March 28, 2010
The Health Care Bill
The Health Care Bill: Progress or Retrogression? Becker
Studies show that men and women place a high value on even small decreases in their probability of dying at different ages. Presumably, the same is true of increases in the quality of their lives. This is why, given the rise in incomes over time, and the revolution in the development of blockbuster drugs and the advances in medical technology, the share of national income spent on health care would have risen over time in the US, even if it has had the best health care delivery system. Indeed, the share of income that is spent on health has risen quite sharply over time in every economically developed country, regardless of the nature of their health system.
Clearly, however, the American health system does have many defects, which contributed mightily to the growth of the share of medical spending to 17% of American GDP. Yet when I was recently asked whether I prefer the present healthcare bill to no change in the health delivery system for a decade, I answered "no change". Even though the American healthcare system can use many reforms, regrettably the bill that passed the House and Senate is a messy compromise to attract reluctant Democrats that is short on needed reforms. Instead, the bill is filled with many complicated, and generally bad, new regulations, higher subsidies, and greater taxes.
The most important needed reform is an increase the fraction of total medical costs that come from out-of pocket expenses in the form of large deductibles and significant co-payments. Out-of-pocket spending accounts for only about 12% of total American spending on healthcare, whereas the share of out-of –pocket spending is over 30% in Switzerland, a country considered to have one of the better health delivery systems. Partly because of this major difference, health care takes 11% of Swiss GDP compared to the much higher American percentage. As far as I can discover, nothing in the new bill really tries to raise the out-of-pocket share, and some changes would reduce it even further. These include tax credits for individuals and families that earn up to 400% of the federal poverty level (up to about $90,000 for a family of four) that enable them to get coverage through newly created Insurance Exchanges.
Another desirable reform is to reduce the reliance of the American health system on tax-deductible employer-based insurance since tax deductibility has encouraged low deductibles and low co-payments. It has also locked workers with health problems into their current jobs since they may not qualify for insurance at other companies because of these pre-existing health conditions. The bill does propose to phase out tax deductibility for the more expensive plans by 2018, but who knows if that will ever be implemented.
For the most part, however, the bill increases our dependence on employer-based health care by imposing sizable penalties on companies that do not provide their employees with sufficient health insurance. Many companies are already beginning to add to their projected future costs the anticipated increase in the cost to them of insuring their employees. These changes will particularly affect the costs of smaller companies since they are the main ones that do not provide health insurance for their employees. Since smaller companies are responsible for a disproportionate share of additions to employment during recent years, this provision of the bill will tend to reduce the demand for workers and hourly wages.
The US health care market is over-regulated rather than under-regulated. One example is that families in one state are generally not allowed to buy their health insurance from companies located in other states. Another example is the mandates that states impose on insurance companies, such as coverage of the costs of normal birth deliveries. Such coverage has little to do with insurance against unexpected health costs, whereas coverage of extraordinary delivery costs is a desirable protection against unexpected health care risks. The bill generally pushes in the direct of greater regulation, such as the limitations imposed on how much health insurance companies can spend on administrative costs relative to their other costs, the mandated reviews of the premiums charged by health insurance companies, and the mandated provision of health insurance by small companies.
Health savings accounts (HSAs) have been one of the most important innovations in the health care field during the past decade. These accounts require large deductibles, such as $2500, that individuals and families most cover out of their own pockets. Unused portions of the amounts in these accounts can be carried over tax free from any year to future years, and can eventually be phased into their old age pension accounts. HSAs with large deductibles encourage individuals to economize on their normal health care expenses, such as visiting doctors for colds or flu shots that they could get much more cheaply at CVS, Walgreens, and other retail medical clinics. There is little mention of HSAs in the new bill, and certainly no encouragement to their expansion.
The American health care delivery system needs greater transparency and easier access to medical information by consumers. The bill takes a valuable step in this direction by encouraging the development of online medical records and medical histories for all individuals, no matter how many doctors they have seen, or how often they have moved. A few other parts of the bill would also increase information and transparency, but for the most part the bill obscures rather than enlightens consumers about the health area. Many of the most important taxes come early while the additional spending kicks in much later, so that it will appear for a few years as if the new system will cut medical costs. Consumers will get a false impression that they are getting a more efficient medical care system when in fact the new system will turn out to be both expensive and invasive of individual choices.
Proponents of the bill claim it will save hundreds of billions of dollars during the next ten years from cuts in Medicaid and Medicare, but it is far from obvious how such cuts will materialize. Moreover, some changes will clearly increase the costs of these programs, such as the expansion of Medicaid coverage to individuals well above the poverty line, and by additions to drug coverage of seniors under Medicare. I do not see how the bill will lead to Medicare savings since there is no increase in out of pocket payments by Medicare enrollees, and Congress is likely to continue to override any scheduled cuts in payments to Medicare doctors and others. The most likely attempt to cut future Medicare costs will be through greater rationing of health care to the elderly, but lobbying groups for the elderly will fiercely resist these efforts.
Adequate and appropriate coverage for persons with pre-existing health conditions is a challenge for any healthcare system, especially those with private insurance. Although the bill addresses this issue, it makes coverage of pre-existing conditions more difficult in one dimension by expanding rather than contracting employer-based health insurance. The bill prevents insurance companies from dropping individuals if they develop serious sicknesses, and also prevents these companies from imposing limits on how much they will pay to cover an individual's health costs during any year. In addition, uninsured individuals with pre-existing conditions will be able to obtain health insurance through the new health insurance exchanges run by non-profit companies.
The only truly efficient way to handle the pre-existing condition issue is to try to develop an insurance system in which young adults, who generally have few serious existing medical conditions, can take out long-term healthcare insurance. Long-term health insurance programs have been proposed in the academic literature, but they have been implemented only to a very small extent. Perhaps the bill's approach to pre-existing conditions is the best that can be expected at this point if nothing is done to wean the system from employer-based tax-deductible health insurance (which at least does provide long term health insurance for employees who stay with the same company for many years).
Although the impact on the costs to taxpayers of the more than 40 million uninsured persons in the US is usually greatly exaggerated, I do support a requirement that everyone has health insurance that covers medical catastrophes. Coverage limited to catastrophes would not be expensive for the uninsured since they are mainly young and are generally in quite good health. They could readily pay the premiums for catastrophic insurance from their incomes. The health care bill does make health insurance compulsory, but it does this in an unsatisfactory way by requiring rather extensive benefits, and by subsidizing coverage for individuals and families with incomes far above the poverty line.
So for all the reason I have given, and many more, no change in the present American healthcare delivery system would be much better than the new bill. The American system has many great strengths and some serious weaknesses. The bill will generally weaken the strengths and strengthen the weaknesses.
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.