The Administration's Health Care Plan--Posner

It is understandable why there is widespread concern with the American system of health care. The nation spends about 15 percent of its very large Gross Domestic Product on health care, which is almost twice as much per capita as the nations that we consider our peers spend, yet outcomes, at least as measured by longevity, are no better in the United States than in those other nations, or for that matter in many much less wealthy nations. We provide much greater health care to elderly people at the end of their life than other nations do, though without much to show for it in increased longevity. Some 45 million people--15 percent of the population--have no health insurance, either private or public. They are either charity patients, or pay the full price of any medical treatment they receive--or at least are charged the full price, for a common sequel to an expensive medical procedure for an uninsured patient is the patient's declaring bankruptcy in order to wipe out his medical debt. The Administration wants every American to have medical insurance. The details are unclear, but the thrust of the Administration's plan is those who can afford to buy medical insurance, either directly or through their employer, would be required to do so and that those who cannot would have their insurance subsidized. The cost to the government alone of the Administration's program is estimated by the Administration itself to be $120 billion a year. How it will be financed remains up in the air, along with many other crucial details. Probably part of the cost will be defrayed by limiting the tax deductibiliy of employer-provided health insurance. But most of it, at least in the short run, will simply be added to the government's huge budget deficit--so huge that amounts like $120 billion are beginning to seem like small change. The Administration claims that in the long run the aggregate cost of health care will actually fall. Indeed, the hope is that the $120 billion annual cost will not have to be funded at all, but instead will be offset by various reforms that the Administration proposes, including digitization of health records, allocation of greater resources to preventive care, and evaluating the performance of hospitals and other medical providers more carefully, to determine which medical procedures are really useful, and limiting reimbursement to providers accordingly. I don't think the program makes fiscal sense. If enacted in anything like the form that the Administration is urging on Congress, it would be immensely costly and would thus add significantly to our national debt, which is already growing at a fast clip because of the decline of tax revenues as a result of the current depression and the immense government expenditures on trying to speed economic recovery. Ignored in estimates of the cost of the health care program is the effect of insurance on the demand for medical services. When people, because they lack health insurance, have to pay for medical services or encounter long queues in hospital emergency rooms, they have an incentive to economize on medical treatment. If they have health insurance, the marginal cost of treatment in excellent medical facilities falls to the cost of a deductible or copayment; and it is the marginal cost that the insured consumer of medical services confronts--the cost of the health insurance premium itself is a fixed cost, which is not affected by how much treatment the insured receives. Because the supply of medical services is not highly elastic, an increase in the demand for those services will increase average as well as total cost. I would not object if a program of universal health insurance could be financed by reducing or eliminating the tax deductibility of health insurance. But only a modest reduction, if that, in its deductibility is politically feasible. The reforms that the Administration contends will not only pay for the program but also reduce the aggregate costs of health care in the United States are probably pie in the sky. Digitization of medical records does increase efficiency: it makes it easier to change doctors, track health histories, and coordinate medical services. But the net savings are likely to be modest or even negative, because anything that lowers the average cost of a given quality of health care increases demand, just as broadening insurance coverage does. Preventive care--another efficiency measure touted by health-care reformers--is potentially very