The Health Care Bill—Posner’s Comment

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03/28/2010

The Health Care Bill—Posner’s Comment

The bill has now become law. Its length alone (some 2,700 pages, including the modifications made in the “reconciliation” process) precludes a full analysis within reasonable length limitations.

Although on balance I think the new law is a mistake, there are three things that can be said in its favor. The first is that it is a genuine social experiment, and we are bound to learn a lot from it—about the size and elasticity of demand for medical services, the reliability of cost estimates by the Office of Management and Budget and the Congressional Budget Office, the reliability of advice given by health economists, the relative perceptiveness of liberal and conservative commentators, the ability of the federal government to manage a vast and highly complex program of social welfare, and, a related point, the relative efficiency of a lightly regulated market, versus a government-controlled market, in providing health services, and perhaps goods and services more generally.

Second, the very cost of the health-care program, which is likely to be far higher than predicted by its sponsors and not nearly offset by tax hikes, spending cuts, or economies in the provision of health care, may act as a wake-up call for the need for fiscal reform. Greece is making real reforms in its economic system, because it has to; it’s broke. If the new health law, piled on top of all the other measures that are causing the federal deficit to explode, causes real damage to the United States, the stage will be set for real reform.

Third, and related, the health law does contain some economizing measures, though fewer than the sponsors pretend. (The best may be the tax on “Cadillac” health-insurance plans, which I discuss at the end of this comment.) For example, the requirement that all chains with more than 20 stores must publish calorie information on menus and signs may contribute to reducing obesity, though the effect will be modest. But a typical measure included in the new law that is touted as economizing—subsidizing preventive care—is unlikely to reduce overall health expenses. The reason is not only that preventive care is often more costly than treatment, especially because it tends to be repetitive (annual tests for this and that, for example), but also that it is consumed by the healthy as well as by the sick, and there are more healthy than sick. Even the sick, moreover, are potential users of preventive care—to prevent the illnesses they don’t yet suffer from.

More than the tepid economizing measures, however, the Administration will be under pressure to prove that the bill really will save money. Responding to this pressure may produce significant economies, or at least raise the public consciousness concerning the need and opportunity for reducing health costs.

That’s the bright side of the new health law. The dark side includes the timing of the measure: the uncertainty that the health law and the deliberations leading up to it have generated for business and consumers alike has probably retarded our economic recovery from the financial crisis. But the law’s biggest negative is its costs. The $100 billion or so of annual subsidies that the law mandates is just the beginning, but it is an ominous beginning. It is true that these are transfer payments, rather than costs in an economic sense; but they are federal transfer payments and so increase the federal deficit, which even without them is growing by more than $1 trillion a year. The subsidies will grow at the rate at which medical costs grow, which is between 5 and 10 percent a year—much greater than any plausible estimate of annual economic growth. Indeed, as Greg Mankiw has argued, the health bill is likely to reduce the nation’s annual growth by increasing the income taxes on the well to do.

The biggest cost is likely to come from the law’s effect on the demand for health care. One effect that can be expected is that, if one assumes (plausibly) that the supply curve of health care is upward-sloping, meaning that unit costs increase as demand increases, adding 30 million people to the health-insurance rolls (whether private or Medicaid) will increase overall health-care costs by more than the percentage increase in the number of persons insured.

A second demand-related cost effect will result from the fact that insurance,(even with deductibles and copayments, drives a wedge between the cost of a service and its price, and so increases demand. (It’s like a restaurant with a buffet: the marginal cost of eating all you want is zero.) Persons who are uninsured are deterred from consuming medical services in quantity— because of cost (they are billed for such services at very high prices and may be forced into bankruptcy if unable to pay), because of difficulty of obtaining quality service from charity hospitals or other “free” providers, or simply because, though they can “afford” insurance, they prefer to gamble on remaining healthy. These persons, when they become insured, will increase their utilization of medical services, because those services will now be cheaper to them.

Health insurance may even induce some people to take worse care of their health: the lower the expense of treatment, the less benefit one derives from prevention, including nonmedical preventives such as a healthy diet, exercise, and avoidance of dangerous activities.

The additional costs of health care are likely either to be defrayed by higher taxes on upper-income people or avoided by reductions in the quantity or quality of medical services. The idea that the costs of our health-care system can be significantly reduced by eliminating “unnecessary” treatment is as quixotic as the idea that the Pentagon budget can be significantly reduced by eliminating the “fat” in it. One person’s “unnecessary” medical treatment is another person’s last hope for survival. Cutting medical costs means reducing treatment, which will impair outcomes.

The only durable and culturally acceptable ways of reducing the nation’s health costs—which are, by comparison with other wealthy countries, excessive—are by eliminating the tax deductibility of employer-provided health benefits (and thus decoupling health insurance from employment, reducing the cost of insurance to the taxpayer, and discouraging overconsumption of medical services because the tax treatment of health benefits encourages employers to substitute them for wage increases), increasing deductibles and copayments in health-insurance policies in order to give people a greater incentive to take care of themselves, and changing Medicare from an entitlement program to a means-tested welfare program. Unfortunately, there is no political support for any of these measures—although the heavy tax on “Cadillac” employer-provided health insurance, which is to go into effect in 2018—is a step in the direction of reducing the tax deductibility of employer-provided health insurance. In practical effect, it will eliminate the tax deductibility of expensive employer-provided plans.

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