As the prescription drugs bill heads into a conference between House and Senate, it is already clear that it will add hugely to the Federal deficit, worsen drugs coverage for many senior citizens already adequately covered, and further socialize U.S. medicine. So it’s worth asking: is there an economically superior way to cover medical costs?
Prescription drugs are only peripherally the issue; they were not covered by the original Medicare legislation, largely because back in 1965 there were only a limited number of efficacious drugs, which generally represented only a minor portion of a patient’s overall medical costs. However, as drugs have proliferated and their cost has skyrocketed, there are today many long term drug therapies that can allow a patient to lead a full life, may well save huge amounts of money compared to other alternatives such as surgery, and yet are costly in terms of the patient’s income level.
This is particularly the case for older patients, where people who might have died a few decades ago are now able to prolong healthy life through drug therapy. Thus there is no reason in principle why, if government is covering health care costs, it should not cover drug therapies, which often reduce substantially the overall cost of a patient’s healthcare to whoever’s paying for it.
Conversely, there are a number of costs that are traditionally covered by Medicare, where the rationale for coverage is very much weaker. On average, 50 percent of medical costs are incurred in the last six months of a patient’s life; the cost-benefit analysis for these costs (where it is known that they fall into this category) is thus heavily negative. Equally, long term care in the last years of life is extraordinarily expensive, without in many cases bringing significant benefit to patients or their loved ones. To the extent that Medicare makes either terminal medicine or extended geriatric care free to the user, it is wasting resources in large quantities.
The U.S. medical payment system has another huge flaw: it rewards institutionalization of the system, by allowing medical providers to grant huge discounts to insurance companies, while charging outrageous prices to the uninsured private individual. Two examples: the modest mix of blood pressure drugs I was taking in 1998-2001 cost me $25 per month in Croatia, where they were manufactured by a local drug company under license, no less than $115 per month when I returned to the U.S. without medical insurance, and was paying their costs myself, and $25 per month again when I joined UPI, and was paying only the co-pay for UPI’s medical insurance. This might be deemed the appropriate cost for drug companies’ research and development costs being reimbursed by wealthy American consumers rather than less wealthy Croatians; however my other example has no such justification.
I currently have a 3-monthly blood test, fairly extensive but by no means exhaustive. The laboratory work for the most recent test was billed at the extraordinary sum of $850, but the insurance company actually paid $225, since the laboratory had agreed to accept the insurance company’s reimbursement determination as full remuneration for its services. To my admittedly inexpert eye, the insurance company figure looked about right, even a little high; the $850, which I would presumably have been forced to pay had I been uninsured, appeared nothing short of price gouging at a Pentagon-contract level.
I am as yet too young for Medicare, and have been lucky enough never to be eligible for Medicaid, but I understand that these programs also grossly underpay for medical services, often using price schedules that were set decades ago. Consequently, many doctors and medial facilities will not accept Medicare/Medicaid patients, thus removing much of the point of the programs’ existence — it should surely not be a taxpayer priority to subsidize BAD medical care.
The problems with U.S. medical care financing are thus pretty clear; the question is what to do about them. At one extreme, if the U.S. adopts a British-style National Health Service (to which it got fairly close at the time of “Hillarycare” in 1993-94) it will institute a government program that will be subject to continual expansion, far more rapidly than gross domestic product. While British spending on the National Health Service is a smaller percentage of GDP than U.S. healthcare spending, the service also provides greatly inferior healthcare, rationed largely by waiting lists and the random factor of where you live.
The experience of the Blair government in the last few years, in pouring extra resources into the NHS, far more rapidly than the rise in British GDP, while watching service levels remain unchanged at their existing low level, indicates that this is not the answer. Since the state is a monopoly provider of healthcare services (and the NHS is the largest employer in Europe except for the Russian Army) additional resources are simply appropriated by the healthcare unions and the bureaucracy, to no discernable gain for the patients who are, through taxation, paying for them.
