Why is Healthcare so Expensive?

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Time Magazine has just published its longest article ever, a 25,000 word piece by Steven Brill, entitled Bitter Pill: Why Medical Bills Are Killing Us.  The article contains one example after another of outrageous medical bills being charged to people who are the least able to pay, either the indigent or the uninsured.  Mr. Brill’s solution to this horrible mess is for the government, i.e. the bureaucracy now being expanded by the Affordable Care Act, to do a much better job of using its clout to control costs.

But there is another point of view about what is wrong with our healthcare industry and what can and should be done to make it far more efficient and enable it to provide us with quality care at a much lower cost.  David Goldhill provides a roadmap to a consumer-driven healthcare system with his new book, Catastrophic care: How American Health Care Killed My Father and How we Can Fix It. 

Mr. Goldhill’s proposal is to introduce true competition, not quasi competition dictated by over-burdensome bureaucratic rules, into the American healthcare system.  In other words, let the marketplace figure out what works best by trial and error, rather than expecting even the brightest and most well-meaning experts to be able to figure it out a-priori.  There would still be massive government sponsored programs, such as cradle-to-grave catastrophic insurance and mandatory health accounts, to provide universal care for all.  But the myriad details would be left to the consumers and providers of healthcare to work out over time.

The healthcare crisis in the United States is not just about controlling the rapidly increasing costs of Medicare and Medicaid, as serious as this problem is.  It is also about controlling the costs of private healthcare which is retarding the growth of prosperity for the entire middle class.  Fundamentally we have two basic ways to proceed. We can either move toward a single payer government run program, like much the rest of the developed world, or we can set up a minimally controlled (to insure universal access) system where each of us has the primary responsibility for our own health.

Is There a Need for Urgency in Fixing Medicare?

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In the February 27, 2013 edition of the New York Times the economics analyst Eduardo Porter writes that “Medicare Needs Fixing but not Right Now”. He shows that cost increases have slowed down recently and that there are huge disparities between Medicare reimbursement rates as well as hospital utilization rates by Medicare enrollees in different parts of the country.  Therefore we should first focus on operating Medicare more efficiently before making big changes in its finances.

But a recent study by Michael Chernew, Richard Frank and Stephen Parente, “Slowing Medicare Spending Growth: Reaching for Common Ground”, points out that historically Medicare costs have been growing much faster than GDP.  And now, with demographic pressure from retiring baby boomers, the only way to stabilize Medicare costs as a percentage of GDP, will be to hold per-beneficiary cost increases below the overall rate of GDP increase.

Chernew, Frank and Parente also point out that there are many similarities between the Republican voucher plan for cost control and the Democratic proposal to move away from the fee for service model to either a fixed payment per episode model or global payment per beneficiary model.  A voucher plan shifts responsibility for cost control to beneficiaries and their insurers while the global payment model shifts this responsibility to providers.

Conclusion: yes, it is an urgent matter to slow the growth in Medicare costs and also, yes, there is lots of common ground between the two parties in getting this done.  So let’s insist that our national leaders take Medicare reform seriously and accept no excuses for further delay!

Updated Simpson Bowles Plan versus the February 2013 CBO Report

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Erskine Bowles and Alan Simpson have just released an updated version of their two year old plan to bring our national debt under control.  The new plan is called A Bipartisan Path Forward to Securing America’s Future.   It is very worthwhile to compare their new plan with a recent Report from the Congressional Budget Office.

Bowles and Simpson propose additional deficit reduction of $2.4 trillion over 10 years (which includes the $1.1 trillion in the sequester cuts currently scheduled to take effect on March 1, 2013).  This would have the effect of reducing the national debt from its current level of 76% of GDP in 2013 to 73% in ten years.  The CBO report presents three different scenarios.  Their middle route would require an additional $2 trillion in deficit reduction over and above current law (i.e. assuming  that the $1.1 trillion in sequester spending cuts will take place as scheduled).  This CBO middle route would reduce the Debt/GDP ratio to 67% by 2023.

In other words, for an additional deficit reduction of $700 billion over ten years, we’ll get an additional 6% of Debt/GDP reduction.  These numbers have huge practical significance.  Simpson-Bowles says that we need an additional $1.3 trillion in deficit reduction over and above the sequester cuts, which presumably will soon be enacted,  just to stabilize the national debt over a ten year period at the historically very high level of 73% of GDP.  That’s $130 billion a year for ten years.  Many people are complaining about the approximately 5% cuts in discretionary spending which will be required by the sequester.  But just to stabilize, not really shrink, the Debt/GDP ratio over ten years will require more than twice as much deficit reduction as the sequester.

