Medicare--Posner's Response to Comments

There were, as usual, many very interesting comments. Let me try to respond to a few. One interesting suggestion is that an increase in demand for drugs, brought about by the Medicare prescription-drug benefit, will not, as I suggested, reduce average price by enabling the drug companies' heavy fixed investment in R&D to be spread over a greater output; the companies' patent monopolies will enable them to charge higher prices. This is possible but not certain. If average cost is not rising in output, an increase in demand will not lead to a higher price. If, however, the demand curve facing a monopolist becomes less elastic (meaning that a small increase in price will have a less depressing effect on output), then the monopolist will raise his price (unless, perhaps, his average costs are falling). That is a possible effect of the prescription-drug benefit: the benefit will slow the output reaction to a higher price. However, this effect will be offset to some and perhaps a great extent by the fact that many patented drugs have good substitutes (for example, the different antidepressants and painkillers), since different molecules having the same therapeutic effect are separately patentable. However, I grant that there may indeed be a price effect from the new benefit; one possible (and unlikely!) response would be to shorten the patent term for pharmaceutical drugs. Some comments suggest that compulsory health insurance and socialized medicine are, contrary to what I argued in my posting, the same thing. That is not so. Compare automobile liability insurance. It is compulsory in most (maybe, by now, in all) states, but since the insurance is written by private companies, it is hardly an example of socialized insurance. Similarly, one could have compulsory education laws but no private schools, and one would then not speak of socialized education. The analogy of medical to auto insurance was criticized in some of the comments on the ground that there is no upper limit to how much medical treatment one may need. But, similarly, there is no upper limit to the amount of damage you can do driving carelessly, yet it is possible to buy essentially unlimited liability insurance. The real difference is that medical insurance is more expensive--and would be much more expensive were it not for Medicare--than automobile liability insurance is because many more people require expensive medical treatment, especially toward the end of their lives, than cause serious auto accidents. Many comments suggest that medical insurance would be so expensive if it weren't subsidized by the taxpayer through Medicare that it would be unaffordable. But this is obviously wrong. Here the analogy is to life insurance. One can buy a very large life insurance policy cheaply at a young age because the insurance company invests the premiums and earns a return on the investment for many years before it has to pay out. Similarly, medical expenses tend to rise with age. Of course, young people have less disposable income than older--but one implication is that many older people, having high incomes, can afford to buy health insurance even though their premiums will be higher than if they had bought a lifetime policy when they were wrong. It is true that some, and probably many, people will not be able to afford health insurance, and I agree that, as a practical matter, they cannot be denied treatment just because they can't pay for it. So there will always be medical subsidies, just as there will always be subsidized pensions (social security). But why not make those who can buy health insurance, including health insurance for their old age, do so? One attractive method of subsidy, which I borrow from the automobile insurance example, is to require each insurance company to insure, at premiums only moderately above the market level, the individuals who because of poor health cannot afford to buy health insurance at market rates. The suggestion that you cannot deny, medical treatment to someone who refuses to buy health insurance is also true, but you can punish him for not buying it, just as we punish people for not paying taxes. I like the suggestion that low deductibles in health insurance policies are actually cost savers because they encourage people to visit the doctor at the first sign of trouble, when the problem can probably be corrected at less cost than if they delay. However, this reasoning does not justify the low deductibles in the prescription-drug plan. They will just encourage pill popping.

Comments

[David Thomson]

We have little chance to see medical costs drop until Americans cease deceiving themselves that the employer pays for much, if not all, of their medical insurance. The reality is that the company merely shifts these earnings over to the medical insurance firm instead of paying you directly. It is my understanding that General Motors started this nonsense during an era of price controls. Whatever, it must cease as soon as possible. Far too many people are complacent concerning high costs because “I’m not paying for it. The insurance company is picking up the bill.”

The at least metaphorical reality of Original Sin is still alive and well on planet Earth. People are inherently selfish and will abuse anything if they can get away with it. Anything perceived as “free” will inevitably be carelessly used. Why is that so hard to comprehend?

[David Thomson]

“I like the suggestion that low deductibles in health insurance policies are actually cost savers because they encourage people to visit the doctor at the first sign of trouble.”

Whoops, this sentence must be taken to task. The low deductible may very well “encourage people to visit the doctor at the first sign of trouble.” This admittedly seems entirely reasonable. Nonetheless, the temptation to be wasteful is still overwhelming---and this alone negates the value of the low deductable.

