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01/29/2007

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bonbon

> From an economic standpoint, President Bush's proposal to treat as taxable income of employees the amount of employer health insurance that the employee receives in excess of $15,000 a year for a family or $7,500 a year for an individual is a step in the right direction. But, from that same standpoint, his proposal to subsidize the purchase of individual (nonemployer-provided) health insurance, in order to reduce the number of people who have no health insurance (now almost 47 million), is a step in the wrong direction.

Yes! Servants should not be allowed to have any tax advantages in buying health insurance - whether provided by the master or purchased on their own! I would even argue they should have no access to the health care in the first place.

michael choe

dr. posner,
i agree with some of the things you said about medicare and companies struggling to compete over health benefits for their employees.
- I do disagree with your point about adverse selection. A "combination" that is caused by "adverse selection" cannot be "efficient"; otherwise, we have to re-examine our definition of "efficient". Also, offering tax incentives to level the playing field for the self-employed or others who do not rely on an employer for health insurance is not necessarily a subsidy. The Economist magazine endorsed this idea 8 years ago when Clinton was President. One of the main defects of American health care is that most people receive health insurance from their employer and the insurance market is Employer-driven. president bush's tax/health reform plan would benefit consumers and make the market more Consumer-based, which is a step in the right direction.

eric

The issue of adverse selection here is as much an ethical/moral issue as an economic issue. By accepting adverse selection as a result of moving towards individually purchased health insurance, we are getting rid of this subsidy for older/sicker people.

The subsidy may not be necessary or appropriate if there is a way for people to contract long-term premiums, thereby subsidizing their own healthcare as they age. This would eliminate problems resulting from demographic shift.

However, depending on one's ethics, I believe that there are some risks for which this will not work. For instance, if a person is born with congenital disease, or a person has a family history of cancer or other disease, should they pay higher premiums? In an individually-rated system, of course they should, because they will most likely incur greater health-care costs. But one can also believe that a good/bad health condition of this form ("original sin") is a past risk to which we all were exposed, and the outcome did not depend on any action for which the individual can or should be held responsible. I think it is a matter of personal belief whether or not we should subsidize those for whom the outcome was less fortunate.

I don't really find the "adverse selection is efficient" argument very compelling, because I think the more important issue is whether the "efficiency" resulting from adverse selection leads to a desirable result.

Jack

Professor Posner contorts himself into some truly curious positions in order to fly "Libertarian" flag on this one:

"The economic explanation for insurance is that because of diminishing marginal utility of income, people will pay to avoid a big financial loss (e.g., will pay $2 to avoid a 1/100,000 prospect of a $100,000 loss, even though the actuarial cost of such a prospect is only $1), but most medical expenses are modest."

......... Yes, this sums up the reasons for risk sharing and the reasons most states have mandatory auto insurance. But, I too would resist the efforts of Bush, Mitt and Arnie to feed us all into the greedy maw of the insurance companies. What do medical insurance companies bring to the party that's worth the mark-ups costly process of deciding what is "covered" and what is not?

..... ah! "abolish Medicare!" and I assume the VA? in favor of flushing us all into insurance pools? Despite the overhead of both Medicare and the VA being far lower? What IS the point? So we can bragg of being the first nation to spend 20% of GDP on healthcare while leaving out, a rapidly growing 40 million? Currently we're 18% while the next closest is 13% and the norm for the civilized nations that cover all of their people is below 10% and that on typically smaller per capita GDP.

........ I have a better idea: First we have a national debate and decide who we want to leave OUT of having health care:

........ those on welfare?

...... those off welfare but working in marginally profitable small biz?

..... those in prison?

I conclude from the ER policies that really Americans don't want to deprive anyone from basic health care. Once we've, honestly, made that decision it will be FAR easier to decide how to use market forces to provide decent care at reasonable cost.

I'd suggest pooling all that is spent on health care today in our patchwork system and suppling all with a voucher. THEN leave the people to choose their providers.

But for our widening wage gap......... I suppose the individual could pay the $7500 directly....... but......... what do we do with the min wage and other low income folks for whom $7500 is half of their annual wage?

