The Reform of Health Care--Posner

The early Presidential campaigning season is replete with complaints, discussions, and proposals concerning the health care system, widely regarded as broken. Democratic candidate John Edwards has proposed a comprehensive reform that he calls "Universal Health Care through Shared Responsibility," http://johnedwards.com/about/issues/health-care-overview.pdf. Although the Edwards plan is commendable for its detail and clarity, there is an element of fantasy in Presidential candidates' proposing detailed, specific reforms, on any complex issue, so far before the election; for the feasibility of reform depends on economic and political conditions, including the political makeup of Congress, when the President takes office. But, passing that point, the current concern about the health system, which generates plans such as the Edwards plan, may be misplaced. It is true that health costs are rising faster than the inflation rate. But rising costs, even of "essential" products and services, such as food, health care, and national defense, do not necessarily demonstrate the existence of a problem. Costs may be rising because quality is rising, which is true of health care (new and better therapies and diagnostic tools), or because demand is rising (and average cost is not flat or declining), which is also true; as people live longer, their demand for health care rises because more health care is required to keep people alive and healthy the older they are. In addition, much health care is in fact discretionary (cosmetic surgery is only one example; others are treatment for mild depression and other mild emotional or cognitive problems and treatments designed to enhance athletic ability), and demand for it can be expected to rise if quality rises relative to price. It is also true that Americans spend much more on health care on average than the people in other wealthy countries do, without greater longevity to show for these expenditures. But health care does much more than extend life; it alleviates pain, discomfort, disfigurement, limited mobility, visual and hearing impairments, and mental suffering, and it is not clear that foreign health systems, which also involve considerable costs in queuing, do these things as well. In addition, the better a nation's health care is, the riskier the population's life style is likely to be, because the cost of obesity and other risk factors for disease is less. Also misplaced is concern that the United States is becoming less competitive because employers pay for their employees' health insurance, rather than the government. Employers do not really pay for their employees' health insurance; employees (and the taxpayer, who subsidizes employee health insurance) do, because by raising labor costs employee health insurance reduces the wages that employers are willing to pay. Employers who committed themselves to assuming open-ended obligations for employees' (including retired employees') health costs have only themselves to blame for having assumed a risk that has materialized because of the rapid growth in those costs. Nor is it a scandal, or even a serious inefficiency, that many millions of workers do not have health insurance. Their health care is paid for my Medicaid if they cannot afford to buy health insurance whether directly or as part of an employee group health insurance plan. Those that can afford health insurance but forgo it either are young and healthy or are risk preferrers, gambling that they will avoid illnesses requiring expensive treatment. If their gamble fails, they will have to pay out of their pockets, and when their pockets are empty (their assets depleted) go onto Medicaid, where their care will be subsidized. Although there is no reason why people who can afford health insurance should be treated at the taxpayer's expense, the effect on the aggregate cost of health care may be neutral or even negative, because Medicaid patients receive less pricey treatment on average than patients who have health insurance. If the young and healthy who today choose to go without health insurance were forced to buy health insurance, there would be two potentially offsetting effects: the average cost of health insurance would fall because the insurance pool was getting an influx of people with below-average expected health costs (though this assumes that the insurance companies wouldn't be permitted to charge lower rates on the basis of age and health, in which event the influx of young and healthy would