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Means testing for Medicare
Let's first quote Mark Thoma's response to my column; it is indirectly a good summary of what I argue:
I believe the political argument that giving everyone a stake in the program helps to preserve it has more validity than Tyler does, market failures (some of which hit all income groups) probably play a larger role in my thinking about government responses to the health care problem than in his, and I have more confidence than Tyler that a universal care system has the potential to lower costs.
And now here's me:
...the idea of cutting some government transfers provokes protest in some quarters. One major criticism is that programs for the poor alone will not be well financed because poor people do not have much political power. Thus, this idea goes, we should try to make transfer programs as comprehensive as possible, so that every voter has a stake in the program and will support more spending.
But even if this argument holds true now, it may not be very persuasive when Medicare costs start to push taxation levels above 50 percent. A more modest program, more directly aimed at those who need it, might prove more sustainable in the longer run.
Americans have supported the growth of many programs aimed mainly at the poor. Both Medicaid and the Earned Income Tax Credit have grown rapidly in size since their inception. The idea of helping the poor and not having the government take over entire economic sectors was the original motive behind welfare programs, in any case.
Furthermore, the argument for comprehensive and universal transfer programs does not meet the ideal of democratic transparency. If taking care of the poor is the real value in welfare programs, those programs should be sold as such to the electorate. We shouldn't give wealthier people benefits just to trick them, for selfish reasons, into voting for greater benefits for everyone, the poor included.
Here is another point:
Advocates of health care reform tend to be long on ideas for expanding care and access, but short on practical solutions for cost control. The argument is often made that single-payer health care systems in Canada or Europe are cheaper than health care in the United States. But Medicare is already a single-payer plan, yet its costs are unsustainable.
Note that I am calling for higher benefits for the poor and lower benefits for higher-income groups. That's not a popular stance, not even with egalitarians. In fact I view the contemporary left as oddly ill-prepared on the health care issue. Electorally speaking, the issue is fully 100 percent in their court (and they are used to pressing it aggressively), until of course they get their way and have to "meet payroll," so to speak. One attitude is to cite Europe and think that the production possibilities frontier can expand under better management of the U.S. system, even as you cover an extra 40 million people. Another attitude is to face the notion of trade-offs.
Here is the full column. (By the way, I think that HSAs are ineffective as health care reform and that the so-called "right" is floundering on this issue, just to get in my equal opportunity smack on the blog.)
Addendum: You can make a good argument that (some) public health programs are the best health care investment of all; I just didn't have enough space in the column to cover that issue.
Second addendum: Greg Mankiw didn't read so closely. It's not "an income tax surcharge on sick, old people." It's a reallocation of benefits toward people of greater need. Is any benefit less than infinity an "income tax surcharge"?
Third addendum: Here is Paul Krugman on the topic.
Posted by Tyler Cowen on July 20, 2008 at 07:22 AM in Medicine | Permalink
Comments
The argument against a wide range of prices and services in health care seems to be that inequaltiy or experience will mean that the poor get less quality than the rich who can pay for it but suppose the goal is nutrition. Is eating food from Food Lion or WalMart lower quality than Food from WholeFoods? Much of it is marketing and the customer experience. If people are willing and able to pay for let's say, the right to not be forced to wait for 30 to 60min to see their doctor, does that make them healthier than those who pay less but have to wait for non emergency type care? This is already happening with lasik surgery I think it would not be difficult to allow it to spread.
Posted by: Ward at Jul 20, 2008 8:15:37 AM
As I'm considering HSAs for my company, why do you think HSAs are a fraud? Do you have a link to a post that summarizes your thoughts?
Posted by: Jody at Jul 20, 2008 8:31:56 AM
I guess we're just supposed to forget the pesky fact that "the rich" pay a lifetime of Medicare taxes (with no wage cap as with Social Security) and just meekly accept the notion that they're no longer entitled to benefits. You yourself note that "lifetime earnings" should be the mean-test, but "lifetime taxes" suddenly become irrelevant. Go figure.
If we're going to means-test Medicare, then can we at least be intellectually honest about it -- by eliminating the Medicare tax, raising federal income tax rates by the requisite amount, and presenting Medicare for what it would in actuality become: a health-care dole for the (somehow) "indigent" middle class.
Posted by: KipEsquire at Jul 20, 2008 8:37:09 AM
Tyler, where do you get the "above 50%" figure for taxes due to Medicare?
