February 13, 2005
Comments on Medicare Reform-BECKER
Total medical costs are about 15 per cent of GDP, and are continuing to rise. Medicare is some 20 per cent of this total, and its share will grow significantly in the coming decades as the population ages, and as new medical technologies develop. Many people are under the misperception that aging of the population is the main driver of the growth in medical expenses, but health economists have demonstrated that this is false. The more important reason is greatly increased medical spending at each age, especially at older ages. Expensive treatments and drugs have been developed to treat heart conditions, cancers, and other diseases, to replace and repair hips and other parts of the body, and simply to keep people alive.
A reasonable question would be why complain since the value placed on advances in both the quantity and quality of life at older (and younger) ages have far exceeded the increased spending on medical care- my colleagues Kevin Murphy and Robert Topel have demonstrated this in important studies. But the system can be made much better, as long as changes bolster the weak parts of the American medical system, and do not tear down the many strong parts.
I concentrate these brief comments on one problem only, the excessive use of hospitalization and expensive surgeries under both private and public systems of payment. One major reason for this excessive use depends on “political” considerations, while the other depends on economic reasons.
Politically, it is very difficult to prevent expensive treatments from being used by persons who gain little. To take one of many examples, removal of the prostate after detection of prostate cancer may be the best treatment for a younger person, but makes little sense for someone in his late ‘70’s or 80’s. Yet it is usually impossible to force patients who want that surgery to take instead much cheaper and more appropriate options, such as hormonal deprivation therapy, or doing nothing (“watchful waiting”).
Given that the U.S. is unlikely to be able to prevent excessive use of expensive options, we should try to find more approaches that are relatively cheap to use to treat additional patients, even when those patients are better treated in other ways. New drugs and improved understanding of the medical value of proper nutrition may both have high development costs, but they are cheap to extend to additional users, especially after patents expire and cheap generics enter. By contrast, hospitals have relatively constant costs of adding additional patients.
So I agree with Posner for this reason mainly, but also for the reasons he gives, that medicare and other medical systems should include drug coverage. The potential of drugs to reduce the total cost of treatment is provided by the evidence on costs of the antidepressants developed during the 1990’s. A recent study in the Journal of Clinical Psychiatry shows that spending on anti-depressants increased from about $400 per depressed person in 1990 to about $1399 in 2000, but total spending per depressed person declined because expensive hospital stays fell by a lot. Moreover, antidepressants also allow many formerly depressed persons to lead reasonably normal lives.
Unfortunately, the 2003 Act that introduces drug coverage under medicare has serious flaws that needlessly increase its cost to the very high levels recently revealed by a government recalculation. For persons who elect this coverage, it pays fully up to the first $250 per year of drug expenses, then has no coverage-the famous “donut”- for additional drug expenses in the middle range, and finally it has insufficient coverage at the very high end. The total cost of this program could be significantly cut while eliminating the “donut” and raising high-end coverage by adding a sizeable deductible, perhaps as large as $1000. Incidentally, a not very well understood puzzle is why both private and public systems of medical payments, and also other types of insurance, generally have foolishly low deductibles.
Another way to cut excessive use of medical care is to end the free riding by the approximately 40 million uninsured individuals who receive cheap care at emergency rooms of all hospitals, and as in-patients in public hospitals. To prevent that, everyone should be required to buy at young ages private catastrophic medical insurance that can be automatically extended. Medicaid would cover the poor who cannot afford to pay for this insurance (I cannot address the many problems of Medicaid here). Catastrophic insurance provides people with protection against their greatest fear: diseases and disabilities that require expensive treatments which they cannot afford.
A third important change would be to encourage tax-free medical savings accounts that allow unused medical balances to be carried over from year to year. The advantages of medical saving accounts with carry over provisions is that they encourage economizing on non-catastrophic medical expenses, which would help take further waste out of the present system.
Once these three reforms are in place, we can then start to “privatize” the medicare system for the elderly, except for those elderly who are poor enough to qualify for a government program like Medicaid that pays for their medical needs. The privatization of medical coverage of the elderly would be the dual to my proposal last week to privatize retirement incomes.
While reform of pay as you go social security gathers most of the headlines, the value of the looming “crisis” in the medicare system for the elderly is much bigger. Privatizing medicare would prevent that crisis from developing if combined with a system of compulsory catastrophic medical coverage, medical savings accounts, and greater emphasis on treatment by drugs and nutrition rather than by hospitalization and surgery.
Posted by becker at 09:59 PM | Comments (5) | TrackBack (3)
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Comments
"Another way to cut excessive use of medical care is to end the free riding by the approximately 40 million uninsured individuals who receive cheap care at emergency rooms of all hospitals, and as in-patients in public hospitals."
Your comments are very interesting and I mostly agree, but what I quoted above doesn't seem quite right. Are many people free riding (as I understand it, not buying insurance even though they can afford it because they think the hospital will pick up the tab as charity care), and is that really driving up costs?
People with no health insurance generally pay the *highest* fees, as far as I know, which would seem to benefit the system (HMO's bargain for lower ones). People with no health insurance that could afford health insurance, given their income and assets, don't get much charity care, as far as I know.
Those who get charity care are probably the indigent who aren't exactly intentionally free riding, since they can't afford to buy health insurance anyway.
