Some Priorities in Reforming Health Care-BECKER

I will make three points: the United States system of health care may not be the most efficient but people here get good value for their large spending on health care, employer-based health insurance has the frequently overlooked major advantage of providing long term insurance, and catastrophic health coverage probably should be made compulsory. Americans spend the largest amount of any country on health care, both in terms of dollar spending, and as a percent of income-the health sector in the United States takes about 1/7 of GDP, which is a far larger percent than any other country. Although this share of income has grown rapidly during the past 25 years, the benefits are also very large. Using the economists concept of how much people are willing to pay for improvements in their life expectancy- called the "statistical value of life"- Kevin Murphy and Robert Topel (see their “"he Value of Life and Longevity", Journal of Political Economy, 2006, pp. 871-904) estimate that improvements in life expectancy in the United States from 1970-2000 is worth over $95 trillion (yes, trillion!). Even after netting out the $35 trillion dollar increase in medical spending over the same period, the net gain exceeds $60 trillion. Of course, not all the increase in life expectancy is attributable to medical spending, as declines in smoking and other behavior changes made major contributions to longer life. On the other hand, the large improvements in the quality of life due to medical spending, including hip replacements, pacemakers, organ transplants, Viagra, and other advances should be added to the benefits of the increased medical spending. Other OECD countries, such as Europe and Japan, had comparable improvements in life expectancy with much smaller increases in medical spending. Perhaps that means they have more efficient health care delivery systems than the United States has, but these nations generally ration care, and are less generous in providing quality of life improvements, such as hip replacements and breast reconstruction after breast cancer. The United States is also the world's leader in medical research, and residents of other countries come to this country for advanced medical treatment of serious diseases and ailments. I have argued in a previous post (January 29, 2007) that the tax advantage currently enjoyed by employer-provided health plans should be extended to individual and other group based plans in order to level the playing field among competing plans. All tax advantages should have a cap, however, so that "Cadillac" coverage is not deductible, and any extension to individuals and that other group plans of the tax advantage of employer plans would not raise the overall tax burden. Even with such changes, employer-based plans would continue to be important in competition against other group-based plans. A drawback of employer-based health coverage is that workers with existing medical conditions who are covered by such plans would be discouraged from changing jobs because their condition may discourage companies from taking them on. However, most job changes are by younger workers who have few serious medical conditions. Employees who have been with the same company for a few years or longer are not likely to change jobs, although the propensity of senior workers to lose their jobs has risen a little in recent years. The advantage of employer-based medical insurance to employees who remain with the same employer for many years is that they effectively have long-term medical coverage against serious health problems that could arise in the future. The big problem in individual health insurance coverage is that it is on a year-by-year basis. Anyone who develops a serious health problem can lose his coverage or be forced to pay much higher rates, especially if he wants to change plans or insurance companies. Long-term health insurance with individual plans is uncommon mainly because health insurance companies cannot force customers to make a long-term commitment. If a person has experienced good health, he may seek a cheaper plan with another company that would reward his additional years of good health, an experience that his original plan could not fully anticipate. Given such "adverse selection", health insurance companies are discouraged from offering long-term insurance. Most individuals and families need a combination of health savings accounts that give them incentives to conserve on normal health spending, and protection against major health problems. President Bush's State of the Union address proposed an excellent extension of health saving accounts that would help handle more normal health spending (see my post on this on January 29, 2007). To avoid the risk that individuals and families would attempt to free ride on taxpayers and others by not contracting for catastrophic medical coverage, one can make such coverage compulsory for everyone, either through group plans, such as from employment, or through individual plans. As Posner indicates, poorer individuals and families are already covered through Medicaid, so no additional subsidy for lower income persons is needed to implement compulsory coverage of catastrophic health problems.

Comments

[jim]

I am a 62-year-old male, lifelong happily uninsured. Health insurance is wasteful, inefficient, highly discriminatory (against young males, low-earners, non-breeders, etc) and carries all sorts of moral hazards, like hypochondria and encouraging the over-production of babies that we could get already potty trained and ready to work from Mexico. Health insurance, treated as an investment, returns about 20 cents on the dollar, on average, according to my estimates, once all the inefficiencies are taken into account.

Though I have paid loads in taxes to support Medicare and Medicaid, when I retire to Brazil, none of their benefits will be available to me, including the drug benefit, because those socialist programs make no provision for an Amerikan to get medical care or drugs [unlike Social Security benefits] in a foreign country. Thankfully, I can get good and cheap, or even excellent and expensive, healthcare in Brazil and generally don't need a prescription for drugs, but this represents paying again for what I've already earned. You can be sure that I will have no qualms about visiting the USSA and milking Medicaid and emergency rooms for all they're worth if I develop a serious illness. A solution to this problem would be for the gummint to buy me out of my participation in their socialist programs with a lump sum at age 65, as Germany did with their Rentenversicherung obligations to me when I abandoned Germany and its socialism in 1975. Even better would be for them to arrange with Brazil to trade me for a Brazilian youth who would be happy to slave away in the USSA, at least until he catches on.

[N.E.Hatfield]

jim, If you're so disencahnted with the place, you're always free to leave. Bye, Bye! And don't let the door hit you on the backside on the way out.

