Category Archives: Medicare

Is A Free Market Possible in Health Care?

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With a total national debt of $17.8 trillion, of which close to $13 trillion is public debt (on which we pay interest), it is easily understood that the U.S. has a very serious fiscal problem. At the present time the public debt is 74% of GDP and this already high percentage is predicted by the Congressional Budget Office to keep growing indefinitely.
The biggest driver of spending growth going forward is the cost of healthcare.  For example just the three programs, Medicare ($492 billion), Medicaid ($280 billion) and Veterans Healthcare ($54 billion), cost a total of $826 billion per year in federal dollars.  And these costs are all increasing rapidly.  Of course, private healthcare spending, currently about $2 trillion per year, is also growing rapidly.  Overall, the U.S. spends 17.3% of GDP on healthcare spending, public and private, almost twice as much as any other developed country.
How are we going to address this enormous cost issue going forward? The Affordable Care Act (aka Obamacare) doesn’t do it.  What it does do is to provide healthcare to more people under our current model of employer provided health insurance with Medicare for the elderly and Medicaid for the poor.  It is this model which is broken and must be reformed. Basically we have two choices for how to do this.  Either we switch over to a “single payer” system like most of the other developed countries have or we establish a far more efficient free market system.
Capture  As the above chart shows, right now we have a composite system and it is just not cost-effective. There are plenty of experts who claim that a free market cannot work in healthcare.  For example, the tax lawyer, Edward Kleinbard, in a new book, “We Are Better than This: how government should spend our money” argues that what a free market gives us is:  unavoidable controversy for excluded pre-existing conditions, moral hazard for risky behavior, uncertain premiums for permanent insurance, fragmented healthcare markets, monopoly provider organizations leading to price opacity, very high administrative costs, etc.
Capture1The Manhattan Institute’s Avik Roy has a different point of view.  In his proposal, “Transforming Obamacare,” (http://www.manhattan-institute.org/pdf/mpr_17.pdf) he points out that there are two countries, Switzerland and Singapore, which operate highly regarded free-market healthcare systems at very low public cost. Stay tuned for further discussion!

Why Medicare Needs to Be Reformed and How to Do It

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My last post, “Fixing Obamacare Rather Than Repealing It,”presents a comprehensive new healthcare reform proposal by Avik Roy of the Manhattan Institute.  His plan has the ambitious goal of expanding health insurance coverage beyond ACA levels and at the same time achieving a huge deficit reduction compared with current CBO projections.
Capture1Mr. Roy points out, for example, that for all of Medicare’s huge cost, $635 billion in 2014 alone, it does not provide catastrophic coverage against long-term hospitalizations.  The supplemental insurance program, “Medigap,” accelerates Medicare’s wasteful spending by wiping out cost-sharing features such as co-pays and deductibles.  Medigap has proven hard to change because it generates huge royalty fees for the AARP, $458 million in 2011, for example.  For all of these reasons and others, Medicare needs big changes.
The core Medicare reform of Mr. Roy’s Universal Exchange Plan is to increase the eligibility age by four months per year forever, beginning in 2016.  This means that current seniors can stay in the existing Medicare program but that future retirees will remain in the universal state-based exchanges for an increasing period of time.  This is estimated to save $6.5 trillion over 30 years.
Additional features of the new Medicare program are:

  • Reduce Medicare subsidies for hospital’s uncollected bills saving $4 billion per year.
  • Exempt Medicare Part C and Part D from state and local taxes.
  • Combine Part A and Part B into a single insurance product saving $30 billion per year by reforming Medigap.
  • Introduce additional means-testing into Part D premiums.
  • Reduce waste, fraud and abuse systematically, saving approximately $50 billion per year.
  • Restore the ability of seniors to opt out of Medicare.
  • Restore the pre-ACA tax subsidy for employer-sponsored retiree coverage (to encourage more employers to sponsor retiree health benefits).
  • Address the physician shortage through additional medical education funding costing $6 billion per year.