According the non-partisan CBO, total Medicare and Medicare spending in 2075 is projected to grow to 14.9% of GDP if there are no program changes, and total federal spending is projected to be about 28% of GDP (not including interest expense) if there are no changes.
See http://www.frbsf.org/publications/economics/letter/2003/el2003-27.html, the CBO reports and/or the paper by Chad Jones.
Do you disagree with those numbers?
Given the additional life expectancy that is likely to result from this spending as technology improves, not to mention the simple demographic reality that we will need to take care of more elderly people (like me and you, let's hope!), is this something you find unreasonable?
Posted by: a student of economics at Jul 20, 2008 9:51:23 AM
Is any benefit less than infinity an "income tax surcharge"?
It's not a matter of the benefit being less than infinity, it's that you propose for the benefit to decrease with income. In other words, Greg believes the incentive effects are equivalent to an income tax surcharge -- the more you make, the more you have to pay for a given level of medical care.
Only in your proposal, it only applies if you are old and sick -- i.e. it's not broad based but targeted at medicare recipients.
It's a reallocation of benefits toward people of greater need.
Are you now arguing that there would be no net savings from your proposal just a reallocation of spending?
Posted by: a student of economics at Jul 20, 2008 10:30:14 AM
Student, here is a CBO link: http://econlog.econlib.org/archives/2008/07/the_longterm_bu_1.html
Note that today poorer old people qualify (at least potentially) for both Medicaid and Medicare, not to mention many other welfare benefits, whereas wealthier old people qualify only for Medicare. No one seems to find this principle morally offensive, so why should its extension be? You're seeing a lot of posturing, without considering which principles are already being embraced, albeit often in different guises.
Posted by: Tyler Cowen at Jul 20, 2008 10:55:25 AM
Portraying Medicaid as a good example of what those with political influence and power are willing to fund when they don't personally benefit seems like a bad idea to me. While it is true that funding has gone up, it is false that the coverage for those covered by it in almost every state meets a standard that the average insured American would consider remotely acceptable if applied to themselves.
Posted by: RW Rogers at Jul 20, 2008 11:53:19 AM
You can make a good argument that (some) public health programs are the best health care investment of all; I just didn't have enough space in the column to cover that issue.
I want to make an analogy.
I used to live in a city that had terrible traffic problems. You could live inside the city and have all the urban problems, or one alternative was to go live in a brand new suburb and suffer a horrible commute into the city. They had a bond issue to pay to improve the roads so the terrible commute wouldn't be so bad. But as soon as they announced where the new road construction would be, developers were building more subdivisions to take advantage of those roads. They kept building more houses and the commute stayed as bad as the drivers were willing to accept -- when it got so bad that they could no longer sell houses because of the commute, they passed another bond issue for more road work.
In a similar way, actual improvements in health care result in people living longer and needing more health care.
Ideally we would find cheap ways to help people live longer more productive lives. We could and would retire older. We would be healthy and would not require much medical intervention. And that would delay the problem -- instead of having a lot of old people needing expensive care *now* the same people would need expensive care *later*.
If we can get people to work more decades -- and have productive work for them -- then we can afford more healthcare for them when they finally do need it. The goal should be to improve health more than to just save lives.
Our current system has no brakes on it. We come up with expensive new procedures and we have no good approach to decide whether they're actually worth using. Our "improving" medical technology is driven by med-tech companies whose purpose is to improve their profits -- it's only natural that new improved methods are more expensive than older ones.
So I would propose that we find a way to make sanitised medical records available to everyone, over the net. Make it hard to identify individual patients, but make it possible for anyone to look for statistical correlations etc. And for each proposed change in established practice, run official tests. Double-blind if possible. People who sign up for medicare etc would implicitly volunteer for experimental studies, and they might be assigned to new-method or control-group. Make it clear whether the new approaches actually work enough better to justify the expense. Also, establish a prize for economical methods that work. If a new method works as well as the old one but it costs less, give whoever created it a lump sum plus half the savings for 10 years.
We should also have questionnaires etc for lifestyle stuff, anonymized. Let people look for correlations there.
We have a whole lot of people interested in folk medicine and chinese herbs and whatever. They'd be interested in how well the standard methods work, if they could find out. And likely a lot of them would be a lot less interested in various of our expensive treatments if they saw the usual results.