After the mess Bush % Co made of Medicare prescription drugs........ we'd better wait until someone with far better intentions takes the stage. With "wartime" favorables of 30% and the "new" Congress he simply has not the "political capital" to lead at all.

Lawrence Indyk, University of Kansas School of Law

A few studies that have analyzed recently stagnant average real wages have concluded that, on the contrary, average "real compensation" has increased at least as fast as GDP when the rapidly increasing cost/value of employer-provided health care is taken into account. (Of course, to use Dr Becker's term, this has not necessarily meant a comparable real increase in "healthiness").

The improvement in a worker's position is especially evident when compared to the position the average worker would be in if they collected all this compensation as wages, were taxed on it, and had to use what remained to pay much higher premiums individually than available with the negotiating power of large group plans.

If individuals become increasingly compelled to purchase their own insurance, but real wage growth remains constrained by global competition, then the average family could experience a net decrease in welfare. Worth a look by you health care economists out there.

Grumpy Old Man

I think demand for health care is pretty elastic. When the marginal cost is zero, lots of the "worried well" or people with transitory upper respiratory infections will visit their doctors. If they had to shell out a C-note, they might wait until their conditions resolved.

If the demand for health care is elastic, no society can afford to fulfill it all, and so health care must be rationed, either by some not being able to afford it, or by some bureaucratic system.

Bill

Isn't it a bit inconsistent to say that we should abolish medicare because people would be forced to purchase medical care for their old age? Afterall, aren't we purchasing medical insurance for our old age when we pay our medicare insurance payment out of our current income. (I realize there is a generational issue: I pay for my dad through my payments into medicare, and my son pays for me.) The point is, though, that people are currently being forced into purchasing medical insurance for their old age.

Now, if you wanted to be really creative, how about this: Currently the middle class has their parents medical coverage covered by medicare. Consequently, their parents do not deplete their estate to cover medical expenses. At their parents death, they get a larger inheritance. The wealthy and those with assets (and their children) are the true beneficiaries of medicare.
So how about this: to reduce some of the medicare funding gap and encourage private medical insurance for old age coverage, raise inheritance taxes to fund medicare shortfall for the poor and to recover the savings the middle and upper middle class parents saved from not having to deplete their estates to cover medical expenses. Permit persons to escape the inheritance tax on their estate if they purchase for themselves a lifetime medical annuity and do not dip into medicare for any coverage.
The beneficiaries of medicare are actually the upper middle class and their children who get larger inherited estates due to medicare.

David

I fundamentally disagree with Judge Posner on this issue, for many reasons, and I will try to organize my thoughts for a more detailed post later.

At the outset, however, I would like to ask Judge Posner a personal question: what type of insurance does he have? The federal government offers quite generous medical benefits, which are the envy of most of the country. I too have a job with good benefits, and I feel very fortunate to have a good health plan. I know that, if I get sick, I can see a doctor for a relatively small copayment, and that if I need medication, I can get it without having to break the bank. I can also get regular checkups, see specialists if necessary, and receive preventive care to forestall future problems. As a rational consumer of health care, I know that it makes sense to pay premiums and receive regular checkups now, rather than land in the emergency room later with an advanced illness. Perhaps counter-intuitively, regular users of health care are in fact the healthiest people and the least costly to insure. For instance, it's better -- and far cheaper -- to remove a benign cyst early on than to treat a cancerous skin tumor later.

This country should have a health care policy; it is both inhumane and irrational not to. And, that policy should focus on "wellness" and preventive care: getting people in the habit of seeing doctors regularly and taking care of their minor problems. That way, many of the truly serious, truly costly problems will be avoided. Also, a rational heatlh care policy realizes that the free market has limitations when it comes to dispensing coverage and care. There are many different possible approaches, but plain laissez-faire is the worst one.

David

I fundamentally disagree with Judge Posner on this issue, for many reasons, and I will try to organize my thoughts for a more detailed post later.

