The Republican Plan, II: You’re On Your Own

In my previous post on the Roadmap for America’s Future, I discussed how the Republican plan is based on converting Medicare into a voucher program and then slashing the vouchers drastically relative to current Medicare spending projections, leaving seniors without the ability to buy anything close to what they get from Medicare today. In that post, I compared projected Medicare vouchers under the Roadmap to projected Medicare spending under current law. If you assume that, in the Roadmap world, the cost of Medicare-equivalent health insurance will be the same as currently projected Medicare spending, then people will die.

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

52 thoughts on “The Republican Plan, II: You’re On Your Own

  1. Your final paragraph sums up the moral and social reality of it.

    I still don’t understand why we should tolerate the existence of “property” and “the rich” if we can’t even get decent, basic health care out of the deal, as a social good.

    If even something that modest isn’t going to trickle down, why have heights at all?

  2. “The Roadmap takes the opposite approach: it puts all the risk of rising health care costs on beneficiaries. In concept, it takes the current amount that the government spends on Medicare and turns that into vouchers that are distributed to individual beneficiaries, who are then free to buy whatever health insurance they can in the free market.”

    More of the same bs – the shifting of life’s risks, and the burden of dealing with these risks – to individuals and families. Just how many are capable of becoming their own experts about one of the most complex facets – struggling single-handedly with health insurance companies – of their lives? Many are already balancing precariously on a financial high wire on their own.

    Is this what we mean America to be?

  3. Unless people adopt healthier lifestyles or scientific breakthroughs lower costs, this country is going to be spending an increasing share of its GDP on health care.

    How we adjust to this is the problem at hand.

    Good posts by James.

  4. It is the government’s responsibility to ensure that we live forever, whatever the cost. More money is not going to do this. Spending money on technologies that extend our carbon based lifeforms is only a stopgap measure. We need new technologies, like electronic backup of one’s soul.

  5. James, we have been fooled since the Reagan Revolution to think that if you can’t do it yourself then you are not American. There are many out there that cling to this “ownership” ideology and, like the lottery, have convinced many more people to that gamble because they might strike it rich like the rich guys and then get “screwed” by having to pay health care and social security for poor people. And this mentality has carried over to places like Wall Street, where we now have 401k’s instead of pensions because people are convinced that all they have to do is put away 15% of their incomes and when they turn 65 they will have millions of dollars in their accounts.
    I think also this ideology feeds on the human character flaw of vanity. People like to feel like they won and someone lost. They like to feel that they were smarter than the guy next door. That they have a bigger house/boat/car/401k than the other guy. And people are really caught up in this ideology that they would rather have a 1% tax cut than have a .5% tax increase if it means that that money is going to “cadillac welfare queens”, instead of providing grandma and grandpa with health insurance.
    Great writing.

  6. Notwithstanding, it’s interesting to see that the Obama administration can get tough, seemingly, on business, if not Wall Street. Witness how they are going aggressively after Toyota.

  7. exactly, DakotabornKansan.
    This Roadmap ideology expects individuals to be personally responsible for everything. You are supposed to be an expert in law, accounting, tax, etc. And if you can’t, you spend the money to hire an expert. Which puts the average minimum wage worker at a disadvantage to the billionaire to can afford the best. I don’t expect the gov’t to hire me one of these individuals for everything. But in democracy, everyone is supposed to be equal. And money destroys that equality.

  8. “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.”

    Gov’t doesn’t “provide” anything. It redistrubutes what was previously created in the marketplace to politically preferred groups. Reagan worked with horses. He knew that if you overwork the horse, he quits.

  9. GOP political economics is based on the neoliberal (mistaken) notion of aggregation. It is mistaken because of the fallacy of composition. Society is not the aggregation of its members, as is a set. Society is a complex and dynamic web of relationships among its subsets (groups of individuals) and elements (individuals). The complexity and dynamism of a system make it much different from the simple aggregation that neoliberal static models presume, based on the simplistic concept of a representative agent.

  10. “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.”

    Basic difference between equity and a bond. Returns from equity are ALWAYS greater over time than returns from lending. Otherwise, no one would own anything or bother to start a business.

  11. Ok, Ms. Rand. Let’s test that proposition. Eliminate the government entirely. No more enforcement of contracts, no more enforcement of property rights, no more court system, no more police, no more military, no control of negative externalities, usher in a return to that wonderful Hobbesian state of nature. Then tell us if total wealth has increased (or even remained static) in the absence of all that pesky government. No, the existence of society, and the government that holds it together, most certainly DOES increase wealth as opposed to merely redistributing it.

