I'm eager to read the posts, as I don't see much to disagree with.

"Concern has been expressed that increased demand for drugs may increase their price. That is unlikely. The principal cost of drugs is R&D. The manufacturing cost is slight"

But the cost isn't set by the cost of production and development, but by its value to the person who buys it. Assuming that the drug is under patent protection the cost should rise if people are willing to spend more for it.

If people have $250/year `to spend' then they will be willing to spend more on drugs, so I would expect the cost of drugs to rise.

AGL

Perhaps, as in the previous discussion on Social Security, privatization could be an alleviating factor for Medicare as well.

Simplistically, private health insurance companies maximize profit by attempting to control several dimensions, among them:

1. The numbers of payers and amounts of their premiums. Increasing market share by marketing and careful adjusting of premiums provides a reliable inflow of cash.
2. The numbers and amounts of payouts. Tightening the outflow is managed by enforcing standards, delaying payouts, negotiating rates with providers, restricting the number of providers and generally restricting outflow.
3. Investing the float between premiums and payouts. The float that is generated in the first two dimensions is put to work in financial markets.
4. Reducing the risk for the client. Here the insurance company attempts to make payouts less likely by teaching preventative care (and reducing payouts).

Perhaps the privatization opportunity for Medicare could be in investing the float, similar to the way private insurance companies invest in the marketplace. There could be a Medicare funding investment board judiciously buying securities and equities with Medicare funds, in a way similar to public and union pension funds investing in equity and security markets. Imagine the impact on markets with this huge influx of funding.

Thanks for the very thought blog.

However, these temptations to free ride provide an argument for compulsory health insurance rather than, as often argued, for socialized medicine.

What, apart from the name, is the difference between "compulsory health insurance" and "socialized medicine"? (Assuming we're talking about "single payer" schemes like that of Canada, and not "single provider" schemes like Britain's NHS.)

Yes, I thought the same thing, Phil. If everyone is required by the government to purchase health insurance, I assume government-imposed price controls would be necessary to prevent gouging. Wouldn't we have a government controlled health care system at this point?

Can someone please explain how a comprehensive health care insurance market with private insurers would work in the real world? I understand that as a rule of thumb, markets are more efficient when there is greater information available to the participants. Isn't the opposite the case with health insurance in that insurers will use information to cherry pick desirable customers?

If insurance is about pooling resources and thus spreading risk, who is going to insure the riskiest among us? At some point, certain customers will be undesirable to insurers who are in the business of making money. So with a fully private health insurance system, won't there be a group of the uninsurable (at a profit)?

Also, it seems to me that the provision of health care and services is unlike other products in that demand for such is not efficiently satisfied. If one becomes injured or sick, one simply does not shop around, especially one's life is at risk.

(1) Requiring medical insurance for all, or even catastrophic insurance, is easier said than done. Medicine is critically different from driver’s liability insurance, in that driving is considered a privilege, whereas mandatory insurance for all, to abate the free-riding problem, is, well, mandatory. Many, many persons, often though not always indigent, use public transportation, use mopeds, or let others give them a ride when they do the rare traveling outside walking distance. Those that choose to drive without insurance can be jailed for electing to engage in an illegal activity. I do not see how to codify an effective “opt-out” provision from this requirement. We cannot jail people who refuse to find health insurance. That would not even be constitutional, I would think. Barring that, a lot of people would not get health insurance. Requiring health insurance as part of employment would greatly increase the use of black market labor, part-time positions that are exempt from such a requirement, etc.

(2) My brother and I (I’m a law clerk, and he’s a medical student) were talking about this yesterday. One of the big problems with moving towards universal care is how to define the parameters for health care to which all would now be “entitled” under the requirements. The same problem exists with the minimum wage and any other market control. Those in the health care field understandably feel a strict, fiduciary duty to their patients to stop at nothing to cure them, so far as they can. That belief can translate into an inflated belief in the efficient amount of health care, such that everyone becomes entitled to the latest and greatest medicines. That entitlement, in turn, would facilitate a major growth in the supply of wonder treatments. Such inefficiency may already exist, as we see in the extraordinary cost of the last six months of life or so. Until we see health care as more of a commodity instead of a right, these costs will continue to spiral upward. Regrettably, making it into an entitlement would feed that problem, and the public choice problem of health care providers wanting to see the government support/subsidize these fancy treatments would create inefficiently high levels of care. No one wants to make those choices, and yet they will have to be made somehow, or we could easily cripple our economy in the coming century. Health care as 15% of GDP already strikes me as incredibly high.

Regarding the economically confusing low deductible phenomenon: I believe there is a good economic rationale for it. A low initial deductible encourages people to visit the doctor with little up-front cost. Encouraging that visit constitutes a powerful cost-reducing mechanism, because it helps catch medical problems early, before they fester. Preventive medicine is perhaps the best cost-saving possibility on the platter today, by far. A close friend who is a physician recently told me that he thought there should be an obesity tax or some sort of extra cost for health insurance for the obese, given that obesity complicates just about every health treatment he does, resulting in greatly increased cost. Same with smoking and other such poor behaviors.

I’m a good example of the problem with a high deductible. We federal government employees have access to GEHA, which allows a very high deductible for the lowest cost plan. I was ecstatic. Armed with my microeconomics textbook, I triumphantly chose that and bragged about it to my economics major buddy. Well, now I have a small problem that may be neurological in my knee that I have not had checked out in six months. Brother tells me I’m crazy, because it could become a major, major problem. I keep putting it off, because I know in the back of my mind that I’ll have to pay for the whole visit.

Hence the “donut” coverage: encourage initial visits to keep costs down for irrational people like myself, but require out-of-pocket for potential treatments to prevent people from stocking up on anything the doc might prescribe without regard to cost. Then, have the coverage go up again for catastrophic health costs. Btw, I just scheduled an appointment about the above.