At the outset, however, I would like to ask Judge Posner a personal question: what type of insurance does he have? The federal government offers quite generous medical benefits, which are the envy of most of the country. I too have a job with good benefits, and I feel very fortunate to have a good health plan. I know that, if I get sick, I can see a doctor for a relatively small copayment, and that if I need medication, I can get it without having to break the bank. I can also get regular checkups, see specialists if necessary, and receive preventive care to forestall future problems. As a rational consumer of health care, I know that it makes sense to pay premiums and receive regular checkups now, rather than land in the emergency room later with an advanced illness. Perhaps counter-intuitively, regular users of health care are in fact the healthiest people and the least costly to insure. For instance, it's better -- and far cheaper -- to remove a benign cyst early on than to treat a cancerous skin tumor later.

This country should have a health care policy; it is both inhumane and irrational not to. And, that policy should focus on "wellness" and preventive care: getting people in the habit of seeing doctors regularly and taking care of their minor problems. That way, many of the truly serious, truly costly problems will be avoided. Also, a rational heatlh care policy realizes that the free market has limitations when it comes to dispensing coverage and care. There are many different possible approaches, but plain laissez-faire is the worst one.

Noor

Dr. Posner,
On a side note, your comments on Ford and other domestic firms interested me greatly. How would you recommend their present crisis be averted? Would you allow the current union contract to be set aside (or the terms requiring health insurance stricken) given that not to do so would force domestic firms to have a competetive disadvantage for years to come? Or let market forces destroy the domestic industry and rely on imported cars to meet demand?

N.E.Hatfield

Everything I've read and heard so far on the subject is like giving an individual a band-aid for a wound that is hemorraging. We can all play the economic game of elasticity/inelasticity and supply and demand, but it will never get us any closer to staunching the blood flow. Especially, when trying to use tax manipulation and the like too solve the problem.

What is really needed is a good analysis of the underlying root causes for the high cost of medical care and and its double digit growth over the past few years that has created this problem in the first place. Then we might be able to solve the problem of supplying medical care to all citizens.

As a great man once said when the country was confronted with seemingly unsolvable problem, "The dogmas of the quiet past are inadequate for the stormy present and we must learn to think anew and act anew." Perhaps if we followed the advice, we may very well be able to come up with a solution. But a band-aid is no solution.

Bernard Yomtov

not to do so would force domestic firms to have a competetive disadvantage for years to come?

Nonsense.

Let the domestic firms calculate the present value of the benefits they are obligated to pay and sell equity in that amount. The stockholders would take a mighty hit, no doubt, but so what? It's their obligation after all.

William Rhoads

All the highflying comments on health insurance ignore one thing: the pricing system for medical services is completely broken.

When I see my doctor for a routine visit, he charges me one fee, but Medicare then cuts it heavily. When I did not have Medicare, my PPO health insurance paid much less than the regular fee. When I get an MRI at my local hospital, Medicare pays about 1/3 of what the hsopital bills.

I would have to be insane to rely on paying all my bills directly out of a medical savings account, or waiting for catastrophic insurance to kick in. I would be charged from 300% to about 40% more than Medicare or my health insurance provider, Mutual of Omaha, paya.

And I am told that if hospitals think you have the money, they will sue you for the full amount of their bill. I suppose I could go through the time consuming and demeaning process of negotiating lower prices with my doctors and hospitals with some success, but I don't think I could get the prices lowered to the levels that Medicare or health insurers pay.

Frankly, I think that Posner and Becker have taken leave of reality and live in a dream world. Until the pricing system is fixed and individuals pay the same amounts as Medicare or private insurers to doctors and hospitals, health care reform is just a dream. Bill Rhoads

Bernard Yomtov

The combination of high premiums and low demand observed in the individual insurance market is thus an efficient combination.

Not so.

Markets characterized by adverse selection are not efficient in the economic sense. What happens is that mutually advantageous transactions are not made, because information is incomplete.

In the context of health insurance this means, oversimplifying, that an individual who is an average risk may not beable to buy insurance at a price appropriate for an average risk, because the insurance company assumes that anyone applying for insurance is an above average risk.

Jeff

Dr. Posner touched on a salient point for which I don't understand and none of the above posts have commented on either. If you are a wealthy individual that is retired, why are you receiving medicare and social security? I am surprised no one is outraged over this, yet they get morally outraged over tax policy when it comes to income.
Would someone of a certain income level, or asset level miss their medicaid or soc sec? Ending it would be a "tax" on them. It would also point us in the right direction, ending those programs altogether.