not affect the rates charged the existing members of the insurance pool); at the same time the average cost of insurance would be rising because aggregate demand was rising, since being forced to have health insurance the newly insured would consume more health care in order to get their money’s worth. Some people are uninsured because of lack of "portability." Suppose a person insured under his employer's group policy leaves the job, and cannot find another one; or suppose that while working for that employer he had contracted a serious chronic illness. In either case, he may find it impossible to buy health insurance at a rate that he can afford. But the idea that such experiences demonstrate a market failure comes from a misunderstanding of the economic function of insurance. The economic basis of insurance is declining marginal utility of income: the more money we have, the less utility (pleasure, happiness) an additional dollar would confer. Suppose your life savings is $2 million, and you are asked to flip a coin: heads you win $3 million, tails you lose your $2 million. The expected value of the bet is $500,000 ($3 million x .5 – $2 million x .5), and thus is positive; but most people would refuse the bet, because the pain of losing their entire savings of $2 million would exceed the pleasure of winning $3 million. The implication for health insurance is that such insurance should be limited to catastrophic long-term illnesses that would drain an individual's or a family's resources and thus be equivalent in the example to losing $2 million. Such cases are rare, and therefore such insurance would be cheap, especially for young people, who would be unlikely to encounter such a catastrophe for many years, during which the insurance company would be earning interest on the premiums paid by the insured; so the premiums would be low. Someone who purchased such insurance at the outset of adulthood would not have to worry much about the lack of portability of an employer's group health insurance because he would have his catastrophic coverage even if he switched jobs or had no job. Nor finally should we think it a scandal that such a large percentage of the Gross Domestic Product (about $2 trillion out of a total of $14 trillion) goes for health care. One reason it is so large is that other expenses of living, such as food and clothing, have become such a small fraction of overall spending. The question should be not whether the percentage of spending that goes to health is increasing but whether there are better things to spend some of the $2 trillion on than health care. Notice that liberals' concern with the increasing percentage of expenditures on health parallels conservatives' concern with the increasing percentage of GDP that is spent on government services. In both cases the proper concern is not the percentage of overall spending that goes for a particular class of services but whether there are better uses for some of the money being spent for those services. There are two ways to reduce the aggregate cost of health care, if this is considered a worthy objective, as I am inclined to doubt. One would be to ration demand. If the supply curve for health care is upward sloping, as undoubtedly it is, then capping demand would result in lower prices by forcing the market down the supply curve. But rationing demand would be fiercely resisted by patients, for obvious reasons. The second way to reduce aggregate health costs would be to force down the price of treatment by exercise of the government's potential monopsony power. Suppose all doctors were employed by the government. Then their wages would be low because if you wanted to be a doctor, as many people do, you would not have any alternative to accepting the government's wage. Of course the quality of care would decline. Or suppose (and this the tendency toward which some of the current proposals are tending) that the government bought all the drugs that are produced, having forbidden the drug companies to sell to any other purchaser. Then the price of drugs would be much lower than it is today, but so would be the quality, since the incentives for innovation would be diminished by the lower price. We should be wary of proposals that if adopted would not reduce (and might increase) aggregate costs, but instead would shift the costs to another class of payees, such as taxpayers (the Edwards plan contemplates additional federal subsidies for health care, which are paid for out of taxes) or future consumers of drugs.