"What, apart from the name, is the difference between "compulsory health insurance" and "socialized medicine"? "

In compulsory health insurance, 3% of the GDP is funneled through the market via private corporations, with all waste and private profit taking labeled as a transaction cost. Contractarians preach the religion of free will, and the CEO of Pfizer buys a helicopter.

In socialized medicine, 2% of the GDP is taxed and spent directly on provider benefits, with costs controled by the administrative agencies, and no profit taking. The CEO of Pfizer only gets a limo, but his employees can afford to take the drugs manufactured, and no HMO hassles them about their claims. The extra 1% of GDP is spent on drug research or schools.

Judge Posner has some interesting proposals, but I have a few questions:

1. If we abolish medicare, would private insurers really agree to cover the elderly? I would guess that the premiums would be astronomical, or the coverage would be minimal, or both. Probably the only way to make meaningful private health insurance truly affordable for the elderly would be to legislatively cap the rates and require insurers to offer coverage. But then, that raises the question whether a government-run program would be more efficient. A private system does not necessarily work better than a public system, depending upon the problem and the goal. For instance, administrative costs for health care in the U.S. consume about 30-40% of total spending. In single-payer systems, the figure is closer to 3%, I believe. I don't know the overhead costs of Medicare, but I assume they are less than those of private insurers. That savings alone might make it worthwhile.

2. If our goal is to reduce the cost of our health care system, some other reforms might have more of an effect:

First, there is not truly a free market in medical services. Patients do not know the cost of health care or drugs up front, have no access to information regarding the quality of doctors, and cannot truly make informed choices. This is a recipe for gouging. If patients could compare the costs of doctors, hospitals and drugs (perhaps online), and could research quality control information as well, we could have a truly competitive market. Doctors, hospitals, and drug companies might be forced into bidding wars as a result, but isn't that the free market? Price should be negotiated up front, as is true with every other contract for goods and services. Of course, subsequent discoveries may increase the price of treatment, but that can be negotiated up front as well.

Second, patents of drugs arguably last too long and are awarded for drugs that are not innovative. Thus, drug companies can overcharge for too many years. The R&D costs are not nearly as high as companies claim. Simply put, Pfizer, BMS, etc. make too much money at the expense of ordinary patients.

Third, our system of employer-based insurance makes no sense. Workers, especially private-sector workers, are at the mercy of their companies, because insurance is prohibitively expensive to purchase on the private market. Companies increasingly hire temps, "part time" workers, or "independent contractors," because they do not have to provide health benefits to those categories of workers. This fact, more than free riding, is the reason for our 40 million uninsured. We should end employer-based health insurance. Large purchasing alliances should be allowed to negotiate with insurers, preferably across state lines, to obtain reasonable rates. Consumers should all have the option of joining or forming alliances. Health insurance should be portable and should be required to cover "pre-existing conditions" (as I think it now is, largely). This would reduce the cost of insurance, make our system more sane, and reduce the number of transient uninsured. By doing so, it would also reduce the number of uninsured who must be treated at public expense.

Fourth, Medicare and Medicaid should adopt the managed care model (PPOs and HMOs) that pervades the rest of our health care system. It is a more efficient system of rationing care. However, with managed care, a strong "patient's bill of rights" is necessary to ensure that patients are not denied coverage for needed care.

With those reforms, I think that we could make the system more sane and drastically cut costs. The more intrusive remedies of socialized medicine -- which I dislike, because it limits choice -- or mandatory insurance would be unnecessary. Hopefully.

One final note: of course, any system of medical insurance will result in the healthy subsidizing the unhealthy. There is nothing wrong with that. Standing behind the veil of ignorance, none of us know what our medical needs might be. It is unjust to force people to risk bankruptcy from the twist of medical fate.

OK, 7.8 machines per million eh? Well, Finland, another country with socialized medicine, has 15 per million. Iceland has the most with 16.5!

So, if Canada uses its machines twice as often as those crazy Icelanders, we get...

THE EXACT SAME EFFECT

Better go drum up another statistic. How about asking how many MRI machines they have in Compton or Watts. Or better yet, how many people living there have any kind of health insurance at all. (I don't know if you have priced MRIs without insurance coverage, but trust me, you aren't getting one.)

Or, look at me, I've got an Engineering degree and 7 years experience. I'm in school working on a JD, but guess what, I can't afford health insurance. I just borrowed $30,000 for one year of school, and I am not borrowing another $1000 from Sallie Mae and giving it to Blue Cross for a plan that pays 50% after a $1000 deductible. So yeah Posner, I'm a "free rider!" Those thousands of dollars I paid over 7 years without ever filing a claim... that doesn't count, it is gone with the wind of my last layoff. I wish I knew who's heart bypass I paid for.

Go ahead, make me buy insurance. No one wants to be a free rider, emergency room care is horrible to deal with. Someone had better give me a job though, because you can't get blood from a stone.

I know, Posner can give us all jobs, and then we can get on the nice 100% coverage Federal health plan too! Soon we will feel so secure in our good health care, all the world will look like ungracious free riders to us too. Its all so easy when you have money! Why can't you all just have enough money? You must be irresponsible. Wait in line with the rest of the irresponsible charity cases. What, are you crying? Responsible people don't cry!

I know at least a few people who have been free riders on the system involuntarily--people with existing health conditions who at some point couldn't get health insurance at a price they could come up with. My dad was one for awhile, before he went back to work after retirement. As a diabetic smoker with high blood pressure, nobody wanted to write him a policy at all. (Maybe nobody bothers quoting rates as high as would be reasonable for someone with his health conditions.)

--John

Corey, bitter much?

I think it's worth noting that in socialized health care systems such as in the EU, health care comes much, much slower than in the US, to the point where sometimes patients wait up to two years for a ride in the MRI or investigative surgery.

That isn't to say that such a system is without advantages; but it has severe flaws of its own, too.