  12. You are using the wrong marginal tax rate to do the exclusion: Health benefits are not included in income for both income and payroll taxes. Thus to a family making $62,000, a health insurance policy purchased through an employer at a cost of $10,000 avoids 20% in income taxes and 15.3 percent in payroll taxes (not including state taxes). So you’d need $15,456 to purchase the same plan on your own. That’s pretty big to me.

  13. “Eliminate the government entirely. No more enforcement of contracts, no more enforcement of property rights, no more court system, no more police, no more military, no control of negative externalities, usher in a return to that wonderful Hobbesian state of nature. ”

    And don’t forget the elimination of limited liability for corporations, the biggest moral hazard we have today. Corporations cannot exist without governments that recognize their fantasy existence.

  14. Also, you are confusing the elsticity of health care with the elasticity of demand for employer provided insurance coverage. The marginal tax rate doesn’t matter for my consumption of health care conditional on my having health insurace. Indeed, in most insurance plans the marginal cost of care is zero (or a $20 copay or something). Since cost sharing is so small, even with inelastic demand for health care you can generate sizeable increases in care.

    The tax subsidy only affects your demand for insurance itself, not the care you get contingent on having insurance.

  15. “Only about 60% of people get health insurance through an employer plan, so the average discount across the population is only 12%”

    Is this really correct?

    You are neglecting the discount from payroll taxes, state taxes which combined can be another 25+%, counting both the employee and employer payroll taxes and state taxes can be close to 10% example in CA.

  16. I would suggest a 20-30 year experiment with the Republican proposal. It would include only registered Republicans.

  17. The notion of aggregation, as best expressed by Milton Friedman (see his book, Free to Choose), permeates all of neoclassical economics and doesn’t have a party affiliation. For that reason alone, I wish that we could have this discussion based on the merits of the proposals and economics alone without making it partisan.

    The notion of aggregation has a further problem in that it fails to recognize we live in a world of scarcity and not abundance. The choices that one individual makes often reduces the choices of other individuals who will have to choose later. We are not truly “free to choose,” we are only free to choose among the options that remain available when its our turn to decide.

    A critical role of governments is to protect resources that are needed by all in the long term from being squandered by a few in the short term for a gain that will ultimately prove illusory. Unfortunately, both parties in government today seem more interested in shaping our choices to benefit the fictitious citizens that sponsor them instead of protecting the commons for the benefit of living, breathing human beings.

  18. On the tax exemption: I think the effects of this are larger than you state (though there are also reasons for thinking they might be lower). First, I think means, not medians, matter here. (I have no clear sense for what difference that makes, but I suspect it would give slightly bigger numbers.) Second, the tax exemption is closely related to the employer-based pooling. Because of this, overconsumers of health care don’t face higher future premiums, since premiums are fixed at the employer level. Rather their coworkers face higher premiums. I think if the tax exemption ended, this employer-based health care benefit provision would unravel, and there would be reductions in moral hazard that goes with it.

  19. Bravo, sir.

    The idea of resource management never existed where greed was king and morally acceptable, and people mere aggregations. Curse Friedman and all his would-be believers and pracitioners. And shame, SHAME on the Nobel Committee for awarding this man, this dissembler and deciever. If it were in my power, to teach his works or utter his name in praise would be criminal.

  20. So to sum up: the Republican plan is to implement the “death panels” concept. But it’ll be OK, because they aren’t government death panels.

  21. My problem here is that this voucher system is only a half way measure. If we want health care to behave anything like a free market we need to severely limit the role of private insurance. A “free market” in health insurance accomplishes nothing. On the other hand a free market in health care could have a chance of controlling costs.

    Health insurance is not insurance at all. It is really a way for providers to get their money from their customers. The real problem is that the service appears to be free to the customers, so they have no incentive to behave like a good consumer and keep costs down. That is a major cause of runaway health care costs in this country.

  22. ok, let Medicare continue to be social insurance against the risk of disease/dying, but reform it to stop paying for hip/knee replacements, scooters from the “Scooter Store,” hearing aides, etc. etc. How much will that save? Does anyone know? When you can’t turn on the radio without hearing an advertisement for a utility-improving-yet-not-medically-necessary procedure in which the announcer says “in most cases this will be covered by Medicare,” you know we’ve come too far. There are so many things we can do to reform the system without eliminating the benefits of social insurance.

