Health Care, Cost, and Insurance Theory--Posner

The focus of the Administration's health-care plan, and of its campaign to enlist public support for the plan, is dissatisfaction with health insurance. To see the problem--or whether there is a problem--compare health insurance to fire insurance. Almost everyone has fire insurance (even if he doesn't want it, invariably it is required by the mortgagee, if there is one). The reason is that a fire can wipe out a big part of most people's wealth, and, given declining marginal utility of income, which makes most people prefer a certainty of obtaining a million dollars to a 50 percent chance of obtaining $2 million (and a 50 percent chance of nothing), the cost of fire insurance is a good investment. The insurance company knows how much it may have to pay if there is a fire because the insurance policy has a dollar limit. If someone is convinced that his house is fireproof and therefore fire insurance would be of no value to him, and therefore refuses to buy it, the insurance premiums charged the buyers of fire insurance will be slightly higher (because his being in the pool would have reduced the expected cost to the insurance company). But no one is concerned with this, because very few people opt out of fire insurance. Health insurance is different superficially because of the extreme variance in costs of medical treatment; some people have medical conditions that cost literally millions of dollars to treat. But this is a problem in other forms of insurance as well, such as liability insurance in which the insurer undertakes to pay the insured's legal expenses, which can be astronomical; and insurers deal with such difficult-to-estimate risks through reinsurance and large deductibles. Health insurers, if left to themselves, generally refuse to insure the cost of treating pre-existing conditions; but that is no different from a life insurer that refuses to issue a policy (or charges more for it) to someone whom a medical exam reveals to have a short life expectancy. Prudent people buy life insurance when they're young and in good health. Health insurers often cancel an insurance contract, or refuse to renew it, after discovering that the insured is in bad shape and likely to cost the company a great deal in the future. Fire insurers and automobile insurers often do the same thing. If people want to have lifetime protection, they have to pay higher premiums but it is hard to see why health insurers would refuse to offer such contracts; in fact some people do have such health insurance. There are several puzzling aspects to health insurance, one of which, however, is rather easily solved, and that is the fact that a significant fraction of the population has no private health insurance. If your house burns down and is uninsured, tough luck. But if you get sick and have no insurance and no money, you can still get treatment at the nearest hospital emergency room. (You will be billed, and if you have enough money you will have to pay the bill.) If you have no money, you're a free rider, but the amount of free riding is kept down by the cost that emergency rooms impose on patients by making them wait--and a queuing cost is a real cost to the people forced to stand in the queue. Many of the uninsured are young and healthy; they are like the person with the fireproof house. If they were forced to insure, therefore, premiums for health insurance might fall, though this is highly uncertain. Many of the uninsured, rather than being young and healthy, are uninsured because of pre-existing medical conditions that imply that these people will incur abnormally high costs of treatment in the future. Medicaid, charity treatment in emergency rooms of hospitals, and Medicare when utilized by indigent people constitute a form of poor relief. There is no reason why Medicare shouldn't be means-tested; people who can afford medical care should pay for it themselves. The fact that, because of tax subsidy, most health insurance is offered as an employment benefit screws up the health-insurance system considerably. Not only does the subsidy result in giving people more medical benefits that they would want if they had to pay the full, unsubsidized price. They lose the insurance if they lose their job or if the employer cancels the group insurance policy, and when they seek new insurance they may find themselves turned down, or made to pay a very high price, because of their age or because they now have a pre-existing condition. If people were willing to pay high premiums, and accept high deductibles and copayments, they could buy health insurance policies that would give them lifetime protection against all major medical problems they might encounter. But people are not willing to pay high premiums or (mysteriously) to accept high deductibles and substantial copayments. They prefer to take a chance on their employer-supplied health insurance and on making it to 65 (Medicare eligibility age) without going broke as a result of a medical condition for which they are not adequately insured. And if they have no employer-supplied health insurance they may decide to do without and hope for the best even if they could afford to buy an expensive individual policy. Repealing the deductibility of employer-supplied medical benefits from federal income tax, and instituting a means test for Medicare, would reduce the demand for, and therefore total cost, of medical services and reduce the federal deficit as well, since Medicare costs the federal government more than $300 billion a year. Since Medicare would cover fewer people, there would be less need to institute procedures designed to limit expense by limiting treatments--something people fear, whether rationally or not.

