PLANK NOVEMBER 28, 2012
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Republicans say that if you’re serious about reducing the deficit, you have to get serious about restructuring Medicare and Medicaid. Many of Washington’s fiscal scolds agree. Their argument hasn’t gotten much attention in the last few weeks, but that’s probably about to change because Republicans are demanding that the two entitlement programs—along with the Affordable Care Act—be part of negotiations over how to avoid the so-called fiscal cliff.
These folks have a point. The rising cost of Medicare and Medicaid is the single biggest reason that, in the future, federal revenue won’t keep up with federal spending. The gap isn’t going to close unless health care spending comes down. And if it doesn’t close, future generations will be stuck with higher taxes, cuts to other federal programs, and/or potentially crippling deficits.
But it’s a mistake to think that health care spending has to be cut right now. Strange as it sounds, the best strategy for reducing the deficit might be to delay making those reductions—at least until we know whether we need to make them at all.
The debate about government health care programs and the deficit is, in a sense, the same one that conservatives and liberals have been having for nearly two decades. Conservatives see Medicare and Medicaid as expensive government programs that interfere (wrongly, in their view) with the free market. If they had their way, they’d enact the sorts of changes Paul Ryan proposed in the House and Mitt Romney promoted on the campaign trail. Medicare would turn into a premium-support scheme, in which seniors would use vouchers to buy private coverage and the guarantee of benefits would be weaker than it is today. Medicaid would turn into a “block grant,” in which the federal government would write the states a check and allow them to spend it as they see fit. These ideas obviously won’t come to pass, at least not as long as President Obama wields the veto pen. But conservatives are still pushing for substantial changes, starting with a higher eligibility age for Medicare.
President Obama has flirted with some modest versions of these ideas. During the 2011 negotiations over the debt ceiling, he suggested he’d support a deal that included a higher Medicare age, much to the horror of liberal supporters (like me). And his most recent budget called for, among other things, higher charges to upper-income beneficiaries. But he's never endorsed the radical, wholesale changes conservatives support. And since the election he has made clear his preference for reforms that affect providers, not beneficiaries. He’d agree to reduce what Medicare pays drug companies, for example, but not reduce the medical services the program covers. Obama’s allies have said basically the same thing, only in more emphatic terms. In a joint letter earlier this month, Democratic Senators Tom Harkin and Jay Rockefeller wrote, “We urge you to reject changes to Medicare, Medicaid, and Social Security that would cut benefits, shift costs to states, alter the structure of these critical programs, or force vulnerable populations to bear the burden of deficit reduction efforts.”
These liberals aren’t ignoring fiscal reality. They’re actually making a smart argument about how to balance two priorities—reducing the deficit and protecting the people on Medicare and Medicaid. Contrary to what conservatives say and even many centrists seem to believe, the high cost of Medicare and Medicaid isn’t a by-product of government inefficiency. On the contrary, Medicare historically has held down costs as well as, if not better than, private insurance on a per capita basis. That’s thanks, in part, to the administrative advantages of a centralized government program and Medicare’s enormous power to set prices. Medicaid is cheaper still, to the point where, honestly, it's underfunded. The programs keep getting more expensive, relative to inflation, because medical care keeps getting more expensive—and, in the case of Medicare, because of the increase in the number of people coming on the program. That’s due to a variety of factors: paying too much for services and to the people who provide them; delivering a lot of treatments that are unnecessary, unhelpful, or even harmful; focusing too much on acute treatment when we should be focusing on preventative care and other ways of keeping people healthy.
Solving some of these problems is relatively straightforward, at least on paper. If Medicare is paying too much for a health care service or product, the government can simply insist that the program pay less. But imposing these changes too severely or quickly threatens disruptions: If providers don’t get enough money to cover their costs, they’ll perform fewer services or see fewer patients—sometimes, in ways that make it difficult for people to get care they need. The system can tolerate only so much shock at any one time.
And that’s the easy stuff. When it comes to the more complicated causes of health care inflation—focusing on prevention, shifting to treatments that have more proven effectiveness, improving the quality of care—we are still learning how to mitigate those. If Medicare offers doctors incentives to form cooperative groups, for example, will they respond—and will they become more efficient? If malpractice law changes, will the price of health care actually come down—and will quality actually improve? And so on. On these and other issues, doing too little is a danger, but so is doing too much.
