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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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February 13, 2005

Is Health-Care Compensation "Stickier" Than Wages?

In an earlier post, I asked whether there is something about compensating workers with in-kind benefits -- health-care insurance, in particular -- that makes that form of payment qualitatively different from explicit wage payments, from an employer's point of view. My musings were prompted by this passage from SmartMoney.com:

Many economists attribute the slow pace of hiring during recovery from the last recession in part to the rapid growth of benefits, especially health insurance.

My response at the time:

I'm not convinced that last sentence should be taken at face value. After all, from an employer's point of view all that should matter is the total cost of labor, not the form in which payment is made.  The difference, of course, might be that payments in the form of health care benefits are more open-ended and "sticky" than payments in wages. If that's so, perhaps its a wrinkle in this debate (with follow-ups here and here)  that deserves some consideration.   

So this, from an article in this morning's New York Times, caught my eye.

It's no secret that surging health costs have become a C.E.O.-level issue. When a company like  General Motors looks more each year like a giant health plan that operates a nice little nonprofit car business on the side, who wouldn't sound the alarm?

But to many business leaders, their union counterparts' view of soaring health costs remains a mystery. Given union readiness to strike in the face of even modest efforts to slim generous health plans, these costs almost certainly doom unionized workers to few if any real wage increases for years to come. Do union leaders get this trade-off? Are they hamstrung by political dynamics that make it hard to approve even sensible health plan changes that can be cast as "givebacks"? And what is their answer?

Recent conversations with Morton Bahr of the Communications Workers of America and Andrew Stern of the Service Employees International Union suggest that at least some union leaders think about the health system in ways more sophisticated and businesslike than many chief executives do - and that they are eager to be partners in a national reform dialogue that's overdue.

"There's really one economic pot, and you argue essentially over the size of that economic pot and how it gets distributed," Mr. Bahr said of the growing trade-off between health care and wages. "What it leads to is more strife at the bargaining table because workers are not going to be ready to say, 'Well, the health care costs are going up, so we're willing to take a zero wage increase.' They expect the union to find a way to do it, and that's going to lead to more strikes."

Any thoughts?

UPDATE: John Irons and Russ Roberts discuss the issue of employer-provided insurance (among other things) in the latest issue of the Wall Street Journal's Econoblog.

February 13, 2005 in Health Care | Permalink

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Part of the problem in the debate about health care is most of the people debating it do not realize the key difference between the US and other countries system.

In the US we have somehting like a cost plus health care system and the total cost of the system has risen so sharply that we need to do something to limit its costs. In Europe and Canada they impose a limit on the costs of healthcare and ration care.
That is the reason they have waiting list and other similiar features that people refer to when claiming that the US system is better.

But in the US few are willing to look at what the true basic case is -- healtcare has gotten to be too expensive. Until that problem is addressed we will continue to argue pass each other and do nothing to really solve the problem.

Posted by: spencer | February 13, 2005 at 10:11 AM

The key to health insurance is that companies get a tax break for health insurance dollars that the employees don't get if they took that money as wages and paid for their own. Therefore, it's not true that from an employer's point of view that helath insurance is the same as wages. They far prefer health insurance! Now the problem is that for the employees, health insurance is now "other people's money". So, the marginal cost to an employee of additional medical services is[*] (close to) 0, so naturally they start using more. Now, finally we see that costs are spiralling out of control, and nobody wants to pay for it.

[*] Technically, a pure economist would say that the charge additional medical services goes to the employer and therefore to reduced (other) wages for the employee, but this is so slow and indirect that it *appears* to be zero in the short term. In the long term, what you would expect is the sort of political fuss that we are seeing right now as the costs of the system slowly bubble their way through to the real consumers.

Posted by: Jordan | February 13, 2005 at 01:37 PM

To your prior post on this, I gave the Wessell market clearing view. But your title here is interesting as I am a Keynesian who has been arguing we are still below full employment. Add to the discussion, the intriguing grocery worker strike that shut down Von's et al. in Southern Cal for almost half a year. The complaint of the unions? That Von's et al. wanted to reduce health care benefits.