[Bob]

When I first started working I had, in effect, a single-payer health-care plan. I paid the provider (thus I had some incentive to minimize costs, and the provider had some incentive to maximize satisfaction); then I applied to my health care plan for reimbursement (thus I had an interest in higher benefits, and my employer had an incentive to maximize overall employee satisfaction for a given payroll cost).

I explained the working of the plan this way to my dentist, at one point: my employer probably had no particular interest in whether my dentist lived or died, but may have had some interest in whether I felt I was being treated fairly.

As an aside, I must admit it's more convenient with direct reimbursement, but it does shift the incentives.

I think this was as close to ideal as a plan is likely to get, these days. The only improvement I can see from a social standpoint would be to eliminate the tax preference for medical insurance. (As Milton Friedman pointed out years ago, the tax preference itself is a legacy from employers' successful attempt to subvert wage-price controls during World War II.) I earn a comfortable living, and there is no particular reason why my insurance premiums, my insurance reimbursements, and my medical reimbursement savings plan should all be given preferential tax treatment to the detriment of taxpayers at large. I would support Prof. Friedman's concept of the negative income tax to compensate individuals at the lower end of the income scale (who realize precious little in any case from tax preferences). On the other hand, I have no illusions that the consequent tax revenues would be diverted to areas more to my liking.

[jf]

As Posner indicates, poorer individuals and families are already covered through Medicaid, so no additional subsidy for lower income persons is needed to implement compulsory coverage of catastrophic health problems.

As I indicated in my comments to Posner's statement, you would really benefit from either talking to an individual who doesn't have health insurance, or doing some research on people who once had health insurance, but are now on Medicaid. Please, enlighten us.

[nakliyat]

thank you very much very very nıce.........

[Henry]

What will happen to healthcare during the next depression? Will the linking of healthcare to employment blow up in America's face?

During a depression, the economies of other countries might be buffered by their nationalized healthcare systems, but America might be punished twice over by a positive-feedback loop wherein healthcare people lose income and jobs because their customers lose their's.

Maybe the political equation during a depression will finally result in a single-payer system.

[n.e.hat]

Henry, Fear Not! In our new, modern, and globalised "service economy", all thoughts of economic downturns are banished. In other words, can't and won't happen. "Live the dream" as if there were no tomorrow!

Ever get the feeling we are all living in the bunker in Berlin in 1945? ;)

[Jack]

Despite Jim's abrasive and blunt manner doesn't most of his points hang together?

I am a 62-year-old male, lifelong happily uninsured. Health insurance is wasteful, inefficient, highly discriminatory (against young males, low-earners, non-breeders, etc)

......... well wasteful and inefficient to be sure. As for "against young males" many don't buy in or pay anything......... UNTIL later in life.

and carries all sorts of moral hazards, like hypochondria and encouraging the over-production of babies that we could get already potty trained and ready to work from Mexico.

............ curmudgeonly hrsht here, Jim

Health insurance, treated as an investment, returns about 20 cents on the dollar, on average, according to my estimates, once all the inefficiencies are taken into account.

.......... probably close, but would those of modest assets, primarily their homes, want to roll the dice? Might be a good bet for those with several million to cushion the "bad rolls". but with tax deductions and the relatively small premiums I doubt many in that league opt to "self insure"

Though I have paid loads in taxes to support Medicare and Medicaid, when I retire to Brazil, none of their benefits will be available to me, including the drug benefit, because those socialist programs make no provision for an Amerikan to get medical care or drugs [unlike Social Security benefits] in a foreign country.

.......... Isn't this an excellent point? If a retiree opts to head south whether to lay in the Sun and never take another lick, to relieve the pressure on our own pricey and crowded retirement havens or to bring American skills to a poor country, why shouldn't his well-earned benefit follow him? Especially as medicos in most other nations would be very happy to take the Medicare or Medicaid payments so often scorned here? Woudn't we ALL benefit if Jim buys gets his prescription drugs in nations where they are but half to a third that of the price-fixed US??

Thankfully, I can get good and cheap, or even excellent and expensive, healthcare in Brazil and generally don't need a prescription for drugs, but this represents paying again for what I've already earned.

............ Yes, it does.

You can be sure that I will have no qualms about visiting the USSA and milking Medicaid and emergency rooms for all they're worth if I develop a serious illness. A solution to this problem would be for the gummint to buy me out of my participation in their socialist programs with a lump sum at age 65,

......... It would be interesting to know what that fair price might be. I'm sure someone knows. Problem is that even after a buy-out I suspect Jim would be admitted to an ER here.

as Germany did with their Rentenversicherung obligations to me when I abandoned Germany and its socialism in 1975.

.......... wouldn't it be great if we joined with nations such as Germany in providing universal health care? That way we could have reciprocal arrangements and travel freely.

Even better would be for them to arrange with Brazil to trade me for a Brazilian youth who would be happy to slave away in the USSA, at least until he catches on.

......... If he were one of the millions of poverty stricken street urchins he'd likely be happier "slaving away here" than in Brazil where the wage/wealth pyramid is still steeper than that of the US has become over the last 40 years. Later he too may wish to return after earning US per capita income of $45,000 and spend it where per capita income is $3500? Even our rapidly shriveling debt-backed buck should be welcome down there, eh?

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