The Candidates' Health Care Reform Plans--Posner

Virtually all the presidential candidates have proposed plans for reforming health care in the United States. All the plans would require federal legislation, although many include measures that the executive branch of the federal government could implement without new legislation. To evaluate proposed solutions, one must know what the problem is. Different candidates perceive the problem differently, but there is general agreement that health care in the United States costs too much--it accounts for more than 16 percent of GNP, compared to less than 11 percent in France, which the World Health Organization ranks first in the world for the quality of its health system; the WHO ranks the United States 37th. Now that is one of those multi-factor rankings that can be criticized for arbitrariness. However, if one confines one's attention to just one of the criteria, "disability-adjusted life expectancy," the United States still does not do very well. It ranks 24. (France is 3; Japan is 1.) There also is general agreement that too many people in the United States lack health insurance, whether public or private, and that this is either an economic problem or an ethical problem, or both. More than 45 million persons under the age of 65 lack insurance (few older persons do, because of Medicare, though Medicare coverage is incomplete and elderly people who can afford to buy medi-gap insurance usually do so), about 90 percent of whom are citizens or lawful residents. The uninsured are disproportionately poor and lower-middle-class (and therefore disproportionately black and Hispanic), though many poor children are covered by Medicaid or by SCHIP (State Children's Health Insurance Program). Contrary to popular impression, Medicaid is intended primarily for poor families with children; it does not cover the poor as such. Also, Medicaid reimbursement to health-care providers is chintzy, unlike Medicare reimbursement, and the quality of service is as a result poor. Most (70 percent) of the uninsured are in families with at least one full-time worker. Most are young: The age breakdown is children: 20 percent; ages 19–44, 56 percent; 44–64, 23 percent. The health of the uninsured is on average significantly worse than that of insured persons of the same age. As one would expect, the uninsured consume less health care than the insured--only about $1,000, on average, a year, though this is partly because elderly persons, who consume the most health care on average, are covered by Medicare, and more broadly because of the relative youth of the uninsured. The care they do not pay for--the uncompensated care--is provided to them as charity, for example by hospital emergency rooms, which swallow much of the cost, though some is reimbursed by various government programs. In part because they consume less health care, in particular less emergency health care, the uninsured have as I have mentioned poorer health and greater mortality than the insured, though I do not know how large a part; low income, and the style of living that goes with low income, may explain more of the difference in health and longevity between the insured and the uninsured than the lesser demand for health care by the uninsured. A further complication is that since premiums for employees' health insurance plans are deductible from corporate income tax and heavy medical expenses are deductible from individual income tax, the health care of group-insured persons (and most health insurance is employee group health insurance), and of persons with high incomes (and therefore high deductibles from income tax), is subsidized. The goals of reducing the costs of health care (at least without reducing quality or producing political outrage) and increasing health-insurance coverage are in conflict, but the candidates' plans strive somehow to achieve both goals. Some of the proposals for reducing aggregate costs are either fluff, like reining in jury awards in medical malpractice cases (those awards are a tiny fraction of total health costs, and already are being reined in by judges and by tort-reform measures adopted by state legislatures), or measures that the market is in process of implementing, such as the digitization of medical records. Other economizing proposals have hidden negative implications for quality--such as placing price controls on prescription drugs, reducing the protection that the patent laws provide against competition by generic (nonpatented) substitutes, and permitting the reimportation of drugs from countries that have price controls on drugs. Reducing property rights in medical innovations is likely to reduce the rate of those innovations and hence, in the long run, health and longevity, and those costs have to be traded off against benefits in lower prices for existing drugs. Some measures defended as economizing because they would simplify the administration of health insurance would generate offsetting costs, such as forbidding "discrimination" against persons with preexisting health conditions. Which brings me to the essential point in evaluating the candidates' health care reform proposals: significantly expanding health insurance coverage is bound to be very costly, whether the role of government in bringing about the expansion of coverage is large, as in the case of the Democratic candidates' proposals, or small, in the case of the Republicans' proposals, which generally are limited to increasing the tax subsidies for the purchase of private health insurance. Although some of the uninsured are healthy risk takers, most would have difficulty affording health insurance, and, as a practical matter, would require a subsidy of some sort. The subsidy itself would just be a transfer, financed presumably by a tax increase; the social cost (that is, the consumption of scarce resources by the program) would be the cost of administering the subsidy program and the misallocative effects that a tax increase would create. The larger social cost would be the additional health care resulting from the expansion of coverage. Insured people use more medical care because the possession of insurance lowers the marginal cost of that care to them. And because the uninsured are on average less rather than more healthy than the insured, forcing them to buy insurance would not lower insurance rates to others. The average annual cost of employee group health insurance for a family of four is $12,000. Supposing there are 10 million families without health insurance, and that two-thirds could not afford such insurance, it might well cost more than $80 billion a year to buy it for them. This would be more than 3 percent of the federal budget. That is not an unthinkable amount, but the political opposition would be great, because the majority of the population--the people who have public or private health insurance already--would not benefit from it. Might there be a compensating offset because with greater medical care the people who now are uninsured would be healthier and live longer, and thus cost less in subsidized medical care in the long run? Not necessarily, since the longer a person lives, the greater his average medical expenses because average annual such expenses grow with age. Living a healthier and longer life is of course a benefit to a person; my point is only that it need not reduce his average annual health costs. The way to economize on expenditures on health care, though it is utterly infeasible politically, would be to eliminate the tax subsidies for health insurance and health care and institute a means test for Medicare, and at the same time to limit medical services. Then both the demand for and the supply of those services would be reduced, and the percentage of GNP that goes for health care would drop. But the principal result might be to reallocate consumption spending to goods and services that most people value less at the margin than they do health care. Moreover, there is an economic argument for some level of tax subsidies for health insurance premiums or health care. Medical care increases human capital, and is thus an investment, and investment expenditures need not be (probably should not be) taxed as long as the revenues generated by them are. Medical treatment that extends life or enables a person to work increases the person's income, which is taxable. Maybe a little patchwork here and there is the most that is both economically desirable and politically feasible by way of reform of American health care.