John - I don't think your father should be classified as a "free rider," since he tried to get health insurance but failed. Rather, he should be considered a victim of the current system - an example of why many people support universal coverage. If an insurer were forced to cover him for the same rate as anybody else, then perhaps the insurer would lose in his case, but the system would save overall, because managed care is less expensive than acute care at emergency rooms.

Judge Posner's comment, here and in the SS discussion, about the way of seeing people as almost more like three or four people (youth person, young adult, middle age adult, senior citizen) that do not really think for the succeeding "person," pertains to the person's father above. That is a common phenomenon. Regrettably, lifetime health insurance products are not sufficiently demanded. That is what needs to happen--people need to buy their own health insurance plan that protects them as they age, and start when they are young and can get coverage.

The above 4-part person has a very high discount rate and therefore does not save that much for the future. Alternatively, one could say this is a market failure due to imperfect information, where Young Adult just does not know what the true health care forecast for himself will be.

One very appropriate solution to this problem is to attack it at its root, not the branches. A required course in the details of lifetime personal finance, such as the types of problems needing insurance and the economics of optimal saving and investing, taught in high school, would be *valuable* preventive medicine.

I'm all for teaching people life skills such as money management, how to save, and how to obtain health coverage. But a lifetime policy strikes me as problematic. Can many young people afford such a policy? Can they be sure that the company will be around all their lives? What if they move to another city, state, or country? What if they want to change policies because another one is better; will they be locked in, therefore destroying choice (and with it competition), which is the raison d'etre of a free market?

If we're going to require "life" policies, we may as well have government-run health insurance. The private sector just adds another layer of bureaucracy, and a lifetime policy eliminates choice, so why bother with the free market? The gov't can offer the same options more reliably and efficiently. Not that I support a single-payer system, I don't, but if we're going to destroy the market anyway, why bother with the extra trouble of private insurance?

I'm all for teaching people life skills such as money management, how to save, and how to obtain health coverage. But a lifetime policy strikes me as problematic. Can many young people afford such a policy? Can they be sure that the company will be around all their lives? What if they move to another city, state, or country? What if they want to change policies because another one is better; will they be locked in, therefore destroying choice (and with it competition), which is the raison d'etre of a free market?

If we're going to require "life" policies, we may as well have government-run health insurance. The private sector just adds another layer of bureaucracy, and a lifetime policy eliminates choice, so why bother with the free market? The gov't can offer the same options more reliably and efficiently. Not that I support a single-payer system, I don't, but if we're going to destroy the market anyway, why bother with the extra trouble of private insurance?

Thank you again Judge Posner for your reasoned analysis that defies conservative/liberal categorization.

I'd be very interested to read your responses to David's point on employment based insurance, though I suspect I could find your views elsewhere with a little effort.

i don't understand.

You say that people want to feel like they are getting what they pay for, so they won't tolerate high deductibles. In a private system however, like magic, they won't care about getting what they pay for, so all of a sudden people will demand higher deductibles. This, of course, is the classic "liberal" mistake of thinking that people are stupid and can't make decisions for themselves (like picking politicians who will act in their interests).

David:

I don't think lifetime health insurance plans are anti-market. That is somewhat similar to Clinton's initiatives in the 90s to make health insurance more portable. Can't remember what the exact mechanism that got passed does, but that's part of it. It decouples health insurance from the labor circumstance and avoids the problem of companies not hiring full-time to avoid paying benefits. Even today, a major reason for the so-called jobless recovery appears to be the high cost of health benefits for hiring new workers.

Regarding if a company goes belly-up 20 years down the line, I asked just that question to my life insurance agent when getting a policy a few months ago. He stated that, here in NC, insurance co. bankruptcy is protected by a required reinsurance pool to which all licensed insurers contribute to bail out a defaulting company. That, to me, sounds like an efficient way to lower transactions costs & the problem of the bankruptcy stay.

I think whole life insurance is a product that can easily be crafted by the market. I researched my life insurance company carefully to see that it had an excellent long-term reputation, then went with a good one. The desire for a good reputation checks part of the bilateral monopoly problem. Second, my premiums start low and rise slowly as my ability to pay increases. For whole life insurance/annuity policies, starting early is the way to go. Same with health insurance.

RWS,

The problem is that potential payout is known for life insurance (you buy a $100,000 or $500,000 policy), while it is highly inflationary in the case of health insurance (who is to say how much it will cost to have a heart surgery in 30 years, or who knows what treatments, such as nanotechnology, will cost when they become available). Because of this variability, companies face additional obstacles in providing long-term health insurance like you describe.

Excellent point, though a government entitlement plan faces the same uncertainties in designing and funding, and without the efficiency-enhancing aspects of the market for insurance. To an extent, choosing an insurance company is a bit like entering the market for optimal government. The insurance companies would compete for “citizens” (customers) based on a track record. The customer chooses the insurance company knowing that there will always be a tension between cost of the plan and the generosity of the insurance fiduciary. The same thing exists with disability insurance. I looked into the company’s standards for what constitutes disabilities and whether there is an appeal process before going with them–and that is a life-time fiduciary insurance contract, too. Getting disability insurance early pays off big time, rather than later, too.

This option has to be weighed against the government option, where many of the same problems arise, though with often greater inefficiency and greater potential to veer away from optimal coverage and innovation in the insurance product.

Speaking of the market for optimal claim processing/optimal government... a very interesting and well-researched article on the competition for optimal rules in the various British court systems, with many new findings on the subject: Todd Zywicki, The Rise and Fall of Efficiency in the Common Law, 97 Nw. U.L. Rev. 1551.

RWS,

My skepticism of socialized medicine runs deep, but it doesn't entail the same unknowns as your lifetime health insurance plan does. It's true that unexpected inflation could put pressure on government-run health care plans, but that is something which can be addressed when it arises (through raising taxes, for example). But the feasbility of life-long health care plans that you describe requires, I think, the insurer to have reasonable expectations about future costs, while government-run programs only require adjustment once costs and available funding change. In other words, the insurer must have confidence in their ability to predict future costs and probabilities. The ability to predict future costs is much easier with life insurance than it is with health insurance. Uncertainty about future costs will lead to higher premiums, or the unwillingness of insurers to engage in the practice at all. My point, I think, is that because of the great uncertainty here, free market solutions of the kind you describe seem infeasible.