[Corey]

"Nonetheless, the temptation to be wasteful is still overwhelming"

Assuming of course that everyone is a hypochondriac, or that we should set policy based on the few who are. It would be a simple thing to set the deductable low and institute some simple fraud detection like the sort used by credit card companies, forcing pill-poppers to otherwise justify their expenditures.

High deductables contribute to the inability of many to afford insurance.

Imagine that I have $1000 per year in disposable income after paying bills (I actually do not). I could buy an insurance policy that would cost $1000 but has a $1000 deductable and pays 70% of usual and customary costs. Am I going to do it? NO.

Why? Because the actual cost of that policy is $2000 + 30% of whatever catastrophic expenses I have, which is more than I could afford anyway.
If I don't need to use it, then I just spent ALL of my disposable income on nothing, and I can't even afford to go to the movies. Since I am 29 and healthy, I refuse to opt for never leaving the house in order to insure against the .001% chance I will get cancer. (Especially since getting cancer will bankrupt me even WITH the insurance)

So far in this discussion we have not talked about the declining coverage in available private insurance plans. This is a huge problem as well. Over the last decade my dental plans went from 90% payout to "60% of usual and customary for approved procedures only." The list of exclusions on my health plans quadrupled in size. Deductables rose, EVERY name brand drug was taken off the formulary (even when there was no generic), and my coworkers started to have increased trouble with denial of claims. Over this same period premiums more than tripled.

This is yet another reason why simply compelling private insurance will not solve the problem. Absent government regulation of coverage and costs, quality of insurance will continue to decline until the effect of buying insurance is identical to donating money to the insurance corporations.

And of course this makes sense under market theory, because there are no restraints on profit maximization. Why shouldn't insurance companies de facto deny all claims, that is exactly what maximizes profit. All that is needed is an anti-competitive compulsory element to prevent consumers from opting out. For that the insurance companies can turn to Posner and friends.

[Dan Luu]

Corey,

Have premiums tripled in real dollar terms after normalizing for expenditures?

One reason for rising co-pays is the RAND study which found that increasing co-pays resulted in much lower spending without affecting substantially affecting quality of life.

Here's the abstract along with an excerpt and a link.

The RAND Health Insurance Experiment tested the effects of cost sharing on use of medical services and health. We randomly assigned 5809 people to insurance plans that either had no cost sharing, or 25, 50, or 95% coinsurance rates with a maximum annual family out of pocket payment of $1000 in current dollars. Compared with free care, cost sharing reduced spending by 2/3. Spending was reduced more for outpatient medical and ental care. The cost of treatment episodes was no smaller with cost sharing, but people did not seek care as frequently. Cost sharing led to poorer blood pressure control and corrected vision, but had no other deleterious effects.

Of general self-assessed measures, none resulted in significant health differences between those with free care and those with cost sharing.

http://www.rand.org/publications/RP/RP1114/RP1114.pdf

[David Thomson]

"Assuming of course that everyone is a hypochondriac, or that we should set policy based on the few who are."

You possess a very optimistic view of human nature---which I utterly reject. Sigh, I guess I’ve read too many Billy Budd type novels and that ancient historical commonly referred to as the Bible. The world is not filled with saints, but instead is populated by weak human beings who don’t hesitate to rationalize away their self centered behavior. Most people would abuse the system if given even half a chance to do so.

[Corey]

I am a realist about human nature, I understand that people will attempt to abuse free will. My idealism is limited to wishing that this were not so.

However, it is a common tactic among republicans, libertarians, and the economists who speak for them to use the possibility of bad actors as an excuse to completely shut down social benefits. A great example would be Reagan and his anecdotes about the mythical cadillac driving welfare mom. Another would be this week's Class Action shutdown legislation justified by general propaganda about frivolous claims.

I believe that in general, we can always create a safeguard in the social program against bad actors. We have pretty good computers these days, it is not so expensive to see what people are doing with their benefits.

[lincoln]

COREY,I don't understand what you mean by "abusing free will".My problem(and I suspect others' also)is that if something is priced lower than its value(or even given away),more is consumed.I saw in my former practice how patients' consumption of my and hospital services declined in cost,but not in value as they were made responsible for some of the cost of their decisions.I also have problems with the accuracy of your comment that every non generic drug was removed from your formulary.Could you please give some info that I could check on this?If so, I'd like to write an article on this.

[Chris]

"Similarly, one could have compulsory education laws but no private schools, and one would then not speak of socialized education."

I think you mean "but no public schools."

[Zathras]

In the 3rd paragraph, I think you mean to say older people would be able to afford higher premiums if they had not bought lifetime coverage when they were young, not when they were "wrong."