Medicare spends 30% of its overall budget on end-of-life care (for the last six months of life).  The reforms suggested by Mr. Roy will allow it to operate much more efficiently and thereby put a greater focus on the end-of-life care which is its fundamental purpose.

How to Control Federal Spending II. A General Approach

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“Life’s tragedy is that we get old too soon and wise too late”

Benjamin Franklin, 1706 – 1790

CaptureThe above chart from the  Congressional Budget Office’s latest budget forecast “Updated Budget Projections: 2014 to 2024” shows very clearly how the public debt (on which we pay interest) has climbed dramatically in the last six years, as a percentage of GDP, and is projected to keep on growing indefinitely.  As the economy improves and interest rates return to normal levels, interest payments on the debt will skyrocket and become a permanent drag on future growth.
In a recent post “How to Control Federal Spending: The Highway Trust Fund” I pointed out that thanks to the Budget Sequester Act from 2011, it is unlikely that the $35 billion Highway Trust Fund, supported by an 18.2 cent per gallon federal gasoline tax, will be supplemented by general government revenue, paid for by increasing the deficit. In other words, discretionary spending is under control at the present time due to the ten year sequester limits.
But this makes up less than 1/3 of the federal budget, the rest being “mandatory” entitlement spending, for such programs as Social Security, Medicare and Medicaid.  This is where the huge projected future growth in overall federal spending comes from and therefore where we need to focus on budget control.  The huge challenge is that the number of Americans who are retired, now about 50 million, is growing rapidly.  Furthermore, older citizens vote in greater proportion than any other age group and don’t want their benefits to be cut. Elected representatives need help to resist the pressure from senior citizens for greater benefits.  Here are two possible ways to provide this help:

  • A Balanced Budget Amendment to the U.S. Constitution. It would have to be flexible enough to allow overrides for emergencies by a supermajority vote, but otherwise it would force Congress to either cut spending or else raise taxes to bring in more revenue. The tradeoff between these two alternatives would create the discipline to make the hard choices required.
  • Term Limits for national office. I would choose 12 year limits for both the Senate and the House of Representatives but other choices are possible. Knowing that one’s time in office is limited will help provide the strength to make the difficult decisions to either cut spending or raise tax revenue. New members of Congress are more independent thinking than the careerists whose main goal is to get reelected.

Either of these two possible changes in the rules would help turn things around.  We need to do something before we have another financial crisis much worse than the last one!

Why Debt Matters II. “Go for the Heart”

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The author and lecturer, David Horowitz, has just published a little pamphlet,”Go for The Heart: How Republicans Can Win” describing how conservatives are being outmaneuvered on the campaign trail.
Capture“Year after year the Democrats’ campaign themes are monotonously familiar. They rely on scaring the voters by accusing Republicans of the same imaginary crimes: Republicans are a party that wages war on women, minorities, and vulnerable Americans. They don’t care about the vulnerable and the poor. Their policies inflict pain on working families to benefit the wealthy few.”
“ ’Caring’ is not one among many issues in a democratic election. It is the central one. Since most issues are complex and require too much information, voters care less about policy than about the candidates themselves. Above everything else they want to know who they can trust. Far more important to voters than a particular policy, they want a candidate or party who cares about them.”
“Behind Republican campaign failures lies an attitude that reflects an administrative rather than political approach to election campaigns. Such an approach focuses on policies for running the country and fixing problems rather than the political aspect of the electoral battle.”
In other words, fiscal conservatives must make a compelling moral case why it is so important to stop spending money that we don’t have.

  • By piling up more and more debt year after year, we are creating a huge burden for future generations. Is this the legacy we want to leave for our children and grand- children?
  • If we do not control the growth of entitlement programs, we are endangering their very existence. It’s ordinary people with average incomes who will need Social Security and Medicare when they retire. It’s our moral obligation to keep these programs sound for their sake!
  • Boosting the economy with lower tax rates has nothing to do with helping the rich. In fact, it’s the rich who benefit from the tax loopholes and preferences which must be eliminated to pay for these rate cuts to benefit the people who really need them!
  • Insisting on a work requirement for welfare recipients is demonstrating the tough love that they need to gain the dignity of becoming productive citizens. We need to give them a hand as well as a handout!