I am not an expert on insurance, but one of the reasons I suspect life insurance is cheaper when purchased younger is that your early premiums act as investment for future payouts (as well as spreading out the costs of later, higher risk periods over more years). Perhaps some of this effect could be captured with medical savings accounts--allowing one to save for future health problems. Maybe the government could pool these funds to protect individuals from catastrophic losses, but the benefit of investment would remain. Of course, older persons would have to be excluded to avoid the Ponzi scheme attributes of SS.

An addendum to my last comment:

Thinking about this a bit more, let me compare to pension plans.

I think your plan is definitely feasible if it were a defined contribution health plan. That is, people pay in X dollars each year, hope it grows to a large amount over time, and then they can use those dollars for future health problems. If they run out of money, then they run out of money.

I do not think your plan is feasible if it would be a defined benefit plan. This is for the reason I have already written about--uncertainty. I don't think a company can predict future costs well enough to guarantee any set benefits in the realm of health insurance.

Singapore has a system of catastrophe insurance, coupled with some redistribution and a system of compulsory medical savings accounts. Seems to work well for them: their key healthcare outcomes are just as good as those in the United States (according to the World Health Organization) but the total cost of the system is less than what the US system spends on administration alone - around $1000 per person.

Some commentators have expressed their distrust of 'socialised medicine', but the distrust seems based more on ideology than experience or evidence. Yes, we know that well-functioning markets produce better results than a command economy. Health-care markets don't function well (for well-established reasons) so the argument against socialised medicine needs to rest less on theory and more on evidence.

It's worth bearing in mind that the British system costs around two thirds less than the American system; healthcare is largely free at the point of use for anyone who walks into a doctor's surgery, but the government spending required to support the system is less than that in the United States. My own experience as a Brit moving to the United States was that the extra money was being spent on paperwork, defensive medicine and luxury rooms which I could have paid for myself had I wanted them. The British system was faster, smoother and used the latest cost-saving diagnostic technology. To my surprise (and in an unscientific sample of one) the 'socialised' British system started to look pretty good by comparison.

Palooka:

I think you're completely right that if a lifetime health insurance plan were a defined benefit plan like a pension plan, it would be wholly impractical and unworkable from a financial standpoint. My guess is that the market should be able to codify some set of standards and options that one chooses that can adapt to changes in the market. One insurance co. might say it always hires the best docs in the area and attempts the finest in home hospice. Another might be middle grade, and another (like my GEHA standard) would be the cheapest docs within 100 miles.

Medicine adapts and changes, and the general type of coverage one buys would adapt accordingly. The reputation of the company and its name brand value would be a key part of its incentive to act as a good fiduciary--just like my (very reputable) disability and life insurance company, which has worked hard to establish that rep and advertises itself as such. Like someone said, it's sort of a "medical savings account with risk pooling" sort of a product. Maybe just risk pooling for catastrophic costs or some such.

I agree your point is well made, though--this may be more an ideal market solution than a realistic one. Complicated stuff. I guess I would just say that I would prefer the above to government run approaches, my faith in which continues to dip to new lows for so many reasons, the more I see of it. But, until we teach financial responsibility in the schools, imperfect information problems will swamp any market-oriented solution, I believe. Regardless, if we think we can turn high quality health care into an entitlement, we could easily tax this country into the ground in the coming century.

RWS,

I think the idea has a lot of promise. Even if that promise is only ultimately realized in a government program of some sort. The lessons of the market and a private insurance, at a minimum, can be instructive to that end even if the "ideal" is never realized.

Tim Hartford,

I think it is foolish to just compare costs as the measure of if a socialized medicine system is working efficiently or not. My principal concerns in having socialized medicine is the loss of quality, decrease in quantity, and the loss of innovation. If everybody gets their health care paid for, that may feel great in the short-term, but I have serious doubts it would help society's health in the long term due to fewer health services of less quality with fewer innovations. If I had confidence in the ability of obtaining a system which retained comparable quality, quantity, and innovativeness,, then I would be much more open to the idea.

"My principal concerns in having socialized medicine is the loss of quality, decrease in quantity, and the loss of innovation."

Those would be great concerns if there was any evidence that the government is institutionally incompetent in the area of medicine.

Much of the current innovation in medicine IS now funded directly or indirectly (through university grants) from the US treasury. What the Market adds is 40% sales and marketing costs (in the case of drugs) and overproduction in areas with high profit margin. The government can avoid both of these evils by guarantees of universal access and pricing at cost.

The government can buy just as many doctors and MRI machines as private hospitals can. It has less incentive to be "efficient" because it is not in competition and has more incentive to focus on fair distribution. This is a good focus in health care because pure market economics rejects fairness and suggests perverse results (like pricing poor people out of the hospital or allowing the old to die once they have stopped producing.) It is not possible to apply bargaining theories to a situation where anyone will pay all they have in order to not die. I doubt that even rich economists would say that hospital beds should be distributed according to ability to pay. Too many people make more money than the economists.

I would go so far as to say that the Market is incompetent to provide universal access to health care. It is easier for me to see perhaps because I am not an economist and have not spent decades thinking about the world as if transaction costs are always zero and initial distribution of entitlements does not matter.

Certainly evidence would support my assertion, given that currently more than 1 in 10 Americans are without health insurance. Calling these 40 million people free-riders doesn't fix the
system. Nor does taking half steps towards socialization (compulsory private insurance) in order to hide the growing mass of discontented market-failures.

Compulsory private insurance or compulsory private retirement investment is just socialized insurance plus profit taking and marketing costs. If we are willing to drop the pretext of autonomy, why keep the pretext that providers are entitled to appropriation of a percentage?

