Reform of the Health Care System--Posner's Comment
President Bush has proposed a number of incremental improvements in the regulation of health care, and, as Becker explains, they seem desirable. Incremental improvements are doubtless the only ones that are politically feasible until crisis hits. But I would like to examine the issue of health care reform from a more fundamental, though less practical, angle.
Generally, economists believe that the supply of products and services should be left to the market unless there are significant positive or negative externalities. If some people are too poor to be able to buy a minimum market basket, they can be subsidized out of tax revenues, as by a negative income tax, but still left free to choose what to buy.
So what is special about medical care? The primary answer is that our society does not permit people to be denied medical care (for other than trivial complaints) merely because they can't pay for it. They may not be poor; it may simply be that they didn't buy health insurance because they were gambling on staying well, and now a major medical problem has hit them and they can't afford to pay for treatment. If these forms of "free riding" are thought to present a serious social problem, they could be mitigated by making the purchase of health insurance compulsory, with the premiums for poor people being paid for by the government and with every insurance policy being required to contain a major-medical component to prevent underinsurance that would enable the gamblers to shift the costs of a major medical problem to the government. People with such dreadful health prospects that they, though not poor, could not afford to buy health insurance could be placed in an "assigned-risk pool" and distributed among the insurers, who would not be permitted to charge more than some fixed maximum rate to the assigned (poor) risks. Health insurers would compete to reduce premiums by adopting policies, such as generous deductibles or copayments, that encouraged the policyholders to economize on their demand for medical services.
I don't think the problem of the free-riding patient is a very serious one, however, because people who don't have insurance don't get the best (and most expensive) treatment and because most people don't demand medical care unless they have a serious need for it; many people have a horror of doctors and hospitals. The basic reason why so much money is spent on medical care in the United States is that people attach a very high value to their health. The frequent complaint that 15 percent of GDP is "too much" to spend on health care is superficial. When 80 percent of the average family's budget was spent on food, no one thought that this signified a "market failure" in the food industry.
There are problems of information in health care, as in many markets. Greater use of performance measures for hospital and doctors would reduce those problems, and digitization of medical records, which is now under way, will increase competition among health care providers.
The tax burden of government health programs is a matter of concern. There are several measures, though none at present is politically feasible, that would reduce that burden. One would be to eliminate all tax deductions for medical care. Another would be to reduce federal funding of medical R&D. This measure, combined with reducing patent protection for drugs and medical devices, would have the effect of slowing the rate of technological advance in the medical industry. Such slowing would reduce the amount of money that the government spends on Medicare and Medicaid because 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. (I do not suggest eliminating federal funding of medical R&D altogether, just as I do not suggest eliminating patent protection for drugs and medical devices altogether. Both basic and applied research generate positive externalities that justify government support, which in the case of basic research takes the form of direct subsidy and in the case of applied research of patent protection.)
Another measure would be to repeal Medicare. Medicaid would remain available for the indigent; and the "assigned-risk pool" device could be used to spare the nonpoor the crushing burden of a major medical problem. There is no reason the taxpayer should pay for the medical care of elderly people who can afford to pay for it themselves.
Finally, an efficiency measure worth considering would be to reallocate federal funding of R&D from diseases that afflict mainly elderly people, such as most cancers, and from diseases avoidable by behavioral modification, such as AIDS, cirrhosis of the liver, and most Type II diabetes, to diseases that are not avoidable by changing behavior and that afflict mainly children and young adults. Such a reallocation would reduce net medical expenditures and also increase productivity.