Posted by: J Thomas at Jul 20, 2008 12:08:50 PM
Means testing is okay, as far as it goes. But that does not solve the underlying problem. It just shifts the problem from government to seniors. And under most proposals seniors would not get any new tools (like HSAs) to deal with it.
The problem is that health care costs are growing at twice the rate of growth of income. And that problem is not going to be solved unless someone is forced to choose between health care and other uses of money.
No health savings accounts??? Tyler, what can you possibly be thinking?
I'll say more about this on my blog tomorrow.
Posted by: john goodman at Jul 20, 2008 12:12:48 PM
Jesus, I just realized that I'll probably have to live under socialized health care sometime in my life time. Right now I pay $60/month for good health insurance. I doubt that any socialized system will match that.
Posted by: Mercutio.Mont at Jul 20, 2008 12:28:07 PM
While it is true that funding has gone up, it is false that the coverage for those covered by it in almost every state meets a standard that the average insured American would consider remotely acceptable if applied to themselves.
Fair enough, RW Rogers. But if you're going to say that, you should acknowledge that, e.g., neither does the Canadian or British health system meet a standard that the average insured American would consider remotely acceptable if applied to themselves. As Professor Cowen notes, Medicare already is single payer, and much more expensive than such plans in other countries.
Americans don't consider acceptable the very cost savings that single payer (and other government-run) health care is supposed to provide. That's independent of whether those savings are reasonable and efficient or not.
Posted by: John Thacker at Jul 20, 2008 12:34:07 PM
Thanks, Tyler. I think I get it. Income tax revenues are about 8% of GDP. Therefore, to increase gov't revenues by 8% or more solely via income taxes with no other changes, then those rates would need to more than double. Got it.
Alternatively, we could put in place a broad based VAT, e.g. 16%, and that would also do the trick, and that would be immensely more efficient.
And, of course, as you point out, we could cut benefits for relatively wealthy retirees and make them pay for the medical care themselves.
The first option is clearly too constrained and inefficient, though it's a good attention-grabber. The third option doesn't really save anything overall and from what I've read about US vs. other countries, probably would make our health care system (even) more inefficient.
The second option doesn't seem so bad, especially when combined with other tweaks to improve efficiency (e.g. national electronic health records, disseminating standards of care, more spending on prevention and public health, etc).
FWIW, according to Harvard's David Cutler, the American health care system is so very far from the efficient frontier (and he has overwhelming evidence to prove this), that that's probably where our brain power should be focused.
Posted by: a student of economics at Jul 20, 2008 12:48:03 PM
Well, since no other libertarian purist has pouted yet, I will Tyler (if you're still checking the comments):
(1) In the whole column, not even a one-sentence nod to the fact that the free market would do a better job than the federal gov't spending hundreds of billions? Or do you not agree with that?
(2) In essence, higher earners would receive lower benefits instead of facing the prospect of higher taxes, as current trends predict. This policy reflects an ethic of individual responsibility — namely, that people who have earned well throughout their lives should be expected to take care of themselves, precisely so that the truly unfortunate can be helped.
Actually, I would say that an ethic of individual responsibility means that nobody owes you anything, and that if you want charity you should go to a church or the United Way. If you are successful and earn a lot, you can buy more medical care than someone who doesn't produce much. How does an ethic of individual responsibility seem to mean the exact opposite in your book?
(3) And now I will really hit below the belt: Typically in these countries, higher earners receive lower pension benefits — and that helps to maintain strong and robust welfare states.
When you were in grad school, Tyler, did you dream you would be writing NYT columns giving advice on how to maintain strong and robust welfare states?
My disclaimer: I had heard from a bunch of people that Tyler Cowen was the smartest libertarian alive (or something like that). I know you have distanced yourself from Austrian economics, so I don't criticize any of your stuff on that score. But don't you still consider yourself a libertarian? If not, then I apologize for my rant. But if so, I really am surprised at how readily you concede that the feds should be running health care.
Posted by: Bob Murphy at Jul 20, 2008 2:19:12 PM
Tyler advocates redistribution towards the poor, and the Krugmanites are still in a huff about libertarian dogma. WTF?
By the way, anyone have recommendations for relatively unbiased sources on health care systems around the world?
Posted by: Jim at Jul 20, 2008 2:31:06 PM
Bob Murphy writes: "...the fact (sic) that the free market would do a better job than the federal gov't spending hundreds of billions?"
