to our incentives.

N.E.Hatfield

I've never really believed in statistics and mathematical modeling coupled with inductive-deductive process's as true science until the whole theoretical framework and concepts is tested and proved in the real world. Otherwise it stands as theory and theory alone.

As someone has pointed out, "Figures don't lie, but liars sure can figger". ;)

Dude

"Health Care Annuities" will induce health insurance companies (HICs) to pay more for preventative health care. Today, most people switch HICs every 7 years (mostly due to job changes). HICs will not invest in preventative care if their customers are going to leave anyway. The solution is for people to pay a fixed-fee for very long-term health insurance. If HICs know you're going to stick around, it's in their interest to keep you as healthy as possible. When you die, the HIC can pocket the extra insurance money you paid as profit. It's the same gamble that life insurance companies make with annuities.

Also, most money is spent on the few very sick people. We could cap the expense per patient for HICs (say, $5M), after which the patient is paid for by a government program like Medicaid. This is paid for by a "catastrophic health care" tax. Insurance companies should reduce their premiums substantially if they know their liability is capped.

N.E.Hatfield

In order to cap costs, perhaps we ought to return to the old medical practice that served mankind so well before the advent of modern medicine. Exposure and elimination of the sickly and those incapable of cure. If I remember correctly, there is an entire body of Law surrounding this issue in Ancient Law texts.

Flavio Rose

I'm afraid I disagree with Judge Posner that large numbers of people fail to procure health insurance because they gamble on remaining healthy. Health insurance can be group or individual. Group health insurance generally means holding a job which gives you insurance as a fringe benefit; those people who fail to have group health insurance are generally those who have had difficulty getting or keeping such a job, and people with such a weak position in the job market generally make too little to pay for individual insurance out of their labor income. Individual health insurance is available only to the healthier people in the population; the remainder are uninsurable. Self-employed and unemployed people are the main market for such insurance. Among these, some may fail to procure such insurance because they are uninsurable; others cannot afford it.

One might say of the uninsurable "why didn't they buy individual insurance while they were still healthy?" This may be a valid criticism in some states where an individual insurer isn't allowed to drop you or raise your rates to the stratosphere because your health fails (although carrying a duplicate policy is extremely expensive). I also believe, however, that in other states buying individual health insurance while you are healthy does not ensure that you will be able to renew your policy when your health declines, so the question is not valid in those states.

The key thing about health care is not, as Judge Posner says, that we refuse to allow people to go without it. Quite the contrary: among developed countries we are the only one that does allow people to go without it, at least until they hit an emergency room (and before the 1980s I believe emergency rooms could turn people away rather freely).

The key thing about health care is that the consumer is unable to shop for the best price due to informational asymmetry and the adverse effects of ill health itself on one's ability to shop and bargain. As an extreme example imagine someone who has just suffered a heart attack or stroke trying to shop for the best treatment before being treated. In this, health care is like auto repair -- informational asymmetry makes it difficult to avoid being cheated by repair shops which are so inclined -- but worse.

Out of both moral reasons and a desire to overcome informational asymmetry, the rest of the developed world has a large government intervention in favor of the health care consumer to even the scales.

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