The New York Times: A Real Choice on Medicare

The New York Times editorializes on competing plans for the future of Medicare:

We know it is not how most people want to spend their time, but Americans need to give a close reading to the Democrats’ and Republicans’ plans for Medicare reform. There are stark differences that will profoundly affect all of our lives — and clear political choices to come.

Click here for the complete editorial, which lays out the differences and similarities between the Democratic and Republican plans for the nation's 46-year commitment to old age health care:

President Obama wants to retain Medicare as an entitlement in which the federal government pays for a defined set of medical services. The Ryan proposal would give those turning age 65 in 2022 “premium support” payments to help them buy private policies. There is little doubt that the Republican proposal would sharply reduce federal spending on Medicare by capping what the government would pay at very low levels. But it could cause great hardship by shifting a lot of the burden to beneficiaries. The Congressional Budget Office estimates that by 2022 new enrollees would have to pay at least $6,400 more out of pocket to buy coverage comparable to traditional Medicare.

It's an open question as to whether either proposal is the right one. Congressman Ryan's proposal would, as the Times points out, reduce spending on Medicare. It would do little, however, to reduce spending on health care as costs would simply be passed from the government to the elderly.

Unless their use is mandated and heavily regulated, the insurance vouchers are likely to be practically worthless. Individual health insurance is sold on the basis of experience-rated premiums, meaning that the claims experience of the relevant group dictates the price of an individual premium. No group requires medical care more than the elderly, and their premiums will reflect a pool consisting only of the elderly. The CBO estimate for 2022 reflects only the first year of Rep. Ryan's plan. By design, in subsequent years the value of the vouchers increases at less than the rate of medical inflation; over time, they will purchase less and less insurance. Thus, even if premiums don't go up, coverage will go down at the time of life when people need it most.

What about President Obama's proposal? Economist Laurence Kotlikoff argues that we have already passed the point of no return regarding Medicare, and that even well-executed reforms will be too little too late. Given the proven power of medical, pharmaceutical, and insurance lobbyists and given Congress' unwillingness to turn Medicare reform over to an independent commission, it's easy to imagine that many if not most reforms will be hobbled right from the starting gate.

At the end of the day, the best way to reform Medicare may be to eliminate it as a vehicle dedicated to elder health care (as the Republicans propose) and put in its place either a single program of basic benefits that covers all Americans or strong incentives to individual states to tailor universal coverage to their needs and sociopolitical culture.

Paul Krugman: Patients Are Not Consumers

Paul Krugman writes:

How did it become normal, or for that matter even acceptable, to refer to medical patients as “consumers”? The relationship between patient and doctor used to be considered something special, almost sacred. Now politicians and supposed reformers talk about the act of receiving care as if it were no different from a commercial transaction, like buying a car — and their only complaint is that it isn’t commercial enough.

What has gone wrong with us?

More here.

Consumer Driven Health Care advocates legitimately point out that health care's supply-driven economics insulate patients from costs and thereby increase them. However, CDHC counts on a degree of health literacy that isn't possible under the best of circumstances, and the United States doesn't have the best of circumstances. For example, patients rarely have access to care outside of their insurance plan, meaning that quality and competition is subject to financial penalty. Moreover, there are no standards with which patients can compare costs and quality, and even if there were, there's no way to access them.

Negotiating the U.S. health care apparatus is a daunting task for medical professionals. How can people facing potentially mortal conditions be expected to do it?

Canadian Critique: A Response

One hardly knows where to begin. Although he claims to be Canadian, Mr Bugos apparently remains ignorant of the fact that Canadian health care is not socialized. Of course, he also believes that anyone disagreeing with him is either a socialist or -- worse -- a Soviet. 