Comments

[Raghav]

Surely means-testing Medicare is an implicit increase in income tax rates, and shares the same misallocative effective.

[jimbino]

I know I'm not the only person in this country whois philosophically opposed to insurance and I hope not to get included in somebody's socialized medicine. You say the head of a family spends some $12000 annually on health insurance. Assuming he were to spend that sum annually on premiums for ALL types of insurance in 45 years of working life and a claims ratio of 50%, a person who goes "bare" and who pays his own losses, putting what would be his premiums in an S&P index fund instead, will be between $2,000,000 and $4,000,000 richer at age 65 than the religiously risk-averse insured.

I'm sure one of you econ guys can come up with a more exact number, but I know I'm not in the mood to impoverish myself to the tune of several million dollars on account of such foolishness.

I know you won't get the Amish and the Christian Scientists to participate in your socialized medicine, and I see that I must now begin to start a religion that, like theirs, disapproves of participation in the insurance-medical superstition.

[truxrule5]

I am surprised that Becker and Posner did not demonstrate how individual state regulations have affected health insurance premiums thus far. In other words, what is the correlation between new state regulations and premiums? Does anyone have thoughts?

[brn2run]

I am sure politicians will never veer from the "$45M uninsured Americans", but what about the underinsured, and what about the people who choose not to be insured. It seems to me that there needs to be a whole new way of talking about healthcare. 1) health insurance as a fringe benefit makes no sense; 2) way too much is spent keeping people alive (just barely); and 3) personal responsibility and accountability needs to be part of the equation. I bet the best return is on prevention.

[Mike R]

Paco,

The CDC has not shown an increase in obesity rates in over 7 years. Additionally, there is very little evidence for a link between obesity and actual health care costs.

Also, the largest study ever done on nutrition and health, the Women’s Health Initiative (WHI) Dietary Modification Trial, with nearly 50,000 subjects and 8 years of study showed no correlation between commonly accepted ideals in nutrition and health outcomes.

We get old, we get sick, we die. It happens to all of us. It costs money.

[paco]

Fair enough -- indeed, maybe obesity and unhealthy lifestyles (like smoking) reduce health care expenses overall since people who die sooner wind up using up less health-care resources overall!

[Mike R]

At one point I actually tried to figure out if smokers were costing the economy money. I've frequently joked that from an economic standpoint, the best thing that can happen for society if for people to turn 65 and be hit by a truck. Smokers do have a shorter life expectancy and symptoms that tend not to show up in the first 50-60 years of life (except we mostly hear about the outliers who die younger). So the question is whether smoking (or any other high risk activity that lowers life expectancy) is more similar to being hit by a truck at age 65 or if it bleeds money, more than other causes of illness, over an extended period of time.

[Jake]

1) Uninsured patients actually get more emergency care than other forms of care (not the other way around as you've stated), because emergency departments are required to treat people regardless of their ability to pay.

2) If better health care results in people living longer lives, its not actually a financial investment unless they weren't going to live to 65 anyway. Once they've retired and gone on Social Security/Medicare they aren't putting anything into the economy, just taking. I agree thats its good to have healthy people, but I wouldn't consider extending life a financial boon.

[MD]

"those awards are a tiny fraction of total health costs, and already are being reined in by judges and by tort-reform measures adopted by state legislatures"

1) This doesn't account for undisclosed settlement agreements; and
2) Both the settlements and the awards themselves make medical malpractice insurance more expensive for ALL doctors, which as I understand is one of the largest of the costs incurred by doctors/hospitals

[neilehat]

Judge Posner is probably correct in the fact that all we can expect is mish-mashed patching of the current medical system that plagues us. Due to a lack of political will to deal with the situation and the entrenched economic interests.