To even mildly shrink the Debt/GDP ratio to 67% by 2023 will require yet an additional deficit reduction of $70 billion per year.  In other words, we will essentially have to triple the size of the sequester effect in order to achieve real debt reduction over ten years.  And all of this assumes favorable economic conditions such as steady growth and continued low inflation.

Do our national leaders have the will to do what should be easily understood as needed by anyone looking at the numbers with any degree of objectivity?  Let’s hope so because the future of our country depends on it!

The Connection between Business Investment and Unemployment, Revisited

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In my previous post I discussed the very close inverse relationship between business investment and unemployment pointed out by John Taylor in his February 4, 2013 blog entry.  Paul Krugman pointed out that that investment can be subdivided into residential and nonresidential components and that residential investment shrunk dramatically during the Great Recession.  According to Krugman, this invalidates Taylor’s conclusion that the best way to boost the economy is to boost business investment.

But Taylor has done further analysis which shows that it is the nonresidential component of total fixed investment which has the very close inverse relationship with unemployment, not the residential component.

In other words, the best way to boost the economy, and thereby increase employment, is to stop giving excuses for our slow recovery because of low housing prices and to motivate businesses in general to increase investment.  There are various ways to do this, as pointed out by many commentators including myself and, the important thing, is to increase movement in this direction.

The Connection between Business Investment and Unemployment

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The Stanford economist, John Taylor, has pointed out in the February 4, 2013 entry of his blog, Economics One, the strikingly close correlation between business investment and the national unemployment rate. His graph shows that since 1990, whenever business investment increases, then the unemployment rate starts to fall with only a short time lag.  And, vice-versa, when business investment starts to fall, then the unemployment rate starts to increase.

It seems like plain common sense, then, that a very good way to boost the economy and thereby create more jobs, is to figure out how to motivate businesses to increase their rates of investment.  One way to accomplish this is to let businesses speed up their tax deductions for capital investment.  Of course, the best way of all would be to completely eliminate the corporate income tax.

Approximately 10% of federal tax revenue comes from the corporate income tax.  This amounts to roughly $250 billion per year.  Such a loss of federal revenue could easily be balanced by closing loopholes and deductions for high income taxpayers.  Such a shift in federal taxation would provide an enormous boost to the economy.

Making our economy grow faster is the key to solving both our very serious economic (putting people back to work) and fiscal (shrinking our federal deficit) problems.  Any and all ways to get this done should be the top priority of our national political leaders.

The Stark Budget Choices Now Before Congress

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The Congressional Budget Office has just released a new report, “Macroeconomic Effects of Alternative Budgetary Paths” concerning several decisions which Congress will have to make in the very near future, pertaining to the sequester budget cuts of $1.1 trillion over ten years, approving a budget for the remainder of the current 2013 fiscal year and raising the federal debt limit.

The first page of the CBO report conveys the basic message with a single graph.  If the sequester is cancelled and there is perhaps even additional deficit spending in the near term, it will give the economy a small boost in 2014 but cause a drop in GDP of close to 1% by the year 2023.

If the deficit is decreased by an additional $2 trillion over 10 years, beyond the spending cuts required by the sequester, the economy will take a small hit in 2014 but will receive a boost of close to 1% by 2023.  An additional deficit reduction of $2 trillion over 10 years, will cause a greater immediate hit to the economy but produce a much more substantial boost of almost 2% by 2023.

An excellent summary of the CBO report, including political implications, is given by the Wall Street Journal on February 6, 2013.  For example, it is the last scenario above, an additional $4 trillion deficit reduction over ten years, which would put the US on a path to achieve a balance budget by 2023.

Under current law, with no additional deficit reduction in the future beyond the sequester which takes effect on March 1, the annual deficit will shrink for the next three years but then resume a steady climb back to $1 trillion by 2023 and the publicly held national debt will climb from its current level of 73% of GDP to 77% of GDP by 2023.

The choice now before Congress is thus very clear:  should we continue kicking the fiscal can down the road, as the Keynesian economists want to do, or should we bite the bullet, take a small immediate hit to the economy, and thereby put the future of our country on a sound financial basis?

To me the answer is clear as clear can be.  But it will require our national leaders to stand up and be counted.  Do enough of them have the political courage to do what needs to be done?

Why $16 Trillion Only Hints at the True U.S. Debt

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In an Op Ed article last fall in the Wall Street Journal two former Congressmen, Chris Cox and Bill Archer, point out that the total US government debt, now over $16 trillion, is only a fraction of the total unfunded liabilities of the government, which now exceed $87 trillion.  The unfunded liabilities represent future expected payments for Social Security, Medicare benefits for currently employed workers as well as current retirees and also the future retirement benefits of current federal employees and retirees.

