August 17, 2009
American Health Care Once Again
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.
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.