American Health Care Once Again-Becker

In a recent post (see my discussion on July 28) I explained why the American health delivery system is superior in some important dimensions to health care in most other advanced countries. Americans have considerably longer life expectancies when they contract serious diseases, like cancers and heart conditions, than do persons living in these other nations. That post emphasized that many criticisms of the American system do not sufficiently appreciate its positive effects on both the quantity and quality of life. Here I address a few of its major shortcomings, and suggests ways to overcome, or at least moderate, these without eroding the strong parts of the system. I recommend to readers the many high quality discussions of health care reform by John Goodman of the think tank, The National Center for Policy Analysis, and also a good op-ed piece in the Wall Street Journal of August 12th by John Mackey, CEO of Whole Foods. A glaring weakness of the American health system is the over 40 million Americans without health insurance. To be sure, they impose much less of a cost on the health care system than is commonly claimed, partly because the majority of the uninsured are young and healthy. Still, in a country as wealthy as the US, this is embarrassing, and should be rectified. The least bad solution, strangely, opposed by many conservatives, is to require everyone to take out catastrophic health insurance that covers each person against major illnesses. Those individuals and families that lack the means to pay for such insurance would be supported under a version of Medicaid. Such compulsory insurance for everyone would greatly reduce the uninsured problem, in particular their free riding on others when they get seriously sick and go to hospitals for extensive care. Increasing their medical coverage in this way would add to total spending on medical care, but it might well reduce the cost of medical spending to others. Since the uninsured would be forced to take out such insurance, they would pay for any major medical care through insurance premiums rather than imposing the cost of their care on taxpayers and other groups who pay for their hospital care. Another feature of the present system is that most Americans receive their health insurance through employment. Americans are stuck for political reasons with this system for a while, yet a few important changes may be politically feasible to significantly reduce its cost, inequities, and inflexibilities. To start, a cap should be placed on the amount of employment-based health insurance that is tax-deductible, so that employees would have to pay for so-called "Cadillac" plans out of their own incomes rather than out of taxpayers' incomes. A second reform would be to provide the tax savings from these plans in the form of tax credits rather than tax deductions, so that higher income employees would not have a tax advantage to opt for expensive plans only because taxpayers foot much of the bill. A third and very important reform of the employment -based health insurance system would be to make the same tax savings available to persons who buy health insurance outside of their jobs. One advantage of encouraging the purchase of non-employment-based health insurance is that persons changing jobs would not risk losing their health insurance. This would also raise the attractiveness of working at small companies that find it too expensive to provide health insurance. This extension would increase the taxpayer burden from health insurance, but that burden would be offset by the elimination of the tax deductibility of Cadillac plans. Perhaps the greatest problem facing the health care system is the high and rapidly growing cost of Medicare for the elderly as the American population ages, and as new drugs and surgical procedures are developed to treat diseases of old age. I agree with Posner that a means test for Medicare should be implemented, so that older men and women who can pay for their medical care should get a much smaller subsidy. This would reduce the incentive for these persons to opt for expensive drugs and surgeries only because they pay a small share of the cost. I do believe that older persons would still be willing to pay a lot to extend their lives, partly out of their fear of death. But that belief should be put to the test by requiring the elderly who are reasonably well off to spend more of their own money for their medical care. In order to increase the number of older persons with enough financial means to cover much of their spending on medical care, further encouragement should be given to tax exempt health savings accounts, where unused balances can be carried over to later years. By age 65, families that have made prudent use at younger ages of the monies in these accounts would then have accumulated sizable balances that will prepare them much better financially for the medical risks of old age. Another way to reduce medical spending by the elderly in the long run is to encourage, not continue to attack, drug and biotech companies, so that they invest more in developing new drugs that treat better the major diseases of old age. The research and development work required to expand significantly the production of new important drugs would add only a very small fraction to the huge total medical spending. Moreover, this cost would be more than offset by the savings from substituting drugs for expensive surgeries or hospital stays, for drugs have the major advantage over these other treatments that they can be used to treat large numbers at relatively small additional cost. The cost structure of drugs- high initial costs and then low costs of extensive use among the population- is especially advantageous to a health care delivery system, like the American one, that has trouble denying available medical care to persons who might benefit only very slightly. The current Congressional bills on health car reform generally include a public insurance option; that is, a federal government health insurance plan that would compete against private plans. The Obama administration is retreating from its emphasis on the importance of including this option, and the details about the form such an option will take have not been spelled out. Nevertheless, the experiences of other government-run operations strongly indicate that whatever Congress says in these bills, such an option will cause far more harm than good. For one thing, employees of a government-run health plan are likely to be unionized, just as public school teachers and postal workers are unionized. These unions have raised the costs of operating schools and the postal system through their pay structure, and they have reduced the efficiency of these operations through opposition to innovations, merit pay, and other efficiency-raising changes. Supporters of a government-run plan claim that it will be financially self-supporting, and will provide a standard for private plans. To see how this would work out in practice, consider the postal system, a nominally private but basically a very old government -run business. The postal system is also supposed to be self-supporting, but only recently it once again asked Congress for additional subsidies to cover deficits. It strains credibility to expect that a large government-run health care option will not run huge deficits. Just as part of the postal deficits are caused by government mandates, such as providing Saturday deliveries at no added cost, so Congress will also impose costly and inefficient mandates on the government health care option, in addition to other inefficiencies of such a government health care organization. The micro details of the way the postal system operates are hardly reassuring about the efficiency or flexibility of a public insurance option. To illustrate, we summer in a small town on Cape Cod that has about a 1,000 year-round population that rises to about 10,000 during the heart of the summer. In responding to this large seasonal change, Fed Ex, a non-union private company, rents delivery trucks from auto rental companies to supplement their own fleet of trucks, adds temporary workers, and extends their hours of operation, so that they often make deliveries long after sunset. By contrast, the local post office maintains exactly the same hours as during the off-season. This includes closing for lunch from 12-1, closing at 4:30PM every weekday, and staying open only for a few hours on Saturdays. Since there is no regular mail delivery because the all year round population is too small, many families rent boxes at the post office. Instead of arranging to allow box-holders to access their boxes at most hours even when the postal window is closed, box access is only marginally better than access to the postal window, including no Sunday box access, and only morning Saturday access.