I appreciate that Mr Bugos is Canadian and that I am not; however, this renders his at times factual mischaracterization of Canadian health care all the more baffling. Essentially, his argument is one long assertion without supporting data; also, he states things like “economics teaches us” as if he were advancing a truism rather than a debatable point. A couple of observations:

• Unlike the Veteran's Administration in the United States, Canadian health care is not socialized: The government does not own and operate the means of production or service. Instead, the thirteen provincial and territorial governments administer tax-financed insurance a la Medicare (the name of the Canada’s health care system) to reimburse private providers. Thus, there is no "state monopoly in the provision of Medicare." The national government serves to set standards and to negotiate on behalf of the Canadian people. That's a good thing;
• The genesis of the Canadian health care system goes back to the mid 40s. It arose as a result of need, not a left-wing scheme to undermine the free market. Canadians believed that the free market had failed to provide equal access to quality care. The system that emerged is a statement of pragmatism, not ideology;
• Government regulation of health care is the common denominator of the health care systems of every developed nation. All -- even the United States -- have concluded to varying degrees that the health of their country and the people who reside there cannot hope to succeed based on rates of return;
• Canadians like their health care system. In 2003, 57% of Canadians reported satisfaction with their health care, compared with 25% of Americans. (Danes, who have a true socialized system, register the highest degree of satisfaction at over 90%);
• The World Health Organization does not share Mr Bugos' assessment of the poor quality of Canadian health care: It ranks their system ahead of ours (30th to 37th). Canadians live longer than Americans and have a healthier life expectancy. Their maternal mortality rate is lower than ours, and they even smoke less. And, of course, Canada accomplishes this while spending less than we do. Mr Bugos' understanding of quality seems to have the same relationship to reality as the Land of Oz;
• Canada’s health care system reflects a national egalitarian ethos that exceeds that of the United States or even France;
• The argument that American health care somehow serves as a safety valve to relieve pressure on other systems is a canard never accompanied even by anecdotes, much less actual evidence. I am immersed in this stuff, and have yet to see this particular claim seriously advanced. Here is an anecdote: One of my MHA colleagues is an interventional cardiologist, i.e., a heart surgeon. By no means is he the class liberal. Someone asked him if he had many Canadian patients fleeing the supposed inadequacies of Canada’s secondary care. He was genuinely puzzled by the question. Even someone extremely wealthy, he explained, would think twice about paying 100K for a procedure that would be performed in Canada both free and perfectly well;
• Why does Mr Bugos cite 1904 AMA restrictions as an example of unwarranted state intervention? The AMA is a private organization. This is a case of the market imposing artificial controls, not the state;
• American history suggests that when the money gets big enough (i.e., railroads, oil, telecommunications), unregulated markets will consolidate until a few major competitors emerge as price setters, a development in health care that most Americans would find unacceptable. Mr Bugos does not address this as even a possibility even though history suggests that it is a likelihood;
• Mr Bugos writes that the United States government "forced" employers to contribute to health care, the presumes to lecture about what "economics teaches us." Had Mr Bugos passed his freshman Econ class, he would know that payroll taxes are inevitably passed on to consumers. Moreover, Mr Bugos ignores altogether the impact of the Revenue Act of 1954, which established a tax exemption for employer-provided health care benefits. In what way is that government coercion?
• In the same paragraph. Mr Bugos accuses the United States government of sabotaging the free market, then touts its relative freedom. Admittedly, by then I didn't know whether he was coming or going either.

Overall, Mr Bugos makes an argument typical of the ones advanced by privatizers: It assumes a debatable premise and proceeds from there, rather than constructing a theory supported by underlying data. The result consists of cherry-picking, ad hominem attacks, and straw men. 

Canadian Critique

An associate recently forwarded the following critique of Canada's health care system, written by a Canadian Ed Bugos:

A subscriber and friend, Laurence Hunt (who has his own blog here, who lives in Canada, as do I, made some comments to the effect that the Canadian socialized medical system is better than a free market medical system.This is a very prevalent attitude in Canada.  Here was the main thrust of his argument:"The Canadian system delivers world class healthcare at half the cost due to disintermediation. The system is run like infrastructure, like the highways, and is more economical.   I'm still an advocate of government running infrastructure, as there has to be a method of collective participation. I do think that without government, the bullies would be in charge (they are hard to restrain under any system). Nothing is perfect, including freedom."The following is my response: 

Laurence I respectfully disagree with your comment. First, we would hope that healthcare is ultimately not run like "infrastructure," especially not like the highway system.  A warlock of Austrian Economics, Walter Block, who wrote a book lobbying for a return to private roads and highway, notes:"If the highways were now commercial ventures, as once in our history they were, and upward of 40,000 people were killed on them annually, you can bet your bottom dollar that Ted Kennedy and his ilk would be holding Senate hearings on the matter.  Blamed would be "capitalism," "markets," "greed," i.e., the usual suspects. But it is the public authorities who are responsible for this slaughter of the innocents."   