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It is doubtful whether any other measure consistent with American culture and values would reduce medical costs substantially, though one can imagine a series of modest reforms that might add up to a net savings, including limiting liability for medical malpractice, imposing large deductibles for medical treatment for injuries experienced in dangerous recreational activities, reducing highway speed limits, and taxing fattening foods and beverages. None of these is likely to figure in any health reform enacted by Congress at the present time, however. The opposition to the Administration's health plans is understandable, though some of it is uninformed and even irrational. The Administration's problem is that it wants to expand insurance coverage, and this will increase the cost, including the public cost, of the health-care system, but that the only serious way in which the Administration can imagine limiting the cost increase (as there is insufficient public support for terminating the tax subsidy of employee health benefits, let alone for limiting Medicare to people who can't afford private health insurance) is by curtailing treatment. And that upsets people, since they don't trust the government to decide what medical treatments are cost-justified. (And why should they?) In all likelihood, moreover, the Administration is underestimating the cost of expanding coverage. It wants to push as many of the currently uninsured as possible into insurance plans, and this will not only cost a lot in subsidies, as well as in higher costs to employers; it will also increase the demand for and thus the aggregate cost of medical services (because supply is inelastic). Once a person is insured, the marginal cost (which includes the queuing to which the uninsured are subjected, as well as monetary cost) to him of treatment drops to the copayment or deductible. The government also wants to forbid insurers to deny coverage on the basis of pre-existing conditions or to rescind policies after paying a large claim to an insured (and foreseeing future such claims). This will increase the cost of health insurance, and the government will doubtless end up picking up the tab, because there is great resistance on the part of the public to paying higher insurance premiums. The cost of the projected health reforms cannot be estimated. One reason is that no one seems to know what is actually in the literally thousands of pages of health-reform bills drafted by different congressional committees. Or if they know, they are not telling. Another reason for uncertainty about cost is that no one outside government (maybe inside it as well) knows what the Administration is likely to settle for in its negotiations with the various interest groups and legislators. But worse than not knowing the cost is not knowing how it is going to be paid. Higher taxes, unless trivially higher, seem politically infeasible, which means that health reform if enacted will add to our soaring national debt--and probably add a lot, though we cannot know how much.

Comments

[Anonymous]

How many illegal immigrants does Obama want to cover...? The # of uninsured that Democrats keep touting at town hall meetings is as artificial as this KEYNESIAN economy they are inflating for us.

STOP OBAMA, STOP THE COMMUNISTS...!

[Anonymous]

One of the problems in the debate is that "insurance" is a misnomer. No one would expect his homeowners insurance company to foot the bill for, e.g. mowing the lawn, nor his auto insurance company to pay for tuneups. But we all think our health "insurance" should most of the cost for doctor visitsto get a prescription for antibiotics or for annual physicals.

Our system is basically one of prepaid health care. Looking at it in that fashion shows that the uninsured are gaming the system by getting care anyway at the emergency room or taking out a policy when they perceive they have a health problem. No wonder that the insurance companies don't cover prexisting conditions. (Although there is certainly plenty of gaming on the insurance and provider side as well).

A high deductible, catastrophic-type policy, required of everyone, would both make this more like real insurance and solve the free-rider problem.

The anonymous David Drake

[Anonymous]

Judge Posner, I think most of your comment is fair, but am beginning to worry about your continued remarks about conservative groups being irrational or wrong. ( Duh, I'm a conservative. ) To say that people in opposition, who, of course could be from any political stripe but let's be serious, are uninformed is a tedious exercise in rhetoric.

