I’m currently in the process of buying long-term care insurance—you know, so my daughter won’t have to take care of me when I’m old. I have a good agent who knows all about the market and has answered every question I’ve had. I understand personal finance, opportunity costs, discount rates, and inflation. I know my way around a spreadsheet (one benefit of my years at McKinsey). But I find it’s still hard to figure out what to do.

A bit of background: Long-term care insurance pays for your stay in a nursing home if you become unable to take care of yourself. Depending on the policy, it may also pay for care you receive at home instead of going into a facility. According to the insurer I’m considering, the median annual cost of a semi-private room in a nursing home in my state is $145,000, and the average stay is something like three years. To put that in perspective, in 2009, the median net worth of families where the head of household was of age 65–74 was $205,000 (including real estate assets).

Long term care is not covered by Medicare, except for a short period after each acute event. It is covered by Medicaid, but to be eligible for coverage you have to exhaust all of your assets. Despite that onerous requirement, Medicaid currently covers 40 percent of all spending on long-term care. (2011 Long-Term Budget Outlook, p. 39.) The Affordable Care Act of 2010 included what is known as the CLASS Act, which would have allowed anyone to buy long-term care insurance, with an average benefit of $75 per day, for a monthly premium of $123. The CLASS Act, however, has been suspended because the administration could not certify that it would be deficit-neutral over the long term. So the bottom line is: until you use up all your money, you’re on your own.

Still, shouldn’t you be able to buy protection in the private insurance market? The short answer is: not really.

The first problem is that private long-term care insurance is designed to help you pay for long-term care, but not to insure you against open-ended costs. Most policies have limits on both your maximum daily benefit and your lifetime total benefit, so a typical policy will only cover you for, say, three or five years. Unlimited duration policies do exist, but they are priced to deter people from buying them—because insurance companies don’t want that risk on their books. So an insurance policy will help you pay for long-term care, but won’t take away the tail risk—unless you’re rich enough that you can cover the tail risk yourself.

The second problem is that there’s no way to protect yourself against inflation. The “inflation protection” in the policies I looked at is a simple annual increase in your daily benefit by 3 percent or 5 percent. It isn’t indexed to actual inflation, let alone to actual inflation in the cost of long-term care, which is what you care about. This is important because, if you’re in your forties, you’re buying a policy you will probably need in about thirty years. Again, the insurance companies don’t want that risk, so you get to keep it. So if you buy the maximum, 5-percent protection clause, there is a decent chance that your benefit will keep up with actual costs, but there’s no assurance that it will.

The third problem is that you can’t protect yourself against your premiums going up in the future. The standard way to pay for long-term care insurance is to pay an annual premium that stays flat in nominal terms for the rest of your life. This means that you’re overpaying (relative to the actuarial cost of the insurance) in the early years and underpaying in the later years. But if the insurance company figures out that it has underpriced long-term care insurance in general, it can file for a rate increase and boost your premium payments down the line. And by that point, you’re stuck. You can’t switch insurers because the new insurer won’t take into account the overpayments you made to the old insurer, so it’s certain to charge you higher premiums.*

In a competitive market, doesn’t that just mean that someone will enter the market with a product that includes real inflation protection and a lifetime premium guarantee? Well, it hasn’t so far. But more importantly, that wouldn’t be real insurance either, because of the fourth problem. With long-term care insurance, you’re buying a product you probably won’t need for decades, at which point the world will have changed considerably. There is a decent chance that your insurer has mispriced the risk (more people will need long-term care than they expect, or long-term care will be more expensive, or medical advances will mean that people are living longer in long-term care)—in which case it will go out of business. And then your insurer won’t be around when you need it.** Insurance companies try to protect themselves by (a) not offering real inflation protection and (b) reserving the right to raise your premiums in the future; if they didn’t, they’d be even more likely to fail. But that still isn’t perfect protection, which means you’re taking on counterparty risk.

Then there’s the fifth problem, which applies to all private insurance without a governmental mandate: adverse selection.

In short, the private market doesn’t provide good long-term care insurance—because it can’t. The insurance you can buy is really just a way of reducing the amount you’ll have to pay for long-term care; it’s a financial planning tool that tightens the distribution of your expected long-term net worth. My spreadsheet says it’s worth it on that basis, so I’m planning to buy it (although I’m not accounting for counterparty risk or the risk of future premium increases). But it isn’t insurance against extreme outcomes.

If we want real long-term care insurance, there’s only one place where we could get it: the federal government. The government can offer unlimited coverage and real inflation protection (benefits based on actual costs at the time you incur them) because it has the ability to absorb long-term financial risks. It can mandate universal coverage, eliminating adverse selection. Because it can raise premiums (or other taxes), it will not go out of business. (Those potential premium increases, however, do mean that it can’t offer a lifetime premium guarantee.)

If this sounds radical, it shouldn’t. We already do virtually the same thing: it’s called Medicare Hospital Insurance, and it’s one of the most popular programs in existence. The Hospital Insurance trust fund is facing a long-term deficit, but that’s not because of its basic structure: it’s because the premiums it charges (payroll taxes) haven’t gone up along with health care inflation, so it’s systematically undercharging for the risk it’s taking on.

A federal long-term care insurance program would pool a major financial risk that most middle-class families today are facing alone. (Arguably, if you don’t have any assets, you don’t face any risk because of Medicaid.) This is exactly what governments are supposed to do: protect ordinary people from risks that they cannot absorb and that private markets do not provide good solutions for. It would probably also help budget deficits in the long term. The government already picks up 40 percent of all long-term care spending through Medicaid, for which it gets nothing; a real long-term care program could pay for itself through payroll taxes, reducing Medicaid spending.

Now I know the last thing that will happen today is a new social insurance program. Instead, middle class people will continue hoping they don’t need long-term care, elderly people will spend all their money on long-term care and then go on Medicaid, and government spending on Medicaid will continue to climb. But that’s a comment on our political environment, not on the proper role of government in society.

* You can accelerate your premium payments by paying the whole thing over ten years, which reduces this risk; but the people who can afford to do that are usually people who can self-insure for long-term care anyway.

** There are state guaranty funds that pick up policies from bankrupt insurers, but their benefits are likely to be less than what you originally paid for.

I was looking at OECD health care data for something else I’ve been working on and wanted to share some of it. It’s well known that the United States spends a lot more per person on health care than comparable countries and that our actual health outcomes are anywhere from average to bad. See, for example, this chart from a 2008 paper by Gerard Anderson and Bianca Frogner.