Comments

[Anonymous]

Professor Becker, you failed to mention the 200 billion in annual defensive medicine costs and the 80 billion in Medicare expenditures annually in the last year of life. I guarantee you there will be no savings until something is done about the tort bar. The last year of life issue should be addressed by mandatory advance directive filing at the time of Medicare sign up. AND this entire problem would go away if you could convince the hospitals and physicians and ancillaries to provide free care to any person with a combined income of 80 thousand annually or less. They are doing it now so what is the big deal. Everybody wins and we deprive the socialists of their glee. In addition, if the present plan is implemented the emperor will have no clothes as there will be such a shortage of primary care physicians that there will be care by veternarians. I refer you to The Maryland Hospital Association study on physician shortages in that state.

I still practice medicine and know that the system is flawed much of it based on the fact thatb the public expects instant and magical diagnosis and treatment for little or nothing, the government and regulators have turned physicians into industrial cogs and the hospitals have become large awkward uncaring organizations. None of those things will change under Obamacare.

By the way, most of the folks who write and speak about healthcare have never taken care of a single patient.

[Anonymous]

To the best of my knowledge, Professor Becker's implied criticism of conservative opposition to requiring the uninsured to purchase catastrophic coverage is not based on the kind of data that would support infringing this are of personal freedom. Obviously there are multiple kinds of uninsured, ranging from those afraid to become associated with any public plan because of their alien status to those making a rational minimally risky decision, the young and healthy. I'm unaware of data demonstrating that those in the latter group actual incur catastrophic care at rates that would lead a rational purchaser to buy catastrophic coverage. Remember a significant percentage of them are covered in their auto policies for accident related care.

I personally am more worried about the complimentary requirements in the Waxman bill for mandatory coverage that would tax small business not providing coverage and individuals who choose not to buy coverage than I am about the public option.

First, suppose an employer chooses not to buy coverage, but instead opts to increase wages of his employees so that they can buy coverage directly. Why tax the employer even if you believe that coverage should be mandatory?

Second, the industrial outsourcing to small business that will be increased by the Administration's industrial policy will mean more relatively small manufacturing businesses (e.g. parts suppliers)will be competing with East Asian sources. The 2% to 8% payroll tax will lead much of that production to come from East Asia and Mexico.

Third, many universal coverage programs are based on the assumption that an individual should not be required to pay more than 3.5% of his income for health coverage. In the Waxman bill, business that does not provide coverage is taxed up to 8% of payroll. Why? Individuals not covered by employers and who dont buy coverage are taxed 2.5%. Why? How can the difference between individual and firm rates be explained except as an effort to lock in employer based coverage?

Fourth,an individual American can be an owner of a company chartered in East Asia or Mexico that simply sells to a US manufacturer without the goldplated company health care policy being a taxable benefit under the bill because it is the company's purchase of such a policy that is proposed for taxation.

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[Anonymous]

Professor, I urge you to read http://www.theatlantic.com/doc/200909/health-care/ "How American Health Care Killed My Father" -- the article crams 1 page of content into 6 pages of length (mostly it seems to me to make the article interesting and engaging to read) but I believe the author has very important points.