  23. Regarding the effect of tax subsidy on consumption, a colleague pointed out that it isn’t the extensive margin that drives costs, rather it is the intensive margin. Also, the tax subsidy isn’t simply the Federal marginal tax rate. The correct expression also includes state and payroll taxes, which together can double your assumed figure of 20%.

    (The proper expression for the tax subsidy is derived by considering the cost to an employer for providing a dollar of after-tax compensation to the employee. It’s far more complicated than you might think. See the 5th page (marked 297) of

  24. Of course it shifts risk onto individuals. This is essentially the Republican/ free market world view. They eviscerated the corporate pension system that used to exist, shifting the burden of risk from companies to individuals. If you had the bad luck to retire last year, as my mother did, you saw your 401K collapse by 50% and then grow again. How do you like those wild fluctuations just as you retire? Once upon a time an institution with greater resources and greater time horizons would have dealt with that. Now it’s you. (And of course this has the benefit of serving as a sort of full-employment plan for stock brokers.)

    Now they are seeking to do the same with health care. And of course they continue to seek the same with Social Security, the shred of collective pension that still exists.

    It’s all part of the same process. The achievements of the 20th century are being dismantled one by one.

    What I can’t decide is if Americans just get what they deserve in the end.

  25. I am thinking the answer is yes. as an individual trying to buy the same coverage as your employer can get (because its a group policy they have a lot more leverage. and the risk is spread over a much large group. in a family of 2 or 3, the odds change dramatically and the insurer has to account for that. so rate go up, or coverage goes down).
    so the odds of you getting the same coverage for the same price are nil if non existent

  26. I think what we tend to forget here is that if we make health care a social good, we will inevitably run into the free rider problem and people who overuse and abuse the system. Look at any other entitlement program created: people abuse the system. This will happen with health care as well. What we need is tort reform.

  27. then why is it that in the US we spend at least twice as much as any the next most expensive country. and get worse results? is it because American have bad DNA and will always have bad health?

  28. While your analysis has much to commend it, there ar two big problems, and one small one, with your analysis.

    First and most obvious, is the straw man fallacy. Who said that 100% of health care overconsumption was due to one silly tax policy? That’s a straw man argument. Why do you do these things? It demeans the contribution you are otherwise making.

    Second, related, perhaps not as obvious to the casual reader: 12% is a huge number is absolute and relative terms. First, it’s 20% of the overconsumption. That is significant! If you can fix it you’ve fixed 20% of the problem. Second, and even more important, it’s 12% of a sector that is 17% roughly of the US economy, so right there it’s 2% of the entire US Economy. $1 of every $50 spent in the US in one year. In dollars, it’s 250 -300 billion per year. That is a huge number derived from one “silly tax policy”. This is not loose change. It’s huge. Compare it to anything – the cost of the Iraq war, the education department budget, infrastructure needs, the cost of interest on the debt, the things you want to subsidize. It’s huge in its contribution.

    Last, the small problem: why do you sneer at the second order effects – “blah, blah, blah”? You haven’t quantified or modeled those; do you realize how “silly” it comes across to sneer at something you haven’t analyzed? Surely you teach your students to do better than that. You’re working in the realm of huge numbers. Even a modest second order effect will be in the tens of billions a year.

  29. we actually did tort reform here in Texas. guess what? it had little no impact on health care costs. we still are among the most expensive in the country
    and i suppose we can identify many corporations and other business as free riders too? after all we seem to have just as much if not more entitlements for them!

  30. Is there a Republican Roadmap for the food stamp program, which will grow to more than $60 billion this year?

    According to a recent analysis of state data collected by The New York Times, “about six million Americans receiving food stamps report they have no other income. In declarations that states verify and the federal government audits, they described themselves as unemployed and receiving no cash aid — no welfare, no unemployment insurance, and no pensions, child support or disability pay. Their numbers were rising before the recession as tougher welfare laws made it harder for poor people to get cash aid, but they have soared by about 50 percent over the past two years. About one in 50 Americans now lives in a household with a reported income that consists of nothing but a food-stamp card.”
    Andre Bauer, the Republican candidate for governor of South Carolina, whose political thinking was shaped by his grandmother, on food stamps, “She told me as a small child to quit feeding stray animals. You know why? Because they breed! You’re facilitating the problem if you give an animal or a person ample food supply. They will reproduce.” And Representative John Linder, a Georgia Republican, who is the ranking minority member of a House panel on welfare policy. “We’re at risk of creating an entire class of people, a subset of people, just comfortable getting by living off the government. You don’t improve the economy by paying people to sit around and not work. You improve the economy by lowering taxes”

    Are there no prisons? Are there no workhouses? Don’t we have to screw these people–or at least make them bear the high degree of risk – in order to save the budget?