Posted by: pgl | February 13, 2005 at 03:03 PM

I worked for a British firm in the 1970s when personal tax rates were extremely high. The British offset part of the system by providing a very large menu of fringe benefits ranging from free meals to cars for all managers.

If you average tax rate is 20% a firm can provide $100 of income for $80 by paying directly for insurance and other fringe benefits.

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Posted by: orlando bloom | March 07, 2005 at 09:05 PM

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February 09, 2005

The Big Miss On The Medicare Drug Plan: Tell Me Something New

The new estimates for the ten-year cost of the Medicare prescription drug plan are out and, as you probably know by now, it's pretty ugly.  The short story, from the Washington Post (via Hugh Hewitt):

The White House released budget figures yesterday indicating that the new Medicare prescription drug benefit will cost more than $1.2 trillion in the coming decade, a much higher price tag than President Bush suggested when he narrowly won passage of the law in late 2003.

The piling on has, of course, begun -- Max here, and Angry Bear here, for example.  But before we get too carried away, this picture documenting the historical misses in budget targets is worth keeping in mind.

Cbo_misses

The source is Appendix C of The Budget and Economic Outlook: Fiscal Years 2006 to 2015.

Note the magnitude of these annual projection errors.  In the much heralded surplus years of the late 1990s, the misses were hugely favorable -- well over $100 billion each year.  And the discrepancy was not due to policy changes, but unforeseeable economic developments and "technical factors,"  or errors in estimating the budgetary consequences of particular policies. (It's also interesting to note that the misses were almost all positive in the Clinton years -- the poor Republicans seem to get the other end of the stick.  As I said in this article some years ago, maybe it's better to be lucky...)

The lesson, to me, is that all the harping about this budget projection or that economic assumption is, well, ridiculous.  The confidence intervals on these things are so large that no one -- and I mean absolutely no one -- has any solid grounds to complain about the baseline assumptions of others.  You're all going to be wrong.

I'm not being nihilistic about this.   The point is the conversation should be how much of our incomes we want allocated by the government on average, who we want to tax to pay for it, and how we want to tax them.  The great benefit of the rules implemented in the administration of Bush the elder (with the Omnibus Reconciliation Act of 1990) and the Clinton administration (with the Omnibus Reconciliation Act of 1993) is that they framed the projections in the context of those fundamental decisions. 

Nouriel Roubini suggests returning to that world in this post.  I think he wrongly suggests that this implies the current administration would have to reverse its tax policies -- it only means that they would have to pay for them with reduced spending, which I gather they are more than willing to try.  But on the basic suggestion that we get back to rules that force those types of decisions, we are agreed.

February 9, 2005 in Data Releases, Health Care | Permalink

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December 09, 2004

The Health-Care Deduction Debate Heats Up Update

"Adam O'Neill" at The Lowest Deep -- now enthusiastically included on the econ blog roll to the left -- is not so enthralled with the Cogan-Hubbard-Kessler proposal noted in my previous post.  He has some qualms about how the numbers work out -- essentially a disagreement about how strong the cost-saving incentives are from an individual taxpayer/consumer's perspective.  But, in addition, he has a major problem with the regressivity implied by the payroll tax implications of shifting from employer-financed expenditures to employee-financed expenditures.  From his post:

...hidden in their plan is a 15 percent tax hike on health benefits for low income workers. Their plan makes insurance tax deductible (deductible from income taxes) rather than an exclusion from income (which makes it deductible from income taxes AND payroll taxes). 1) This would significantly reduce insurance offering at firms (firms would no longer have any direct reason to offer insurance) and 2) This makes the tax system more regressive because only individuals earning under $87,000 pay the social security payroll tax. They themselves peg this implicit low-income tax increase at a minimum of $8 billion a year ($8 billion from switching eliminating the payroll tax exclusion plus some fraction of the $11 billion of increased revenue from increases in take-home pay).