That chart shows how each country’s spending and life expectancy differ from what you would expect based solely on how rich they are (per capita GDP). As you can see, we spend a lot more and live a lot less. (That paper also considers a number of other outcome measures; we do well on some, poorly on others.)

Besides where we are today, though, the other thing we should be interested in is where we are going. Our health care system is the product of a number of historical factors that we can’t make go away with a snap of our fingers. So even if we have a bad, expensive health care system, maybe it is getting relatively better and relatively less expensive.

Nope.

This chart, from the OECD data, shows the change in each country’s per capita spending and life expectancy relative to all other countries. The data are standardized: you’re looking at the number of standard deviations each country was away from the mean in 1992 and in 2007.*

You can see that not only is the United States the outlier when it comes to spending, but we are moving in the wrong direction: we are becoming more of a spending outlier, and we are drifting down from the average life expectancy into the lower group (currently surpassing only Turkey, Hungary, Mexico, Poland, and Czech Republic).

I labeled a few of the other outliers. Basically the lower left is relatively poor countries, Japan is at the top, and that big cluster is Western Europe and the Commonwealth countries.

Another way to look at the situation is to look at actual values rather than standard deviations, as in the following chart. This one shows you actual increases in life expectancy and percentage increases in nominal per capita health care spending. The axes are located at the averages of these countries: the average spending increase was 132 percent and the average life expectancy gain was 3.7 years.

One thing you can see is that, in percentage terms, health care costs have not been growing in the United States much faster than in other comparable countries.** If you exclude countries starting with a small 1992 base (Korea, Turkey, Ireland, etc.), our rate of health care cost growth has been above average, but it’s not an outlier. So the reasons why our health care costs are growing rapidly are probably at least somewhat different from the reasons why they are high to begin with.

The other thing you see is that our life expectancy gain was the absolute lowest of the whole group (and we weren’t starting from a particularly high level, as you can see in the previous chart).

Ordinarily, you would think there should be convergence across countries. Since other countries spend less and live longer, you would think that we would learn from them—global competition, you know. But instead we’re moving the wrong way on both dimensions.

* I picked all OECD countries for which there was data, except Belgium (which has a different methodology for counting spending), which meant dropping Chile, Estonia, Israel, Luxembourg, Slovak Republic, and Slovenia. I only went back to 1992 because Germany has a gap in 1991 and I initially planned to use all the intervening years. I stopped in 2007 because Canada and Greece are missing data for later years.

** We had below-average growth in percentage terms, yet the number of standard deviations separating us from the mean increased, because the poorer countries increased spending rapidly; this convergence caused the standard deviation to fall as a proportion of the mean.

Masquerading behind an invocation to “wisdom” in the title, David Brooks today finds his false equivalence (see here for another example) by comparing the the two parties’ approaches to Medicare: the Democrats, he says, favor “top-down centralized planning” while the Republicans favor the “decentralized discovery process of the market.”

David Brooks swallowing Republican talking points whole is not worthy of note, so I’ll just point out one: he calls the Ryan Plan a “premium support plan,” despite the categorial denial by Henry Aaron, the creator of the premium support idea.* But it’s marginally more interesting to point out Brooks’s finely-honed rhetorical dishonesty.

The first example is characterizing this difference as a “basic philosophical choice” between centralized planning and the market, when it’s really the difference between having a government health insurance system and not having one. Brooks echoes the Republican characterization of the Independent Payment Advisory Board (Paul Ryan’s “fifteen-panel board“) as a centralized planning bureaucracy and expresses skepticism that it can work. But IPAB is supposed to do the same thing that every private insurance company is trying to do: figure out how to provide incentives that will improve care at lower cost. All large companies have centralized planning; that’s how they get things done. One problem with Medicare is that its centralized planning committee is called Congress, and hence Medicare payment rates are highly politicized. The alternative to IPAB is running Medicare poorly. Criticizing government experts as central planning is just a more reasonable-sounding way of saying that government programs shouldn’t have planning at all, which is transparently crazy.

The other alternative, Brooks would say, is not having Medicare at all. But the Obama administration didn’t choose IPAB because they wanted Soviet-style centralized planning; they chose it because it was the only pragmatic, responsible choice. Based on everything we know about Obama’s economic and domestic policy teams, it’s much more likely that, if they had a clean slate to draw on, they would have preferred managed competition — the exchanges, regulation, and subsidies that the ACA creates for the under-65 individual market — for the entire population. They stuck with Medicare because (a) it’s politically popular and (b) it’s already the lowest-cost part of our health care system. Dismantling Medicare would be like pouring gasoline on a fire: it would only exacerbate the problem of health care cost inflation, since Medicare pays lower reimbursement rates than the private sector.

The real choice is whether or not to have a government health insurance plan for the elderly. And in evaluating that choice, Brooks invents a whole new category of rhetorical subterfuge.

“The fact is, there is no dispositive empirical proof about which method is best — the centralized technocratic one or the decentralized market-based one. Politicians wave studies, but they’re really just reflecting their overall worldviews. Democrats have much greater faith in centralized expertise. Republicans (at least the most honest among them) believe that the world is too complicated, knowledge is too imperfect. They have much greater faith in the decentralized discovery process of the market.”

Why is this brilliant? Most ordinary pundits (those without space on the Times op-ed page) use the more common device of citing studies on both sides to show that there is support for both sides. But this is rookie league stuff. Brooks shows how it’s really done: just dismiss the entire attempt at empirical support with a wave of the hand, which lets you get back to “philosophy.” It’s much easier to know nothing than to know something.

But for this question, we don’t even need to go to the academic studies. We already have a health care system where people “select from a menu of insurance plans. Their consumer choices would drive a continual, bottom-up process of innovation. Providers could use local knowledge to meet specific circumstances.” It’s called the individual market, there are tens of millions of people in it, and it’s a complete failure. It leaves tens of millions of people uninsured, and to those who are insured, it delivers mediocre care at high costs. The only way you can ignore this fact is by pretending that facts don’t matter.

Then there’s this gem: “if 15 Washington-based experts really can save a system as vast as Medicare through a process of top-down control, then this will be the only realm of human endeavor where that sort of engineering actually works.” Um, David, there’s this country to north of us. It’s called Canada. They have a national health insurance system that covers everybody. And that system . . . Whom am I kidding? When you don’t have respect for facts, a few more aren’t going to change your mind.**

I’m not expecting the Times to fire David Brooks anytime soon, but after his enormous, embarrassing gaffe with the Ryan Plan, can’t his editor at least get him to stop writing about Medicare?