costly, because by definition it provides health services to people who are not yet ill. Advances in preventive care are not limited to telling people to exercise and eat healthful foods, but increasingly are dominated by massive and costly programs of screening and follow-up. Such programs, and the treatments that ensue for persons found to have a treatable condition, may extend life, but often this means keeping alive very sick people who will require expensive care for the remainder of their prolonged life. An effort to create a form of benchmark competition between hospitals and between doctors, by careful evaluation of outcomes and by using the results of the evaluation to calibrate reimbursement by insurers so that the best-performing health-care providers will be rewarded and the worst punished, is likely to founder on the difficulty of adjusting for differences in outcomes that are not attributable to the efficiency of the health-care provider. In addition, efforts to limit treatment by limiting reimbursement, especially efforts by government to do so, are deeply unpalatable both to patients and to doctors and hospitals. A patient convinced by his doctor that a particular treatment is his only hope for continued life will not be reassured to be told that in the opinion of the government's experts, the treatment would not be cost-justified because it is very costly and is unlikely to be successful. Insurers, and employer health-benefits plans, try to do this kind of financial triage now, but their lack of success is reflected in the enormous annual cost of American health care. A deep problem is the replacement, in the medical profession as in the legal profession, of a professional model of service with a business model. In the professional model, the service provider is assured a good but not extravagant income by limitations on competition, and in exchange he is expected to avoid exploiting the ignorance of patients as he could do by performing unnecessary or low-value procedures. In the business model, the service provider endeavors to maximize his net revenues. In the case of medicine, the disparity of knowledge between provider and patient, coupled with the fear and desperation that serious illness (or just the possibility of it) engenders, enables the profit-maximizing provider often to convince the patient to undergo costly low-value treatments. Certainly the profit-maximizing health-care provider will be very relucant to refuse to provide a treatment that the patient insists upon, his insistence being made convincing by the fact that insurance will pay all or most of the cost. Insurers do try to limit their costs by refusing to approve low-value procedures--but in the face of combined pressure by provider and patient, the insurer is often forced to back down. To return to the initial puzzle of why our peer nations are able to provide what seems, judging by outcomes, a level of health equal or superior to that of Americans at far lower cost, the only convincing answer is that the health-care providers in those nations limit treatment. I am not sure of the explanation, but the possibilities include: the professional model is more tenacious in societies less committed to free markets and a commercial culture than the United States; more of their hospitals are public and more of their doctors are public employees, who are therefore salaried rather than entrepreneurial; and Americans, being less fatalistic than most other peoples, have a more intense demand for life-extending procedures. These are reasons why a national health plan modeled, as the Administration's appears to be, on the health plans of peer nations with much lower aggregate health costs is unlikely to work well, or at least to generate net cost savings. Of course if people value extension of life very highly--and there is evidence that, in the United States at least, most people do--a very costly health care system may be cost-justified, in the sense that the benefits exceed the costs. Yet the benefits seem rather illusory, since the extra money we spend on health care does not seem to produce better outcomes. But international comparisons of health that are limited as they largely are to differences in longevity are crude. They ignore health benefits unrelated to longevity, such as the benefits conferred by cosmetic surgery and the possibility that the additional costs of health care in the United States enable people to live more dangerous, strenuous, or self-indulgent lives and by doing so confer utility.