These are just a few examples of ways that conservatives can address the debt and deficit issues in a positive, and non-punitive, manner. Thanks to Mr. Horowitz I will attempt to take this approach consistently from now on.

Invested in America

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The Business Roundtable, an association of chief executive officers of leading U.S. companies, has just issued a new report, “Invested in America: A Growth Agenda for the U.S. Economy”, describing four actions which policymakers can take to rejuvenate the U.S. economy.
CaptureThey are:

  • Restore Fiscal Stability: constrain federal spending in a manner that reduces long-term spending growth, making both Medicare and Social Security more progressive and less expensive.
  • Enact Comprehensive Tax Reform: adopt a competitive, pro-growth tax framework that levels the playing field for U.S. companies competing in global markets.  Several studies estimate that cutting the U.S. corporate tax rate by 10 % (e.g. from 35% to 25%) would boost GDP by 1% or more.
  • Expand U.S. Trade and Investment Opportunities: pass updated Trade Promotion Authority legislation and use TPA to complete many new trade agreements which are already pending.
  • Repair America’s Broken Immigration System: increase the number of visas for higher skilled workers and provide legal status for the millions of undocumented immigrants currently living in the U.S.

These are the same “big four” policy changes which many progressive business leaders as well as evenhanded think tank experts often recommend.  They are really just common sense ideas which reasonable people should be able to come together on.
Isn’t it obvious that we’ll soon be in big trouble if we don’t get our enormous budget deficits under control?  And that controlling entitlement spending is key to getting this done?
Isn’t it just as obviously commonsensical that even U.S. based multinational corporations will try to avoid locating business operations in countries like the United States with very high corporate tax rates?
Isn’t it likewise obvious that foreign trade is just an extension of domestic trade and that the world is better off with as much trade as possible?
Finally, the secret of a vibrant, growing economy is to encourage as much initiative and innovation as possible.  Who take more initiative than the immigrants who figure out how to get here in the first place?
We don’t have to accept a sluggish economy, high unemployment and massive debt!  But we do need to take intelligent action to extricate ourselves from the predicament we are in!

Fundamental Tax Reform Is the Key to Solving Our Economic and Fiscal Problems I. Why Change Is Needed

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I have been writing this blog for just over a year.  It addresses what I consider to be the two biggest problems faced by our country at the present time.  First is our enormous national debt, now over $17 trillion, and the huge annual budget deficits which are continuing to make it worse.  The second problem, of equal magnitude, is our slow rate of economic growth, about 2% of GDP annually, ever since the Great Recession ended in June 2009.
CaptureThese two problems are closely related.  If the economy grew faster, federal tax revenue would grow faster and the annual deficit would shrink faster.  Not to mention that a faster growing economy would create more jobs and lower the unemployment rate, which is still a high 7%.
The impediments to solving these problems are huge.  Our public debt, on which we pay interest, is now over $12 trillion or 73% of GDP.  Although it may stabilize at this level for a few years, it will soon begin climbing much higher, without major changes in current policy.  This is primarily because of exploding entitlement spending for retirees (Social Security and Medicare) who will increase in number from about 50 million today to over 70 million in just 20 years.  As interest rates return to normal higher levels, just paying interest on the national debt will become, all by itself, a larger and larger drain on the economy.
The impediments to faster economic growth are increasing global competition, such as inexpensive foreign labor, as well as rapid advances in technology, such as electronics and robotics.  Both of these trends reduce the need for unskilled workers in America which in turn holds down wages and slows down economic growth.
At the same time we have an antiquated tax code to raise the huge sums of money necessary to pay for a large and complex national government.  It worked fine through the post-World War II period, as long as the U.S. had the dominant world economy with little significant competition from others.  But this situation no longer exists.  We now have a tax system which doesn’t raise enough money to pay our bills and at the same time is so progressive that the highest rates (39.6% on individuals and 35% for corporations) are not sufficiently competitive with other countries.  This discourages the entrepreneurship and business investment we need to grow the economy faster and create more jobs.
We have an enormous problem on our hands!  Is it possible to fundamentally change our tax system to turn things around?  My next post will answer this question in the affirmative!