Do you know all the facts about the insurance market? All the economics needed to address this issue? Do you have complete information on this problem? No, no, no. Everyone's uninformed. We do the best with the information we have which is why we are all, indeed, rational.

The anonymous Admiral

[Anonymous]

If the medical licensing authorities in this country would simply remove unnecessary obstacles which prevent thousands of foreign doctors from qualifying to practice medicine in the US, the supply of medical services would become elastic.

But the current collection of MDs know they need to limit their numbers to maintain "healthy" profit margins.

In addition, so called medical tourism could play a role in augmenting the supply of medical services.

Finally, let's not forget that, since much of the medical testing and treatment in this country is not even necessary, we have, in effect, been wasting testing on treatment on patients that don't need it. This waste may well be transformed into valid testing and treatment when new patients enter the system.

[Anonymous]

Anon 12:47,

All physicians are not the same, the technology doesn't do the work and there is no benefit to anyone in doing unnecessary testing. The public demands it and physicians don't want to be humiliated in the witnwss chair by some witless tort lawyer. I suggest that you go abroad for your medical care where it will be less expensive and you won't have tp communicate with your physician and there will be no testing unless you take along your own testing tools.

Medicine is an art and some are better at it than others. Pretty difficult to practice the art if you don't understand the language or the culture.

Thec regulators wanted to turn physicians into businessmen and the hospitals into corporate organizations. That happened and you got what you wanted.

Be careful what you wish for.

[Anonymous]

Since there is a shortage of general practice physicians (or family doctors) it also makes sense to eliminate many states' (including Illinois) curtailment of the use of nurse practioners and physicians assistants.

These lower-cost health care providers can provide the day-to-day frontline health servicers most people need and would stop many insured people from having to go to the ER for basic medical care because they cannot wait a week to get in to see their doctor.

Also, not to nit-pick, but when you talk about getting rid of the health-care deduction for employer-based insurance it sounds like the costs the employer picks up would no longer be an "ordinary and necessary" business expense deductible as a cost to the employer.

More precisely, I think you mean that the premiums paid by the employer should no longer be exempt from the employees' incomes. Employees (unless self-employed) don't even account for their employer-paid health care premiums as an above-the-line deduction on their income tax returns. Many employees don't even know how much of their compensation comes from employer-paid premiums.

Finally, since Obama criticized McCain's campaign plan to tax employer-paid premiums (offset by a pretty generous $5,000 tax credit) and took a blood-oath not to raise middle-class taxes, he would face a double-whammy in political costs for now pushing for this reasonable proposal.

I don't see anything other than modest reform at the edges being feasible here.

[Anonymous]

Here's a doctor speaking out against "Obamacare."

[Anonymous]

here's the link http://www.youtube.com/watch?v=lZ3EI2F8XX8

[Anonymous]

When it comes to making REASONABLE cuts to social security, the Democrats hug the FDR statue while AARP does anything and everything to cry and obstruct any type of cost cutting reform. THESE SAME PEOPLE are now trying to ration out healthcare to the elderly with their death panels. AARP is flat out lying to their people right now, all because a communist ideology has taken over its organization. The same thing happened to the ACLU years ago. Both had good intentions originally but have been bought by and are run completely by Communists intent on destroying the USA.

These people are lunatics and they need to be stopped.

[Anonymous]

شات الشلة

دردشة تعب قلبي

[Anonymous]

@ Anonymous 2:21

Was that with a straight face or not? Hard to tell on the internet when someone's playing a part. Hope you were.

[Anonymous]

Make no mistake, AARP is a front, a shill operation, for its Washington, D.C. executive leadership and United Health Insurance Company. End of story.