Comments

[Anonymous]

Dr. Posner, Wouldn't a reform that ha been proposed by John Cochrane, the creation of "health-status insurance" markets, remedy at least the coverage problem? A recent policy brief is found at the Cato Institute link below: http://www.cato.org/pub_display.php?pub_id=9986 A fuller treatment is in John H. Cochrane, "Time-Consistent Health Insurance," JPE 103 (June 1995) 445-73.

[Anonymous]

If one views the U.S. Health Care System as an Industrial and Business Model, only one immediate solution comes to mind, "Price and Wage Controls". All of the other cares and concerns are superflous.

neilehat

[Anonymous]

I'd like to know how one could demonstrate that Americans are "more fatalistic than other peoples." (I believe this is a corollary of the assertion that Americans are "more idealistic" or "optimistic" than other peoples.) I am an American. Did I betray my fatalism by posing this question and criticism?

[Anonymous]

I meant to write "less fatalistic" but I couldn't keep the nonsense sorted out in my head.
-Anonymous again

[Anonymous]

I guess the fatalisticness of Europeans is shown by the way Frenchmen and Germans strike and riot against govts and corporate management while American workers (their union leaders) usually just try to bribe some Democrats in Congress to do something on their behalf.
In other words, I think "Anonymous again" has exposed Posner's thoughtlessness. I guess writing so many books has taken its toll on the judge.
Second-that-motion

[Anonymous]

A large percentage of medicare costs (over half I believe)are incurred by patients in the last 6 months of life. As a physician I see this all the time. A demented nursing home resident falls, or complains of abdominal pain, the nursing home protocol is to send the patient to the ER, ER protocol, driven by overcrowding and malpractice fears is to obtain very expensive CT scans, even before the patient is seen by the physician,(ie it is more "efficient to for the physician to see the patient after all the results are available). Thus after a workup of many thousands of dollars, the patient is seen by a doctor who will either admit the patient or send them back to the nursing home to start the process over in a few days or weeks. We see these "frequent fliers" over and over until they finally die, either naturally or due to the complications of the best that modern medicine has to offer. Somehow, I think the process is different in Europe.

[Anonymous]

We see these "frequent fliers" over and over until they finally die, either naturally or due to the complications of the best that modern medicine has to offer. Somehow, I think the process is different in Europe.

[Anonymous]

At what point does it become cheaper to just start constructing large, regional, public health facilities that offer professional "cost-efficient" care to low-income families and/or those who buy into "public" health insurance (while leaving the current remarkable system that keeps obese Americans living almost as long as the French intact)? They could be staffed by meaningful government investment into fellowships for life science, nursing and medical students...which can be given to low-income and URM communities! I'l call it MediCorps, Boom!

/How are the House Dems not all over this plan?

//And think of all the "earmarks" the facility could pull for a District!

///Quick, someone get me Murtha!

[Anonymous]

I recall having read many treatment outcomes other than longevity that have been compared to those of Europe, always to the detriment of the US system. Focusing on longevity is a red herring.

[Anonymous]

Longevity is an available statistic that tells a small part of the health care story. Quality of life is difficult to measure but likely more important to health care consumers.
Where a retiree was once destined to suffer for decades with worn out knees or hips, costly joint replacement surgery now trades pain and incapacitation for 18 holes of golf and softball with the grandkids. Not a bad thing but hard to put into a spreadsheet.

[Anonymous]

testing

[Anonymous]

Did I betray my fatalism by posing this question and criticism?

[Anonymous]

Public funds comprise about half of all healthcare expenditures and most of that is without rationing of any kind. Surprise, surprise that usage and costs are high. That was predicted by opponents of Medicare in the 60s and ignored.

Longevity is relatedf more to public health and life style issues as well as to economic status than to national policy or healthcare spending. To make assertions otherwise would require studies removing heterogeneity from consideration.

Healthcare is not the same as medical care. If one considers the outcomes of treatable diseases like breast cancer, prostate cancer, etc the United States is far better than other nations in the results.

Medicare spends 80 billion per year in the last year of life. That issue alone is fit for a separate discussion but consideration of a mandatory advance directive at the time of Medicare (Social Security) sign nup should be considered. Estimates of defensive medicine costs vary from 10% to 30% of the total costs of healthcare which may be as much as 700 billion. If providers are not protected from the perils of the tort bar, those costs will persist regardless of rationing regardless of other standards of care.

Of the 45 million uninsured, 12 million are illegals and 10 million are eligible for some coverage but choose not to avail themselves of it. Emergency room services are free to the uninsurd and many with Part A (hospital coverage) choose not to buy Part B (physician coverage) for reasons mostly economic but who knows.

The level of understanding of anatomy, physiology, pathology and phamacology among the US population is appallingly poor and contributes to enormous unnecessary healthcare and medical interactions. That could easilly be corrected with education at the primary and secondary school level (taught by medical professionals).

Medical care is an ART. Very difficult to set standards. The whys and wherefores of that statement is also fit for an entire discussion. Suffice it to sat that academic medicine is structured in such a way as not to be entirely reliable for setting standards for everyday medical practice.

