Code Red: Two Economists Examine the U.S. Healthcare System

August 13, 2011

Medicare Musings

Filed under: Uncategorized — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 8:54 am

I have been thinking about the connection between healthcare cost growth and the budget crisis. Many pundits have pointed out that rising Medicare costs are one of the biggest contributors to our budget mess. Republicans want deep cuts in future Medicare spending while Democrats are sensitive to constituents who demand the Congress keeps its hands off “their Medicare.” Current Medicare spending growth trends are unsustainable – at some point the math will trump the politics.

There are several options for putting Medicare on a much lower cost trajectory. Here is what I have come up with:

1) Do nothing but pray. Projections of future spending growth are mostly guesswork. Maybe the guesses are wrong. Consider that technological change has been a major driver of cost growth. (It is interesting to ask why medical technology nearly always seems to cause spending to increase, but I will save that for another blog.) Perhaps medical science has reached the bottom of the well and that output of costly new technologies will slow to a trickle. Of course, this will also mean that a century of advances in medical care will come to an end. I don’t know if we will really be better off; we will spend less on medical care than we projected, but we will also receive fewer benefits than we projected. Besides, the head-in-the-sand approach to cost cutting hasn’t worked yet. (Note to readers. Please do not comment that we can save the system through prevention. The Committee on the Cost of Medical Care already made the same point – in 1932.)

2) Slash provider fees. The Affordable Care Act already calls for large reductions in provider fees. Dare we slash them again? At some point the best and brightest young Americans will decide that investing eight or more years after college getting a medical degree and doing a residency just isn’t worth it. Let’s not go there. I don’t expect Congress to cut doctor fees any deeper (and I would not be surprised if Congress reneges on the planned cuts.) Congress could go after other providers. Medicare has already announced big reductions in payments to nursing homes. Can outpatient providers like DaVita be next?

3) Raise the age for Medicare eligibility. This is the surest and easiest way to “fix” Medicare. Again, the politics are strange. Proposals to raise the eligibility age to 67 in the year 2030 are met with howls of protest by today’s beneficiaries. They must think that if Congress can change Medicare in the future, they might also change Medicare today. Note to seniors: “do nothing but pray” is not an option. We ought to acknowledge, however, that raising the eligibility age does nothing to lower overall healthcare spending, but merely shifts the burden to the private sector. On the other hand, it might encourage productive older workers to remain in the work force, thereby raising GDP. (Second note to readers: The economy is not a zero sum game. Retiring older workers do not necessarily create jobs for younger workers.)

4) Raise taxes. If we raise taxes to cover the projected shortfall, we may eventually find ourselves in a position where the taxes we collect per worker to finance Medicare will approximate what other nations collect to finance their entire health care systems! Besides, raising taxes for Medicare leaves less room to raise taxes to cope with the rest of our debts. The Affordable Care Act already did this, which may be one reason why moderate Republicans have refused to discuss further tax increases.

5) Change the way medical care is delivered to Medicare patients. Medicare is the last open ended fee-for-service medical system in the developed world. Every health economist that I know, and that includes several of the economists who advised the President on health care reform, wants to do away with fee-for-service incentives. Perhaps we will. Medicare Managed Care is still strong, although the ACA may change that. The ACA creates new Accountable Care Organizations (but does so in a way that some believe is overbearing). Congressman Ryan proposes that seniors to choose their own private sector managed care plan and bear financial responsibility for making expensive choices. The belief that these proposals will cut costs is, admittedly, a leap of faith. But the CBO cannot put a score on a leap of faith. Proposals like this will not change projected deficits until they are well underway. Congress needs to act now.

Looking over these options, my plan is to work well into my seventies and take advantage of Northwestern’s generous health benefits. As for everyone else, I expect to see more selective fee reductions and similar band-aids. But if we want fundamental reform, we should do more. Neither one of my two ideas is original. And only one is pragmatic:

1) It seems that bailing out the federal government has a higher priority than lowering health care spending in the private sector. The recently appointed twelve member Congressional Panel of Elders should include an increase in the age of Medicare eligibility. It is the least speculative of all these options.

2) Have faith in economic incentives. Get rid of fee-for-service Medicare once and for all and make Medicare beneficiaries who want to cling to “their Medicare” pay for their profligacy. I think this is the best long run answer to our cost crisis. But I wonder which will happen first: true Medicare reform or the Cubs winning a World Series?

1 Comment

  1. I’ve spent my career in the healthcare industry and I would agree that FFS Medicare is at the root of the problem and that the solution lies in transitioning to a managed care model with a modification in benefits to help compensate for the unsustainability of funding. I believe the current, flawed model has survived as long as it has due in part to the population glut of the baby-boomers that have been paying into the system during good (and bad) economic times. Unfortunately it’s the expected healthcare requirements of that same cohort that will drive the system to insolvency given its current course.

    As you pointed out – these are not new ideas about what the system needs to look like. The real challenge is finding a politically viable path to get us there. Unfortunately people feel entitled to their entitlements – especially when they’ve spent their careers funding them and financially planning on that benefit being there when they need it. There is also a large segment of the economy dependent on the healthcare industry. One person’s unnecessary test or overly complex billing process is another person’s livelihood.

    How do you convince a generation with the lion’s share of the political power not to act in their own, near-term self-interest?

    Comment by Jim Talano — September 8, 2011 @ 2:48 pm


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