Jennifer Steinhauer in the Times reports that some Republicans are running away from the Ryan Plan (you know, the one that changes Medicare from a health insurance plan to an underfunded subsidy), while others are trying to figure out if they should support in order to gain Tea Party votes. As policy, of course, it never had a chance to pass the Senate or of being signed by President Obama (and every Republican staffer Politico could find agrees), so it was pure political theater from the start. As Paul Krugman points out, the goal may have been to win over the pundits — a group that is vastly more concerned with the deficit than ordinary voters — but even that failed. (They got Jacob Weisberg, but he backpedaled furiously, and they got David Brooks, which was mainly amusing because then we got to watch Krugman trying to observe intra-Times decorum by not going after Brooks by name). Now Republicans are wondering if the loss of a Congressional seat in a conservative New York district was Ryan’s fault.

But while I’d like to think that the nation is recovering its senses, at least on what Republicans mean for Medicare, I’m not optimistic. Brad DeLong put it well:

“the political lesson of the past two years is now that you win elections by denouncing the other party’s plans to control Medicare spending in the long run — whether those plans are smart like the Affordable Care Act or profoundly stupid like the replacement of Medicare by RyanCare for the aged — sitting back, and waiting for the voters to reward you.”

Remember that at the same time they were plotting the destruction of Medicare as we know it,* the Republicans were also attacking the Obama administration for planning to reduce Medicare spending (from its projected levels, not its actual levels). Remember when Mitch McConnell’s office released press releases, on consecutive days, saying, “Cutting Medicare Is Not What Americans Want” and “Expanding Medicare ‘A Plan for Financial Ruin’”? Politically, the only mistake they made — if they made one at all — was putting out those press releases on consecutive days from the same office. I’m certain that a majority of Americans would agree with both of those positions, standing on their own.

Most likely, the Republicans will reposition the Ryan Plan as an attempt to “save Medicare” (wait, they’re already doing that). They will try to eliminate the provisions in the Affordable Care Act that attempt to reduce Medicare costs by making Medicare spending more efficient, like the Independent Payment Authorization Board, demonizing them as government intrusion into medical treatment decisions. The answer, they will say, is a “Medicare” system free of government involvement. And if they can create enough gridlock to make sure the Affordable Care Act fails, then five or ten years from now, when the debt projections are even worse, they will take another shot at privatizing Medicare. Remember, this wasn’t the first one: Newt Gingrich took a shot back in 1995. As long as the Republicans can use voters’ fears of “big government” to block real reforms to Medicare, time is on their side. At some point, even if they have to wait twenty years, the fiscal imbalance will be so big that they will be able to eliminate Medicare.

The Obama administration knows this game. They knew what they were doing when they put cost-control measures into the Affordable Care Act, and I’m sure Obama will veto anything that prevents those measures from working. But it’s still an uphill battle.

* No, I don’t think this is an overstatement. The Ryan Plan would change Medicare from a guaranteed level of health insurance coverage to a voucher that may or may not buy you health insurance at all.

David Brooks, perhaps realizing that it was a bad idea to swallow a politician’s PR bullet points whole, is now backpedaling. The Ryan Plan, which he originally hailed as “the most comprehensive and most courageous budget reform proposal any of us have seen in our lifetimes,” now has the principal virtue of existing: “Because he had the courage to take the initiative, Paul Ryan’s budget plan will be the starting point for future discussions.”

As I’ve discussed before, the Ryan Plan is just one bad idea dressed up with the false precision of lots of numbers: changing Medicare from a health insurance program to a cash redistribution program that gives up on managing health care costs. Here’s the key chart from the CBO report:

Here’s how to read that chart. In 2030, under current law, a 65-year-old Medicare beneficiary’s health care will cost $60. (Obviously, this is using an index, not real dollars.) Medicare will pay $35 and the beneficiary will pay $25 in Part B premiums and cost sharing. Under the CBO’s more likely “alternative fiscal scenario,” her health care will cost $71, of which Medicare will pay $41. Under the Ryan plan, the same health care purchased in the private market will cost $100; “Medicare” will give her a $32 voucher, and she’ll pay the last $68 on her own.

The bottom line is that the Ryan Plan increases beneficiary costs more than it reduces government costs. In a weird sense, it’s a bizarrely pro-government plan: it helps the government’s bottom line at the expense of ordinary people.

So what should we do? Most importantly, we have to recognize that there are two separate problems, and they are not equal. The primary problem is health care inflation. The secondary problem is the long-term Medicare deficit. That’s a secondary problem because it’s largely a result of the primary problem.

Of these two, the Medicare deficit is the easier problem to solve: index the payroll tax to actual health care costs. This should automatically solve the Medicare deficit because as Medicare’s costs go up, its funding will go up at the same rate.*

This may sound like just raising taxes whenever the government wants to spend more. But the key is that the more taxes you pay, the more you get back. To see this, assume for now that Medicare is a pure price taker: it has no impact on health care costs but just has to pay what the market charges. Then, if health care costs go up by 5 percent, your taxes go up by 5 percent, but the expected value of your future Medicare benefits also goes up by 5 percent. You get all the insurance benefits of traditional Medicare, but now that insurance is worth 5 percent more, so you should be willing to pay 5 percent more.**

Raising taxes can have macroeconomic effects, but anything that solves the Medicare deficit problem will have macroeconomic effects: any solution involves either higher revenues or lower spending. Furthermore, increasing payroll taxes in line with health care costs is no different in substance than increasing premiums for employer-sponsored plans in line with health care costs, which has been going on every year for decades.

As commenter JD Johnson said previously, the assumption that Medicare is a price taker isn’t quite right because Medicare itself, as the largest insurance program in the country, has an impact on health care costs. So at the same time we should use Medicare to try to bring down system costs. But the question of bringing down overall system costs should be separated from the question of Medicare funding. And when it comes to Medicare funding, indexing the payroll tax to health care costs not only fills the budgetary gap, but it’s also fair: it maintains balance between the amount you pay and the value of your benefits. And most importantly, it balances the Medicare budget without eliminating the insurance benefits of Medicare, which are crucial to its long-term political support.

The primary problem — system costs — is harder, and I don’t have a better answer for that than the many health economists who have studied the problem. The first thing to point out, though, is that using Medicare to bring down system costs is exactly the approach of the Affordable Care Act — see Ezra Klein for all the details.