Comments

[Devi Mohanty]

So here is a question...How about we increase supply by letting anybody who can take a government approved or some agency approved test....And by anybody I mean anybody from the world....This of course abuts into immigration policy too, but what if we allowed any doctor to be allowed to practice in the US, any hospital in the world to be reimbursed....So if I am a patient and I wanted to go to a top notch hospital in Brazil.....let me be reimbursed by whoever is the reimbursing agency....or if I am a doctor from India...I don't have to go through a multitude of visa issues to practice in the US....I just need to be able to take a test which tests my competency...but there is no cap on the number of doctors allowed to enter the country and practice....

I think the AMA creates a supply deficiency with a multitude of rules and the AMA is nod different than a Union trying to protect the high wages of its members....You are already seeing the effects as you hear reports trickling in that "medical tourism" as a concept is starting to hold where people go to India get things done and come back...still not very efficient but its going to happen...

[Pete Avitable]

I agree with much of what you said here Mr. Posner, but I believe your section on ways to reduce health care costs in incomplete.
A third way to decrease health care costs would be to increase the effect of market forces. Your two mechanisms for cost reduction (rationing and government regulation) assume that market forces are at work, which is not always the case.
The current system of health care in the US has the effect of reducing competition among providers as well as the cost to consumers. With today's low-copay plans and non-participating doctors, the insured party's choice and realized cost are reduced, which leads to rising costs for both the insured and un-insured. In the end the insurance companies profit for this systematic inefficiency and the customers of health care (especially the un-insured) bear the cost. I'm not against big business by any means, but the large profits of the health insurance companies are due partially to systematic inefficiency instead of from filling an economic void.
Furthermore, your claim that the use of Medicaid for the un-insured is not a serious inefficiency is simplistic when one considers the high complexity of medical problems. An un-insured person is more likely to aviod the doctor's office for small problems until they become big, which can (and usually does) mean a more costly treatment.
Thankfully a new generation of health care plans seem to be introducing a more efficient incentive system. The new community Blue program (I think is what it's called) offers a threshold of low-deductible doctor visits each year after which the patient is responsible for the entire cost of most visits until they reach a second threshold, at which point they are again covered. Perhaps the insurance companies are trying to improve their services to avoid being cut out entirely if public health care were to pass? Since there is competition among insurance companies the inefficiens should work themselves out eventually (assuming the government doesn't meddle too much), but will it be soon enough from a social-justice point of view?

[Eric]

"the better a nation's health care is, the riskier the population's life style is likely to be, because the cost of obesity and other risk factors for disease is less."

Are you arguing that our national obesity problem is a sign of excellence in our health care system?

[Robert]

Any third party payor system is part of the problem. Insurance makes those other than the patient liable for some or all of the the cost of medical care. This incentives both the lack of vigilance as to one's health coupled with the lack of comprehensiveness of cost, e.g., going to the doctor more freqeuntly than needed. A health savings account approach is superior and has already been shown--on a small scale--to be successful.

[Justin Ciale]

Correction to my comment on April 16, 2006.
Infant death per 1000.

[Wes]

While health care, in general, has many fundamental challenges, my sense is that the problems in the USA are exacerbated by a shortage of medical doctors resulting from medical school admission policies (under the guidance of the AMA). I recognize that labor of any type is extremely expensive in the USA but my health care experiences lead me to the conclusion that there is an artificial monopoly (on doctors - or, more specifically, medical training) in the US health care industry.I recognize that there is a need to insure that medical doctors are qualified and that the usual argument is that there are simply not enough qualified applicants to medical schools. My experience with medical admissions, however, contradicts this assertion of lasck of qualified applicants.I had a friend at MIT who was at the top of her class as an undergraduate in the biology department who went on to do a PhD in molecular biology at Yale. My friend really wanted to go to medical school and she applied to pretty much every medical school in the USA. She didn't get accepted anywhere and I'm pretty sure she didn't even get as far as the interview step. Why? Because, at the time, she was not a US citizen.Now, if there was a shortage of qualified applicants then citizenship shouldn't matter. Medical schools would accept non-citizens and then try to convince them to stay in the USA. This anecdote strongly suggests that there is a massive surplus of qualified applicants that allows medical schools other criteria unrelated to qualifications to reject applicants.Yes, health care is difficult but situation could be improved dramatically if medical schools did not artificially reject qualified applicants. For that matter, it's ridiculous to require a bachelors degree to enter medical school. For someone to spend four years looking at statues of naked people while getting an art degree and only then enter medical school just doesn't make sense - but that's how the system works: your best chance of getting accepted to medical school is if you didn't major in a biology related field.

[Dostoevsky's Poodle]

Even without taking the briefest look at the plan proposed by Edwards I am confident that it boils down to an increase in the redistribution of wealth. Whereas the redistribution of wealth at the moment is, say, X, Edwards's intention is to increase it to 1.5X. That is, more of the wealth of the top, say, 25 percent of this country will be shifted to the bottom 75 percent. What exactly happens to healthcare, and how well the 75 percent are treated after this shift, is difficult to predict. What's easy to see is that in the case of healthcare what impels Edwards is a perception that there is much disparity in treatment between the top 25 and bottom 75. (I hope none will make the mistake of concentrating on my random 25-75 division.)
So, to me it seems the standard, uninteresting donkey politics. Business as usual. If you're in the top 25 percent, you probably shouldn't vote for Edwards. If you're in the lowest 25, you should probably vote for him. If you're somewhere in-between, the wisdom of rational ignorance suggests flipping a coin.

