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The Atlanta Fed's macroblog provides commentary on economic topics including monetary policy, macroeconomic developments, financial issues and Southeast regional trends.

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February 14, 2005


Becker and Posner on Medicare

This week's discussion at the Becker-Posner blog -- which I should be linking to far more often -- concerns prescription drugs and medicare.  (Econlog notices as well.)  Posner leads off with an observation that I have long thought unjustifiably ignored by conservative critics of the administration's prescription-drug benefit plan.

Given Medicare, I do not think that there is a principled objection to including a prescription-drug benefit in it. Suppose Medicare were limited to hospital treatment. Then critics would say, that’s absurd—it will only impel people to get hospital treatment that would cost society (though not the patient) less in a non-hospital setting. It is similarly questionable to exclude prescription drugs from Medicare coverage. Drugs are substitutes for other forms of medical treatment in many situations; therefore excluding them from coverage will induce people to seek other forms of treatment that may cost society more to provide... This means, by the way, that in calculating the net social cost of the prescription-drug benefit, the cost of other treatments for which drugs, with their cost to the patient reduced by the Medicare subsidy, will substitute should be subtracted.

And Becker agrees.

Given that the U.S. is unlikely to be able to prevent excessive use of expensive options, we should try to find more approaches that are relatively cheap to use to treat additional patients, even when those patients are better treated in other ways. New drugs and improved understanding of the medical value of proper nutrition may both have high development costs, but they are cheap to extend to additional users, especially after patents expire and cheap generics enter. By contrast, hospitals have relatively constant costs of adding additional patients.

So I agree with Posner for this reason mainly, but also for the reasons he gives, that medicare and other medical systems should include drug coverage.

He does, however, note a well-known peculiarity in the current program.

For persons who elect this coverage, it pays fully up to the first $250 per year of drug expenses, then has no coverage-the famous “donut”- for additional drug expenses in the middle range, and finally it has insufficient coverage at the very high end. The total cost of this program could be significantly cut while eliminating the “donut” and raising high-end coverage by adding a sizeable deductible, perhaps as large as $1000.

The "Given Medicare" proviso in Posner's comment is the tip off that he is not so thrilled with the program in the first place.

As a matter of economic principle (and I think social justice as well), Medicare should be abolished. Then the principal government medical-payment program would be Medicaid, a means-based system of social insurance that is part of the safety net for the indigent. Were Medicare abolished, the nonpoor would finance health care in their old age by buying health insurance when they were young. Insurance companies would sell policies with generous deductible and copayment provisions in order to discourage frivolous expenditures on health care and induce careful shopping among health-care providers.

But then again:

I do not think, however, that total expenditures on medical care would decline markedly if Medicare were abolished. The reason is the enormous value that the vast majority of people place on longevity, good health, and freedom from pain and other physical discomfort.

(Not only that, but the amount we spend -- relative to spending on everything else -- is likely to expand -- by choice -- the richer we become.  If that doesn't strike you as stating the obvious, and you like mathematical models, check out this paper by Stanford's Bob Hall and Berkeley's Charles Jones.)

Becker essentially votes for reforms -- close, I think to those that the administration has in mind -- that look very much like the analog to social security privatization.  In addition to the changes in the drug benefit plan described above, Becker thinks

...everyone should be required to buy at young ages private catastrophic medical insurance that can be automatically extended. Medicaid would cover the poor who cannot afford to pay for this insurance...

A third important change would be to encourage tax-free medical savings accounts that allow unused medical balances to be carried over from year to year...

Once these three reforms are in place, we can then start to “privatize” the medicare system for the elderly, except for those elderly who are poor enough to qualify for a government program like Medicaid that pays for their medical needs. The privatization of medical coverage of the elderly would be the dual to my proposal last week to privatize retirement incomes.

Professor Becker's "proposal... to privatize retirement incomes," incidentally, can be found here.  (And I couldn't agree more.)

UPDATE: Don Boudreaux comments on Becker's social security post.
UPDATE UPDATE: Boudreaux was actually pointing to an editorial in today's Wall Street Journal based on last week's Becker-Posner blog entry.
ANOTHER UPDATE: Tyler Cowen comments too.

February 14, 2005 in Health Care | Permalink

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Question: Unemployment????? Who pays?

Posted by: dilbert dogbert | February 15, 2005 at 12:50 PM

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