The Rand Corporation study of 2005 which finds a annual saving os 80 billion per year should all medical records reside in an electronic form is pur nonsense, again a subject for lengthy discussion. The cost of implementation and maintenence would be enormous. Failure on the first attempt would triple the costs. Ask Tony Blair. He tried it and failed and now the UK can't afford to try it again.
I predict that we will design and enact a national system with one tier and no up-front recognition of the necessity to ration to avoid a political food fight. That will lead to runaway cost escation, more political mistakes, rationing and continuing unhappiness with an ineffective expensive system.

Remember that the National systems in other nations are more two tier, have rising costs, long waits for routine procedures and/or hopitalizations (unless you have private insurance) and acceptance of rationing(if you have end stage renal disease and are over 55 in The UK, you just go home for your remaining few days).

If we are going to have a national system, at least approach it honestly and learn from others. That, I am afraid, is too much to expect from what is a politically driven situation.

JIM

[Anonymous]

The budget numbers are bad, but the Republicans tossed that one under the bus back in 2001 as a reason not to do something. If we can go into trillions of dollars of debt to pay for tax cuts so the well-to-do can buy McMansions, then we can go into trillions of dollars of debt to pay for health car for regular folks, is how the argument goes.

Cheney was more right than he knew when he said budget deficits don't matter anymore.

Buster

[Anonymous]

Now on the LP YouTube Channel:

Tom Palmer - Free Trade, Protectionism, GM, and Peter Schiff
http://www.youtube.com/watch?v=KK0-_nNsDO4

[Anonymous]

In all the talk about "Obamacare" nary a peep has been uttered about the most important part of the entire equation: the doctors. As the forgotten men and women of this debate, professional physicians who labor long and hard to acquire the expertise necessary to save lives are now expected to become mere government employees no different than those in the local post office. Even worse, they will be practicing a sacred and professional art essentially at the direction of government bureaucrats. Ask yourself: would you want to be operated on by a physician who gives up his professional, independent judgement in this way? What's more, what self-respecting physician would allow such a thing to happen except if forced by the barrel of a gun, i.e., as a result of government coercion? In sum, how can there not be a diminuition in the present-day quality of medical care should physicians be relegated to this level?

[Anonymous]

By the time the public figures that out about the physicians, it will be too late. About the only people who will get high quality health advice will be physician's families and maybe a few friends. The rest won't even know that they have been hoodwinked. How about surgery at Walgreens or CVS?

Jim

[Anonymous]

I spent two years at the GSB and I know how I was trained. With Austen Goolsbee at the GSB and Barack Obama at the law school for 12 years, what gives?

[Anonymous]

Fees paid to doctors for their services in the US are much higher than fees paid for exactly the same services to other doctors in the rest of the world. Most of the blame can be placed on an overly generous Medicare fee schedule. The balance of the blame can be placed on congressmen who, each year for the past 6 years, have over-turned mandated law (SGR) requiring doctor fees to be lowered. The American Medical Association (AMA), the doctor's lobbying arm, has become our country's most powerful labor union. Every MD in America belongs to the AMA. And every MD is beholden to the AMA for its successful fee negotiations with Medicare. The price of health care in America is strictly controlled by the AMA and its doctor members.

[Anonymous]

I find Posner's post to offer up a number of conundrums...

We pay double for health care, insure less people, live shorter lives.

Yet the success seen in other countries - that lovely combination of longer lives and lower health care costs - is because they "limit treatment," according to Posner.

Huh! Limiting treatment can lead to successful health care outcomes, apparently!

Criticizing the Obama plan is all very well and good. The problem is that the health care system we have now is horribly broken and needs to be fixed. There is absolutely no transparency in the costs of health care - nor is there any logic in how pricing is determined.

Relying on the "free market" has given us a system that takes in money from healthy clients and dumps the people who are seriously ill. I'm not talking about elderly people in nursing homes - I'm talking about people (who don't work for large companies) with diabetes, Crohn's disease, cancer, depression - people chronic, treatable conditions. These people with "pre-existing conditions" are liabilities for insurance companies and thus are priced out of the market, if they are not rejected outright.

