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.

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