Brian Davis
Austin, Texas

[Anonymous]

About all nurse practioners and physician assitants can do is either refer the patient to a physician or to the ER. Your assumption again is that all medicine is the same like 2+2 is always 4. Very bad assumtion on your part and dangerous to your health. There are quite a few false assumptions floating around on the whole subject and everyone is an expert. Football games are sort of that way too.

[Anonymous]

This still makes sense to me:

Let me ask everyone a question: Do you consider price and discount when buying Tylenol and Pepcid? I answer in the affirmative.

Here's another question: Do you consider price when considering brain surgery? I answer in the negative.

Therefore, I suggest splitting health care costs into two categories:
1) Medical goods that a consumer could price and shop accordingly on.
2) Medical goods that a consumer cannot price and shop accordingly on.

Once you do this, you can split up medical costs into:
1) Costs subject to a deductible.
2) Catastrophic Costs.

And, further, you can say the following:
For 1) You don't want third party payers, since you want the consumers to shop for the best price.
For 2) You can have a third party payer. In fact, you can have one: the Federal Government.

Now, here's Milton Friedman's plan:

"A more radical reform would, first, end both Medicare and Medicaid, at least for new entrants, and replace them by providing every family in the United States with catastrophic insurance (i.e., a major medical policy with a high deductible). Second, it would end tax exemption of employer-provided medical care. And, third, it would remove the restrictive regulations that are now imposed on medical insurance—hard to justify with universal catastrophic insurance.

This reform would solve the problem of the currently medically uninsured, eliminate most of the bureaucratic structure, free medical practitioners from an increasingly heavy burden of paperwork and regulation, and lead many employers and employees to convert employer-provided medical care into a higher cash wage. The taxpayer would save money because total government costs would plummet. The family would be relieved of one of its major concerns—the possibility of being impoverished by a major medical catastrophe—and most could readily finance the remaining medical costs. Families would once again have an incentive to monitor the providers of medical care and to establish the kind of personal relations with them that were once customary. The demonstrated efficiency of private enterprise would have a chance to improve the quality and lower the cost of medical care. The first question asked of a patient entering a hospital might once again become "What’s wrong?" not "What’s your insurance?"
I would add a Democratic Party addition to this plan: You could relate the deductible to income.

That's my plan. Everyone covered.

I would add the following: I've no idea what the correct amount of money that we should spend on health care should be. That's why I would like some portion of our medical bills to be subject to our own choice.

[Anonymous]

Posner, without quite saying as much, gets close to the nub of the problem with legislated "health insurance reform" of the sort currently floating around on Capitol Hill. The supposed legislative fix pays no heed to risk pooling, underwriting of risk, adverse selection, or moral hazard. Whatever the majority in Congress is proposing, it surely ain't insurance.

Massive compulsory wealth redistribution, perhaps?

[Anonymous]

Anon 8:18,
I'm with you 100% up until: "I would add a Democratic Party addition to this plan: You could relate the deductible to income."

This is the "rag-bag" that Friedman was referring to when talking about his Negative Income Tax. There's no need to have a deductible related to income when we already have several other measures that compensate in this exactly same direction: income tax brackets, EITC, public assisted fill-in-the-blank, etc.

[Anonymous]

In my Google Reader feed of this post, there are a bunch of random keyword type ads. These haven't appeared in any other post in my Google Reader, or any other post on this blog. Maybe you got hacked?

See below:

"Repealing the deductibility of employer-supplied medical benefits from federal income tax, and instituting a means test for Medicare, would reduce the demand for, and therefore total cost, of medical services and reduce the federal deficit as well, since Medicare costs the federal government more than $300 billion a year. Since Medicare would cover fewer people, there would be less need to institute procedures designed to limit expense by limiting treatments--something people fear, whether rationally or not.

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It is doubtful whether any other measure consistent with American culture and values would reduce medical costs substantially, though one can imagine a series of modest reforms that might add up to a net savings, including limiting liability for medical malpractice, imposing large deductibles for medical treatment for injuries experienced in dangerous recreational activities, reducing highway speed limits, and taxing fattening foods and beverages. None of these is likely to figure in any health reform enacted by Congress at the present time, however."