Robert Pear in the Times lists the following as some additional proposals in the air:

1. Increase the age of eligibility for Medicare to 67, from 65.
2. Charge co-payments for home health care services and laboratory tests.
3. Require beneficiaries to pay higher premiums.
4. Pay a lump sum to doctors and hospitals for all services in a course of treatment or an episode of care. The new health care law establishes a pilot program to test such “bundled payments,” starting in 2013.
5. Reduce Medicare payments to health care providers in parts of the country where spending per beneficiary is much higher than the national average. (Payments could be adjusted to reflect local prices and the “health status” of beneficiaries.)
6. Require drug companies to provide additional discounts, or rebates, to Medicare for brand-name drugs bought by low-income beneficiaries.
7. Reduce Medicare payments to teaching hospitals for the cost of training doctors.

I think those are all reasonable ideas except for #1. The problem with raising the eligibility age is that it makes the primary problem worse by shifting 65- and 66-year-olds from Medicare back onto their employers or into the individual market. I think #4 and #5 are the best, but the others should be on the table.

At the end of the day, we’re not sure how to bring down system costs, although lots of people have good ideas. The rate of cost growth will come down someday, one way or another; it’s not possible to have an economy that is 100 percent health care. My point is that while we’re trying to slow down health care inflation, as health care becomes more expensive, it makes sense for people to pay more for benefits that are becoming more valuable at the same time. It doesn’t make sense to eliminate the insurance component of Medicare because 2.9 percent is some magical ceiling dictated by the Founding Fathers.

My post earlier this week on the equivalence of tax increases and spending cuts received a large amount of criticism from the left because the example I used for illustrative purposes was increasing the Social Security payroll tax rate instead of eliminating the cap on wages subject to the tax. And there I was just trying to illustrate a principle. So this time I’m sure many people will object to the idea of raising the Medicare payroll tax, preferring to raise taxes on the rich instead.

In some abstract sense, I would prefer to raise taxes on the rich instead. But I think we should look other places rather than Medicare to make the tax system more progressive. Medicare, like Social Security, is a progressive system even though its taxes on their own are not. Because everyone gets the same benefit, there’s already a large amount of redistribution going on; in addition, that benefit is worth more to poor people, because they are less likely to have other sources of insurance. A flat percentage tax seems like a fair way to pay for it, but more importantly it’s the way we’ve paid for it for forty-six years, so for political reasons it doesn’t seem to me worth changing. Making the payroll tax itself progressive would also reduce political support for Medicare. If we want to “tax the rich,” we should do things like converting major tax deductions like the mortgage interest deduction into refundable credits or raising the tax rates on capital gains and dividends.

* There’s also the problem of Part B, which is funded by beneficiary premiums and general revenues. In principle, I think the answer is to increase the payroll tax to cover the contribution from general revenues and use the money freed up from general revenues to reduce some other tax in a progressive way (maybe extending the EITC phase-outs to reduce the super-high marginal tax rates that hit you as your earnings increase through the phase-out range). That has the benefit of strengthening the link between Medicare’s funding and costs, which is important for indexing.

** There is a demand elasticity issue, which is that as the price of health care increases the amount of it you want to buy may go down. I don’t have a perfect solution for this because Medicare is a one-size-fits-all program. But I think it’s mainly just a theoretical problem, for two reasons. First, the price elasticity of health care is very low, so the effect is small. Second, the fact is that when shopping today for an insurance plan that will cover you when you retire in the future, there is no other alternative that has a lower P and a lower Q. So given the alternatives that are actually available, forcing people to pay 5 percent more for a health care plan that’s worth 5 percent more does not deprive them of some other product they could buy that better suits their preferences.

This isn’t a post explaining how Medicare works in detail. It’s a post about why Medicare matters to you.

The basic “problem” with Medicare is that its liabilities are projected to grow faster than its revenues indefinitely because health care costs are growing faster than GDP (and Medicare’s revenues are a function of wages).* The “solution” proposed by Paul Ryan is to convert Medicare from an insurance program, which pays most of your health care expenses, to a voucher program, which gives you a certain amount of money that you can try to use to buy health insurance. I’ve described the main problems with this approach already: it transforms a large future government deficit into an even larger future household deficit, and on top of that it shifts risks from the government to individual households. Today I want to look at this from a different angle.

We created Medicare in the 1960s because retired people did not have another viable way of getting affordable health insurance. Medicare forces workers to pay for retirees’ health insurance, but since workers become retirees someday, it’s in their own interests to do so, assuming the system remains in place.

Forty-five years later, the same factor that is creating the projected Medicare deficit — health care inflation — is also making it even harder for non-working people to get affordable health insurance. On its face, this should make it even more important to preserve the basic structure of Medicare, even if it requires a higher payroll tax: you pay now, but in return you get decent health insurance later. But instead of being concerned with ordinary people — the workers who will need Medicare when they retire — the political class is concerned with the abstraction called the government deficit. Hence its overriding concern is providing cost certainty to the government, even if it means eliminating Medicare’s most important feature — guaranteed insurance.** In addition, the political class seems to think that cutting spending is always better than increasing taxes — even though, to some extent, the two are equivalent.

To put it another way, think about it from the perspective of someone who is working now. She may have a stable job, a good income, and decent health insurance through her employer. But someday she is going to stop working. In a world without Medicare, or one where Medicare has become a voucher system, that means she has to buy insurance on the individual market. And the most important thing about the individual market — more important than the high prices and the lousy policies — is that no one has to sell you a health insurance policy. If you have the wrong medical profile, you could be simply uninsurable. That’s how a free market works.***

This is an enormous source of financial insecurity. If you are forty years old and healthy now, you simply cannot insure yourself against the risk that you will be uninsurably unhealthy when you are sixty-five. And this is not a poverty problem. If you have a major illness, you will not be able to pay for all of your medical care without insurance unless you are truly, deeply rich; being merely affluent or “high net worth” won’t cut it. In other words, the upper-income need Medicare just as much as the poor.

So how much would you pay just for the certainty that, when you turn sixty-five, you will be insurable? How much would you pay on top of that for the certainty that your premiums will not depend on how healthy you are? How much would you pay on top of that to have heavily subsidized premiums when you retire (Part A is paid for by current workers and Part B is subsidized by general revenues)? Right now we pay 2.9 percent of our wage income. I would pay a lot more than that — again, because it protects me from a risk from which I cannot protect myself any other way.

That is the question that matters. I believe that if people were to understand the options, they would rather pay considerably more than 2.9 percent of their wages today to get real Medicare in the future than pay 2.9 percent of their wages today to get a voucher in the future — especially when the voucher is designed to be worth less than they need to buy health insurance, and there is no assurance that they will even be able to find an insurance policy that they can use the voucher on.

