Legal Commentary

The Candidates' Health Care Reform Plans--Posner

By Richard 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.

Full post as published by Becker-Posner Blog on January 13, 2008 (boomark / email).