Controlling the Cost of Healthcare

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The New York Times is running a series of articles, “Paying Till It Hurts,” giving many examples of the very high cost of healthcare in the U.S. today.  The latest article “As Hospital Prices Soar, A Single Stitch Tops $500”, focuses on the high cost of emergency room treatment around the country.
We spend 18% of GDP on healthcare, twice as much as any other country in the world.  It is specifically the cost of healthcare entitlements, Medicare and Medicaid, which is driving our huge deficits and rapidly growing national debt.  But to limit the cost of these entitlement programs, we first have to address the more fundamental problem: how to control the overall cost of healthcare in general.
Our current healthcare system, a combination of private insurance and government programs, is very inefficient. The basic problem is that the tax treatment of employer provided health insurance takes away the incentive for individuals to control the cost of their own care.   And Obamacare does not solve this problem, because it just extends the present system to more people, rather than revamping it.
There are essentially two different ways to transform our current healthcare system to make it far more efficient.  One way is to turn it into a single payer system, like what most of the rest of the world has.  This could be accomplished by simply expanding Medicare to everyone.  Costs would then be controlled by government regulation which would, of course, include rationing.  Given the unpopularity of Obamacare, with all of its mandates and uniform coverage requirements, it is unlikely that Americans would be happy with such a highly proscribed single payer system.
The alternative is to change over to a truly consumer based, market oriented system.  This could be accomplished by limiting the present tax exemption for employer provided insurance.  For example, the current system could be replaced by a (refundable) tax credit equal to the cost of catastrophic insurance (i.e. insurance with a very high deductible).  All other healthcare costs, whether paid for directly by consumers or through insurance, would be with after tax dollars.  Subsidies could be provided to lower income people through the Obamacare exchanges.  Once such a system is set up and running smoothly, it could fairly easily be extended to encompass Medicare and Medicaid.
Insurance companies selling catastrophic coverage would negotiate with hospitals and other healthcare providers to get the lowest possible prices for their customers.  In other words, both insurance companies and providers would compete in the open market to deliver healthcare products at the lowest possible cost.
Something along this line will have to be done and the sooner we get started the better!

Why Is Obamacare So Unpopular? Because It’s Too Coercive!

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The individual mandate for health insurance, upheld by the Supreme Court a year and a half ago, is now leading to millions of policy cancellations in the individual insurance market.  The mandate overrides any existing policy which does not provide minimum coverage.  The employer mandate, stipulating that any business with 50 or more employees must provide health insurance for all fulltime employees, has caused many businesses to replace fulltime employees with part-timers.
But these are not the only forms of coercion under Obamacare.  As reported in yesterday’s New York Times, “Court Confronts Religious Rights of Corporations”, the Supreme Court is expected to accept a case involving the Hobby Lobby’s refusal, on religious grounds, to pay for insurance coverage for the contraceptive coverage which is required to meet minimum standards.
It would be much better to replace all of these coercive mandates with economic incentives.  This could actually be done in such a way that would also make healthcare less expensive, thereby giving a big boost to our economy.  Here is one way to do this, as I discussed in my November 14, 2013 post:

  • Provide a flat and universal tax credit for health insurance coverage which applies to everyone and not just for employer provided healthcare.  The (refundable) credit would be roughly the amount necessary for catastrophic insurance coverage.
  • Convert Medicare and Medicaid into a means-based addition to this tax credit.
  • Everyone with continuous coverage (paid for by the tax credit) would be protected from price spikes or cancellations if they get sick.  This provides a strong incentive for everyone to buy and retain coverage.

It is entitlement spending which is driving our country’s fiscal crisis.  And healthcare programs such as Medicare and Medicaid make up a big part of entitlements.  In order to get these costs under control, we need to first get the cost of private healthcare under control.  The best way to do this is with economic incentives rather than coercive mandates.
Obamacare doesn’t need to be repealed.  It could just as well be modified and improved as described above.

