Health Care Reform--Posner's Comment

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. I cannot think of a good reason for subsidizing health insurance, or, indeed, for the demand for noncatastrophic health insurance. 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. So if there were no tax subsidy for health insurance, probably much less would be purchased, which would be fine. People might even be healthier, because diet and other life-style choices are substitutes for medical care and thus for health insurance. The fact that millions of people have no health insurance does not strike me as a social problem. 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. As Becker points out, the quality and conditions of charity medical treatment (such as long queues in emergency rooms) discourage overuse of "free" medical care--it isn't really free, because the nonpecuniary costs are substantial; among those costs are the fear and discomfort associated with medical treatment. Becker also points out that the uninsured are not the most frequent visitors to emergency rooms. Many of them can afford to pay at least the modest expenses that are all that are required to to obtain most medical treatments in the market. They do not need to resort to charity and indeed, unless they are indigent, they are ineligible for it. The choice not to carry health insurance is of course influenced by the fact that individual as distinct from group health insurance is very expensive. There is a good reason for this--adverse selection. Sickly people are the most likely to insure, driving up premiums and causing the healthy to drop out of the insurance pool. 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. The combination of high premiums and low demand observed in the individual insurance market is thus an efficient combination. I see no need for public intervention, as proposed by the President. The best, though politically unattainable, reform would be to abolish Medicare, brutal as the suggestion sounds. Then people would purchase catastrophic or other medical insurance for their old age, or depend like the young on charity. If it were thought "unfair" to make elderly people of limited means pay for their entire costs of health care, there could be a subsidy, but it should be means-tested, unlike Medicare. Why taxpayers should pay the medical expenses of affluent oldsters, of whom there are a great number, is an abiding mystery, at least from an ethical as distinct from a political standpoint. 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. If people want to spend more of their money on medical care and less on food or housing because they greatly value good health and longevity, that is their free, legitimate, and authentic choice. It is a sign of affluence that the nation can afford to devote so high a percentage of national income to medical care. The Detroit auto manufacturers complain that the high costs of their employer health insurance makes it difficult to compete with foreign firms. That is not a social problem, and indeed makes little sense. Foreign firms such as Toyota manufacture cars in the United States, yet are able to control their labor costs. Competition will force the Detroit firms to do likewise. Their business error in making long-term commitments to their unionized workers is being punished by the market, as, from an economic standpoint, it should be. A legitimate concern about health costs is with the expense to the taxpayer of health-care entitlement programs, mainly Medicare. Yet even that concern is exaggerated. The demand for medical care is not as open-ended as the demand for other goods and services, with the exception of such purely optional medical treatments as cosmetic surgery for people who are not severely disfigured and drugs to enhance athletic performance, and such nonillness-related medical expenses are not subsidized. If they were, demand would soar. But most people do not court illness in order to be able to consume subsidized medical care, or demand more medical care than is necessary to treat their illnesses. This means that the demand for medical care is driven primarily by the prevalence of illness and the progress of medical technology rather than by the payment scheme. Even abolishing Medicare, therefore, would probably not greatly affect the amount of money that is spent in the United States on medical care. Whether that money is spent by the sick or by the taxpayer is more than a detail, in part because withdrawal of subsidy might induce people to adopt a healthier style of living, but it is not the principal factor driving total health costs.

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