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