My principal concerns in having socialized medicine is the loss of quality, decrease in quantity, and the loss of innovation.

"Those would be great concerns if there was any evidence that the government is institutionally incompetent in the area of medicine."

Corey, in all those years you proudly were not thinking like an economist, maybe you neglected these little economic nuggets: What happens when the price of something is zero? What happens when professionals are undercompensated? What happens when the government places price controls (a natural response to government-run health care) on a product or service?

Shortage, shortage of labor, and MORE shortages. All effecting quantity and quality of medical services. Your bizarre assumption that the profit motive is not a powerful driver in reaching new innovation notwithstanding, the last several hundred years of human history have proven you wrong.

As to "proof" of these effects, one needn't look any further than a country with socialized medicine.

As well as being general economic truths, these effects are seen in countries with socialized medicine. They are not a matter of "idealogy," as one commenter put it.

http://www.angelfire.com/pa/sergeman/issues/healthcare/dentists.html

http://www.angelfire.com/pa/sergeman/issues/healthcare/uknurses.html

http://www.fee.org/vnews.php?nid=2040

http://www.cato.org/dailys/9-23-96.html

http://www.angelfire.com/pa/sergeman/issues/healthcare/smokers2.html

One more:

http://news.bbc.co.uk/1/hi/wales/4173073.stm

"What happens when the government places price controls (a natural response to government-run health care) on a product or service?"

I don't know, lets ask the farmers. They have been operating with price (and production) controls for over a century now... yet we all still seem to be eating.

I did not say that the profit motive does not drive some innovation, I said that direct payments from the government to innovators also drives innovation, without profit taking. I suggested that direct subsidies are more efficient because the overhead/transaction costs of the profit-motive system are consistently understated. Direct subsidies also have the virtue of being democratically controllable in an equal fashion. (1 vote per person vs. 1 vote per dollar) I will admit that this was more implied than overt in my language.

Your fundamental ideological assumption here is that innovation comes from capitalists, and since capitalists get profits, profits motivate innovation most efficiently. However, actual technological innovation originates in the brains and depends on the labor of people who are paid salaries.

Admittedly some engineers and scientists manage to win the stock option lottery and become capitalists themselves, but for every one of those there are at least 500 who eat on their payroll checks each month. The option lottery is the carrot on the stick that converts them into 80 hour per week wage slaves. These professionals are undercompensated in the CURRENT system, at least in comparison to senior management at the companies they inhabit. Yet innovation occurs.

"the last several hundred years of human history have proven you wrong."

The last several hundred years of human history have proven that market theory is an extraordinarily effective tool for protecting status quo distributions of wealth and power.
What you might call the truimph of liberalism I would call the beautification of feudalism. The devil convincing the world that he doesn't exist.

Market theory protects initial distribution of wealth, because having more dollars means having more votes in the world of bargaining. It is exactly like playing poker with someone with enough chips to make you go all-in on every hand... you will lose at that game. Protecting the initial distribution is the same thing as protecting rights based on status, which is feudalism.

So if you want a King or the CEO of Blue Shield making health care production decisions that affect everyone's ability to access care, by all means continue to shill for privatization.

The bottom line is that you will end up with dole queues in either system, in Market systems because the poor are priced out of the system, and in socialized systems because the poor are NOT priced out of the system. The question is, which queue is shorter, and which is more equitable. If you think possession of money is evidence of moral worth, then go for the market and hope you always have money.

In response to Palooka and Corey, I do not think that it is an "all or nothing" choice of a market versus a command and control system. We can create a system that harnesses the innovation of the market while creating more fairness for those not born into wealth. For instance, we could have gov't subsidized insurance - perhaps through tax credits or vouchers - to those who cannot afford it. We could have gov't sponsored purchasing alliances to give collective bargaining power to consumers, which will bring down the costs of drugs and treatment. Or, we could have modest price controls that allow the medical industry to profit, but not too much. And, we could have gov't grants to researchers to encourage innovation. In fact, the NIH already does this, and most of the groundwork of innovation comes at the university level. The drug and biotech companies merely buy the promising ideas and develop them further.

There is of course a trade-off in every choice. A pure market system might produce the most innovation and the most choices, but it will benefit only the most wealthy. The tough decision is to figure out which compromise is most acceptable to the nation as a whole. I would suggest a "veil of ignorance" analysis: we should think about the question as if we don't know where we will fall in the economic ladder. Probably, from behind the veil, most people would support a system of at least subsidized, if not universal, insurance, with enough market aspects to ensure a steady dose of innovation and choice.

"I don't know, lets ask the farmers. They have been operating with price (and production) controls for over a century now... yet we all still seem to be eating."

Different kind of price control, buddy. Price floors versus price ceilings. Price floors cause surpluses, price ceilings cause shortages. You really ought to brush up on your econ if you're going to debate in "econ for neocons." Wasn't that your phrase?

"However, actual technological innovation originates in the brains and depends on the labor of people who are paid salaries."

Yes, and when you cap their salaries to control costs, you get fewer individuals willing to do the work.

"The bottom line is that you will end up with dole queues in either system, in Market systems because the poor are priced out of the system, and in socialized systems because the poor are NOT priced out of the system."

Well, the poor aren't priced out. Heard of medicaid? The lower middle class is left without coverage, however. But without coverage doesn't mean no access to medical services. Uninsured persons are one of the reasons why insurance is so expensive (free riding).

The reason there are long queues is because the price is zero or negligible. What if McDonald's had free food tomorrow, what would happen? The shortage is also caused because of lower paid nurses, doctors, dentists, and other professionals. The supply of medical services decreases, which only exacerbates the shorage.

So, we get fewer medical services, of poorer quality, and with less innovation. How is that a formula for progress, Mr. Progressive?

"You really ought to brush up on your econ if you're going to debate in "econ for neocons.""