In order to truly deal with the situation it needs to be attacked on a four fold front. Those four fronts are:

1. Controlling medical cost inflation. Current inflation is running at approx. 5% a year, almost double the inflation rate of the Consumer Price Index.

2. Controlling utilization. This is due to predominately the greater use of more expensive medications and procedures.

3. Controlling the use and application of new Medical Technologies. Such as new procedures and the expense of new medical equipment used to diagnose and treat illness. Such as many of the chronic conditions that are now "treatable" and other conditions that were once considered 'untreatable".

4. Elimination of cost shifting by the Government by refusing to pay or cuts in Medicare.

For the approx. 20% cost increase in the last year, fully 12% is due to utilization costs, 4% is due to medical inflation, the balance results from technology innovation costs and government cost shifting. Until one recognizes where the problems lie, we'll continue to have to deal with a mangled medical care system that is growing ever more expensive and unavailable.

[neilehat]

Jack, Thanks for detailing some of the problems inherent in battling the fourth front, "Government Cost Shifting". Without Medicare, E/R Medicare becomes the stop gap and the hospitals do not receive payment for the service. This service is not provided "agratis". These costs are shifted to the private carriers, driving health costs up across the board. Too bad we can't shift our costs like the Government does.

[helbok]

Americans actually live longer than all the other western country citizens IF you subtract death from auto accidents and violence which have nothing to do with health care. Further, if you look at cancer survival, Americans cancer victims live twice as long as those in any other country.

So the premise is wrong !!

[neilehat]

helbok, I've seen cancer patients live twice as long, and in most cases, not a pretty sight. As far as I'm concerned, we treat horses and dogs better. And I won't even mention the costs involved.

[Tiffany Bonds]

I agree that Health care is a major problem in the United States. It is true that something needs to be done. I mean if the rich are the only ones who are getting help then something needs to be done. I agree that if our cost for insurance is so high, then why is the US life span not as long as other countries?
I am ready for a change and hopfully the next president will try to make it better!

[Jack]

Thanks, Neil, and so far no one, inc Posner or Becker has mentioned insurance CEO's "earning??" $200,000,000 in one year.

Does that really work out to ONE MILLION for nearly every "working" day?

[Len]

As an insurance broker you missed the more important points about healthcare and the US in particular.

The 45,000,000 Americans without health insurance is a number created by the liberal media, expanded upon by the candidates. If you subtract the 12-20 million illegals from the 45,000,000 you have 25 million left. Now take out the 18-34 yr old invincibles and that number keeps getting smaller. Bottom line is there are about 9 million Americans without coverage. Half of that number are elibile for federal assistance but don't know or take advantage. Further facts indicate that 50% of the health problems in this country are related to obesity, smoking, alcohol and illegal drug use. Fix those problems and the cost for healthcare comes down. Add the transparancy aspect of healthcare and that cost for healthcare keeps getting smaller. Electroinc medical records helps Doctors and patients and will ultimately reduce healthcare costs.

The biggest problem with healthcare is the media reporting false information to the public who do not take the time to check it out themselves and just believes what they read. If you had taken the time to investigate these items further before writing articles claiming to be experts on the subject, you might have uncovered these same facts.

[neilehat]

Len, Got open and easy access to the University Med-Clinic do you? C'mon out into the Real World, I'll bet you'll change your tune then!

[Steve Eugster]

This is a good piece of thinking. Clear and informative. And freightening. The cost of providing health care to all of the citizens of the United States will be prohibitive. Or at least so it seems. If decent health care insurance for a family of four currently is $12,000 per year there is no way we as a nation will be able to meet the total cost. So what will have to give? It seems we will have to opt for a basic level of care and will have to resign ourselves to fate for the rest. The rich will do just fine, the other 175 million will -- I suppose be resigned to their fates without more care than basic care.

[nora]

I just don't see what's wrong with spending a lot of money on health care. We each only get one body! Keep us functional and productive. The return on that cost has never been measured. Why not?

What about skipping having the government providing the actual care and simply paying the premium? You'll have a hard time convincing me that it is not cheaper to buy a policy for a poor family that it is to pay for the total care itself. Plus, it keeps care in the free market and out of governemt.

And, we really need to take under consideration the number of people who have enough money to buy insurance but choose not to, before we throw around these big numbers of helpless uninsured. That is a large percentage of the uninsured--very large. When they need care, they get it.

Single-payer? No way.

[Jack]

Geez Steve you're a real defeatist! But perhaps you've not kept up on how wasteful and inefficient our patchwork of health care really is?

Nora....... nothing wrong with paying for two Cadillacs but only getting one Buick......... if you've ton of money.

"What about skipping having the government providing the actual care and simply paying the premium?"

.......... Good! most of the proposals are leaning this way, and but for insurance co lobbyists packing satchels of cash up to Congress we'd see something like a voucher for all with health care providers competing for memberships. "Insurance companies" could join buggy wheel makers and be a thing of the past, OR they could take their capital and provide SERVICES for their memberships. We really DON'T need to waste 40% on managing paperwork for them.

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