In short, Medicare is a great, great thing for participants, by which I mean both workers and retirees. The very factor that threatens its fiscal stability — health care inflation — makes it an even better thing for workers. Because the risk of future health care inflation (and therefore the financial risk of future bad health as well) is so much greater than it was in 1965, we should be willing to pay more to insure ourselves against that risk — especially when we have no other way of insuring ourselves.

I realize that simply raising payroll taxes periodically to compensate for health care inflation is not a complete solution. In the long run, we need to find a way to control health care costs (something, incidentally, that Medicare does better than private insurance companies today). We need more effectiveness research and, more importantly, we need incentives to push providers toward actually applying effectiveness research. (A single payer system could solve this problem, but I’m not holding my breath.) But in the meantime, the insurance component of Medicare — by which I mean not that Medicare is an insurance program, but that Medicare insures you against the risk of not being able to buy insurance — is more valuable than ever.

As Jonathan Oberlander discusses in The Political Life of Medicare, political elites have been primarily concerned with cost control since Medicare’s beginnings, even while the public was willing to pay more for better benefits. Today, the public should be willing to pay more to preserve Medicare’s most important benefit. Someone in Washington should be willing to take up this fight. But who?

* Medicare Part A is paid for by a dedicated 2.9 percent payroll tax. Part B is paid for by beneficiary premiums and by general revenues, but general revenues also grow with GDP, not with health care costs.

** This is not just a Republican position. For example, Alice Rivlin co-signed an earlier version of the Ryan Plan, although she opposes the latest version.

*** Things may not be quite so bad today. The Affordable Care Act (i.e, “ObamaCare”) prohibits medical underwriting and pricing of policies based on health characteristics, and it also provides subsidies for lower-income households to buy insurance. But — the Ryan Plan eliminates the individual mandate and the subsidies, which are the very mechanisms that make insurance affordable for people with modest incomes, such as many seniors.

Update: Here’s another way to put it. Medicare is like an insurance company that sells a unique product. You pay 2.9 percent of wages while you work. In exchange, you get a decent policy that kicks in at age 65 and covers you until you die; during that period, you only have to pay an artificially low premium as well as some cost sharing. No one else sells that policy for any price, nor should you trust any insurer that sells that policy for any price, because the only entity that could reliably deliver on such an open-ended, long-term promise is the government.

Now, Medicare is realizing that it’s not charging enough for that policy. Paul Ryan says that therefore we should scrap the whole thing. Instead, the first question to ask should be whether Medicare can raise prices. Given the fact that there is no even remotely comparable substitute available on the market, how much would you be willing to pay for it? I think most people would pay more than 2.9 percent. That should be the first option on the table.

Driving home from school today, I listened to a Fresh Air interview from two months ago with Atul Gawande, by now perhaps the most famous doctor in the policy intelligentsia. The interview was based on a New Yorker article discussing how some doctors and even some health care payor organizations are trying to reduce health care costs for the most expensive people while improving outcomes. In Camden, New Jersey, one doctor found that one percent of people generate thirty percent of health care costs.

One refrain you heard incessantly during the health care reform debate was that we have high health care costs because of overconsumption and we have overconsumption because people don’t bear a high enough share of their marginal health care costs, so the solution is to increase copays and deductibles. This is what Economics 101 would tell you: people respond to incentives. But Gawande discussed one large company that tried this year after year, but only saw their costs going up. The problem was that while most members responded to the higher copays and kept their costs more or less steady, the 5 percent of members who generated 60 percent of the costs behaved differently. Or, rather, they also reduced consumption (of doctor’s visits and prescription medications), but as a result they often had catastrophic outcomes. These were people with heart disease on cholesterol-lowering medications, and when they went off their medications they ended up in the hospital with heart attacks and then with congestive heart failure.

If incentives worked on this level, we should have solved the problem already. Employers all want to bring health care costs down, so if any insurer could bring health care costs down they would have a competitive advantage, and so insurers should be trying to bring health care costs down. But it’s not working. One explanation is that insurers don’t have enough market power compared to providers (like large hospital chains); I believe Uwe Reinhardt has explained the situation this way.

Another way of looking at the problem is to note that there is no one who is trying to brings costs down directly. Sure, insurers try to do it, but they do it through the types of monetary incentives that economists love: higher copays, lower payments for various procedures, etc. But that’s not actually what most companies do when they have a cost problem. If you run an auto company and it’s costing too much to build a car, you don’t lower the transfer price that you pay to that factory and let incentives solve the problem. You go and figure out what the problem is and you engineer a solution, whether by redesigning the manufacturing process, reengineering the product to use cheaper parts, negotiating lower wage costs, negotiating lower input costs, or something else. That’s how you solve most problems in the business world — not by tweaking some clever incentive scheme.

This is a high-level analogy for what Gawande is talking about: doctors and health care organizations identifying their most expensive patients or members, figuring out what’s wrong with them, and getting them the right treatments. In the few examples that Gawande discusses, it results in cost reductions on the order of 20 percent with better outcomes. It seems that for the people who consume the most health care dollars, you can save money simply by focusing on giving them better care — because right now their big problems are things like coverage gaps that prevent them from getting basic care, not being on the right medications, and ending up in the emergency room for catastrophic problems. Maybe for most people you would not save money simply by providing better care, but for the few people who consume most of the system’s resources, maybe you would save money. The problem is that with few exceptions, no one is trying to do that. That’s what we need an incentive for.

Uwe Reinhardt has a post about the Rivlin-Ryan Medicare Plan, which would convert Medicare into a voucher program for people currently under 55 and also fix the growth rate of the value of the vouchers at GDP growth plus one percentage point. The issue Reinhardt focuses on, and which I also blogged about a while back, is that health care costs have been climbing considerably faster than that, so over time the value of the vouchers will fall relative to real health care costs.

But another problem is that, at least according to the CBO’s summary, the Rivlin-Ryan plan doesn’t say anything about how elderly people will buy insurance. Today, the cost of Medicare is reduced by the program’s bargaining power with providers. which means the total amount spent by Medicare is less than the total amount that would be spent by all Medicare beneficiaries if they had to buy insurance on the individual market. A voucher system would push them into the individual market, which means that the amount they would have to spend would go up dramatically.

Now, it’s possible that the Rivlin-Ryan plan takes the Obama health care reform and its reforms to the individual market (including a prohibition on medical underwriting and the creation of exchanges for buying insurance) as a starting point. But that would be interesting, since Paul Ryan voted to repeal the Obama health care reform.

