Legal Commentary

Potential Reforms of American Health Care-Becker

By 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!):

1) 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.

2) 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.

3) 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.

4) 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.

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