The Reform of Health Care--Posner

The early Presidential campaigning season is replete with complaints, discussions, and proposals concerning the health care system, widely regarded as broken. Democratic candidate John Edwards has proposed a comprehensive reform that he calls "Universal Health Care through Shared Responsibility," http://johnedwards.com/about/issues/health-care-overview.pdf. Although the Edwards plan is commendable for its detail and clarity, there is an element of fantasy in Presidential candidates' proposing detailed, specific reforms, on any complex issue, so far before the election; for the feasibility of reform depends on economic and political conditions, including the political makeup of Congress, when the President takes office. But, passing that point, the current concern about the health system, which generates plans such as the Edwards plan, may be misplaced. It is true that health costs are rising faster than the inflation rate. But rising costs, even of "essential" products and services, such as food, health care, and national defense, do not necessarily demonstrate the existence of a problem. Costs may be rising because quality is rising, which is true of health care (new and better therapies and diagnostic tools), or because demand is rising (and average cost is not flat or declining), which is also true; as people live longer, their demand for health care rises because more health care is required to keep people alive and healthy the older they are. In addition, much health care is in fact discretionary (cosmetic surgery is only one example; others are treatment for mild depression and other mild emotional or cognitive problems and treatments designed to enhance athletic ability), and demand for it can be expected to rise if quality rises relative to price. It is also true that Americans spend much more on health care on average than the people in other wealthy countries do, without greater longevity to show for these expenditures. But health care does much more than extend life; it alleviates pain, discomfort, disfigurement, limited mobility, visual and hearing impairments, and mental suffering, and it is not clear that foreign health systems, which also involve considerable costs in queuing, do these things as well. In addition, the better a nation's health care is, the riskier the population's life style is likely to be, because the cost of obesity and other risk factors for disease is less. Also misplaced is concern that the United States is becoming less competitive because employers pay for their employees' health insurance, rather than the government. Employers do not really pay for their employees' health insurance; employees (and the taxpayer, who subsidizes employee health insurance) do, because by raising labor costs employee health insurance reduces the wages that employers are willing to pay. Employers who committed themselves to assuming open-ended obligations for employees' (including retired employees') health costs have only themselves to blame for having assumed a risk that has materialized because of the rapid growth in those costs. Nor is it a scandal, or even a serious inefficiency, that many millions of workers do not have health insurance. Their health care is paid for my Medicaid if they cannot afford to buy health insurance whether directly or as part of an employee group health insurance plan. Those that can afford health insurance but forgo it either are young and healthy or are risk preferrers, gambling that they will avoid illnesses requiring expensive treatment. If their gamble fails, they will have to pay out of their pockets, and when their pockets are empty (their assets depleted) go onto Medicaid, where their care will be subsidized. Although there is no reason why people who can afford health insurance should be treated at the taxpayer's expense, the effect on the aggregate cost of health care may be neutral or even negative, because Medicaid patients receive less pricey treatment on average than patients who have health insurance. If the young and healthy who today choose to go without health insurance were forced to buy health insurance, there would be two potentially offsetting effects: the average cost of health insurance would fall because the insurance pool was getting an influx of people with below-average expected health costs (though this assumes that the insurance companies wouldn't be permitted to charge lower rates on the basis of age and health, in which event the influx of young and healthy would not affect the rates charged the existing members of the insurance pool); at the same time the average cost of insurance would be rising because aggregate demand was rising, since being forced to have health insurance the newly insured would consume more health care in order to get their money’s worth. Some people are uninsured because of lack of "portability." Suppose a person insured under his employer's group policy leaves the job, and cannot find another one; or suppose that while working for that employer he had contracted a serious chronic illness. In either case, he may find it impossible to buy health insurance at a rate that he can afford. But the idea that such experiences demonstrate a market failure comes from a misunderstanding of the economic function of insurance. The economic basis of insurance is declining marginal utility of income: the more money we have, the less utility (pleasure, happiness) an additional dollar would confer. Suppose your life savings is $2 million, and you are asked to flip a coin: heads you win $3 million, tails you lose your $2 million. The expected value of the bet is $500,000 ($3 million x .5 – $2 million x .5), and thus is positive; but most people would refuse the bet, because the pain of losing their entire savings of $2 million would exceed the pleasure of winning $3 million. The implication for health insurance is that such insurance should be limited to catastrophic long-term illnesses that would drain an individual's or a family's resources and thus be equivalent in the example to losing $2 million. Such cases are rare, and therefore such insurance would be cheap, especially for young people, who would be unlikely to encounter such a catastrophe for many years, during which the insurance company would be earning interest on the premiums paid by the insured; so the premiums would be low. Someone who purchased such insurance at the outset of adulthood would not have to worry much about the lack of portability of an employer's group health insurance because he would have his catastrophic coverage even if he switched jobs or had no job. Nor finally should we think it a scandal that such a large percentage of the Gross Domestic Product (about $2 trillion out of a total of $14 trillion) goes for health care. One reason it is so large is that other expenses of living, such as food and clothing, have become such a small fraction of overall spending. The question should be not whether the percentage of spending that goes to health is increasing but whether there are better things to spend some of the $2 trillion on than health care. Notice that liberals' concern with the increasing percentage of expenditures on health parallels conservatives' concern with the increasing percentage of GDP that is spent on government services. In both cases the proper concern is not the percentage of overall spending that goes for a particular class of services but whether there are better uses for some of the money being spent for those services. There are two ways to reduce the aggregate cost of health care, if this is considered a worthy objective, as I am inclined to doubt. One would be to ration demand. If the supply curve for health care is upward sloping, as undoubtedly it is, then capping demand would result in lower prices by forcing the market down the supply curve. But rationing demand would be fiercely resisted by patients, for obvious reasons. The second way to reduce aggregate health costs would be to force down the price of treatment by exercise of the government's potential monopsony power. Suppose all doctors were employed by the government. Then their wages would be low because if you wanted to be a doctor, as many people do, you would not have any alternative to accepting the government's wage. Of course the quality of care would decline. Or suppose (and this the tendency toward which some of the current proposals are tending) that the government bought all the drugs that are produced, having forbidden the drug companies to sell to any other purchaser. Then the price of drugs would be much lower than it is today, but so would be the quality, since the incentives for innovation would be diminished by the lower price. We should be wary of proposals that if adopted would not reduce (and might increase) aggregate costs, but instead would shift the costs to another class of payees, such as taxpayers (the Edwards plan contemplates additional federal subsidies for health care, which are paid for out of taxes) or future consumers of drugs.

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