Bush's idea is a starting point. I agree with posts above that state that we need to work on bringing competition into the after care market. Prices should come down.

Jack

Bill, dead on post!

"Frankly, I think that Posner and Becker have taken leave of reality and live in a dream world. Until the pricing system is fixed and individuals pay the same amounts as Medicare or private insurers to doctors and hospitals, health care reform is just a dream. Bill Rhoads"

........ what other "industry" would be allowed to dual price at such magnitudes? We can easily understand a 10% or so break if you sign up a team or company at a health club as their, one time, sales costs are lower etc.

Jeff... there have been many proposals to "means test" SS and perhaps even Medicare, but there are serious drawbacks to making it "welfare". SS is partially an old age "annuity" plan, but is also an insurance plan. High earners would be even more opposed to SS than they are today, if after a lifetime of chipping in 14% of a fairly high income they were to receive no benefits at all.

BTW when thinking about these matters, before retiring as a "wealthy" person, it's really quite unknown whether that will be the case. The paper millionaires of Enron and a host of dot coms are not rare instances in the US.

Here's just one more: Three steel companies that had traditional retirement programs went out of business. Their under funded pension programs were pick up the the Fed program but at a lot less per retiree. Then, the medical care they expected in retirement tripled. The typical math was something like a $3,000 monthly benefit dropping to $1800, then med care the guy had been paying $300 for jumps to $1200. What's a guy to do? he played by the rules, hung in there in a tough industry expecting a retirement but in short order has next to nothing.

Oh? The steel cos? An investor picked up three of them at trash heap prices, consolidated them, and whipped around selling them for a $1.5 billion profit in short order. $1.5 billion? Yup..... the same number that SHOULD have been in the pension fund! Jack

Bernard Yomtov

The more carefully I read this post, the worse it gets. Consider:

This effect is reduced when insurance is tied to employment, both because the sickly are less likely to be employed and, more important, because the healthy cannot opt out without quitting their jobs.

But employment-based insurance has massive inefficiencies. Lose your job and you lose health insurance. Want to quit to start a business or retire early? Better think about health insurance. The whole scheme is terrible.

but most medical expenses are modest.

“Modest” is in the eye of the payer. I wonder if Judge Posner hs had occasion to pay for even a one-night stay in a hospital lately. Modest for a prosperous judge perhaps - not so modest for others.

In any case, even if “most medical expenses are modest,” this confuses median and mean. The fact is that the risk of major expense is not trivial. The annual incidence of cancer in the US is about .5%. There are about 8 million heart attacks. About 500,000 people are seriously injured in auto accidents. None of these involves expense that even Posner would consider modest.

The fact that millions of people have no health insurance does not strike me as a social problem.

As long as they don't get sick it's not a problem. If they do they must rely on free care, or perhaps go into bankruptcy, or receive no treatment at all.

It is true that they are free riders, but so to a considerable degree are the insured, since their premiums don't vary much or at all with how much health care they obtain.

This misunderstands insurance. Someone whose house burns down and collects insurance is not a free rider on those whose houses do not burn. Fire premiums are probably more closely tied to risk than health premiums, but even so it's a stretch to call both the uninsured and the insured free riders.

There is widespread concern, though to a considerable extent politically generated, with the total amount of money spent on health care in the United States. To the extent that the money is spent by individuals or firms without any public subsidy, there is no economic problem.

This ignores the fact that despite much higher costs Americans do not receive measurably better results than many other western countries. I'd call that a problem.

I honestly feel that Posner simply phoned this one in. It strikes me as a poorly considered repetition of standard unrealistic uber-libertarian arguments that try to fit a complex problem into a simple scheme.

guy in the veal calf office

The health sector of our economy is pretty environmentally friendly, pays decent wages, can't be easily off-shored, produces useful and exportable technologies and medicines, underwrites universities and private research institutions and gives foreigners reason to travel here. And, oh yes, makes us more comfortable.

So why do people cite as a problem the fact that healthcare constitutes 30% of our GDP? Should we spend it on vodka, offshore gambling, video games or watching Saw III? We like spending our money on gold plated healthcare and, given the foregoing attributes, is that a bad way to spend money?

