Some Priorities in Reforming Health Care-BECKER

I will make three points: the United States system of health care may not be the most efficient but people here get good value for their large spending on health care, employer-based health insurance has the frequently overlooked major advantage of providing long term insurance, and catastrophic health coverage probably should be made compulsory. Americans spend the largest amount of any country on health care, both in terms of dollar spending, and as a percent of income-the health sector in the United States takes about 1/7 of GDP, which is a far larger percent than any other country. Although this share of income has grown rapidly during the past 25 years, the benefits are also very large. Using the economists concept of how much people are willing to pay for improvements in their life expectancy- called the "statistical value of life"- Kevin Murphy and Robert Topel (see their “"he Value of Life and Longevity", Journal of Political Economy, 2006, pp. 871-904) estimate that improvements in life expectancy in the United States from 1970-2000 is worth over $95 trillion (yes, trillion!). Even after netting out the $35 trillion dollar increase in medical spending over the same period, the net gain exceeds $60 trillion. Of course, not all the increase in life expectancy is attributable to medical spending, as declines in smoking and other behavior changes made major contributions to longer life. On the other hand, the large improvements in the quality of life due to medical spending, including hip replacements, pacemakers, organ transplants, Viagra, and other advances should be added to the benefits of the increased medical spending. Other OECD countries, such as Europe and Japan, had comparable improvements in life expectancy with much smaller increases in medical spending. Perhaps that means they have more efficient health care delivery systems than the United States has, but these nations generally ration care, and are less generous in providing quality of life improvements, such as hip replacements and breast reconstruction after breast cancer. The United States is also the world's leader in medical research, and residents of other countries come to this country for advanced medical treatment of serious diseases and ailments. I have argued in a previous post (January 29, 2007) that the tax advantage currently enjoyed by employer-provided health plans should be extended to individual and other group based plans in order to level the playing field among competing plans. All tax advantages should have a cap, however, so that "Cadillac" coverage is not deductible, and any extension to individuals and that other group plans of the tax advantage of employer plans would not raise the overall tax burden. Even with such changes, employer-based plans would continue to be important in competition against other group-based plans. A drawback of employer-based health coverage is that workers with existing medical conditions who are covered by such plans would be discouraged from changing jobs because their condition may discourage companies from taking them on. However, most job changes are by younger workers who have few serious medical conditions. Employees who have been with the same company for a few years or longer are not likely to change jobs, although the propensity of senior workers to lose their jobs has risen a little in recent years. The advantage of employer-based medical insurance to employees who remain with the same employer for many years is that they effectively have long-term medical coverage against serious health problems that could arise in the future. The big problem in individual health insurance coverage is that it is on a year-by-year basis. Anyone who develops a serious health problem can lose his coverage or be forced to pay much higher rates, especially if he wants to change plans or insurance companies. Long-term health insurance with individual plans is uncommon mainly because health insurance companies cannot force customers to make a long-term commitment. If a person has experienced good health, he may seek a cheaper plan with another company that would reward his additional years of good health, an experience that his original plan could not fully anticipate. Given such "adverse selection", health insurance companies are discouraged from offering long-term insurance. Most individuals and families need a combination of health savings accounts that give them incentives to conserve on normal health spending, and protection against major health problems. President Bush's State of the Union address proposed an excellent extension of health saving accounts that would help handle more normal health spending (see my post on this on January 29, 2007). To avoid the risk that individuals and families would attempt to free ride on taxpayers and others by not contracting for catastrophic medical coverage, one can make such coverage compulsory for everyone, either through group plans, such as from employment, or through individual plans. As Posner indicates, poorer individuals and families are already covered through Medicaid, so no additional subsidy for lower income persons is needed to implement compulsory coverage of catastrophic health problems.

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