The Rivlin-Ryan proposal leaves the payroll tax unchanged, so it doesn’t change the amount people are forced to spend on health insurance up front. If you don’t like the idea of forced saving, Rivlin-Ryan doesn’t do anything for you.

It does two main things. First, it reduces the dollar value of the benefits people get, which is unequivocally bad for beneficiaries. That is, for every dollar by which it reduces the deficit, it takes one dollar out of someone’s pocket. In this sense, it’s exactly the same as a tax increase – in this case, a tax increase levied on the elderly.

Second, it gives people more choice over how they spend their benefits. It’s theoretically possible that this could compensate for the fact that those benefits are now lower. It’s theoretically possible for two reasons. One is that people can now buy the plan that they want, instead of the one-size-fits-all Medicare plan. But that’s not much of an advantage here, since if you’re sick you’ll want to buy at least what Medicare provides already, and if you’re healthy you can’t buy a really cheap plan and cash in the unused part of your voucher. The other reason is that, theoretically, the operation of the free market could lead to general efficiencies in the system. In practice, however, we’re talking about the market for health insurance, which is already terribly inefficient and, as Reinhardt shows anecdotally, has been completely unable to keep the cost of healthcare in check. So while government provision of services introduces inefficiencies, you have to compare those inefficiencies to the ones in the private sector — you can’t hypothesize a private sector that always produces optimal results.

Ezra Klein makes an important point about our nation’s health care problem: it’s not just a government deficit problem. The underlying problem is that health care costs are not only growing faster than prices (inflation), but also faster than GDP (economic growth), and as a result the amount of stuff we as a nation will be able to afford, other than health care, will start to go down at some point in the future. (Picture originally from Joseph Newhouse in Health Affairs.)

This means that proposals to solve the long-term budget deficit problem by cutting Medicare benefits are not solutions: they simply shift the problem from the government to individuals–which means they shift the problem from us as taxpayers to us as old people or us as family members of old people.* If, for example, we increase the eligibility age for Medicare from 65 to 67, the government saves money, but only because people who are 65 and 66 lose money–or, alternatively, all of us lose money because their employers now have to pay more for health care.

Paul Ryan’s non-solution is a perfect example. By converting Medicare to a voucher program, he would insulate the federal government from health care cost inflation, saving money for taxpayers; but at the exact same time, this would expose old people even more to health care cost inflation, increasing costs for them and their families. Does Paul Ryan think that somehow “taxpayers” are different from “old people and their families”? Yet his proposal refuses to go away, my efforts notwithstanding. (And despite the fact that his proposal doesn’t actually reduce the deficit–it makes it worse–as Brad DeLong reminds us.)

* Yes, I know the argument that by shifting costs from the government to households, we reduce the incentives to over-consume health care. But if that’s your argument, then you have to explain how the private sector is better at managing health care costs than the government, and it isn’t. There are a lot of reasons for this, but the simplest is that in either case spending is mediated by an insurer (Medicare on the one hand, private insurers on the other), and Medicare has more market power than any private insurer.

Planet Money did a story this week on the problems with medical billing. This is something I’ve been vaguely interested in for a long time; nine years ago, we seriously thought about it as a business opportunity for our company.

The Planet Money team said that there is $7 billion in waste in the medical billing process per year, which sounds like a lot until you realize that it isn’t. (Total healthcare costs in the United States are on the order of $2 trillion, I believe.) But the story had a great example of the problems with enterprise software that I’ve written about before.

The story comes from Jonathan Bush, CEO of a medical billing outsourcer (they bill insurance companies on behalf of doctors and keep a percentage of the proceeds). It has to do with the codes that one of the Blue Cross/Blue Shield companies requires doctors to use to request reimbursement for a certain injection. The doctors used to submit eight-character codes for the procedure. However, the insurer decided that they wanted to negotiate lower prices for the drug itself from drug manufacturers. To do that, they need data on which manufacturer’s drug is used each time a doctor injects it–and that information isn’t contained in the eight-character code. So the insurer decided to switch to a different, eleven-character code for the procedure, since the longer code carries information about the drug manufacturer. (Note: this is what we want insurers to do, because it enables them to reduce costs.)

This is already a pain for doctors. But the kicker is that the insurer’s computer system only has space for eight characters for this particular code. So the insurer sent all of the doctors it works with a memo explaining how to compress the eleven-character code into an eight-character code.* This involved rules like “drop the first digit if it’s a zero, otherwise drop the sixth digit if it’s a zero . . .” that are not only a pain but that are sure to spawn enormous numbers of errors.

The underlying problem is a combination of: (a) the way data is stored in mainframe computers; (b) lack of foresight when designing software programs; and (c) difficulty in modifying said programs. (The better solution would have been for the insurer to write a program that did the eleven-to-eight compression automatically–but presumably it batch-loads the data it receives into its mainframe, and there is no staging area where it can do that kind of pre-processing. Or they were just lazy.)

Multiply this problem by a million and you have the state of enterprise software today.

I should leave the country more often: I go away and suddenly we have (near-)universal health care coverage! (Well, we’ll have to wait a few years for all of the health care reform provisions to kick in, but you know what I mean.) Not only that, but Ezra Klein reminds me that we even got rid of the pointless subsidy to the banking industry in the student loan program (where the government guaranteed the loans but let private lenders earn profits making the loans, even though the guarantee obviated the need for underwriting).

So what happens now? Nate Silver points out that passing health care reform has helped the Democrats, though not as much as I would have expected. I’m no expert on electoral politics and public opinion, so my guesses are just that — guesses. Anyway, I think that just as many people see politics as a type of sport, many people like winners; winning on health care would be good for Obama and the Democrats just as losing on it would be bad, regardless of their actual position on the issue. According to Silver, this is a little bit true. Still, I think it could become more true by November (relative to the unknowable counterfactual where health care reform failed), because it largely takes away one major potential criticism of the Democrats: they couldn’t get anything done. In Colombia, where I was, they were calling it the largest domestic program of any kind since Medicare, over forty years ago.

In the longer term, will this turn out to be as popular as Medicare? I doubt it, because the reform was so modest in many respects. (Klein has written many times about how this is not only a centrist bill, in many ways it’s actually conservative — reliance on market mechanisms, no public option, etc. Here’s his latest version.) I worry that, in the transition period, health care costs will continue to grow faster than inflation, companies will cut back on their plans, and people will blame the loss of their coverage on “Obamacare”; when people have their claims denied by their existing insurance plans, they’ll blame it on “Obamacare”; and, in general, the debate over the past year has so poisoned public attitudes that about 40 percent of Americans will assume that anything bad that happens to them (like getting sick in the first place) must be Obama’s fault. I also worry that, even as the bill “bends the curve” on long-term costs, people will see the fact that costs continue to rise faster than inflation as proof that the reform didn’t work — just like some people point to 10% unemployment as “proof” that the stimulus didn’t work.