[Anonymous]

Again, solutions are usually simple though not always easy. Ask the hospitals and the physicians to agree to care for anyone with a combined income of about 80 thousand gross per year or less
certified by the IRS, for free. They are doing it now so no one loses and everyone wins and there is no big government intervention.

[Anonymous]

Anon:

I'm for a Guaranteed Income. If you have a Guaranteed Income, it would be possible to do as you say, in my mind. However, without such a system, people could be impoverished by a deductible, if they're poor enough. So, I don't agree with your point.

On the other hand, if you are saying that there are other ways to solve this problem, then I'm fine with your point. However, I don't see how any such help is other than a rag-bag solution in fact.

[Anonymous]

A few reasons why the auto and fire insurance analogies do not hold up re health insurance:

1) You can avoid the premiums by not buying a car or a house.
2) The frequency of claims is a totally different order of magnitude.
3) We have fire codes and extensive driving rules that greatly reduce insurance claims. A great deal of police cost is dedicated to enforcing the driving rules. We have no parallel behavior regulation for health insurance.
4) Every household has to pay the full cost of their own auto and fire insurance premiums with after tax dollars.

[Anonymous]

The odd continued life of the false statement that one can get medical treatment in an emergency room is very puzzling. This is not true in any real sense, and certainly it jeopardizes the mission of the ER. It does not treat or prevent disease but intervenes, on a crisis and emergency basis, in accidents or conditions like a heart attack. Some of the latter cardiac events may be the result of lack of care. And young adults need preventive care and accidental care and are foolish not to have insurance if they can afford it. The entire conservative opposition to mandatory health insurance seems most irrational.

[Anonymous]

Social Security is going to pop. Medicare and Medicaid are bankrupt. Our government had to take over our banking and mortgage industries. Obama is set to run $10 trillion in deficits over these 4 years.

And people are fighting for public healthcare. You people are insane.

[Anonymous]

I want to second the comment at
"Posted by Anonymous at August 17, 2009 11:49 PM"

It seems someone has hacked the RSS feed with ads for gambling sites.

[Anonymous]

Anon 4:58 pm,

With all due respect, you don't know what you are talkimg about. I see hundreds of patients per week in the ER with complaints like "My left knee has been hurting for six months", I swallowed my chewing gum", "I have a cough", "I had a fight with my boyfriend". These people are diagnosed and treated on the spot just as if they were in a physician's office, the only difference being that the physician's office usually has no technology for diagnosis so they send the patients to hospitals (where the ERs are) where they do have the technology). The reality is that these patients are better off in the ER. In addition, there are not anywhere near enough primary care physicians to give care to the insured now. What do you think it will be like with millions more insured. You will be cared for by non-physicians who are limited in their knowledge and skills. You better stay healthy or have a physician in the family.

[Anonymous]

In the final analysis, what the American people need and deserve is a Health Care/Insurance System that that allows any patient "affordable" access when ever they get sick or injured, when ever or where ever it is needed and whether one is employed or not. Without the controlling limitations now in effect placed there by the Private Insurers in order to maximise margins. Currently, there are some sixteen thousand Insurance companies out there offering health insurance, offering a myriad number of policies. Some good, some bad. And one wonders why Doctors and Health Care Providers are going nuts trying to figure out whether one is treatable under any of these myriad number of policies. The "single payer system" solves this and creates a uniform Health Care System across the board for all Americans. Not just the Wealthy, the Healthy or the employed.

As for the hyper-inflation that has occured in the last thirty years or so in the Health Care Industry resulting in the inflated prices we now pay today (which is one of the main problems), how come no one has raised the issue/question of "Conspiracy" both within and without the Industry to drive prices up and create even greater profit margins. Hmm ...