That's the "financial triage" I see now - the dumping of patients with "pre-existing conditions" and the ever-higher costs to insure employees.

Health care has become a competitive disadvantage for even our most successful players in the global marketplace. Something must be done to fix it.

[Anonymous]

I am disappointed to see that neither Posner nor Becker touched on the potential free-rider problem out there regarding innovation. There is a very legitimate, albeit speculative, argument to be made that health care costs as they manifest through medical equipment and prescriptions, are much higher in a ‘free market’ like the US than in one which has a monopsonist purchasing instruments/medicines. The related piece is that $ spent on R&D is a function of Expected NPV of research. In effect because people in the US pay so much more for healthcare than in other countries, many marginal R&D decisions are only made because of the ‘inflated’ prices charged in the US. Because of the characteristics of information in these innovations (essentially non-rival), other countries can then free-ride by not paying their ‘fair’ share. That is, if a monopsonist were to make purchases in the US, many important R&D decisions would be vetoed, potentially leaving the world significantly worse off on average (in a Kaldor-Hicks sense I would posit).

Caveat: I am not sure how one would construct the data to demonstrate this. Further, if a monopsony model were adapted in the US, the benefits of lower prices to the public would be obvious, but the foregone benefits, all of the potential treatments that were not discovered, would not have a voice and would likely be ignored.

[Anonymous]

One of the unmentioned arguments for high doctor fees missing from all the comments is the cost of Medical Malpractice Insurance. I have heard it made by provider after provider. If those who see the doctors as victims really care, they should advocate that part of health care reform be not just subsidizing of the poor and disadvantaged, but also both the cost of medical school and malpractice insurance. The two largest financial hurdles for doctors is repayment of the enormous loan debt to obtain their MD degree in the beginning of their practicing years, and the cost of malpractice insurance during the balance.
General primary care availability would be greatly increased alongside demand with an MD program that requires early term practice in the regional clinics so highly touted by Bush, and which are probably a sound approach. Once the cost of the degree is repaid by service term, during which earnings are not reduced due to loan repayment, then the physician MD could return to obtain specialization training with the money in-hand to pay for it, as it is then an investment with a very high yield.

These concessions, good for the country can then arguably justify a significant reduction in fees charged to citizens.

For the mean-spirited among those posting comments, who suggest that much of the 80 billion could be saved by withholding unnecessary MRIs and other procedures during the last year of life, we could do so and balance that as well by using the national average for the "last year of life" by race and let come what may for affected, in effect transferring the decision to their families. If they don't think their worth having around another year, they can let them suffer the consequences. To balance it fairly, using the same national averages, we can force bond holders and those with stock to liquidate the same and pay taxes in full and unamortized, since they won't be around either. The taxes earned could be added to the savings of ditching the elderly, and everyone could feel that bond holder suicides also reduced health care costs accordingly.

[Anonymous]

Anon 9:47: You bring up a good point and one I've given some consideration. I agree with your concept but let's look closer at the pricing mechanisms:

The "free market" of the US isn't much of a "market" at all as the costs of new machines or processes are third partied to insurance companies, and the sky is the limit for new patented drugs while older drugs are sold to Medicare at the "rack rate" (double what the VA pays) with no bidding at all.

Then comes the "monopsonist", perhaps Canada. What method do drug and med equipment makers use price their product at half or one third the US price? I'd think patent and research power would play some role in preventing the Canadian buyer from beating prices down to bare bones, but that doesn't seem to be the case.

While I don't have the answer, it would seem that if buying power such as that exercised by VA but not Medicare were used to lower prices in the US, that those companies with patent or branding power would then drive a bit harder bargain with the rest of the developed world so THEY too could chip in on R&D (and ha! the advertising which often is larger than R&D!)