Do you have any evidence for that, or as Krugman suggests, is it pure ideology? (http://krugman.blogs.nytimes.com/2008/07/20/does-not-compute/)
The overwhelming weight of the evidence in fact suggests exactly the opposite of your beliefs.
Posted by: a student of economics at Jul 20, 2008 2:54:05 PM
I would propose Medicare cover existing technology but require any new technology wanting coverage would need to prove its cost effectiveness to be covered. This would mean Medicare could dictate what it is willing to pay and the provider could accept or reject it, but it would control costs in the clearest most effective way and provide the incentive for cost effectiveness the current system lacks.
Posted by: Lord at Jul 20, 2008 3:10:51 PM
Americans don't consider acceptable the very cost savings that single payer (and other government-run) health care is supposed to provide.
I no longer believe this to be the case.
Posted by: Lord at Jul 20, 2008 3:14:20 PM
a student:
The paper that Paul Krugman cites in the url you've posted isn't even about how well a free market in health care works. It's a comparison of multiple health care systems inlucluding the one in the US, all of which are characterized by governments deciding on a massive scale how to allocate resources. To make an empirical comparison between a free market in health care and government run health care, one needs an example of a free market in health care. This is akin to comparing agricultural subsidies in different countries and concluding that pure laissez faire is not as good as subsidization. Given your commitment to reliance on good solid evidence for the claims people make about economics, I'm sure you'll see why Krugman's citing of this paper undermines his credibility on the issue. Hint: when people have mountains of evidence for their claims, they seldom waste the time to accuse the people they disagree with of holding positions for ideological reasons.
As it happens, while there are very few places which even resemble a free market in health care, and those do are too different from other countries to allow for meaningful comparison, there is overwhelming evidence (the 20th century) that government planning is terribly poor vis a vis the free market system at producing very simple things like shoes, bread, potatoes, rice, etc. Why should anyone expect government planning to actually do a better job than the free market system in producing complicated things like health care?
Posted by: James at Jul 20, 2008 3:41:53 PM
Have to agree with Krugman. Means testing would merely lock the elderly into the existing failing healthcare system if not cause it fail even faster.
There is no market for healthcare. No pricing information is available. No competition exists between providers. No information is available as to effectiveness. No incentive exists to control costs. It is just one huge failure.
Posted by: Lord at Jul 20, 2008 3:47:35 PM
In the whole column, not even a one-sentence nod to the fact that the free market would do a better job than the federal gov't spending hundreds of billions?
Free markets are good at providing what people want, when people know what they want and can afford it.
People mostly don't know what medical care they want. If we all had our MD degrees it might be different....
There's an old saying that goes "Don't ask your barber whether you need a haircut." There is not an old saying that goes "Don't ask your surgeon whether you need surgery." Why is that?
Haircuts are a matter of style. You get them for someone who cares about your style -- your wife, your boss's secretary, somebody like that. And you can schedule them on a regular basis. Every two weeks, every month, every 6 weeks, whatever. Your barber is a professional who knows a whole lot about what he does, but there's no need to trust him with that choice.
Surgeons, though, are doing something that might kill you or might save your life. They know what they're doing and you don't know what they're doing at all. They have professional ethics. They will not schedule a gall-bladder surgery for you just because they have the slot available and they want the money. If you aren't sure you trust your surgeon, you can get a second opinion. Your surgeon will be glad to refer you to a fellow surgeon who will do that for you.
If you want to economise on haircuts you can find a cheaper barber or you can delay your treatment. That is not advisable for surgery. When your life is on the line you want the best surgeon you can get, and you want your surgery before things get worse. If you can't afford the surgery then you want to have gotten insurance. If you can't afford the insurance you need, then you want your job to have given you that insurance. If your employer can't afford the insurance you need, then you want the government to have given you that insurance. If the government can't afford it then you damn well want them to get the money somewhere, from rich people or large corporations or somewhere. It's life-or-death. Not something to skimp on.
And you don't know what you need. Isn't it only natural to suppose that the more expensive treatment is the better one? That the more expensive surgeon is better, the more expensive hospital is better, the more expensive drugs are better, etc? You don't know. You're trusting your doctor's professional ethics. They have pledged to do the best they can to save your life. They have not pledged to get you the cheapest treatment that's likely to save your life.