(This is obviously not addressed to the smaller more easily resolved problem of un-affordibility of basic healthcare to our poorer citizens. I only mean to question why having this sector of our economy constitute 30% of our GDP is a bad thing.)

Bernard Yomtov

why do people cite as a problem the fact that healthcare constitutes 30% of our GDP?

First of all, it's about16%, not 30%.

The reason it's a problem is that the results we get are no better, indeed they may be worse, than other countries that spend less. In other words, we are not getting our money's worth. If we spent 16% and had a spectacularly healthy society it would simply be a consumption choice, as you argue. But we don't have such a society.

If you spend $50,000 on car that's your business. But if your neighbor buys the same car for $30,000 it's fair to say you could have done better.

Ragerz

I am seriously beginning to wonder if anything Posner says is worth reading.

First, he puts the word unfair, in quotes. So, is Posner some sort of nihilist, who thinks that there are no morally preferable paths?? At the very least, he appears to be a radical skeptic. (As a pragmatist, I respect skepticism, but reject the more radical sort.)

Second, Posner writes the following: "from an economic standpoint, it should be."

But economics is not about should! It is about is. Economists should tell us about the tradeoffs for various choices, and then we decide what tradeoff is best.

You know, best is based on our moral sense. You know, ideas like "fairness."

By the way, why should I care what is "economically correct" according to Posner? Would it be "unfair" to Posner if I imposed my own preferences concerning what is correct, and disregarded "economic correctness."

I remember an economist at Harvard Law School who said that Posner is not a real economist, and that he thought it was unfortunate that Posner had what he say as an excessive influence.

I am not sure if I agree, but I do think that Posner is fundamentally confused when he talks about what we "should" do, as if the normative could be totally excised from that word.

David

My caveat about Law & Econ: don't be fooled into thinking that it is science, just because there are numbers and equations. Many (most?) of the numbers and calculations in Posner's posts are purely hypothetical: they are not based on any real-world empirical data. I think, actually, that Posner prefers to discuss abstracts -- as a mental exercise -- rather than engage the actual data.

There is no doubt that thinking in quantitative terms can sharpen our policy analysis. However, throwing in some numbers does not alter the fact that all of Posner's posts represent his *opinion* on matters of policy and politics. It is not math; it is advocacy. Once we can get past the numbers, we can realize that he is making traditional policy arguments, just in a different way. And his core values, often, are his conceptions of efficiency and wealth maximization. If we disagree with those core values, all those numbers are not the least bit persuasive.

guy in the veal calf office

Bernard- Thanks for your reply. I'm not sure how you would quantify "better". How do you account for our different diet, leisure activities, stress, air, diversity of populace (for race based diseases), etc between the countries you are comparing? Life expectancy, survey-based happiness indicators and number of doctor visits seem like blunt instruments. Anectdotally, my health care seems significantly better then my compatriots in other countries in terms of wait time and access to somewhat discretionary procedures like MRIs, back surgery, physical therapy, and palstic suregery for accidental disfigurement.

To return to your example, if my neighbor bought a Rolls Royce for $50,000 and I bought a Dodge Charger for $30,000, I think he got a better deal.

To return to my point, I still don't know why the health care debate needs to address the percentage of GDP problem. Seems like the debate should resolve more important items.


The reason it's a problem is that the results we get are no better, indeed they may be worse, than other countries that spend less. In other words, we are not getting our money's worth. If we spent 16% and had a spectacularly healthy society it would simply be a consumption choice, as you argue. But we don't have such a society.

If you spend $50,000 on car that's your business. But if your neighbor buys the same car for $30,000 it's fair to say you could have done better.

Posted by Bernard Yomtov

Bernard Yomtov

I'm not sure how you would quantify "better". How do you account for our different diet, leisure activities, stress, air, diversity of populace (for race based diseases), etc between the countries you are comparing? Life expectancy, survey-based happiness indicators and number of doctor visits seem like blunt instruments. Anectdotally, my health care seems significantly better then my compatriots in other countries in terms of wait time and access to somewhat discretionary procedures like MRIs, back surgery, physical therapy, and palstic suregery for accidental disfigurement.