Some of this work is already underway, thanks to the Affordable Care Act. Among the most common criticisms of the law is that it did very little to address the cost of health care. That’s nonsense. It’s arguably the most ambitious effort to reduce the cost of medical care in history. It captured some of the obvious sources of savings, such as overpayments to insurers that offer a private coverage alternative to Medicare beneficiaries, and it launched dozens of pilot programs, testing out schemes to make health care more efficient—everything from reducing payments to hospitals with high rates of inpatient infection to “bundling” payments so that Medicare isn’t simply providing financial incentives to perform more tests and treatments.
The Congressional Budget Office projects that, on net, Obamacare will reduce the deficit [pdf]. And that's based on conservative assumptions: The CBO didn’t assume huge savings from those pilot programs. If those pan out, the deficit reduction will be even greater. They very well might be. Although past efforts have not always panned out, it will only take a few successes to make a dent in health care spending, and it takes only a few conversations with executives to realize that the health care industry really is trying to reinvent itself, in no small part to accommodate the new incentives of the law. There’s still room for more reforms along these lines. A recent report from the Center for American Progress offered a series of ideas, some of which Obama had already proposed in his new budget. But it’s not the kind of savings some conservatives have in mind.
And that’s OK. Conservatives and groups like Fix the Debt have set some fairly ambitious goals for deficit reduction, at least on paper. But the long-term goal of fiscal policy should be to stabilize the debt-to-GDP ratio—in other words, to make sure federal debt isn’t rising out of proportion to the wealth that the nation is generating. As a recent report from the Center on Budget and Policy Priorities pointed out, it’s possible to achieve that goal for the next decade or so without dramatic cuts to entitlements. Stabilizing the debt-to-GDP ratio after the next decade would indeed require additional revenue or spending cuts, but, at this point, why not wait and see whether the Obamacare reforms do the job? It’s entirely possible they might. If they don’t, we can make further adjustments in the future, whether those involve agreeing to higher taxes, lower spending, or bigger deficits.
No, that’s not an appealing option. But neither is cutting benefits now. Jared Bernstein, the former Obama Administration economist now at the CBPP, put it well on his blog: “Now’s the time to watch and evaluate, not to reduce access to what is a highly efficient, effective form of health coverage for the nation’s seniors.” The advocates for deep entitlement reductions don’t seem to realize that the people on Medicare and Medicaid need the protection those programs provide—and that, without those programs, they’d suffer. Given the very significant chance we can reduce health care spending without reducing benefits, we have an obligation to try. It’s the compassionate thing to do. And the smart thing, too.
9 comments
"If Medicare offers doctors incentives to form cooperative groups, for example, will they respond—and will they become more efficient?" Are you referring to ACOs, or less formal alliances among otherwise unrelated physician groups? So much of the integration in the industry today is built around hospitals, which are the most inefficient of the providers. Indeed, we recently crossed the point where more than 50% of physicians now work for hospitals. Does this model improve efficiency and lower costs? Hardly. The employed physicians don't have a real choice to perform procedures in free-standing outpatient facilities, where the reimbursement rate is much lower. Indeed, hospitals are busy acquiring outpatient facilities and converting them to HOPDs (hospital outpatient departments) in order to obtain the higher reimbursement rate for hospitals - the same procedure but at a multiple of the reimbursement rate as compared to the rate for free-standing outpatient facilities. Hospitals are like giant black holes, sucking up all the oxygen as well as most of the money spent on health care. The recent experience of HCA, the large hospital company, which went private several years ago, changed the coding for procedures (upcoded), significantly increased revenues, then went public again to the benefit of a few private equity owners (including Bain, whose share of the "profits" exceeded $1 billion), is but one outrageous example of free enterprise in health care run amok. And so-called not for profit hospitals (so-called because they don't operate for free) are often worse than for profit hospitals such as HCA hospitals. With hospitals, the only instrument that works is the blunt instrument, such as the new Medicare rule which provides zero reimbursement for a patient re-admitted within a short time. Ask yourself: does a hospital want more patients or fewer patients? As for innovation, there's hope. The VA along with some enterprising and smart people in the private sector have been developing remote monitoring systems for severely wounded soldiers, permitting the soldiers to live with their families rather than in medical institutions, but without increasing risk to the patient if the patient needs care. This new technology is being introduced in the civilian sector, where it will have enormous potential for reducing costs without sacrificing care. Of course, hospitals won't like it.