For the great majority of healthcare services that an individual uses during his lifetime, it is unquestionably optimal that he should pay directly. In that way, the natural cost controls of private expenditure are given full effect, the choice available to the individual is maximized, the claims and payments bureaucracies are eliminated and the market is able to work freely to ensure that the quality and cost of the medical care provided are optimized. This should be the primary principle of healthcare provision; to achieve it, the cost-generating superstructure of employer and state healthcare provision should as far as possible be done away with.
All modifications to a scheme of pure willing buyer-willing seller private provision should then be designed to minimize the deviation from this principle, as follows:
— Drug companies need to recoup their research and development costs, but by providing them with patent protection for a decade or more the government is putting them into the position of a monopoly seller. In such a position, absent price controls, the drug company will naturally charge “as much as the market will bear” regardless of the cost of producing the drug, thus keeping the drug’s price at an artificially high level.
The most efficient way to get around this problem is to institute, with the patent protection, a system of compulsory licensing, whereby the drug company will be compelled to license say two other companies to sell the drug in the U.S. market. Other drug companies would then bid for the licenses, on a flat fee purchase basis, the revenue from which would go to the company holding the patent. Once the licenses had been granted, the three license holders would all have the right to manufacture and sell the drug.
In this way, the inventor of the drug would get amply remunerated for his initial research and development work, as bidders for the license forced up the license price, but once the drug had been licensed, the original inventor and the two licensees would compete to sell the drug in the normal way, thus keeping the price for it at a competitive level in the light of its manufacturing and distribution costs.
— In order to ensure that people save sufficiently for the medical care needed in their last years, a system of medical savings accounts (MSAs) should be instituted, with a minimum and maximum percentage of annual earnings to be saved in these accounts, on a tax-deductible basis. The amount saved, net of tax will be available to meet medical costs on an ongoing basis; the portion of the account attributable to tax saving will be withdrawable to meet medical bills only after the patient reaches 75 years of age. Thus for a pretax contribution of $1,000, on which the tax deduction is $300, the net $700 would be available immediately, while the other $300 would be available only after 75.
In this way, the maximum possible proportion of medical costs will be covered by the individual, from MSAs or directly, with enough held back to cover the great majority of people in old age. Any amounts remaining in the MSA at death would form part of the account-holder’s estate.
— Employers wishing to provide for their employees’ healthcare needs will be able to contribute to their MSAs, and take a tax-deduction for doing so.
— Insurance policies will be available only for catastrophic coverage, of amounts over $100,000, in which case 10 percent of the cost will still be borne by the patient in order to ensure efficient usage of resources. Premiums for these policies will be provided by the government through the social security system, but individuals will be able to opt out of this portion of the social security system and pay premiums directly to insurance companies if they wish. Essentially, this will replicate the current system, but on a much smaller scale since it covers only catastrophic events, shifting 90 percent of the costs of the unlucky onto the general population. For the very poor, charitable foundations would be available to cover the remaining 10 percent, since the amounts in question would not be large in terms of the overall economy.
By these changes, the catastrophic coverage aspects of the current U.S. healthcare system will be retained in government hands, but the rest of the system will be privatized fully to individual healthcare purchasers, thus maximizing the efficiency of the market for healthcare products and services. Price discrimination and gouging, such as currently forces the institutionalization of healthcare purchases, will be severely discouraged and as far as possible outlawed (anti-price-discrimination legislation may be necessary in the early years, but will hopefully be less and less used as the system beds down.)
As a final advantage, the great majority of the actuarial deficit in the nation’s healthcare system, increased by $8-12 trillion by the proposed prescription drugs legislation, will be placed where it belongs, with the people whose healthcare costs are likely to cause the deficit. In healthcare as in the rest of the economy, there should be no free lunches.
Of course, such a reform is politically impossible. But maybe then it’s the political system, rather than the healthcare system, that we should fix!
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)
This article originally appeared on United Press International.