    Is America is a tough s–t society? How does a tough s–t society affect American families, if its choice is not to step in when someone needs help, and the extraordinary burden is placed on family members to struggle with the problem as best they can? If your homeless, tough s–t. If you don’t have anything to eat, tough s–t. If your sick and don’t have health insurance, tough s—t. I’m all right, Jack. I’ve got mine, Jack. If that is the case, then the United States is a pretty dreadful, shallow uncivilized society.

  31. Unfortunately, not all 401k’s grow back when they collapse. Enron is a great example. Those people who were assured that their 401k’s were in good shape and that the company was sound ended up royally screwed.

    Of course, the Republican philosophy is that those employees should have known better and that bad things are going to happen to people and so what if they do.

    It behooves everyone to remember, though, when conservatives/Republicans talk about ending social programs, that social security and medicare are the two largest social programs in the United States.

  32. The funny thing about Reagan and his “ownership” mentality is that Reagan was a product of the studio system in Hollywood. That system created him, nurtured him, told him what movies he would make, treated him like property, kept him out of trouble and out of the headlines if anything bad happened and created “good” press for him when he needed it.

    When he moved on to politics, it was only a ramping up of his acting career because he convinced people that he had actually made it on his own and that having someone looking out for you was a bad thing.

    The studio system also created in Reagans mind that having elites who were better than everyone else was a natural and good thing and that any attack on that system of elites was contrary to the “natural” way of things.

  33. best description of reagan i ever read. you forgot that he never spoke his own words in his entire life. he went from playing rockne (or gipp, i forget which), to partnership with a chimp, to a sinclair lewis con man who spent 8 years blowing smoke up the country’s a$$. unfortunately, he had box office appeal to the nonthinking,something he passed along to gwb. i wonder how many people realize our screwing began in earnest with him?

  34. High technology health care is very expensive. What is the economics of reducing the number of people who can afford health care to the well off so that the premiums on the few that are left essentially means that premiums must escalate until no one who cannot pay for health care out of pocket can afford it?

  35. c smith:

    “Basic difference between equity and a bond. Returns from equity are ALWAYS greater over time than returns from lending.”

    The key word here is “time”. A bond purchased in 1995 (13 years ago) has returned significantly more than the Dow or S&P. The average man retiring at 65 has 13 years to live. If he retired in 1995 with “ownership” of his retirement, he would run out of money before he dies. By having his retirement guaranteed by taxpapers through SS, he is assured of never living longer than his retirement fund. That is why it is called Social SECURITY, not Social Hedge Fund.

  36. The most obvious flaw in all proposals is that Medicare, which I consider necessary actually covers all of those who are aged or aging, and thus experience the highest cost of medical care on an annual basis. Meanwhile, the rest are left to their own devices. Interestingly enough, Medicare for all (actually single-payer in sheep’s clothing) makes the most sense, since a really good argument can be made to adjust taxes my an amount (on an annualized basis) to fully pay for the benefits, and would actually create substantial power of the government to control costs and leave providers to find better, more efficent ways to deliver treatment. All other proposals, especially those to enable insurer’s to keep their vice-grip on our health, are substantially bogus. The Republicans would (contrary to what they say) like to kill all of the Democratic grandmothers (without using death panels, but through legislation designed to truncate available Medicare benefits.

  37. Why is it that when addressing the health care crisis in this country, no one brings up the fact that we can afford $744 billion dollars for “defense” but we can’t afford the cost of health care. Why is that? Why is “defense” utterly untouchable? Have we become so brainwashed by the Department of Homeland Security (what a communist-sounding name!) that we truly believe that our military is defending us when,in fact, they are defending the corporations that run this country?

    Wake up, people, would you please??

  38. Scot, while I agree with what you say, let me point out that there is a difference between the GOP mantra about individual responsibility, which boils based on aggregation, and the Democratic one that emphasizes that society is a complex dynamic system that implies, “We’re all in this together,” meaning that there is also community responsibility” (it’s called citizenship). As a result most conservatives are neoliberals economically, and most liberals are Keynesian, either New Keynesian or Post Keynesian. Unfortunately, however, the Establishment of both parties has been captured by the moneyed interests and is governing neither in the people’s interest or in the interest of future generations. As a result, neoliberalism (laissez-faire capitalism) is determinative in policy-making, except when the elite needs to tap the Treasury to socialize the losses resulting from their overreach.