A free market where expert salesmen tell you what to buy and you trust them! That's going to be efficient at something....
So then the insurance industry tries to regulate it. Each insurance company decides what procedures it will pay for after each diagnosis. Sometimes they decide what tests are allowed for each set of symptoms. Insurance adjusters say what they'll pay for, and the MDs mostly do what your insurance will allow. Instead of trusting the MD to decide what treatment you need, you have to trust your insurance company -- they have the money. They cut costs by disallowing things they say are not appropriate or ineffective. You get no say in it except by carefully choosing your insurance company based on their 300-page brochures and word-of-mouth about what happened to their other insureds. But if you die because you picked the wrong insurance company, it was your own choice. And of course having multiple overlapping systems to decide which procedures to disallow drives up costs. Sweet.
If you want free enterprise to work with health care, at a minimum you need actual information available to customers. Find out what diagnoses other people with your symptoms have gotten. What treatments did they receive? What outcomes? Where can they get similar treatments? At what price?
Without fully-informed customers, what does free enterprise add to the system?
Posted by: J Thomas at Jul 20, 2008 3:57:07 PM
Why should one assume a free market can do better when none exists? That alone pretty much says it has failed. You may say it failed due to government, but it would take government to create free markets in the first place. You may say it failed because it could not compete with government, but that just says it is less efficient where efficiency includes the collection of funds to pay for it. You may say it is or should be a matter of choice, but democracies are also about choice. You may say governments also fail, but I would say they need to succeed even to make free markets possible.
Posted by: Lord at Jul 20, 2008 4:08:11 PM
Where Krugman is wrong: The Health Affairs article he cites doesn't show other countries do more for less. It shows that the US spends more nominal dollars. However since all countries completely suppress the market in health care, no one ever faces a real price for anything. Totaling up all the transactions produces a figure of questionable meaning. The article also shows that if you count real resouce inputs, we use less: fewer doctors, nurses, hospital beds, hospital days, etc., than the OECD average. The only thing we use more of is technology.
Where Krugman is right: means testing will not solve the proble of rising costs. But not for the reason he gives. (That it is private.) The cited article also shows that over the past 40 years, the real per capita rate of growth of health care spending in the US is just below the OECD average.
All the developed countries are traveling up the same path for the same reason: no one is choosing between health care and other uses of money.
Posted by: John goodman at Jul 20, 2008 4:18:09 PM
FYI, I am not going to Krugman's article and posting comments, nor am I trying to argue with you guys (gals?) here about free markets in health care. I had just assumed that Tyler Cowen thought the best of all possible worlds would be a completely privatized system, and that any concessions he made to government programs were because of political feasibility.
I'm not conceding that you folks are right, I'm just saying we're not going to get anywhere arguing this on a blog. But since I had this idea that Tyler Cowen was a big libertarian, I was surprised by this article, that's all.
Posted by: Bob Murphy at Jul 20, 2008 4:55:34 PM
The reason Medicare is so expensive is quite simple; it insures the sickest of people, those over 65, 45 million people. Life iinsurers don't insure only those over 65 because they are too close to the "death" age. They'd go broke! They include younger people in the mix making life insurance feaseable. A single payer plan would have the same effect; by insuring ALL Americans those under 65, 255 million people, who are the healthier Americans, would bring down expenses enormously and make Medicare cost effective and a good insurance model. It would also extend the solvency of Medicare into the distant future. Medicare for all is very logical from a financial standpoint. HR 676 does just that.
Posted by: robert recht at Jul 20, 2008 5:23:34 PM
A single payer plan would have the same effect; by insuring ALL Americans those under 65, 255 million people, who are the healthier Americans, would bring down expenses enormously and make Medicare cost effective and a good insurance model.
My concern is that it would have to be pretected from Congress. Get a few years of GOP majority, and they fund it in a way that's designed to prove to the public that the single-payer insurance is unworkable, and what happens then?
We get stuck with a single system that doesn't work. The GOP gets to point their finger at Democrats and say it couldn't have worked and it's been proven. Meanwhile, the system is broken for everybody. If we can't protect a single-payer system from the GOP we're better off without it.
The GOP is kind of at war with the USA, and in wartime you don't want to provide your enemy with big juicy targets to attack.
Posted by: J Thomas at Jul 20, 2008 6:00:32 PM