Aside from your comment on "infrastructure", if you are going to compare the Canadian system to the US system we need to first recognize the difference. In Canada there is a state monopoly in the provision of medical care (though not in the provision of essential goods to the medical system monopoly).In America they have had increasing state intervention into the medical industry starting with the AMA who in 1904 limited the number of doctors entering the field and closed down a bunch of schools.  This was done in the name of protecting the consumer, but in reality the doctors got together and did it to raise their incomes.They essentially created a labor monopoly within a private system.  This is typical, by the way. In Canada the state likes to control the industry; in the US monopoly power is doled out by the state but usually vests in private hands - so up here you have state monopolies and crown corporations while down there you have antitrust and cronyism...or "state capitalism" (or corporatism) - in Russia you have oligarchs. Progressively, over the years, the US government eventually forced employers to contribute, then granted the power of licensing to the states, and began to underwrite (subsidize) medical care demand a few decades ago.

Economics teaches us that when you restrict supply and subsidize demand you will get shortages and higher prices - and that's even before we throw the Fed into the mix.  The so called free market medical system in the US has been progressively sabotaged over the past century.  The universal coverage - Obamacare - is just a final straw.So the high price of medical care has nothing to do with it being relatively more private in the US than in Canada - in fact economics teaches us also that prices would fall if the industry were free from government.  So make sure to put the blame for the high cost where it belongs: on government regulation and subsidy, as usual. 

As for Canada's healthcare system costing half as much, undoubtedly the figures do not account for the lower 'quality' and the greater shortages we get here. So in reality you are getting half as much too. As the US system is more socialized you will find that our medical costs not only start to rise more, but also, their quality/availability will fall. 

Like it or not Canada has been a big beneficiary of the innovations of the relatively freer market down south in this industry.  I can attest to that personally.  If you slow down those innovations, because, say, the system is totally socialized, then our state monopoly system will suffer as well.That is, costs will rise and quality will fall.The soviets were the first to try out universal medical care.  As one of Gorbachev's economists pointed out, the system basically deteriorated to the point where a black market developed based on bribery - outside of which the doctors would quip that their patients "pretend they are paying us and we pretend we are working".  And if you were dying, they pushed you out the door so that the hospital statistics wouldn't look bad. The only reason this hasn't happened in countries like Canada that have adopted a similar system is that the rest of the economy here is not centrally planned.  Thankfully, there is a relatively free market in the goods that supply the medical provider monopoly.  And the state is loosening its grip on some provisions lately.

But the main point is that it is a matter of economic law that a private system in medical care would result in lower prices and better quality.  After all, all we want is to allow competition.  It's a ridiculous argument to say that we are better off because our government restricts competition.  Effectively, that is what our system is.In regard to your comment that "nothing is perfect, including freedom," of course you are correct.Undoubtedly nothing is perfect.  Let's not put that stick man up.  The socialists are always criticizing the imperfections of the market but the idea is not to achieve perfection.  Neither Jeff nor I nor Mises would claim the market is perfect.  Far from it. It is a matter of what is better - a state monopoly service or free market competition. 