Or, to put it another way, use your terms and preconditions on the debate or be subject to ridicule. How typically fair and balanced of you.

This isn't the free food hypothetical and you know it. We are talking state administration vs. lassiez faire.

I reject your assertion that price ceilings necessarily cause shortages. I support protectionism wholeheartedly in necessity cases where some locality or class has insufficient resources to reach the price set by majority demand. I don't care if I have to wait 5 years to afford the flat panel TV that someone else paid 500% markup on yesterday, but this is health care and everyone is equally entitled to access it.

Yes I have heard of Medicaid, and I support its protectionist nature. In fact, I support raising the bar for access to medicaid in order to cover the 43 million lower middle class "free-riders" you point to. They are in my view not free-riders because they are without insurance involuntarily.
43 million bad faith actors don't just appear magically in times of recession. Perhaps you have heard of economic duress? It is absurd to draw the poverty line below the point where people have to make tradeoffs between health insurance and rent or food.

I have said nothing about capping doctors salaries below an incenting price. Obviously even a socialized system will pay doctors enough to secure an adequate supply of them. I am talking primarily about capping administrator, profit, and marketing costs. Amazingly, despite salary caps throughout the federal government, hundreds of thousands of people still choose to work for it. Who would have guessed that someone would be willing to be President for so little money!

If a Doctor chooses not to practice medicine because he or she is not content with making more than all other professionals but insists on that 1 in 1000 shot at a $10 million profit taking, then good riddance to that greedy Doctor.

The simple fact that everyone dies guarantees that there will always be sufficient demand to compensate doctors. What I am for is a universal flat health benefit financed via an uncapped progressive tax, which amounts to a redistribution and that makes you mad. But if you are against redistribution then you are for the current distribution, which leads me to presume that you are in the upper middle class. (Or are applying for admission) Unless you were born rich then some money has obviously been redistributed to you. You probably feel that your superior wealth is the result of some superior effort or wisdom or quality, which would of course entitle you to keep it while I wait in line at the emergency room. (being a free-rider and all)

Of course I think wide disparities of wealth cannot be correlated to disparities in talent. They are therefore suspect and reflect a pathology of the Market. I say that the more you are able to extract from the commons, the more you are obligated to give back to it.

Or to put the whole argument another way, my right to competent health care is inalienable, I cannot sell it for food, and you cannot buy it with cash. Market theory is incompetent to allocate inalienable rights.

Many of the 43 million uninsured are voluntarily uninsured, not because their salaries cannot support it.

One of the reasons the poor are priced out of the health care market is that there is a quality minimum that medical malpractice law and other regulations set, such that providers that go below it are subject to enormous liability.

The best in health care is not an inalienable right, in my view. We could easily tax the country into a depression with that sort of viewpoint as the population ages, even aside from all of the other problems that such a government solution would create.

"Or to put the whole argument another way, my right to competent health care is inalienable, I cannot sell it for food, and you cannot buy it with cash. Market theory is incompetent to allocate inalienable rights."

Egad. There is demand for services. There is limited supply of services. Creating a government benefit does not change this at all. All you do is alter the mechanism of allocation from one in which cash buys care to one in which political clout buys care. The person at the end of the line in The People's Healthcare Plan is no better off than the person rationed due to lack of funds in a market driven healthcare system.

To assert an inalienable right to a good or service funded by someone else is logically inconsistent anyway. If the two of us are sitting on an island, do I owe you a job or do you owe me a job? Do I get to sit while you provide my healthcare or do you sit while I provide yours?

"Or, to put it another way, use your terms and preconditions on the debate or be subject to ridicule. How typically fair and balanced of you."

I don't particularly revel in driving this point home, but you leave me no choice. It's not that you refuse to accept the premises of modern economics, it's that you don't UNDERSTAND those premises. Thus you group a price ceiling with a price floor. Something which theory and experience prove has opposite effects (if any effect at all)! When I was making the point about price caps on medical workers' salaries, I was making the point that such caps may (and, in fact, do) cause shortages of labor. Your reply that we don't starve because of price controls on agriculture was inapposite, because price floors cause SURPLUSES!

"They are in my view not free-riders because they are without insurance involuntarily."

Free riding needn't be voluntary.

"I have said nothing about capping doctors salaries below an incenting price. Obviously even a socialized system will pay doctors enough to secure an adequate supply of them."

Experience proves you wrong, Corey. Did you look at any of those links I posted? Nurses, dentists, and other professionals flee socialized medicine for better pay abroad, retire early, or enter another field domestically. And the lower pay isn't enough to attract newer professionals, even if many choose to stay. Unless you think the BBC and The Guardian are crazy capitalists trying to give socialized medicine a bad name! Here are two of them, once more.

http://www.angelfire.com/pa/sergeman/issues/healthcare/dentists.html

http://www.angelfire.com/pa/sergeman/issues/healthcare/uknurses.html

This is just a taste of the problems you get when don't let the market and its invisible hand do the work for you. Oh, and as far as your tendentious claim that socialized medicine systems have equal cability procuring advanced medical technology, chew on this graph.

http://www.mackinac.org/images.asp?ID=2748#939

I repeat: Quantity, quality, and innovativeness suffer. Theory and experience make that clear. I don't think health care is the same as a new cadillac or a plasma TV, I have much sympathy for those who have the stress of being without health insurance (I have been for significant portions of my life), but I do not have faith that government-run health care would improve the system at all. In fact, I am fairly confident it would make it worse for just about everyone.

"All you do is alter the mechanism of allocation from one in which cash buys care to one in which political clout buys care."

Yes that is exactly right, except that without the ability to use cash to move to the front of the queue, and absent physical violence, everyone has the SAME political clout. Even assuming that there will necessarily be a shortage and that the shortage will be greater than what we currently have, why should the rule for ordering the line be "the rich go first"?