  39. There is a lot of talk of… if we don’t do XYZ… people will die.

    Fact: Everyone will die! no?

    Healthcare spending extends life. But it’s the law of diminishing returns… at some level it seems spending 200% of GDP won’t increase average life expectancy more than a year or 2 past what we have today with 20% of GDP spent on healthcare.

    I fear at some point we just need to decide how much of GDP we’ll spend on healthcare, socialize it and hope the system spends the $’s on people who are of the age, and condition that it makes sense (that is scary)… otherwise you have 5000% GPD spent, and life expectancy incrementally increases 4 weeks… but then we all starve to death since the economy collapses.

  40. (PS, I have no idea how much of GDP we spend on healthcare… I just guessed 20%, I’m sure someone will correct me)

  41. One detail I don’t get – how does healthcare bankrupt us?

    If we spend more on it, that money doesn’t “disappear”, in theory it gets moved from one set of American hands (the government or private individuals) to another set of American hands (doctors, hospitals, drug companies, medical device manufacturers, etc.). One would think, much like a war, that it would be “stimulus”. You would think that increased spending in healthcare would lead to increased jobs and income in the healthcare industry. That in turn, if taxed correctly, would yield higher tax receipts thus helping to fund the government and so on.

    So why isn’t this “law of physics” (the conservation of money) working here?

    My guesses are:

    1) Medical jobs tend to be higher paid, thus it leads to unequal distribution of wealth.
    2) The tax system has become regressively skewed and thus the unequal distribution above cannot be recaptured.

    I am sure there are other reasons.

    Anyway, #1 brings me to another point – when we talk about saving money NO ONE talks about doctor’s salaries. Somehow this is sacrosanct. My opinion is just like the rest of us, they are going to have to take a haircut.

    Yes, I know that medical education is expensive, but I’d be more than happy to see government funding (or reimbursement) of medical education provided we could rein in the salaries. I mean there are people at the local hospital doing cardiology who make over $1 million per year. That is just insane, no matter how important the work is and if we want to control this, it isn’t just the insurance companies and the drug companies who will have to be fixed, but also the hospitals and the doctors, who as of current, are sacred cows in this thing.

    Finally, in some sense we know where the money is, so taxing ALL Americans is not the answer. The answer is taxing where all the money went – the top richest 2% who now own an unreasonable portion of the total wealth of the nation. Should that wealth be “recycled” more effectively, then the whole system starts working again.

  42. It is at least arguable that the “over consumption” of health care services is a function of the information disparity between providers and patients. When providers have a financial interest (directly through ownership or lease of equipment and facilities; indirectly through litigation aversion; or directly through schedule “filling”), it’s not fair to put the “over consumption” burden on patients. Further, neither proposal shifts the burden for over-treatment or medically unnecessary care to providers–rather, patients and/or health plans are often left to pay for such care. This removes any real incentive for providers to make cost-effective decisions–someone will pay.

    There has been significant research (Rand, et al) that indicates that patients are able to make cost-sensitive decisions about when to obtain care. If care is free (no or very low out-of-pocket cost) then more services are used than is medically necessary. On the other hand, with reasonable co-payments, patients are able to appropriately seek needed care. One of the problems with the current Medicare system is that if a person purchases a decent Medicare supplement policy, the marginal cost of a physician visit or service is $0. Before we throw the Medicare baby out, let’s try to rationalize the program so that it encourages appropriate use of care. AARP would be horrified, but if Medicare paid subject to co-pays and had an out of pocket amount, it would eliminate the need for Medicare supplement policies and significantly reduce the cost of administration to the providers–less work for the Post Office and paper manufacturers, but a much more rational and focused payment system. Medicare beneficiaries could elect to enroll in the “higher” benefit and pay CMS rather than insurers. Win/win. Doable in the short to medium term.

    There is also a disconnect in any voluntary insurance system. Under current law, hospitals must treat to stabilization. Unless we are willing to revoke those requirements, there is little incentive for those without assets in relatively good health to purchase insurance. (It is highly unlikely that those who elect to go bare would sign a “Being of sane mind, I order you to provide no care to me” order as a condition of being uninsured.) Under these circumstances, a payroll deduction for a national risk pool for care over a high-dollar threshold makes more sense: You can go without insurance but you have to contribute a fair share. We may not like it, but we’re all in this together.