If this enormous sum of already obligated future payouts is not bad enough, even scarier is the rate of growth of these unfunded liabilities.  In calendar year 2011, the accrued expense was $7 trillion, double the entire current revenue of the federal government of about $3.5 trillion.  In other words this awful problem is getting much worse every year.

The House Republican majority is trying to address our almost incomprehensibly bad debt problem.  Will they be able to generate enough public support to force the Senate and the President to take the problem seriously?  Right now the odds do not look very good for effective action to be taken.  An enormous crisis is almost on our doorsteps.  How bad will it have to get before public opinion demands action?  It is very hard to remain optimistic about the future of our country when we appear to lack the collective will to take the action which is so obviously needed

The Great Reset

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The Great Recession ended almost four years ago, in June 2009, and growth in the US economy has been an anemic 2% annually since then.  The unemployment rate, now 7.8% is dropping only very slowly and millions of workers are still unemployed or underemployed.  If this isn’t bad enough already, knowledgeable experts are now predicting (see the Friday January 25 Omaha World Herald)  that many mid-skill, mid-pay jobs will never return largely because of the rapidly accelerating use of technology in all aspects of our lives.
Faster economic growth would not only provide more jobs but would also increase tax revenue and therefore shrink the deficit.  If such traditional measures as lower tax rates, deregulation and aggressively promoting foreign trade won’t fly politically which, of course, is very disappointing, then we need to consider other measures which could gain political support.  A good place to start is to enact The Startup Act of 2011 proposed by the Kauffman Foundation.
The Startup Act proposes: 1) more visas for entrepreneurs and Green cards given out with STEM degrees, 2) tax incentives for startup investments, 3) speeding up the patent process for entrepreneurs and 4) relaxing the regulatory burden on startup businesses.  Such measures as these need not be expensive to undertake and could give our economy a big boost.
Our leadership role in world affairs depends on our economic, military and cultural dominance.  First and foremost is our economic strength.  It is vital to speed up the growth of our economy.  Any and all means to accomplish this should be considered.  The status quo is not acceptable!

Is inequality Holding Back the Recovery?

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The Nobel prize-winning Keynesian economist, Joseph Stiglitz, claims in the January 20, 2013 New York Times, that “Inequality is holding back the recovery”.  He says that the most important reason is because the middle class is too weak to support the consumer spending we need.  And that the weakness of the middle class is holding back tax receipts.  And that we are squandering our young who are increasingly unable to get an education without borrowing huge sums of money.

Many liberals deplore the slow rate of economic growth since the recession ended in June 2009 and all of the problems it creates and exacerbates such as high unemployment and lower tax revenue to support public services.  What these liberals amazingly fail to understand is that there are tried and true methods to promote economic growth.  What we need to do is to lower tax rates (offset by eliminating tax deductions and loopholes), remove or diminish the enormous new regulatory burdens which have recently been placed on the economy, boost domestic energy production and aggressively, rather than halfheartedly, pursue new trade agreements to lower the barriers to free trade.

Powerful trends such as globalization and computer technology are driving economic progress and causing the inequality which Stiglitz and many others deplore.  We need to embrace these trends and use them to our advantage.  The way to boost the middle class is to boost our stagnant economy in the tried and true ways which have worked in the past.  The way to boost postsecondary education is to recognize that there are many high quality and low cost schools all over the country.  And that it is not necessary to borrow lots of money to get a good education. 

In short, the solution to the urgent and critical economic and fiscal problems we are now facing lies entirely under our control.  All we need are national leaders who have the vision, capability and fortitude to lead the way.

The Myth of Government Default

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The moment of truth is rapidly approaching and House Republicans need to crank up their resolve to force a real long term solution to the debt crisis of our federal government.  As David Rivkin and Lee Casey describe in the January 11, 2013 issue of the Wall Street Journal, the threat of government default is greatly exaggerated.  $200 billion in tax revenue is coming into the federal government every month, more than enough to keep making interest payments on the national debt as well as paying many other bills.

Far too many national leaders are in a state of denial about the seriousness of our fiscal problems.  House Speaker John Boehner says that “The American people do not support raising the debt ceiling without reducing government spending at the same time.”  The “Boehner Rule” stipulates that an increase in the debt limit must be paired with spending cuts of equal size over a ten year period.  This is an excellent framework for kicking off a national discussion to persuade the American people to support cutting back spending on entitlements and social programs as well as defense spending.

Every economic unit whether it be an individual, a family, a business, a community or a larger political subdivision, has to learn to live within its means.  This elementary rule of common sense applies to our whole country just as much as to any other social group.  Republicans have the clearest grasp of this basic truth at the present time and now need to exhibit the courage of their political convictions.  The future of our country depends on it!