Saturday, February 19, 2005

Posner: Abolish Medicare

Richard Posner gives a very reasoned argument that only the poor should qualify for government-subsidized or government-supplied health insurance. Link.
The real issue is not the prescription-drug benefit but the overall cost of Medicare; currently (that is, without the prescription-drug benefit) that cost is running at almost $300 billion a year, which is about 3 percent of GDP. 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. The nonpoor could be required to purchase health insurance in order to prevent them from free riding on family or charitable institutions in the event they needed a medical treatment that they could not afford to pay for. People who had chronic illnesses or other conditions that would deter medical insurers from writing insurance for them at affordable rates might be placed in “assigned risk” pools, as in the case of high-risk drivers, and allowed to buy insurance at rates only moderately higher than those charged healthy people; this would amount to a modest subsidy of the unhealthy by the healthy.

Economists are puzzled by the very low deductibles in Medicare (including the prescription-drug benefit—the annual deductible is only $250). Almost everyone can pay the first few hundred dollars of a medical bill; it is the huge bills that people need insurance against in order to preserve their standard of living in the face of such a bill. But government will not tolerate high deductibles when it is paying for medical care, because the higher the deductible the fewer the claims, and the fewer the claims the less sense people have that they are benefiting from the system. They pay in taxes and premiums but rarely get a return and so rarely are reminded of the government’s generosity to them. People are quite happy to pay fire-insurance premiums their whole life without ever filing a claim, but politicians believe that the public will not support a government insurance program—and be grateful to the politicians for it—unless the program produces frequent payouts. If Medicare were abolished, the insurance that replaced it would be cheaper because it probably would feature higher deductibles; it is true that low deductibles are common in many forms of private insurance, such as automobile collision insurance, but I think it would be different in the case of health insurance simply because private health insurance for the elderly, with no Medicare crutch, would be very costly. The premiums would be much lower with high deductibles.

The history of Medicare is very instructive to this argument. It was a typical example of Congress' penchant for looking at a real problem and then passing legislation that has nothing to do with that problem, but rather "solves" another "problem" that does not actually exist. In 1968, many of the elderly could not afford medical insurance. The medical insurance industry already existed. We did not need another medical insurer, we needed a way to allow low-income elderly to afford what already existed. A simple-to-administer system of subsidizing premiums for low-income elderly was all that was needed. This suggestion would substitute what we needed then for what we have now. Unfortunately, while it would have been easy to create such a system in 1968, it probably is politically impossible today.


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