But I think that near-universal coverage, and a ban on medical underwriting, are un-repealable enough that they will make it through the transition period until we reach the point where Americans assume that they can get decent health insurance at a price that, if not reasonable by international standards, is not completely unaffordable. And that would be a huge step forward.

I am getting thoroughly frustrated with a facet of the health care debate – the singular focus on health insurers, with total disregard of other contributors to health care costs.  Yes, I am in total agreement with the concept of providing health insurance to folks who currently cannot afford it, or who do not have access at any cost (because of pre-existing conditions).  I also believe that the rate of increase of health spending needs to be significantly reduced.  But, I do not believe that we can achieve any meaningful health spending reduction just by bashing or financially squeezing the health insurance companies.

Before I go any further, let me state that I do not own stocks or bonds issued by any company in health care, health insurance, or related industry segments.  I have no health insurance clients.  And none of my relatives or friends work for a health insurer.

Lately, it has become quite fashionable to cite egregious moves of various insurers and imply that if such moves were eliminated, the cost of health insurance (perhaps even health care) would be reduced.  President Obama (and others) frequently cites Anthem’s 25% rate increase in California.  Kathleen Sebelius, the secretary of health and human services, according to a 3/9/10 NYT article (p. A18) has called health insurers’ profits “wildly excessive“.  The same NYT article quotes Senator Diane Feinstein: “I believe, fundamentally, that all medical insurance should be not-for-profit.“  Also in the Times, Robert B. Reich, a former labor secretary and a Professor of Public Policy at the University of California at Berkeley, writes in a 2/24/10 article, “. . . because big health insurers are making boatloads of money. America’s five largest health insurers made a total profit of $12.2 billion last year [2009].”

So, let’s try to answer two questions:

1.  What do we achieve by trimming “wildly excessive” profits of health insurers?

2.  Are these profits “wildly excessive,” when compared to other industry segments?

It was actually Professor Reich’s article that initially sent me looking for information, as his billions of dollars of health insurance profits were a meaningless factoid unless one placed them in the context of the actual revenues of the five top insurers.  In order to have a solid foundation of comparative data, I reached for the 2009 Fortune 500 rankings (based on 2008 financials), easily accessible on the CNN web site.  The Fortune numbers are somewhat different from Professor Reich’s data, as they represent prior year results, but one also gets an unbiased comparison with other industries.

In 2008, the top 10 health insurers combined had $264 billion in revenue and profits of $8 billion.  A little bit of arithmetic shows that the combined profit margin for this group was 3.1%.  The highest profitability among the top 10 was reported by Aetna: 4.5%.

Thus, even if we regulate all health insurers to eliminate all their profits, as Senator Feinstein would have it, we can only reduce health insurance spending by 3.1%.  So much for the boatloads of savings that Professor Reich talks about – the impact on our health insurance costs would be minimal.

Now, one might say that turning the health insurers into true non-profits would also free up the sums currently spent on sales and marketing.  While this is mostly true, the sums saved still do not present a panacea for rising health care costs.  A spot check of annual reports shows that the cost of sales for top 10 insurers is about 3-4%.

So, let’s move to the second question.  We cannot make a dent in health insurance spending, but perhaps it’s worth bashing health insurers because their 3.1% profits are obscenely high when compared to other industries.

Well, it is not quite so.  The same source shows that top 10 pharmaceutical companies reported 18.4% profits in 2008 ($49 billion profit on $269 billion revenue).  Interestingly, the top pharmaceutical company – Johnson & Johnson – earned ($13 billion) more than all top 10 health insurers taken together.  Other “pharma” players were not far behind.  Both #2 (Pfizer) and #4 (Merck) earned $8 billion each, or as much as the 10 top health insurers taken together.  The highest profit was 37.7%, reported by Gilead Sciences.

Similarly, the top 10 companies in the ”medical products and equipment” segment had 10% profit ($6 billion profit on $64 billion revenue).  It actually would have been closer to 15%, if not for the disastrous year experienced by the #3 player, Boston Scientific.

Once you internalize these numbers, it becomes clear that any meaningful reduction of health insurance costs can only be achieved by reducing the underlying health care cost structure.  We cannot hold health insurance rates flat if we allow pharmaceutical companies to average 18.4% profits and to grow their revenues.  That would be akin to freezing the price of cars while allowing price increases for steel, rubber, etc.

As I was thinking about what health insurance profitability would not be deemed “wildly excessive,” I also looked at other areas of the economy where we spend significant amounts of money without complaining too loudly.  Interestingly, the top 10 Computer Software companies reported 23.6% profits on average.  The top 10 in Household and Personal Products (ranging from hammers and batteries to toothpaste and lipsticks) averaged 11.2%. Even the regulated Gas & Electric Utilities earned10.3%.

So, the 3.1% profitability that health insurers reported in 2008 pales in comparison with other industries and, even if totally eliminated, will not make a significant dent in our spending.  Any meaningful cost reduction will require a disciplined approach to modify the way we consume and price health services, ranging from doctor and hospital fees to pricing of medications, equipment, and supplies.

The Roadmap brings up the issue that there is little price transparency in the health care market. This is the solution:

“The environment resembles what existed in the securities markets before the stock market crash of 1929. Abuse, fraud, and misinformation about the nature of stocks and the rules governing their purchase were rampant. In response, the Securities and Exchange Commission [SEC] was formed with the main purpose of bringing transparency to the market and restoring consumer confidence.

“With the increasingly rapid transformation of the financial markets and the growing complexity of financial transactions, the private sector began to take a more prominent role in developing accounting guidelines; and eventually the SEC began relying on the private sector to establish the basic standards by which it would be regulated. Since 1973, the SEC has recognized the nongovernment Financial Accounting Standards Board [FASB] as the authoritative standard-setting organization for financial accounting and reporting information. While the SEC has statutory authority to establish such financial standards, it has historically adopted FASB rules. The SEC allows the private sector to establish its own disclosure standards, so long as it demonstrates the ability to fulfill the responsibility in the public interest. The authority to enforce the standards, however, falls solely to the SEC.

“Applying this model to the health care industry will allow all stakeholders to come together, without heavy-handed government intervention, to establish uniform and reliable measures by which to report quality and price information.”

Enron? WorldCom? Self-regulation? FASB, the SEC, and the securities industry are their example?