The socialists will decry the quality of movies produced by Hollywood or the books written in a capitalistic society.  No doubt that in many cases they can produce better quality stuff - even better quality goods - if it were planned.  But the market may not want the "best" quality goods.  In a free system it gets what it wants.People get what they want.I hate what Hollywood produces personally, and it does show that the majority of people (the market) has bad taste, etc.  That doesn't mean that I would favor a centrally planned movie industry.  It would produce movies no one would want to watch even if by someone's standards they would be considered perfect.I'm sure that a centrally planned body could build better cars than we have on the road -but would everyone get one?  Would it be as cost effective without any competition?  In a market economy you would have goods that are near perfect that only a few millionaires could afford - like the Lamborghini - and you would havegoods like the Hyundai that everyone could afford.  You would have a full range for everyone.  This is just not possible through a state monopoly.We'd all either be driving the Yugo or only the despots would be driving their perfect autos.But one thing is for sure - apodictic  - competition ensures that the costs of providing goods is lower than it would be otherwise. 

In regard to your comment about the Government needing to intervene or we'd all be taken over by bullies.  How ironic to say that bullies would take advantage in a voluntary society so let's replace voluntarism with a coercive apparatus that prevents free competition.  Whenever the state controls an industry it is the coercive apparatus that is used instead of voluntary decisions that are being made.This stuff about a "bully" is another socialist tactic.  They've been using it on essential services since time immemorial.  It's almost as bad as the first stick man you used above!  But it's okay.  We're indoctrinated that way up here in Canada.  Unless you have read Mises and Rothbard you're defenseless against the socialists. In order to discredit the myth about bullies in a free market system one of my favorite authors, Frederic Bastiat, used to say: "In war, the stronger overcomes the weaker.  In business, the stronger imparts strength to the weaker."  This is 100% true.   

It is pure irony to say that the state protects the weak from bullies. The state is the biggest bully of all. It's this simple.  If you would not put the state in charge of providing electronics goods why put them in charge of providing ESSENTIAL goods?  Explain to me how anyone is "bullied" in any other industry that we'd agree was a free market industry.  I don't see it.  I see that businesses are accountable to consumers.  I also see that government is not.  I pay FEDEX for any important mail.  The post office is a great example of how government does things. Sure, it all looks great as long as there is no free market alternative. 

Free market medical care would be cheaper and it would be better.  It would be better all around.  I don't expect anyone to agree.  No one agrees, after all, that we could eliminate recessions altogether by going to a real gold standard.  They don't buy it because we've had a gold standard but we still had recessions.  For the same reason, people won't buy that a true free market would be 100 times better than what they call free medical care! They don't buy it because they see the so-called private system in the US costing more.  But they fail to credit the state with that problem, just like they failed to acknowledge that the gold standard of old was rigged too. For every story about a private doctor not treating someone, say, because the customer has no money, there are a dozen such stories under universal medical care systems where patients in dire need are either shoved out the hospital door or discharged by a death committee or otherwise mistreated.  There are many stories.  I can tell you from experience with markets in general that if I had a heart attack and no money I'm confident that the doctor in a free market system would still help me even if he wasn't going to get paid. Charity is something only a free market system can afford.

 I'll respond to Mr Bugos later in the week.

Rationing of Health Care

The cost of eliminating all medical needs, no matter how small, means forgoing the benefits of spending those resources to meet other needs, such as food, clothing, housing, and education. Forgoing these other needs is the real cost of fulfilling all of our medical needs. As no country can afford to spend unlimited resources on medical services, each society must choose some mechanism to ration or limit access to medical services.

Paul J. Feldstein, Health Policy Issues: An Economic Perspective

The question, then, becomes one of fair and effective access. If health care must be rationed, how to ration it in order to ensure the best possible outcomes across a population?

What are the costs to the United States in terms of foregone food, clothing, housing, lost wages, and education? Currently, America spends about 18%, or 2.61 trillion, of its $14.5 trillion Gross Domestic Product on health care, by far the most in the world. This amounts to a per capita expense of about about $8,400. Switzerland, the next most lavish country, spends about 12% GDP on health care, or $5100 per capita. If the United States could reduce health care spending to 12% of GDP, it would have $870 billion for the aforementioned necessaries or to invest in the economy. It could also reduce the deficit by nearly three-fourths or effectively raise average household income by over $10,000.

