The Medicare Challenge--Posner's Comment
Becker makes the ingenious suggestion that the effect of adding drug coverage to the Medicare program is to prevent spending on drugs from growing as rapidly as the number of persons covered by Medicare. The reason is that because the marginal cost of drugs tends to be very low; most of the costs of drugs are fixed costs of research and development. Hence the larger the number of persons eligible for Medicare drug benefits, the lower the average cost of drugs.
Nevertheless the net effect of the addition to drug coverage on total Medicare spending is likely to be a substantial expansion in the total cost of Medicare. As of January of this year, 25 million persons had enrolled in Medicare Part D (the drug part), and the total annual expense to Medicare is estimated to reach $36 billion this year. As the program is only two years old, further increases in enrollment and usage can be expected, irrespective of increases in the eligible population, since more than 40 million persons receive Medicare benefits.
The net addition to Medicare costs will be less than the cost of Medicare drug coverage if drugs are a net substitute for other covered treatments. But they may not be, because there is also a complementary relation between drugs and other forms of treatment, such as surgery; to the extent that drugs reduce the pain, discomfort, or disability of surgery, they may increase the demand for surgery by reducing its nonpecuniary costs, a cost reduction that though real will not be reflected in the Medicare cost figures.
In addition, by increasing the demand for drugs, Part D will increase the net expected profits from new drugs, and thus increase the incentive to create such drugs, with the heavy fixed costs that, as Becker points out, are entailed by the development of new drugs.
Still another problem with Medicare drug coverage is that people have less aversion to popping a pill than to being operated on or otherwise confined in a hospital. The cost of surgery, as it appears to most people, includes a significant nonpecuniary element that of course is not reimbursed by public or private health insurance. Taking drugs does not impose such costs unless a drug has serious side effects. Hence the Medicare drug subsidy should cause a greater percentage increase in demand than the traditional Medicare subsidies did.
Drugs also provide an attractive but costly substitute for life-style changes designed to improve one's health. If the choice is between giving up rich food and taking a pill paid for by Medicare, the latter may be preferred though the social cost may be higher; the subsidy confronts the consumer with false alternatives from an overall social perspective, just like monopoly pricing.
The addition of drug coverage to Medicare entrenches the worst feature of the Medicare program, which is the lack of a means test. There is no reason why people who can afford to purchase health insurance that will cover their medical expenses in their old age should be subsidized by the taxpayer. There is, however, no political will to require a means test. More broadly, there is no political will to reduce public expenditures on health care. The focus of politicians is not on containing costs but rather on what has the opposite effect: expanding coverage. Congress is moving to require health insurance companies to cover mental illnesses, despite uncertainties about the efficacy of treatments for mental illness and the "cosmetic" element in the treatment of such illness because of the lack of a clear distinction between being mentally ill and simply being less happy, focused, energetic, outgoing, and, in short, successful than one would like to be. Especially because of the optional character of treatment for borderline mental "illness," demand for such treatments will be highly responsive to a subsidy, assuming the insured person who demands such treatments can shift some of the cost to the other members of his insurance pool. Notice too how the movement to require insurance coverage for mental illness will interact with Medicare drug coverage to further expand drug usage by the elderly.
In addition of course the politicians want to extend health-insurance coverage to the 40 million plus uninsured Americans, and this will increase the demand for medical services. What politicians say in a presidential-campaign year is not, however, a reliable guide to their intentions. I suspect that when the new Administration takes office in January of next year it will find that fiscal constraints preclude any significant expansion in the gargantuan federal subsidies for health care (including such indirect subsidies as imposing mandates on private insurance companies); but neither can we expect meaningful measures of cost containment.