I'm definitely no expert on the healthcare system, but maybe that is something to consider.
Posted by db at February 15, 2005 02:14 AM | direct link
A more correct statement would be,"People without health insurance are charged the highest rates".I don't have any idea what % of people without health care coverage pay their medical bills-either in part or in toto.I used to work for a hospital where the administrator told me they lost money on me every month,but I was cost effective since my patients would have been seeking care in the ER otherwise.A point to Dr. Becker;it seems to be a popularly held view that physicians don't try medical/nonsurgical treatments but I assure you that is incorrect.However,about the only nutritional asset I used was the dieticians, who are very good for diabetics and kidney failure patients.(Although there is some good data in the nutritional journals about cinnamon restoring insulin activity in type II DM and working better than prescription meds for controlling hyperglycemia.I've tried it on selected patients and am very impressed-just in case other 'docs are reading)I work some at a free clinic and most of the patients aren't indigent,just lower middle class.About 20% of the local 'docs .NP's and PA's donate their time.
Posted by LINCOLN at February 16, 2005 01:12 PM | direct link
"A recent study in the Journal of Clinical Psychiatry shows that spending on anti-depressants increased from about $400 per depressed person in 1990 to about $1399 in 2000, but total spending per depressed person declined because expensive hospital stays fell by a lot."
Let me suggest another possibility. That the number of "depressed persons" being treated increased dramatically, for better or worse. And that a lot of these newer "depressed persons" were marginally depressed, and thus less likely to be hospitalized for their mental illness. Thus, while lowering the average expense per depressed person, it did not necessarily prevent an appreciable number of patients from being hospitalized, as you suggest. Did hospitalizations for mental illness decline during the period? If they rose, and rose more than any population increase would suggest, then I think any speculation about the preventive benefits of anti-depressives is premature.
Your larger point, however, is sound. Medicine, properly prescribed, has great preventive potential. Or, as recent drug scandals have indicated, the over-prescription of medicine has many detrimental effects.
Posted by Palooka at February 16, 2005 03:18 PM | direct link
Unfortunately I missed commenting last week on Social Security, so I will do so now, followed by my comments on Medicare.
There are no less than three principle contradictions in Becker's support of the president's plan. The first is that Becker, like Posner, is not a big fan of government's borrowing large amounts of money. If the president's plan does anything, it will add several trillion dollars to the national debt, since it promises to pay the same benefits while diverting 1/3rd of the revenues. I find it mysterious that Becker never addressed the central critique of the President's plan (only to say he was anti-debt, yet still supports drastically increasing gov. debt). Not willing to challenge the facts, Becker ignores them.
Secondly, a more minor point: both Becker and Posner support a social security system that provides a minimum guarantee. Yet, this is again at odds with the President's plan. The President wants eventually to have a system of guaranteed contributions, not guaranteed receipts. What would then happen to the disabled? They'd be fending for themselves.
Thirdly, and this is a critique which could be applied to nearly everything Becker & Posner write, on one hand he believes that people are smart enough to fend for themselves, but yet the government should decide to force people to put their money in index funds. Aside from the fact that this is another point at odds with the President's plan (in which there will be significant fees), does anyone see a contradiction here? What happened to your faith in people & markets, Gary?
Perhaps its time to alter your view of human behavior to one a bit more rational, and admit that there are times when people aren't so rational, like when there they have poor information. There is a preponderance of information which suggests that people tend not to save sufficiently for retirement, and have an irrational preference for immediate consumption. (After 9/11, President Bush told us to go shopping, now, he's telling us we'd better start saving, 'cause he's going to "fix" Social Security for us.)
Continuing with this meme for a critique on Becker's Medicare reform comments, I note that Becker similarly proposes that all young people should be forced to buy into medicare... Those words are nearly enough to make me label him a socialist! Isn't this similar to what Hillary Clinton proposed? This is the first time I agree with Becker, and here's why: I had a poor cousin in Ohio. He was 35, had two kids, and made a modest, but decent, living. One day he was asked to carry a heavy box across a slick floor at work, and slipped and fell. He was hurt, and though his insurance covered him for a time it wasn't enough. Unemployed, and having quickly run through his life savings on medicine, he began to gain weight, and fell victim to depression. He had no money for surgery, and could not get insured b/c of his medical problems. Last year, he took his own life. (As it turns out, there were many strong Republicans & Hillary haters in his family, not realizing her plan would have saved his life.)
It seems this story offers another rational for Becker's plan forcing everyone to purchase health care, and then providing it for those who can't: America's poor don't invest enough in their own health & education due to budget constraints. Had the government picked up the tab for my cousin's surgery, he might have been able to raise his kids & work for another 20 years.
Posted by doug at February 16, 2005 10:32 PM | direct link
I have seen articles in the past about the efficiency of the medicare system. I have also seen lots of articles about HMO and insurance industry corruption. If we took them out of the equation we would have more dollars to spend directly on medical care.
Drug companies spend more on advertising than they do on research. If people are sick they will search out the medicines they need. Without the TV advertising alone drug companies would save enough to reduce the cost of their patented medicines.
Posted by Maggie at February 19, 2005 10:08 PM | direct link