The Rise in Medical Expenditures (6)

What events occurred during the 1980s in both the public and private sectors to make the delivery of medical services price competitive?

The HMO Act of 1974 legitimized HMOs; the lifting of restrictive federal qualifications in the 1980s allowed HMOs to flourish.  Meanwhile, federal subsidies to medical schools increased the supply of physicians and exerted downward pressure on prices. The introduction of DRG payments incented hospitals to reduce length of stay and to monitor physician practices that increased costs.

Meanwhile, as the United States emerged from a recession, businesses eager to continue their recovery pressured insurers to better control the cost and use of services. Other practices, such as increased deductibles and copayments, prior authorization and length-of-stay reviews, and application of antitrust laws also contributed to a reduction of prices.

The Rise in Medical Expenditures (4-5)

Why were HMOs and managed care not more prevalent in the 1960s and 1970s?

Organized medicine’s success in including the concept of free choice of provider along with state restrictions retarded the development of HMOs. HMOs preclude their enrollees from choosing any physician in a community, which is a violation of the free choice concept. The government thus could not make capitation payments to HMOs, further entrenching fee-for-service as the primary form of reimbursement.

What have been the federal government’s choices to reduce the greater-than-projected Medicare expenses?

Increased Medicare expenses left the government with three choices: (1) Raise the Medicare payroll tax and income taxes on non-elders; (2) require elders to pay higher premiums along with increased deductibles and co-payments; (3) reduce payments to hospitals and physicians. Although each risks antagonizing an important constituency, government efforts have focused on reducing payments. Some policies (ending free choice of provider and increasing the supply of physicians, requiring acceptance of either all or no Medicare patients) worked better than others (utilization review, restriction on investment in new facilities and equipment, limiting fee increases).

Next: What events occurred during the 1980s in both the public and private sectors to make the delivery of medical services price competitive?

Source: Health Policy Issues: An Economic Perspective (Feldstein)

The Rise in Medical Expenditures (2-3)

Why has employer-paid health insurance been an important stimulant of demand for health insurance?

The high inflation rate of the 70s began pushing employees into upper tax brackets. Employers responded by supplanting salary increases with additional health insurance, which is not taxable. This had the effect of stimulating demand and increasing prices.

How did hospital payment methods in the 1960s and 1970s affect hospitals’ incentives for efficiency and investment policy?

Medicare’s cost-plus-2% reimbursement for services gave hospitals little incentive for efficiency and great reason to expand services even if that meant duplicating services available in nearby hospitals. Meanwhile, physicians pressured hospitals to invest in new technology so that they would not have to refer patients elsewhere, and possibly lose them. Typically, patients covered by hospital insurance were hospitalized for diagnostic workups. Less expensive outpatient services were usually not covered.

Next: Why were HMOs and managed care not more prevalent in the 1960s and 1970s?

Source: Health Policy Issues: An Economic Perspective (Feldstein)

The Rise in Medical Expenditures (1)

Paul J. Feldstein is Professor and Robert Gumbiner Chair in Health Care Management at the Paul Merage School of Business, University of California-Irvine. Feldstein has written six books and over sixty articles about health care, including Health Policy Issues: An Economic Perspective, a standard text in Public Health and Health Care Administration programs. Over the next few months, HealthMatters will publish responses to the discussion questions in Professor Feldstein's book, starting with:

What are some of the reasons for the increase in demand for medical services since 1965?

A) Medicare lowered out-of-pocket prices for elders, leading to an increase to an increase in demand for hospital and physician services.

B) In the late 1960s and 1970s, growth in income, the high marginal tax rate, and inflation (which pushed people into higher tax brackets) stimulated growth in private insurance. Employers took advantage of a tax subsidy to provide more before-tax insurance, which in turn stimulated demand.

C) As out-of-pocket expenses declined, patient incentive to worry about price declined, thus increasing use of services.

D) Advances in medical technology not only allowed patients with previously untreatable diseases hope for recovery, it increased their use of medical services.

E) The arrival of new diseases (such as AIDS).

Next: Why has employer-paid health insurance been an important stimulant of demand for health insurance?