- rayward
November 28, 2012 at 8:20am
Forget the deficit, at least for the moment. Seriously. We are being led down the primrose path. I am not taking the Paul Krugman idea strictly speaking, that we should ignore it because it doesn't matter, although that may be true. I am saying we should place it behind other greater issues being artfully shoved out of the scene.Why has no one noticed that the right and the Republicans are cleverly setting the agenda: let's forget, they are saying as they quietly sweep it under the rug with their three ring circus, about jobs and stimulus---which still seems more important to me than deficit reduction right now by a long way. "We will divert you with Susan Rice" (to cause general political confusion and battle fatigue), CEOs being reverently covered on CBS as saviors of common sense about reducing the deficit and a general pre-emption of the reigning narrative. If we are overloaded talking about deficit, deficit. deficit, who will dare talk about jobs, job, jobs? And it is working. Journalists dutifully cover each little partisan squabble with the importance of quantum physics without one glance at the greater cosmology. (That said, the article does have some great points about the future of Medicare and Medicaid to be consider in due time.)
- atlasqq
November 28, 2012 at 10:01am
Rayward is absolutely correct in his description of where healthcare is headed and the buyer needs to be aware: Hospitals are buying up doctor practices, out patient imaging centers and out patient surgical centers so they can garner high reimbursements. Doctors are selling out to hospital based systems because they can no longer financially afford to operate practices on their own due to reimbursement squeezes and rising operating costs. The old fashion free standing private practitioner is becoming a bargain because they are unable to bill the excessive amounts hospital centered systems can. But this bargain is quickly disappearing. Consumers need to know this. This trend is increasing yet another layer of the unchecked health industry. Atul Gwande described the Cheesecake Factory approach towards medicine in his New Yorker article, where high volumes of patient care are moved through "efficient" health system organizations. That is what this reorganization is heading toward. I am not sure seniors will like the impersonal approach hospital care systems will offer toward their complex care. Perhaps they would prefer the personal touch of a "local restaurant" over the Cheesecake factory approach. At some point we need to address the white elephant in the room that is the cost of the industry of health care in the US: high pharmaceutical costs, excessive markup of medical equipment, devices and supplies in addition to the inefficiency and high cost of hospital centered health care.
- esnmd
November 28, 2012 at 10:28am
Republicans say that if you’re serious about reducing the deficit, you have to get serious about restructuring Medicare and Medicaid. Today, Joe Scarborough said had he his way, no tax revenue until entitlements are resolved. Until then, nothing. That is what is wrong with divided government. The principle: "We're going to force stupidity on the country until you give us our way." No conclusive evidence says lower top rates and cap gains cause growth (Congressional Research Service). When Bush dropped top rates and increased the cap gain dividend preference, jobs dropped from 8 million under Clinton to 2.7 million under Bush. $16 trillion says raise top rates no matter what.
- Nusholtz
November 28, 2012 at 12:00pm
I don't understand how raising the eligibility age for Medicare supposed to reduce the deficit. Wouldn't those people have to find insurance through Medicaid, the exchanges, or delay retirement to stay on the employer's plan? Isn't this much more a case of cost shifting than cost reduction. Last month I received an email from our Human Resources offices that next year's premiums would be reduced and a few benefits were added? Not a lot of change but the first time in 30 years I recall a reduction. I wonder if this is a trend or an isolated case.