There's something economically silly about drugs developed here selling for one third as much in Canada when most other products are competitively priced between the two nations.

Topping the whole thing off with laws against US citizens "re-importing" OUR drugs, in a "globalized??" world seems sillier yet. Consider...... if the US did not outlaw reimportation a working market COULD exist with it not taking long for drug companies to figure out they couldn't maintain such a broad, two-tier price spread. Result? raising prices in Canada while lowering them in the US. Dollars available for R&D similar or perhaps more.

Interesting how "globalism" works; Not subject to international pricing pressures are drug companies, docs, lawyers, politicians, CEOs, seemingly Wall Streeters, and perhaps oil companies who benefit from cartel pricing.

Who is under extreme pressure from the effects of "globalism?" Nearly all labor from generic up through professionals whose work can be exported or wages limited by H1-Bs etc. Ha! Great! much of the price lowering effects that help us all are borne by labor with the result being that soon, if not already, we'll be too poor for the beneficiary group to prey on us!

Jack

[Anonymous]

Anonymous at 9:19 p.m.

I think we all agree on the diagnosis. The contention is over the treatment.

Please consider Prof. Becker's proposal to decouple health coverage from employment by repealing the tax deduction, and give each person or family a refundable income tax credit in some amount to be used to pay for health coverage and care. This would (over time) solve the "pre-existing condition" problem because you would purchase coverage when young and have it no matter who your employer is, or even if you have no employer. You could speed this up by requiring that during the transition, insurers cover all conditions of anyone who had health coverage under the current system. Then you get rid of the people who want to buy coverage only when they get sick.

And as mentioned in some of the previous comments, something must be done about medical malpractice litigation. Perhaps a separate claims system like workers' comp.

[Anonymous]

Anon 9:59: I've been thinking along your same line but use voucher instead of RFITC with the same goal of putting all into one pool.

The single pool who can and will use their voucher to buy H/C from some provider gets rid of the need for anything called "insurer".

Instead today's "insurers" combine with hospitals and medical groups to become "providers" none of which could refuse service to anyone. Ideally we might expect large provider groups to compete on service much as airlines once did when they couldn't compete on price.

At the core, much as the airline was expected to carry all safely to their destination there would have to be a social contract something like today's "insurance" contract that protected the consumer; in essence a bill of rights of H/C. A tough assignment right there! Would it include everything? every experimental hope that today might be purchased at great cost?

And the model is a bit too simple as costs vary so much across the nation and our rural areas would still have problems attracting any service much less seeing any competition. But today's and any system imaginable is not simple and consists of a bunch of patchwork such as Medicare paying more in some areas.

I guess Medicare shows us the other option, which has the inherent problem of continuing a tradition of "fee for service" in which the whole system is an incentive not for high quality cradle to grave medical care but for finding niches where medical providers can profit from mis-priced or perhaps even useless "procedures".

Could we hope that in the "one pool voucher financed" model that we could get it right so that the incentive would be that of providing comprehensive health care for that pool that the company would like to have for life, but who do have the option of taking their voucher elsewhere? That the tension for the bean counters above would be that of risking the loss of subscribers if service suffers?

I'd think this would create more of a Mayo Clinic culture with good docs and techs working for salaries in an environment where they could do good work w/o the costs of running individual "horse and buggy" "specialties" and where a devotion to best practices would lower mal-practice claims and automatically spread the costs, for the most part w/o another "insurance company" to deal with.

I've been, for many years, a VA patient, where there not a profit motive but the problem of each unit of service coming out of a budget subject to Congressional oversight. In years past "the wait" was a factor. Today, it's not and service there seems as good, perhaps better than other services and as speedy. They've already implemented the "controversial" records digitization with most records being online all over the world.

I've not been able to compare VA costs, but with an aging group of, often wounded, Vets it would be difficult to compare to the population as a whole anyway. But it does seem to be a model that is serving a large population well and from which we could learn.

Thoughts..........? Jack