NOVEMBER 28, 2012
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.