Why should cash buy care before someone who does not have cash. This requires saying that a person with money is a superior person to one without. Or that one with property is superior to one without. After 200 years of American history we finally figured out that voting rights should not depend on wealth, perhaps in another 200 we will collectively agree that health care is similarily worth subsidizing.

It is not logically inconsistent to assert that an inalienable right creates an obligation in others not to alienate that right. It follows that if your accumulation of wealth prevents me from being able to afford the price you would pay for health care, then your accumulation is alienating my inalienable right. This creates a private wrong out of having money and justifies progressive taxation. Just because you don't like the logic does not make it inconsistent.

"The person at the end of the line in The People's Healthcare Plan is no better off than the person rationed due to lack of funds in a market driven healthcare system."

This is true if the lines are the same length, however, you overlook the key point that in the socialist plan, it isn't always the same person at the back of the line. In the market plan, the poorest individual always goes last. The fact that we have seen fit to provide a socialized medicaid benefit for the most desperately poor usually allows everyone to ignore this harsh aspect of private markets, but lately, as costs, income inequality, and selfishness all rise, 40 million people who would have fallen below the guilt-line in 1967 now do not.

You can call them all lazy if you want, to which I say, "what do you know about it?" Honestly, what should people have to sacrifice in order to pay for health insurance? Rent? Food? A Car? Childcare? Tuition? Bare assertions that statistically significant numbers of people are free riding only convince those who believe it already.

"To assert an inalienable right to a good or service funded by someone else is logically inconsistent anyway. If the two of us are sitting on an island, do I owe you a job or do you owe me a job? Do I get to sit while you provide my healthcare or do you sit while I provide yours?"

To refer to a good or service as "inalienable" is, in fact, irrational. Something which could be given or taken away with economic conditions, cannot be described as "inalienable." I think what Corey really believes is inalienable is radical egalitarianism. Joe has a right to equal material well-being as Bob.

Putting aside the many pitfalls of socialized medicine, one can argue it is immoral, given society's wealth, to allow some to go without health insurance (and, by implication, without some medical care others receive). I, in a sense, agree. The problem is I believe the proposed cure is worse than the disease.

Palooka, you can't use the fact that UK nurses are coming to the US for higher salaries against my argument. I admit that a market based system allows providers to extract more $ from the sick. It follows that it would be more attractive to providers.

However, if the American system was not market based, we could still pay nurses more simply because our productivity (and taxation) in other areas is higher than the UK or Canada.

And your Canada graph is interesting because it does not include countries like Finland and Iceland which actually have more of those machines and centers per capita than the US.
Perhaps having most of the population within driving distance of the US affects Canada's health care as well.

"And your Canada graph is interesting because it does not include countries like Finland and Iceland which actually have more of those machines and centers per capita than the US."

Citation?

"Palooka, you can't use the fact that UK nurses are coming to the US for higher salaries against my argument."

Whatever. In your fantasy land nothing is evidence. Price floors are proof that price ceilings don't cause shortages, and it doesn't matter if there is evidence that socialized medicine drives medical workers from the field. Nothing mattters except your well-intentioned self righteous do-goodiness. Reality be damned!

"and it doesn't matter if there is evidence that socialized medicine drives medical workers from the field."

You presented evidence that socialized medicine had driven medical workers into privatized medicine, not "from the field."

"Citation?"

http://www.fraserinstitute.ca/admin/books/files/HowGoodCdnHealthCareComplete.pdf

A study comparing universal access health care systems and concluding that Canada is underperforming because it allows NO private elements in its system. It was already indirectly cited once on this thread as evidence to suggest that the answer is TOTAL privatization. Because of course if we need a little fat in our diet then we should eat nothing but fat.

US numbers are not included because we are not a universal access health care country. You can google for US numbers if you want to compare.
Who knows, you may even find numbers that make my fantasy world of good intentions seem mathematically unsound (as well as self-righteous.) Then you will really have countered my accusations of aristocratic thinking!

After all, why should we behave morally where there is evidence to the contrary?

"Yes that is exactly right, except that without the ability to use cash to move to the front of the queue, and absent physical violence, everyone has the SAME political clout."

All is roses in your world, I guess. No one has more political clout than anyone else? Are you serious? Politicians don't regulate so as to favor people who vote for them? How noble of spirit!

"Why should cash buy care before someone who does not have cash. This requires saying that a person with money is a superior person to one without."

Superiority has nothing to do with it. Even if you want to look at it that way, saying that private agreements can't be used to allocate healthcare is saying that the worth of a man is determined by a politician. Somehow that doesn't inspire confidence.

"It is not logically inconsistent to assert that an inalienable right creates an obligation in others not to alienate that right. It follows that if your accumulation of wealth prevents me from being able to afford the price you would pay for health care, then your accumulation is alienating my inalienable right."

Let me get this straight. If I don't bother to accumulate wealth and therefore can't pay for both of us, I haven't violated your rights. If I get another job, suddenly I AM violating your rights? Nevermind that my accumulation has less than nothing to do with your ability to pay, that there is no connection at that justifies the language that my wealth "prevents" you from being able to afford anything. Before we get all worked up about my wealth, let's be clear that I don't have any.

In your argument that the poor person is always last, you assume that poor people stay poor forever. I could as easily argue that an out of favor constituency always remains at the back of the line as the popular majority claims the front. Neither statement is really true.

All that aside, there is a reason we don't allocate groceries this way. It is the same reason we don't allocate clothes this way.

"You presented evidence that socialized medicine had driven medical workers into privatized medicine, not "from the field.""

Actually, I did present evidence that it did that, as well as push professionals to better paying markets. But the effect is really more comprehensive than that--caps on salaries would cause many to retire early, others to move to other fields, some to move out of the country but remain in the same field, and caps would also decrease the number of individuals willing to enter the field. If you take note of the article I sent, a majority of Britain's NEW nurses are coming from abroad. Apparently those "reasonable" salaries aren't enough to incent actual Britains to enter the nursing profession.

