January 13, 2008
Health Care Reform
Potential Reforms of American Health Care-Becker
As Posner indicates, American health care generally gets poor grades in international comparisons of health care systems. Although major reforms are needed in the American approach, international comparisons underrate American health care. This is partly because these comparisons give insufficient weight to the fact that most of the new drugs to treat major diseases originated in the US, along with many of the new surgical procedures, and insights about the importance of lifestyles in good health. This helps explain why many Canadians and those from other countries come to the US to treat serious diseases rather than visa versa. The US is also much more generous than other countries, such as Great Britain and France, in making expensive surgeries and drugs available to older persons through Medicare and private insurance. This too significantly raises the cost of health care. Moreover, the American health system is decentralized and "messy", and many health evaluators prefer a single payer (i.e., government) centralized approach to health care as opposed to any market-based approach.
This is not to deny that the American health care system has serious defects. If I were running for president, and allowed only four reforms, I would emphasize the following (assuming I do not worry about getting enough votes to be elected!):
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Eliminate the link between employment and the tax advantage of private health insurance. Since much of the spending on health are investments in human capital, there is good reason to exempt these expenditures, along with other investments, from income taxes. However, this employment link is inequitable because it does not provide the same tax advantages to families without employment-based insurance. It also encourages expensive employer health plans that have significant consumption components since the government picks up much of the cost of such coverage. President Bush has proposed a reasonable alternative; give every family a flat $15,000 standard deduction (and half that amount for individuals), whether or not their health insurance is obtained through their employer. They would still get this deduction if they spend less on their insurance, so they have incentives to economize on their health care (but by my reform number 4, everyone would have to take out catastrophic coverage). Consumers would have to pay for any coverage in excess of $15,000, so they would only choose such coverage if they were willing to spend their own money, not taxpayers.
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Encourage the spread of Health Savings Accounts (see my discussion on Feb. 5, 2006) that encourage consumers to economize on unnecessary medical expenditures. Present law allows tax-free contributions to these Accounts of up to about $2700 for individuals and double that amount to $5450 for families, as long as these contributions are not greater than the deductibles on their health insurance. Contributions to HSAs that are not spent in any year can be carried over to future years without any tax liabilities, and even into retirement income. So HSAs are an efficient way to save as well as to spend on non-catastrophic medical care. Health Savings Accounts have spread since they were introduced several years ago, but might need greater encouragement, such as higher limits.
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Medicare spending amounts to about $350 billion a year, it constitutes about 12 percent of federal spending, and it is one of the most rapidly growing entitlements. It is projected to continue to grow as a fraction of GDP from its present 2.7 percent level to over 11 percent in 2080. The source of the growth is the continued aging of the population, and the increased per capita medical spending on older person as new medical technologies and drugs are developed. Projections made by Medicare Actuaries indicate that the Medicare HI Trust Fund will be exhausted by the year 2018-only a decade away.
Reform of Medicare is probably among the most challenging not only because of the elderly's political clout, but also because Americans have come to expect access to expensive medical treatments as they age. Still, the prescription drug coverage introduced into Medicare in 2003 was an important step in the right direction, despite the flaws in the program (see my discussion on February 3, 2005). Drugs are not only increasingly available to fight many diseases of old age, but drugs, once developed, are relatively cheap to extend to large numbers of users. Even when drugs provide only small benefits as they are extended to groups that can benefit less from the drugs, the costs are far less than would be required to provide expensive surgeries or hospitalizations to older persons with few years of life remaining. This is why I would greatly increase the generosity of Medicare drug coverage, and compensate for the additional expense by cutting down on allowances for lengthy hospital stays, and raising other co-pays.
- I do not believe the problem of the uninsured in the US is as serious as usually claimed since most of those without health insurance are young and do not have major medical expenses. When they do, they can use emergency room service at major hospitals, although studies show that they do not even use emergency room care more often than others. Still, it may be desirable to require that everyone must contract for private catastrophic health care since the uninsured tend to use taxpayer and philanthropic funded medical care facilities to pay for the costs of any major illnesses. Medicaid should be extended to cover anyone who cannot afford such catastrophic insurance. Compulsory coverage would integrate the 45 million or so uninsured Americans into an overall health care system while still preserving the desirable decentralized private system of health care.
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.