I like this blog, but you ought to have someone proofread these posts before they go up.

[David]

A couple of comments:

(1) Judge Posner says:

"Many comments suggest that medical insurance would be so expensive if it weren't subsidized by the taxpayer through Medicare that it would be unaffordable. But this is obviously wrong. Here the analogy is to life insurance. One can buy a very large life insurance policy cheaply at a young age because the insurance company invests the premiums and earns a return on the investment for many years before it has to pay out. Similarly, medical expenses tend to rise with age. Of course, young people have less disposable income than older--but one implication is that many older people, having high incomes, can afford to buy health insurance even though their premiums will be higher than if they had bought a lifetime policy when they were [young]."

My comment:

It is not persuasive to tell those who question your assumptions that they are "obviously wrong." Do we know that lifetime medical policies would be feasible or that companies would even offer them? Would they be affordable? These are all unkowns. Life insurance is a possible but imperfect analogy. Not only are there differences between the two types of insurance, but problems exist even if the analogy is fair. Whole life insurance is quite expensive and many people do not buy it or cannot afford it. Term life is more financially feasible for people with dependents but not so much disposable income to spend on insurance. Judge Posner's suggestion about lifetime policies might warrant further study, but it is not "obviously" feasible. At this point, his conclusions are pure speculation. Absent empirical evidence that lifetime policies are workable and would do a better job than the current system, wholesale change would be irresponsible.

(2) Judge Posner says:

"The suggestion that you cannot deny medical treatment to someone who refuses to buy health insurance is also true, but you can punish him for not buying it, just as we punish people for not paying taxes."

My comment:

Am I missing something, or is Judge Posner suggesting criminal sanctions, including prison, for people who do not buy health insurance? Is he saying that failure to buy health insurance is morally on par with tax evasion? Or is this some sort of 21st century proposal for debtor's prisons? Somehow, I don't think this one will fly politically. Or if it does, I might need to move..

[Anonymous]

Re: drug pricing and supply/demand issues. Shortening patent life, under the current regulatory scheme, is unlikely to reduce price. Any new drug that is approved by FDA receives a New Chemical Entity exclusivty period of five years (i.e., no generic can enter at this time). This time period (plus predicted phase-out as the generic or alternative branded product penetrates the market) is where R&D costs primarily are recouped. Most basic molecule patents deserve their full patent life. And the "add on" or second generation patents are typically targeted by generics for design-around, so while they may delay for a few years (there have been more than a few creative/abusive schemes on this front by name brands, but that is where antitrust laws come into play), in the end, they are usually overcome well before the patent expiry date. Also, the manufacturing costs of drugs, once a product receives FDA approval, is fairly low. (Though the Chinese these days will sell you drugs at a "patent infringing" price and a "noninfringing" price to reflect process changes needed to avoid patent protection in various countries).

There are three key reasons why the US pays disproportionately higher drug prices, neither of which will be resolved or lowered via prescription drug benefit.

First, we have the rest of the world (particularly Europe and Canada) freeloading on the US as a result of price controls. Drug companies sell product in Europe, Canada and Africa essentially profit-free (if not at a loss), and make up their profits via the U.S. market. (Price controls in the US won't solve the problem, either - it will just change the cost-benefit analysis of bringing a new drug to market (i.e., only genuine blockbusters for widespread afflictions will be worked on, thereby reducing over time the total number of new drugs introduced to market). Actually, expanding prescription drug benefits, by making the govt a major purchaser, will likely result in a de facto kind of price control and thereby either increase prices in the long run, or reduce the total amount of product options available. See, e.g., flu vaccine shortage as a perfect example of this effect)).

Second, product liability costs keep prices high. (Merck just set aside $670 million for attorney fees alone to defend them in anticipated Cox-2 inhibitor product liability litigation. That was not a "cost" that they could have factored in on the upside when the drug was introduced, yet a major blow to profitability).

Third, the major costs of getting a new drug to market is rarely the time spent on coming up with a new molecule to test in and of itself (most active ingredients are sold on a commercial scale on the order of a few hundred to a few thousands of dollars a kilo); the bulk of the R&D expenses are spent performing the actual clinical trial work (and maintaining the necessary infrastructure needed to support that testing) required by FDA. Streamline the FDA approval process, or lower certain thresholds for commercial introduction, and you get more products to spread those costs around on.

[jshea]

The difference between compulsory medical insurance and compulsory auto insurance is that people can avoid the latter by giving up their right to drive.

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Test. I was flagged by this blog as a source of spam, which I am not. I'm wondering if the flag is still out there ...

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