- brthompson
November 28, 2012 at 12:28pm
Great comments, all above! I wish you guys were in Washington. Here's a thought about the no tax cut reform unless you cut the safety net (I refuse to use that word "entitlements"): it's a totally bogus argument on a number of levels. But on one level alone, why is it even rational to compare raising taxes on people who can well afford to part with a few bucks to slashing services and (usually earned Social Security) dollars from people who are already struggling? A few less dollars to the rich are meaningless. Less dollars to the poor are life and death. There is simply no comparison to the "sacrifice." It's the difference between the eggs and bacon. The chicken is involved, the pig is committed. Well the poor and old and sick and disabled are COMMITTED. We're supposed to make our suffering equivalent to that of a rich person parting with a few dollars? Give me a break. It is shameful that this false equivalence is even on the table. Shame on the GOP. And shame on the Democrats if they entertain this bs. Working class and real middle class (ie around $50/K per annum per family) people have no slack. Seniors and disabled people often have zero slack and many are poverty stricken as it is. This includes Medicaid assistance not only to acutely ill people but also to families struggling with kids who have chronic disabilities. There is no other help for them. Ditto seniors who need long term assistance such as nursing homes. Old people can't afford any cuts period and demanding that senior citizens who are already suffering from ailments give up Medicare until whenever and/or delay retirement is nuts. Some professions, yes, you can keep working longer IF you can find the work. Other jobs are just too physically and psychically damaging and then there's a scarcity of work plus ageism. So even if you want to work you can't. Or you're working for so little you can't pay rent let alone health care. The assumption in Washington must be that everybody is making at least $100,000 per annum doing mentally rewarding, physically easy, stress free work I guess but that's ridiculous. And some jobs have mandatory retirement ages. So should forcibly retired airline pilots work at Walmart or what? And pay for their health care how? Delaying the age when Medicare kicks in is crazy. Once you're over 50 you start getting stuff, age related illness and also people start getting really sick and dying. That's also when you're most vulnerable to losing your job and hence your health care benefits. If Obamacare proves to lower costs and truly makes health care affordable for the over 50 group and until, say, age 70, then we can discuss restructuring Medicare. Otherwise it will make things that much worse. Even if you get Medicare now you are not necessarily eligible for supplemental insurance and/or it's unaffordable. That means you're left uncovered for at least 20% of your health care costs and a simple trip to the doctor can amount to hundreds of bucks, let alone if you are seriously ill. So, right. Let's make older, sicker people go without Medicare for longer and also make them work longer, force parents with disabled kids to give up any assistance, leave the disabled in even worse poverty in order to induce rich people to pay a little more, which they won't even notice. Humbug.
- Sophia
November 28, 2012 at 12:48pm
PS aren't the Republicans after food stamps too? Read: http://opinionator.blogs.nytimes.com/2012/11/27/hunger-in-plain-sight/?hp
- Sophia
November 28, 2012 at 1:15pm
esnmd writes: "At some point we need to address the white elephant in the room that is the cost of the industry of health care in the US: high pharmaceutical costs, excessive markup of medical equipment, devices and supplies in addition to the inefficiency and high cost of hospital centered health care." The items you call out aren't in isolation. EVERYTHING about our medical system is expensive. From doctor's salaries to drugs, to the number of nurses on the floor, to the administrators, the the niceness of the facilities, to how often we like to visit the doctor. Everyone I ever talk to in medicine feels THEY aren't the problem. It's the other stuff. It's not. It is across the board. Everyone and everything is the reason our health care system is so expensive. One by one, these things that differentiate use from other health care systems will all go away. The exotic and effective drugs. The expensive screenings. The nice facilities. An MRI machine on every corner. The fact that doctors used to be among our brightest students. They already have in other medical systems. As will our ability to excel at treating really complicated, really hard diseases. Remember how we got here... Insurance became a fringe benefit to upper employees when marginal tax rates went sky high 50 years ago. Employers heaped country club memberships, health care, company cars, expense accounts--everything they could to avoid paying upper employees cash salary, because the cash was taxed. The benefits were not. In response, doctors learned how to cater to insurance companies rather than the customer. And in the beginning, it worked well. Employers were generous, thus insurance companies were generous, and a doctor that took care of an insurance company for a large employer had a sweet gig. A 4 day work week and a fat salary. Sweet indeed. But then the squeeze came. Employers squeezed the insurer, and insurers squeezed the doctor. And since the doctor had forgotten how to deal with customers with cash in hand and had become so dependent on the insurers, they were screwed. And the screwing continues. Gone are the days where I could get a cheap $10K catastrophic care policy and pay for broken arms and sore throats out of my savings account. Shame really. But never forget where we are today is largely in response to employers helping employees avoid sky high tax rates. And because doctors wanted to make the easy money. And because consumers wanted something "for free," not realizing actually that it wasn't free. We get the health care system we ask for.
- seattleeng
November 29, 2012 at 1:50pm
Sophia writes: "PS aren't the Republicans after food stamps too?" The atlantic and PBS reported last March that the poorest households spend 9% of their income on lottery tickets. And the poorest households are very likely smokers too, spending some 10% of their income on smokes. Thus, we have a lot of poor households spending 20% of their money on smokes and lottery tickets. I suspect a huge part of our welfare spending is going to smokes and lottery tickets. And strip clubs and liquor stores. I suspect if a poor person has a dollar to buy a lottery ticket, then it's 100% certain that we overpaid their welfare by at least $1. Agree?
- seattleeng
November 29, 2012 at 1:56pm