  43. So don’t replace a failed osteoarthritic hip and supply a wheelchair instead? Or put disabled insureds in a nursing home for care and flip the cost to Medicaid?

  44. “life insurance is generally backed by state-level government guarantees”: Unless things have changed in the decades since I worked in life insurance, that isn’t so. Instead, a state strictly regulates the financial stability of its life insurance companies. I recall, for example, that Pennsylvania limited a life insurance company’s stock investments to no more than 5% of its assets.

  45. Stop paying for hip replacements and instead pay for what? Five years of cancer radiation; twenty years of heart pills? Hips and cataracts are the two things industrial medicine has learned to fix. Let’s hear from your when your first hip breaks down and you begin crawling to work.

  46. Did you forget we just spent $14 trillion to save the shareholders and bondholders of a few large banks? Have you noticed what we spend on war against an unidentifiable enemy who shows up in person only on episodes of cable cop shows? Is the fed running out of trees and unable to satisfy currency demands? What we cannot afford is a government of scoundrels and a nation of idiots receptive to endless fear messages and demands for bogus patriotism.

  47. You are both right Dakotabornkansan and ep3. This kind of self responsibility is what the Republicans have always believed despite the level of education of many Americans. The Ownership society took a big hit in America because controls were removed. If the Republicans can guarantee that controls will be there to protect citizens from unscrupulous freemarket health insurers, then maybe there’s a 66% chance their Roadmap won’t lead down the wrong road, again.

  48. “I wish that we could have this discussion based on the merits of the proposals and economics alone without making it partisan.”

    Good luck.

  49. If a thing is unsustainable, it won’t be sustained. Can health care expenditures continue to ramp up at that rates we have seen in the last 20 years or so? If society can afford that, then we can continue with today’s Medicare, which is what I sense Kwak is secretly arguing. But if not, projected Medicare expenditures have to be reduced somehow and by a lot. The most straightforward ways I can think of are would seem to be politically very unpopular: a non-trivial increase in the benficiary age requirement or some kind of means testing. Human nature is what it is: only a few years after society agreed to dump billions of dollars into Medicare drug benefits people are screaming about the dreaded doughnut hole. Of course, the doughnut hole could be immediately fixed with a deductible, but that cuts out folks who aren’t consuming “enough” drugs from getting a “fair” deal. I say adopt a Republican type plan and let it run for a decade or so and then when enough people have more reasonable expectations, revert back to a more public plan with means testing involved.

  50. I don’t disagree (entirely), but I’d rephrase your argument somewhat. Insurance works best when it pools stochastic risks.

    Health insurance costs are a mix of non-stochastic consumption of services under human control (people pretty much know when they’re going to have a baby, or even a root canal), semi-stochastic (we’re all going to die, but we don’t know when or of what), and truly stochastic (getting hit by a car). On top of that, costs for a given medical encounter are extremely non-deterministic (when you go the hospital with abdominal pain it could be a stomach-ache, or it could be colon cancer). Put these together and you have a genuine problem with price transparency. This is a big part of our cost control problem – neither doctors nor patients have a particularly good idea of what the final paid cost of service will be when they opt for a procedure, because the cost in each case is hashed out between provider and insurer(s) for that patient. Couple that with a fragmented healthcare system in which many providers typically only have responsibility for a portion of the patient’s health and are paid per-service, and you have a situation where cost control is extremely difficult. To make matters worse, all private insurers are just trying to kick patients down the road until they are on Medicare.

    It’s not clear to me whether getting rid of Medicare solves this problem, but I believe policy-oriented conservatives (such as are left) believe it would force medical services out onto an unsubsidized market and thus bring price transparency. That has and will work for elective procedures like Lasik, but I’m not convinced there will be a functioning and liquid market to set prices on dealing with a heart attack.

    I think the big flaw in James’ post is that he ignores the issues of price transparency and Medicare as the insurer of last resort in cost control. I’d be really curious to know if other wealthy countries have measures that fundamentally increase price transparency and/or prevent the insurer of last resort problems.

    I’m not totally persuaded that the current health care bill will “bend the cost curve” in the ways that they describe – I still think the bill skipped any political heavy lifting with respect to the providers, but I do believe they’re talking to the people who know health economics best, so I’m optimistic that it’s a step in the right direction.

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