By James Kwak

But, Paul Ryan would argue, the Roadmap is going to bring down the cost of health care, so the fact that we’re providing less support won’t matter. Put another way, he might say, Obama’s plan also counts on bringing down the cost of health care, so why can’t I make the same assumption? There are two problems with this argument.

The cost control measures are weak

The first is that the Roadmap simply doesn’t do much to reduce health care costs. There’s a lot of talk about things like electronic medical records, but basically it’s just blather, as opposed to the detailed proposals in the Senate bill. The Roadmap pins cost reduction on one thing, and one thing only: eliminating the tax exclusion on employer-provided health care. I think this is a good idea, and I suspect that Peter Orszag does, too, but couldn’t push it through for political reasons. But the idea that it’s going to solve the health care cost problem alone is the kind of fantasy people have when they’ve only taken one semester of high-school economics and think the world works just like textbooks.

For one thing, the tax exclusion is just too small. The median family household had income of $62,621 in 2008, which means it has a marginal tax rate of 15%. (We’re pretty close to the 25% threshold, so I’ll use 20% in what follows.) So without the exclusion, the typical family plan would cost about $16,000 in pretax dollars, not $13,000; the exclusion gives the median family a discount of 20%. Only about 60% of people get health insurance through an employer plan, so the average discount across the population is only 12%. Given that the price elasticity of health care is almost certainly a lot less than one (if you double the price, demand won’t fall in half), the overconsumption due to the tax exclusion must be less than 12%. Yet our per-capital health care expenditures are more than 60% above those of any other advanced country.

I know there are second-order effects blah blah blah, but I don’t see how you can explain our entire health care cost problem as the result of one silly tax policy.

The Roadmap shifts all the risk from the government to households

More fundamentally, let’s assume for a moment that the Roadmap contained a blueprint for health care cost reduction as detailed and likely to succeed as the Senate bill. What if they are wrong? Here we see the real difference between the Republicans and the Obama administration.

In the Democratic plan, if it turns out health care costs don’t fall as fast as they hope, the deficits stay high and they try again. In the Republican plan, deficits fall and people die. In one case, the government budget bears the risk; in the other case, ordinary people bear the risk.

This gets at the fundamental question of what government is for, and maybe the fundamental difference between liberals and conservatives (at least those conservatives, like Paul Ryan, who are decent enough to have a coherent position). I believe that the government exists “for the people”–it exists to provide us things we can’t provide for ourselves solely through a free market.

Social insurance is one of those things. People are risk averse. Between (a) a guaranteed $40,000 per year in retirement and (b) a 50% chance of $100,000 per year and a 50% chance of zero, most people would take (a). There are some kinds of insurance, like Medicare, that only the government can provide, because only the government has the fiscal credibility necessary. I know some of you are wondering how I can say “fiscal credibility,” but do you think a twenty-two-year new college graduate can go to Aetna and buy a health insurance policy that will kick in when he turns sixty-five and pay out until he dies? No way. There is no way Aetna can take on that kind of risk.

This is why I wrote a post last summer entitled “You Do Not Have Health Insurance.” Aetna can sell you a policy for one year, but they can’t guarantee that you can have the same policy at a reasonable price next year. That’s not what you want. You want the security of knowing that, for the rest of your life, you will be able to buy a decent health insurance policy for a reasonable price. There is no way a free market entity can provide a product like that. (Life insurance, by contrast, works because life expectancies are more predictable than future health care costs–and besides, life insurance is generally backed by state-level government guarantees.)

The Republican platform is that people are better off on their own. The marketing behind this idea is impressive. Remember Bush’s “ownership society,” which meant that you “owned” your retirement? Given the choice between owning your retirement and having it guaranteed by someone else, why would you possibly choose the former? Yet that’s the message.

The Roadmap is an extreme version of this ideology. The implicit premise is that we have to screw ordinary people–or at least make them bear a high degree of risk–in order to save the government budget. But what is the government budget? It’s a pile of money that we contribute and that our representatives are supposed to spend on things we can’t buy for ourselves individually. I know that those representatives make mistakes, are borderline corrupt, etc. But Medicare is exactly the kind of program that we want government to provide–a program that shifts risk from individuals to the government, and thereby the country as a whole–and that’s why it’s so popular, even with Mitch McConnell (on even-numbered days).

Gutting Medicare helps the federal deficit, but it does it by shifting the burden dollar-for-dollar onto individuals. Actually, it’s worse than that, since Medicare does a better job of keeping administrative costs and reimbursement rates down than private health insurers. It’s a net loss to the people as a whole, and that’s what matters.

But . . . it’s a net gain for the rich. Medicare is funded by a flat tax of 2.9% (unlike Social Security, there’s no wage cap, so it’s not actually regressive–well, it’s somewhat regressive, since the tax is only on wage earnings, not investment income). So the amount you contribute is a percentage of your income. But the amount you get back is more or less the same for everyone. So effectively Medicare redistributes money from the rich to the poor. The Roadmap actually makes Medicare slightly more progressive, by reducing vouchers for people with high incomes. (For example, couples making over $400,000 will only get 30% of the standard voucher; but that means their incomes are more than 8x the average and they get 1/3 the benefit.) But the big thing it does is drastically shrink the size of Medicare, so in 2040 it is 3.8% of GDP as opposed to 10.9% under current projections (CBO letter, page 6).

So the net effect is to take a redistributive program (that is the whole point of social insurance, after all–we don’t know who will be rich at age 65, so we’re willing to hedge our bets) and slash it to less than 40% of its projected size.

What would I do? I think that social insurance is good (because otherwise poor old people will die) and that people want it (because they are afraid of being poor and dying). Everyone agrees that we should do what we can to bring down health care costs in general and to make Medicare more efficient.  But assuming for the moment that that isn’t enough to prevent deficits from ballooning, I think we should increase the Medicare payroll tax (or, better yet, income taxes, which are progressive) to fill the gap. Paul Ryan and the Republicans think we should let people fend for themselves.

Remember, all the money we’re talking about belongs to all of us. Either we tax ourselves, put it in a pool, and provide health insurance for all seniors; or we don’t tax ourselves, put it in our wallets, and hope that we’ll be among the lucky few rich enough to pay for health care when we retire. (I know there are efficiency arguments as well, but they break both ways, since Medicare itself is more efficient than private insurers; and in any case, because of risk aversion, we should be willing to give up some expected output in exchange for better security.)

That’s the choice.

Update: Austin Frakt says that I estimated the impact of the tax exclusion incorrectly.

By James Kwak