Legal Commentary

Health Care-Becker

By Gary Becker

The best way to evaluate America's expensive health care system would be to estimate the effects of different kinds of healthcare on the quality and quantity of health for individuals of various ages, incomes, races, and other categories. To my knowledge, no researchers have come close to doing this. Instead, the American system has sometimes been found wanting simply because life expectancies in the United States are at best no better than those in France, Sweden, Japan, Germany, and other countries that spend considerably less on health care, both absolutely and relative to their GDPs.

Life expectancy is surely one supremely important measure of health since individuals in rich countries are willing to pay a lot even for small increases in their probabilities of surviving different ages (see the studies in the book "Measuring the Gains from Medical Research", ed. By Kevin M. Murphy and Robert Topel, 2003). Studies show that an additional year of life is worth over $120,000 to the typical American adult, apparently also including older adults, where "worth" is measured by willingness to pay for a one-year improvement in length of life. One can easily see without a lot of fancy calculations that the large sums Americans are willing to pay for improvements in health imply that they would pay a considerable fraction of their incomes in order to achieve significant improvements in their life expectancy, and also in their quality of life. Similar conclusions apply to other countries since the willingness to pay in different countries for an additional year of life varies approximately proportionately to their per capita incomes.

Although such calculations show that improvements in life expectancy are worth a lot to most people, national differences in life expectancies are a highly imperfect indicator of the effectiveness of health delivery systems.for example, life styles are important contributors to health, and the US fares poorly on many life style indicators, such as incidence of overweight and obese men, women, and teenagers. To get around such problems, some analysts compare not life expectancies but survival rates from different diseases. The US health system tends to look pretty good on these comparisons.

A study published in Lancet Oncology in 2007 calculates cancer survival rates for both men and women in the United States, the United Kingdom, and the European Union as a whole. The study claims that the most important determinants of cancer survival are early diagnosis, early treatment, and access to the best drugs, and that the United States does very well on all three criteria. Early diagnosis helps survival, but it may also distort the comparisons of five or even ten-year survival rates. In any case, the calculated five-year survival rates are much better in the US: they are about 65% for both men and women, while they are much lower in the other countries, especially for men. These apparent advantages in cancer survival rates are large enough to be worth a lot to persons having access to the American health system.

Several measures of the quality of life also favor the US. For example, hip and knee replacements, and cataract surgery, are far more readily available in the US than in Europe. The cancer survival and quality of life advantages enjoyed by US residents indicates that Americans get something for the large amount they spend on health care, but they do not indicate that the bang for the health buck is greater in the US, or even that the US health delivery system is reasonably efficient. Indeed, the American health system has several characteristics that may considerably lower its efficiency.

The American system ties medical insurance to employment by allowing company spending on medical premiums to be fully tax-deductible. Companies introduced health benefits during World War II in order to get around wage controls to be competitive in attracting employees. It was maintained as income tax rates increased during subsequent decades. This employer-based system is partly responsible for the high number of Americans who have no insurance coverage, since many small companies do not provide insurance to their employees. In addition, the system favors persons with high earnings since tax deductions for insurance premiums are worth more to them. A much better approach, so far opposed by President Obama, would provide a certain number of dollars each year to every person-perhaps $2500- as tax credits to be used only to buy health insurance and pay for medical care. Unused amounts in any year would be folded into health savings accounts (see my discussion of these accounts and other health care issues in posts for April 15, 2007 and January 13, 2008), and unused balances in any year would be carried over to spend in later years. This approach gives the same tax incentives to everyone, and it would encourage individuals to economize on their health care spending since unused balances would be available to spend in the future. It would also induce many persons without health insurance to get some since otherwise they lose access to this tax credit.

Health insurance is expensive in the US partly because most states mandate coverage of various health expenditures that have little to do with insurable risks. For example, the majority of states require insurance companies to cover the medical costs of all birth deliveries, even though these deliveries are mainly planned, and the expenses are known beforehand. The proper insurance approach would cover only unusual birth expenses caused by complications in the delivery and post delivery stages. By getting rid of unnecessary mandates, health insurance would become much cheaper, especially in states with the more onerous mandates.

The President wants to establish government-run health insurance companies to compete with private companies. This is a bad idea because experience from government-owned enterprises in other sectors conclusively shows that that they are run inefficiently, in good part because of political interference. Moreover, government enterprises do not compete fairly since they generally are subsidized, often generously and in hidden ways. Private health insurance companies in the US compete very strongly, although they are hampered by mandates and other regulations that frequently have nothing to do with effective and honest coverage of health needs.

Full post as published by Becker-Posner Blog on June 07, 2009 (boomark / email).