BTW, that link was truncated or broken.

In principle your position makes some sense. But here is a simple problem. Last summer I underwent radiation for cancer and it was fully covered by my insurance company. I saw the bills, and the cost to the insurance company was 70-80% lower than the list price of the treatment. The insurance company paid $5000 for the treatment and I would have paid $25,000 for the same thing if I was a private pay patient. This may be an extreme example but the practice is common everywhere: physicias, hospitals, labs etc. and in my experience it isn't extreme.

I don't see how I as a private individual am going to be able to "negotiate" prices with medical service providers. And if I can't then the cost of these services is going to explode because there is no constraint on prices charged. A person with cancer is highly unlikely to negotiate price with his doctor and I don't see any incentive for doctors to lower their "retail" prices.

Clearly the government could regulate prices, but that is widely open to fraud and it isn't clear how it could be monitored since your underlying assumption is that if I have to pay I will be an "intelligent" consumer regardless whether I am a dumb but evil conservation or a smart but gullible liberal.

Does anyone have any information on the health insurance market before before Medicare and Medicaid, which I believe came on the scene in the mid 60s? As I understand it, there were no HMOs. I assume that individuals bought individual health insurance policies and that these policies were not ruinously expensive as they are today. Doesn't this show that the (relatively) free market worked in the health care field?

Prof. Posner seems not to live in the real world.

All of the statements that begin "Insurance companies would offer ..." seem to fly completely in the face of observed reality as well as economic logic.

1. There is no apparent recognition of the adverse selection problem. What insurance companies actually do (and have every incentive to do) is to avoid insuring anyone who might get very sick. That leaves lots of people out in the cold.

2. Yes, though a tenured professor may have difficulty imagining it, there ARE people who cannot afford health insurance. You cannot simply wish them away, or write them off by claiming they are behaving irrationally. When the choice comes down to food or insurance (as it very much does for many people) they will choose the food.

And as for the health insurance market before Medicare and Medicaid, in those days medicine wasnt as technologically advanced as today. You could do everything medically possible for people and it still didnt cost nearly as much relative to GDP (or individual income) as it does today. The situations are not comparable.

This points to the real problem we are facing. We cannot pay for every possible medical procedure for everyone who wants them or needs them given the current state of technology. That means we have to ration medical treatment.

RATION??? you might say. ANATHEMA!!! But the fact is we ARE RATIONING ALREADY. Right now we ration on the basis of income and employment. This leaves poor and unemployed people out of luck.

It is no surprise that a Republican would be OK with this type of situation but that a Democrat would not, and would seek some other basis upon which to allocate limited ability to offer care. And there you have the kernel of the debate.

Another thought

All you folks who think the delays in socialized medicine are so awful - How do you explain that life expectancy in those countries is the same or higher than ours? Check the following site to look at life expectancy in the country of your choice

http://www3.who.int/whosis/hale/hale.cfm?path=whosis,hale&language=english
Healthy Life Expectancy

Just to take one example, Canada beats the US by almost 3 years.

(And dont forget, socialized medicine is NOT the same thing as a single payer insurance system. In the latter the doctors are not government employees and you can still go to whatever doctor you want to so long as you are willing to pay what they charge. Its just the insurance that is run by the government)

sorry - that link is:

http://www3.who.int/whosis/hale/hale.cfm?path=whosis,hale&language=english

Steve,

I don't think one can brush aside the pre-Medicare/Medicaid period as irrelevant by saying that medicine costs much more now due to technological advances. Technology has advanced in many areas, often accompanied by huge price DECLINES in real dollars. Computers are the obvious example. But it's also true of most, or at least much, consumer electronics. It may also be true of cars. Although nominal prices of cars have increased, once you account for inflation and the huge improvements in standard equipment (remember when an AM radio was optional equipment?) and quality over the years, real prices may well have dropped. At a minimum, in all of these examples, there have been huge technological advances without the sort of staggering prices increases seen in the health care field.

So what explains the difference? I would think that massive government spending in the health care field via Medicare and Medicaid must have something to do with it. This spending fuels an enormous increase in demand for health care services and thereby increases the price of those services. This, I think, is why we see medical costs increasing at rates far exceeding the rate of inflation, year after year. If the government subsidized car purchases to the tune of tens or hundreds of billions of dollars per year, does anyone doubt that car prices would skyrocket?

I think that this discussion is rather academic in nature, but not because I think there is no problem. The reality of the situation is that Medicare isn't going anywhere. Why? Simple, most young people do not vote and most seniors do. Seniors, in general, do not like the idea of Medicare privatization, which can be seen in virtually every poll out ther. In fact, there *actually* was an attempt to make a step towards privatization of Medicare in the late 80's. It's kinda funny, but the result was a veritable insurgancy of old folks, taking to the streets, armed with canes, umbrellas, and pocketbooks when the representatives next returned to their home districts. Needless to say, that law was reversed as soon as congress next met. So, looking at it from a purely political perspective, any politician worth their salt isn't going to touch privatization with a 10 foot pole. This can be easily seen in the already growing rebellion within the Republican party regarding SS privatization. Clearly, they see the writing on the wall. Despite the last election being as contentious as it has been in at least 30 years, the youth vote was still terribly lacking while the senior vote was strong as ever. Since there are no term limits, it is generally favorable for the incumbant to do what he/she needs to do to retain their seats. So rather then debating as to whether it should be privatized, we need to start trying to think of how to fix it within the context of the current arrangement.

Mr. Posner writes:
"Economists are puzzled by the very low deductibles in Medicare (including the prescription-drug benefit—the annual deductible is only $250)".................

My understanding is that the low deductible is a political response to Congress' desire to achieve large buy-in. The premium cost is $420 for Part D and congress wanted as many Medicare recipients as possible to pay the premium. If the deductible is too high, they risk adverse selection - only the really sick enroll in Part D, they benefit immensely and the economics of the plan are even worse on a per user basis.