[N.E.Hatfield]

Well... one has to give John Edwards some credit for trying to come up with a rational plan to bring medical care back into reach for the middle sector of the population (those who aren't poor enough to afford Medicare/Medicade and aren't rich enough to afford individual/private health insurance). Most of the self employed fall into this category, as do ever increasing numbers of individuals who are covered or not covered by employer sponsored health insurance.

The biggest problem confronting health care in the U.S. today is not access (if you're poor or rich), but is the finacial access to affordable insurance. Why the problem? it all stems from the tremendous cost increases within the Health Industry over the last few years. If there ever was an industry in vital need of "Price and Wage Controls" this is the one. But, we can't have that! It would run against and afoul of an intellectually moribound Business and Government that is all but blinded by a Laissez-Faire, Free Market economic ideology and model.

[R.A. Rogers]

Those who say that rationing and government intervention are necessary to fix our health system ignore the fact that we have had great improvements in treatment under the current system, which reflects the beneficial effects of free choice, competition, and ever increasing expenditures by working people. We have a great system now for those who can afford it.

On the other hand those who say the system is great as is with maybe a few tweaks (such as Posner) ignore the fiscal reality of many individuals, and the political reality, which is that everyone wants a high level of health care, we believe that most individuals (especially children) are entitled to good care, but it's gotten too expensive for many working families, and a change will be demanded at some point.

Another political reality is that the insurance companies are a huge part of the health business and can't be pushed out of it (even if it seemed like a good idea).

Any improvement has to reflect both the economic and political realities. It is possible to come up with a "solution." I wouldn't want a solution for such a complex system.

Here is an improvement that would decrease costs, keep the insurance companies involved, but allow the government to provide some control.

1. The government becomes an insurer for excess costs for certain insurance policies - say the government will reimburse the insurance company for any cost for an individual in excess of $600,000. This immediately reduces the cost of these insurance policies.

2. However, to obtain the excess coverage from the government, the insurance company must provide a policy that provides certain basic features, including basic preventive care, and features that are already mandated (such as vaccines and breast reconstruction). Preferably, the required part of the contract would be written by the government. The insurance company would be free to add additional features and services, it would be free to price the contract however it wanted, and it would continue to service the contract.

3. The insurance company could sell policies that don't incorporate the government basic provisions, but those policies wouldn't have the benefit of the excess coverage from the government.

This decreases costs to individuals by shifting part of the cost to the government. It decreases administrative costs by creating a uniform basic plan. It increases competition for service (which is what the insurance companies provide) because the basic features of the policies will be similar. It gives both insurance companies and the government a role.

[Marshal Mandelkern]

Two comments on Prof. Posner's invocation of Medicaid as a safety net for the uninsured. Speaking of Connecticut ( Medicaid is administered on a state basis, and so varies considerably from state to state) Medicaid is only available to those below a fairly stringent ceiling of both income and assets. Many poor people are not financially eligible. Further, Medicaid ( as opposed to Medicare) pays fees well under ( in many cases, a fraction of) the market rate. Medicaid recipients generally don't have access to healthcare, certainly not to the extent that Medicare or commercially insured people do.

[George Edwards]

Uh, I hate it when people try to plan my life. You champions of the little, and whatever level and whatever scope, make me sick.

[J]

Unfortunately, all health related talk fail to recognize the basic failure of healthcare...the lack of uniform pricing. Healthcare is basically governed by the insurance and medical professions, both of which do not have any incentive to set a uniform price and/or measure true risk; it only makes sense that costs seem to increase by dramatic proportions. Therefore, talk of quality or "better" care or anything else is meaningless in an environment where there are no limits.