The Floundering of America

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In yesterday’s Wall Street Journal, columnist William Galston talks about “The Floundering of America”.  Based on recent reports from the Congressional Budget Office, Mr. Galston says that “Today we are hurtling toward a less dynamic economy, a meaner society and a riskier world.”
His argument is based on these observations:

  • For the past 40 years, 1970-2010, the labor force expanded at an average rate of 1.6% per year.  It will soon slow to only .4% annual growth, because of more retirements and a plateauing of women’s labor-force participation. This means that growth in GDP will slow down to about 2% annually from its historical average of over 3%.
  • America is aging very fast.  Today there are 57 million Social Security beneficiaries which will increase to 76 million in 2023.  Obviously this will rapidly increase entitlement spending on retirees.
  • America already spends 18% of GDP on healthcare costs and the CBO projects that this will grow to 22% by 2038.

“In sum, current trends and policies will yield lower rates of economic growth, painfully slow gains in real incomes, huge increases in outlays for expenses related to an aging population, and a health sector that devours more and more of the national product”, he says.
These trends are all contributing to an explosion of the national debt.  The only current strategy to keep this debt even roughly stable during the next decade, let alone reduce it, is to shrink discretionary spending through sequestration.  This will lead to a decline in discretionary spending to 5.3% of GDP by 2023.  This means roughly 2.6% of GDP for national defense with an equal share or all other domestic purposes.
“This is pure folly”, says Mr. Galston. “The country needs a new national strategy for a viable future.”
How do we achieve a new strategy?  Immigration reform will increase the size of the workforce.  Tax reform could boost the economy by encouraging business expansion, risk taking and entrepreneurship.  True (consumer-driven) healthcare reform could dramatically lower the cost of healthcare.  In other words there are potential policies out there that address our national floundering. We simply need leaders who are capable of going beyond partisanship in order to help create a better future!

Nowhere to Cut? II. Are You Really Trying?

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The New York Times has a story today, “A Dirty Secret Lurks in the Struggle Over a Fiscal ‘Grand Bargain’”, suggesting that there are really two reasons why the House-Senate Budget Conference Committee, chaired by Representative Paul Ryan and Senator Patty Murray, is unlikely to accomplish very much.  The simple reason is that the Republicans will not support tax increases, on which the Democrats insist, and the Democrats will not support major changes to entitlement programs, on which the Republicans insist.
But the “dirty secret” (according to the NYT) is that Republicans don’t really want to trim either Social Security or Medicare, which many Tea Partiers receive, and Democrats don’t really want to raise taxes on the upper income individuals who support them.  Furthermore, the deficit for 2013 was “only” $680 billion, and is expected to drop further in the next few years, while interest rates are so low that borrowing hundreds of billions of dollars each year is not expensive.  In other words, just kick the can down the road.  Let somebody else worry about the problem in the future.
My previous post “Nowhere to Cut”, based on the report from the Congressional Budget Office, “Options for Reducing the Deficit: 2014 – 2023”, picks 14 possible budget cuts or revenue enhancements out of a total of 103 such items listed.  Just these 14 items alone amount to a savings of $566 billion over ten years, more than enough to offset half of the entire sequester amount.
For example, raising the eligibility age for Medicare to 67 would save $23 billion (over 10 years), using the ‘chained’ CPI to measure inflation for all mandatory programs would save $162 billion, tightening eligibility for food stamps would save $50 billion, taxing carried interest as ordinary income would save $17 billion, limiting highway funding to expected highway revenues would save $65 billion, reducing the size of the federal workforce through attrition would save $43 billion, limiting medical malpractice torts would save $57 billion, and modifying Tricare fees for working-age military retirees would save $71 billion.  Just these eight savings total $456 billion and would offset almost half of the entire sequester.
What is so difficult about making a tradeoff deal like this?  Isn’t this what we send people to Washington to do?