And he objects to Cogan ET Al's claim that "percentage tax reductions from detectability for low-income households are three to five times the size of reductions for high-income households."  Says O'Neill:

The key is the phrase "percentage tax reductions." Of course a $1 tax break to someone making $10,000 a year is greater in percentage terms than a $10 tax break to someone making $200,000. One would like to think that health care spending would be measured in more absolute and egalitarian terms.

I have to give that one the Subjective Judgment Alert. Whether policy ought to be more "egalitarian" is not the sort of thing that economists can speak to with any degree of authority -- our training gives us absolutely no special status for making value judgments.  Our training is, however, pretty useful for pointing out the trade-offs implied by any particular policy choice.  On those grounds, i recommend this post as a useful addition to the conversation.

UPDATE: Yet more from Andrew, who lays out his case for eliminating the excludability of health insurance purchases from income and using the higher tax revenues to provide refundable tax credits to lower income households who purchase insurance.

UPDATE UPDATE: "Brilliant Deduction Revisited" and "Tax Policy for Health Insurance," follow-ups at the The Lowest Deep.  And this, via Vox Baby, at Marginal Revolution.

December 9, 2004 in Health Care | Permalink

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thai Insurance: "The Importance of Travel Insurance
By: Karen Zastudil "

thai insurance: "What Is Term Life Insurance?
By: Tim Gorman "

thai insurance: "How Do I Lower My Auto Insurance Premiums?
By: Tim Gorman "

Posted by: insurance | June 07, 2005 at 06:24 AM

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The Health-Care Deduction Debate Heats Up

Writing in yesterday's Wall Street Journal (in an editorial titled "Brilliant Deduction"), John Cogan, R. Glenn Hubbard, and Daniel Kessler wax enthusiastic about a proposal to make all medical-care expenditures tax-deductible.

We propose... For anyone with at least catastrophic insurance coverage, all health-care expenses -- employee contributions  to employer provided insurance, individually purchased insurance, and out-of-pocket expenses -- would be tax-deductible.  The deduction would be available to those who claim the standard deduction and to those itemize.

The most important effect of tax deductibility would be to reduce unproductive health spending.  Under current law, medical care purchased through an employers insurance plan is tax-free, while direct medical care purchased by patients must be made with after-tax income.  As we and many others  have observed, this tax preference has given patients the incentive to purchase care through low-deductible, low co-payment insurance instead of out-of-pocket, which in turn leads to cost unconsciousness and wasteful medical practices...

According to our calculations, based on research from the RAND Health Insurance Experiment and others, we estimate that tax deductibility would reduce spending by approximately $40 billion in 2004 dollars, or 6% of total private health spending.

But can we afford a revenue-loser like this at a time when federal deficits are a major concern?  The authors argue that to do otherwise would be penny-wise and pound-foolish.

... full deductibility would lead to approximately $5 less spending on relatively unproductive care for each dollar of foregone tax revenue.  That's right -- a progressive tax cut would lead to an efficiency gain in the larger economy about five times as great.

Andrew Samwick, commenting on an earlier post by Brad DeLong, weighs in as well.

December 9, 2004 in Health Care | Permalink

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» A Not So "Brilliant Deduction" from The Lowest Deep
Cogan, Hubbard and Kessler propose to "fix" the tax-related issues surrounding health care by expanding tax subsidies for medical expenses. There are so many problems with their opinion piece that I hardly know where to start. First, hidden in their ... [Read More]

Tracked on Dec 9, 2004 9:58:04 AM

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thai Insurance: "The Importance of Travel Insurance
By: Karen Zastudil "

thai insurance: "What Is Term Life Insurance?
By: Tim Gorman "

thai insurance: "How Do I Lower My Auto Insurance Premiums?
By: Tim Gorman "

Posted by: insurance | June 07, 2005 at 06:17 AM

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