Any reform that does not fix the pricing problem is nothing but a "band-aid". Your last paragraph is quite true. When we're dealing with two multi-trillion dollar industries at the helm, it is laughable to even consider reforms that "solve" the problem by "covering" costs, just means that our tax dollars will be feeding a broken system by greater and greater amounts.

The fact is that we have no understanding of real economic healthcare costs because the industries do not allow us. The current system is a result of 50 years of blindness by the public. It is indeed unfortunate. Healthcare and insurance should be viewed as products and services like all other products and services in the world. That is, everyone should be able to know exactly what they are paying for.

Gucci bags costs more than Kmart bags but at the end of the day, it is still just a bag. But at least I make the conscious choice to pay more for the same thing.

[Pete]

The problem with employer-provided healthcare is they don't give you any choice. I have two options and both are much more expensive than I would buy on my own. But because it is an above-the-line deduction and any plan I would purchase aside from my employer would not provide any tax deduction at all, the employer plan is the only realistic option.

This can't be the best way to handle the system. I think Bush's latest proposal would help this problem somewhat.

[Bill Churchill]

In Madam Bovary, Flaubert speaks of a typical country doctor being paid mostly in barter for his services in caring for the ill. This was the 1800s. The price would be a chicken or turkey or two for the setting of a bone and the numerous follow-up house calls that would necessarily follow. The spirit of the medical professional was more one of doing what they felt called to do—or what they wanted to do for a motive that went far beyond the mere acquisition of money alone. Times have changed however. These days, that setting of a bone, and the attendant x-rays, cat scans, clinical visits, ad nausea would cost north of a year’s salary for most people, and--This doesn’t come with the house calls. I occasionally hear from some sprout that he wishes to be a surgeon or a neurologist. “Fine,” I say, “Why have you chosen this profession?” To this they instantly respond, “Oh, there’s lots of money to be made as a surgeon,”—and, they quickly follow; “I can help people.” “What sparked your interest in science?” “Oh, I don’t know—I never really liked science.”

There is nothing wrong with wanting to be rich. Hell, I could use a few loose millions myself right now. What is wrong is that our society is becoming over-monetized. As a result, we are loosing out in the imagination department. Rather than looking after our own health, we abuse our weight and fitness more and more, while believing that some good natured country doctor will look out for our welfare in the future. Rather than letting the market grind out a solution over time, which would have the effect of lowering prices, we beg for more government intervention in health care, not realizing that the additional dollars will only inflate health care costs.

The fact is that if someone has something expensive to sell, and the buyer can’t afford it, NOTHING HAPPENS until someone changes something to make the transaction happen. Both Doctor and Patient must make changes to come together on a clearing price. That change requires imagination, and who is better qualified than these two individuals, who are closest to the situation, to decide what and how to make the change. This requires imagination on the part of both parties. Such imagination brings the parties together in a way that clears the hurdles to a meeting of the minds. The failure of this is the cause of the health care problem. Medical lobbyists drive health care costs out of the reach of many people, who must rely on the government to pay the inflated bill. Everyone in this game thinks that any solution must necessarily be monetary. This is neo-mercantilism run amok. You wind up with Doctors, who don’t really want to be doctors—but for the money—processing patients through a system that has a disincentive to actually make people healthy.

In such a medical market place, the best healthcare plan is to look after one’s own health, as best they can--as, under the present circumstances, the doctors no longer make house calls. As with all human problems, more money is way down the list of effective solutions. Money is necessary—but not sufficient.