Comparisons are not easy, but rough measures such as life expectancy, infant mortality, etc. are available. If you think these are confounded by the factors you measure then I invite you to provide support for that position, and also for the position that these things produce a bias. Just saying so won't cut it.

Similarly with your anecdotes. There are lots of stories passed around about wait times, etc. I'm unimpressed by general assertions. Also, I might note we are talking about US health care in general. Just because you or I, or Posner and Becker, or any other individual, have access to excellent care doesn't mean the system works well on a national basis. I bet Kim Jong Il gets good medical care too.

Finally, please be careful about my car example. I specified that the two cars were the same except for price. If you consider a Rolls and a Charger the same, maybe we can work out some sort of deal.

hl

Cuba spends 7.3% of its tiny GDP on healthcare. That's $251 per person per year (1). The U.S. spends 15.2% of its huge GDP on health care. That's $5,711 per person per year (2). And yet the life expectancy in each country is virtually identical (1, 2).

This is an outrageous disparity.

There is clearly a fundamental flaw in the U.S. healthcare system that keeps health costs at ridiculously high levels: We pay everybody in our healthcare system way too much money. Our state and federal governments collude with doctors and other "health professionals" to make sure that every medical event be gold-plated enough to provide everybody involved with a maximum amount of money.

Most of the talk here is about how to tweek the insurance system to pay the bill - a bill that is twenty times higher, on a per capita basis, than Cuba's. The conversation should really be about reducing the ridiculous bill instead of quibbling about how to jury-rig an insurance system to pay it?

I'm inclined to think that the best answer lies at one of the extremes. Either totally deregulate the medical business (i.e.. a libertarian model with minimal restrictions on who can provide medical services), or totally regulate it in the form of a universal, government-funded, single-payer plan.

It's unfair for the government to regulate the price of medical care into the stratosphere and then tell the uninsured that they can either pay the stratospheric price or go without care.

There's pretty much only one (gold-plated) standard of care in the U.S. Why shouldn't I be able to choose Corolla-level care instead of being forced to pay for Lexus-level care? I'm not forced to hire a Ph.D. in mechanical engineering to fix my car. Why should I be forced to hire an overeducated and overpaid M.D. with a government-enforced monopoly to fix my body?

At the very least I should be allowed to hop over to Cuba for a competitive bid.

1. http://www.who.int/countries/cub/en/

2. http://www.who.int/countries/usa/en/

hl

Cuba spends 7.3% of its tiny GDP on healthcare. That's $251 per person per year (1). The U.S. spends 15.2% of its huge GDP on health care. That's $5,711 per person per year (2). And yet the life expectancy in each country is virtually identical (1, 2).

This is an outrageous disparity.

There is clearly a fundamental flaw in the U.S. healthcare system that keeps health costs at ridiculously high levels: We pay everybody in our healthcare system way too much money. Our state and federal governments collude with doctors and other "health professionals" to make sure that every medical event be gold-plated enough to provide everybody involved with a maximum amount of money.

Most of the talk here is about how to tweek the insurance system to pay the bill - a bill that is twenty times higher, on a per capita basis, than Cuba's. The conversation should really be about reducing the ridiculous bill instead of quibbling about how to jury-rig an insurance system to pay it?

I'm inclined to think that the best answer lies at one of the extremes. Either totally deregulate the medical business (i.e.. a libertarian model with minimal restrictions on who can provide medical services), or totally regulate it in the form of a universal, government-funded, single-payer plan.

It's unfair for the government to regulate the price of medical care into the stratosphere and then tell the uninsured that they can either pay the stratospheric price or go without care.

There's pretty much only one (gold-plated) standard of care in the U.S. Why shouldn't I be able to choose Corolla-level care instead of being forced to pay for Lexus-level care? I'm not forced to hire a Ph.D. in mechanical engineering to fix my car. Why should I be forced to hire an overeducated and overpaid M.D. with a government-enforced monopoly to fix my body?

At the very least I should be allowed to hop over to Cuba for a competitive bid.

1. http://www.who.int/countries/cub/en/

2. http://www.who.int/countries/usa/en/

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