Why is Emergency Room treatment almost universally accepted to be "expensive?" After all, it leverages the pre-existing capital infrastructure of the hospital (X-Ray machines, CT scanners, etc). Emergency Rooms do not have a lot of other expensive equipment; they have relatively low-cost fix-salaried ER physicians. The marginal cost of treatment is low. So why is the bill so high? cost accountants who allocate costs to ERs so the hospitals can "show" the community how much public care they dispense for the "good of the community?"

Most everyone with an automobile has automobile insurance, yet we don't think we should submit our gasoline and oil receipts to our insurance companies; why do we think routine health care expenditures should be covered by insurance?

Most homeowners have house insurance, but we don't expect to submit painting and plumbing receipts to our homeowners insurance company; why do we think routine health care expenditures should be covered by insurance?

[Anonymous]

Dr. Becker is correct again. His reference to the US Postal Service nails the issue.

Do people who want packages delivered reliably and timely rely on the Postal Service, or do they rely on FedEx and UPS?

Does anyone who needs medical care in this Nation want to rely on Doc-in-A-Box delivered by some federal government agency?

[Anonymous]

I disagree greatly with the criticisms of the US Post Office. For one thing, the USPS does, in most years, cover its own costs. Yes, it didn't in this past year, but the USPS certainly wasn't the only money loser in 2008!

Secondly, the USPS delivers the mail cheaply, quickly, and to all regions of the country. If something needs to get there overnight, then I'll use FedEx. But for everything else? I'll stick with the mailman, thank you very much.

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[Anonymous]

An overarching dilemma is control of insurance by the states or by the feds. As long as each state can set its own coverage and eligibility requirements, then health care costs and administrative complexity will be hard to reduce. On the other hand, few are in favor of the feds taking over anything more than it has already gotten ahold of in the past 18 months. On balance though, having one or two plan options that are available in every state, equally, would tend to streamline the system, along with reducing adminstrative and care costs.
Instead, what we'll get are shouting advertisments - 'who should make your health care decisions? The insurance companies; your state legislators; or the federal bureaucrats?' It's a tough choice, so we'll do nothing.

[Anonymous]

I'm sorry, but this is written like lawyers just like lawyers always think.

Maybe you should examine the facts more diligently if you are going to draw comparisons with other types of insurance.

You can start with the fact that there are relatively few insurers in automobile and fire insurance, and the field is dominated by a handful.

By comparison, there are literally hundreds if not thousands of insurers with their hands in the medical insurance pie. That raises an important question. Why is there not more consolidation in insurance. The answer is simple. Money. Maybe conflicts of interest. Probably even graft. Now you know the answer to why health insurance is screwed up and non-competitive. It revolves around small scale corruption between the providers and the insurers.

Need more proof? Then simply ask any doctor clinic how many different payers they must accept. They may tell you "hundreds", all with their own unique rules.

Okay. So there you have it. These payers are in bed with the people who pay for the plans. Those people are employed by the HR departments of companies. That's where the health plan decisions are being made for a majority of Americans. Those HR people are beholden to their cronies, just as they are when offering 401K plans from Fidelity, Mass Mutual and all these other phony 401K self-dealing pigs.

[Anonymous]

You again fail to consider the fact that a retired Amerikan living or traveling overseas will receive NO benefit from Medicare parts A, B, or D, regardless of the fact that he has been paying lifelong into the lousy system and continues to pay some $100 per month if he's foolish enough.

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I for one, like the Post Office. Everytime I go into my local post office, I receive courteous and efficient service. My local mail carrier has proved to be more than helpful.

I routinely send packages to Sri Lanka. A package to Sri Lanka cost me $35.00. Sending it by Federal Express of DHL would cost me more than $100.00

Now compare that with my cable/telephone company QWEST. I call them for service and get a prerecorded message which basically says: "Your business is very important to us. All of our represntatives are busy. Please wait on line for three hours and one of our represenatives will be avialable." When I finally speak to a rep, they don't have a clue about how to deal with the problem.

Given the choice of the UPS or my cable company, I would choose UPS any day.

[Anonymous]

That very large numbers of people die, or are financially ruined, or have their long term health seriously impaired because they have no health insurance is not "embarrassing".

It is immoral.

That is the trouble with the aggrgationist perspective of the economist. Devil take the hindmost.

[Anonymous]

Its reasonable to limit your discussion to politically feasible tax policy changes, but reducing the tax benefits for "Cadillac" plans is not going to happen. The richest plans belong to union members (no or low deductibles/co-pays, no contribution for dependents, dental or vision, and post-retirement continuity). Union leaders burnish their credentials by delivering such benefits. Those will never suffer harm under this administration.

High earners at professional firms don't get such rich plans.

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