Posted by Bill Churchill

[Kimball Corson]

Proposing reform of any social system by a candidate is fraught with problems. But keeping silent is too. Fantasy invades detailed efforts because of later and generally predictable political rumblings and compromises. However, the lack of detail is damnable too because of the perception that the candidate has not thought it through and is just another political lightweight. What to do? A middle ground perhaps: the framework spelled out, with alternative arrangements within that framework that might be adopted, coupled with a good discussion of them. This approach lets a candidate parade his capacity for analysis around, while proposing change and getting the public to think about it, without nailing his foot to the floor or being accused of being too fanciful.

[Kimball Corson]

The problem with this analysis is the single high standard of care and a lack of diversity in regard to products/treatments, along an economic scale of affordability, within the medical community. You get the $250,000 treatment or nothing, except what you can garner from alternative medicine. We need more product and treatment diversity in the context of affordability and informed choice from the medical community. The single standard of care is monoploy imposed CYA for the medical profession, but hurts the would-be patients in too many areas.

[Kimball Corson]

While I am on a roll here --

More generally, the supply side of medical care is not competitively determined or even close to it, over and above the "standard of care " defining overly aggregated procedures and products to run prices up and afford doctors adequate CYA. Positions in medical schools are carefully restricted by a cabal including the AMA so that even places like University of Chicago's Medical School (ranked down in the teens) accepts fewer than two percent of its applicants, making Harvard College look like it has an open admissions policy by comparison. Talk about an artificial barrier to entry. All of this is to maintain doctors’ compensation at suitably high levels, in essence by administrative fiat or default.

Federal and state governments turn a blind eye even though other "self-regulating" industries came under close antitrust scrutiny, at least until Professor Posner almost single-handedly anesthetized the antitrust laws with the idea that those laws only protect competition and not competitors unless of course they are big ones and their demise would injure competition. The problem is nearly the whole trust busting industry went to sleep when judges discovered they had an idea to get rid of most of it. It is a joke to think that the quantity of medical services and products provided and the prices charged for them are competitively determined or even close to it. The analysis of a competitive medical services market is stillborn in the hands of the profession that controls that it.

[Kimball Corson]

P.S.

Both of these fine gentlemen, Professors Becker and Posner, were among my teachers too many years ago and I suppose I shouldn't be such a stinker here, but I don't like the medical insurance premiums I pay. They rival my food budget.

[jf]

Nor is it a scandal, or even a serious inefficiency, that many millions of workers do not have health insurance. Their health care is paid for my [sic] Medicaid if they cannot afford to buy health insurance whether directly or as part of an employee group health insurance plan. Those that can afford health insurance but forgo it either are young and healthy or are risk preferrers, gambling that they will avoid illnesses requiring expensive treatment.

Have you spoken to anyone without health insurance? Upon what research do you base this finding? It's no scandal to make the argument, but I would think your peers might talk if you didn't at least have some statistics to back up such a statement.

[anonymous]

US President Tim Kalemkarian, US Senate Tim Kalemkarian, US House Tim Kalemkarian: best major candidate.

[anonymous]

US President Tim Kalemkarian, US Senate Tim Kalemkarian, US House Tim Kalemkarian: best major candidate.

[Anon]

I've come to suspect that the positive value of even, and perhaps especially, top-shelf medicine is at best only marginally better than not being treated at all. And it's quite possible that those with the very best medical access are actually worse off than those who don't get such extravagant care. We know now that virtually all of medicine before the 20th century was at best harmless and quite often positively harmful. And since it was only the well-to-do who could afford cutting-edge medical care in the first place, it was they who bore the brunt of that malpractice. As an example, consider the death of George Washington discussed in the link below.

http://xnet.kp.org/permanentejournal/spring04/time.html

Is the 21st century truly different? Are the hundreds of thousands of well-to-do American women who were given HRT-fueled breast and ovarian cancer by their doctors better off for getting cutting-edge treatment? Are heart bypass patients truly better off? Stent patients? Cancer patients? There are serious doctors and economists who wonder about these things.

http://tinyurl.com/ynmxdh
http://tinyurl.com/2c3j8x
http://hanson.gmu.edu/showcare.pdf

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