The recent agreement between the Republican House leadership and President Obama to cut $38.5 billion from the federal budget during the rest of the year is a small step in the right direction of bringing federal spending under control. Since spending skyrocketed during past several years from about 20-22% of GDP to its present level of 25% of GDP, much more has to be done to bring federal spending back to its longer term share of GDP (for a way to approach this problem during next few years, see the Wall Street Journal April 4th op ed “Time for a Budget Game-Changer” by George Shultz, John Taylor, and myself).
A much bigger problem is presented by the expected growth in government spending on medical care and retirements during the next several decades. This growth is the main subject of Representative Paul Ryan’s recently released over 70 page “Roadmap” for entitlement control,and to a lesser extent tax reform. The report also includes cuts in defense spending and domestic discretionary spending that would help in taming the budget during the next half dozen years. Ryan's Roadmap is bold, creative, politically risky, and clearly highly controversial. On the whole, the Roadmap contains excellent proposals that, if enacted, would greatly improve the long-term budgetary situation of the federal government of the United States, and the long-run prospects for the American economy. I will briefly evaluate the main changes in health care spending.
1. The Roadmap proposes to provide a $2300 health insurance tax credit for individual tax filers, and a $5700 tax credit for joint and family tax filers. This tax credit would substitute for the present tax exclusion of employer provided group health insurance from employees’ taxable income. This is quite close to a proposal made by Senator McCain during his campaign for president.
The present system of tying health insurance to employment through special tax advantages is both expensive and wasteful. It also discourages job turnover by employees because they have to obtain new coverage after changing employers or taking time off from work. Eliminating the tax exclusion of employer health coverage would break the artificial advantage given to employer health insurance compared to other group plans and to individual coverage. My main objection to the plan is that tax credits eliminate an important source of taxable income, so it would be better that the $2300 and $5700 government transfers be tax deductible rather than tax credits. Since individuals and families with low incomes and low marginal income tax rates would benefit little from a tax-deductible transfer, they should be helped through special provisions.
2. The Roadmap would reform Medicaid for older recipients partly by substituting block grants to the states for the present system of matching state spending on Medicaid. This would force states to pay 100% of their expenditures in excess of their Medicaid grants rather than sharing these additional expenses with the federal government. The Roadmap would provide younger Medicaid recipients with health care debit cards that could be used only to purchase health care services and supplies. Families with incomes below 100% of the official poverty level would receive $5000 into their debit accounts (in addition to the proposed tax credit), while higher income families would receive smaller amounts. Both reforms of Medicaid are in the right direction because they introduce greater incentives to economize on medical spending by states, and by individuals and families on Medicaid.
3. Medicare is the most rapidly growing entitlement program, and the most difficult to reform of all the entitlements. Unfortunately, to make it more politically acceptable, the reform proposed in the Roadmap will only start after 2021 when 55 year olds today will be 65. It would have been much preferable to have it start in five rather than ten years. Under the Ryan plan, seniors would no longer enroll in a government health care program, but instead they would buy health insurance from private insurance companies that would compete for their business. To help them do this, seniors would receive federal subsidies in amounts that would depend on their incomes. For example, couples with incomes below $160,000 would receive the full standard amount, whereas couple with incomes between $160,000 and $400,000 would receive only half the standard. The standard payment would be the average amount Medicare currently spends per beneficiary, adjusted for health risk, for inflation, and for increases in the medical cost index.
There are several advantages to these proposals for Medicare compared to the present system. Competition among insurance companies will increase efficiency in the delivery of medical care, and thereby keep costs down. The subsidies will help lower-income seniors afford decent medical coverage, but higher income seniors would have to pay more of their own money for insurance rather than taxpayers’ money. In addition, individuals and families could buy more expensive coverage beyond the basic plans financed by the proposed Medicare grants, but they have to pay for that additional coverage themselves. A major weakness of the American health care system is that out of pocket expenses are such a small percent of total medical spending. This proposal helps to correct that distortion.
The Roadmap has the potential to bring major savings as well as better care to the market for health care. I do not believe that the sizable growth in the fraction of GDP spent on health care in the United States (and also in other countries) has been a waste of money. Both the young and old attach very high value to improvements in the quality of their life, and in their life expectancy. However, substantial efficiencies are certainly available through proper reforms in the health delivery system.
Politicians have been afraid to touch medical care as they call it part of the “third rail” of politics, which would involve monkeying with benefits to the elderly. Representative Ryan and his committee deserve great credit for putting forward a bold and specific plan. It can be improved, but if the main parts were adopted, it would be a big help to reining in long term medical expenses.
It also discourages job turnover by employees because they have to obtain new coverage after changing employers or taking time off from work.
Posted by: vibram five fingers | 04/18/2011 at 06:56 AM
Christopher, for the record, I did see the distinction in your original post and I should have been clearer. My sole purpose with the last comment was to set the record straight on the facts as I know them. The problem you mention, on the other hand, is one of the toughest problems people have to face and for which there are no government solutions. That is why values play such an important role in my own model. It is also why I threw in the comment that “You should give that doctor the benefit of the doubt: it could well be that he considered a more honorable course of action to be that of giving his patients the time he knew he needed to dedicate in order to live by his Hippocratic Oath.”
I faced that problem numerous times when I was still active in business, and believe me it was the toughest balancing act that I ever had to face outside of the family. Obviously I have no clue what happened in the case of your doctor but I always hold back making judgments in such situations. As you say, and I agree fully, “There are other considerations, especially for someone who has built up a trust over decades with people in their community.” It is just that having seen how my own GP suffered in his last days because he didn’t have enough time to do justice to his patients that I had to mention what a tough balancing act that is, one deserving of comprehension.
Posted by: Xavier L. Simon aka Xavier | 04/18/2011 at 09:50 AM
Yes, I agree with you, Xavier on the difficulty in balancing legitimate self-interest, responsibility to those who are suffering who have become dependent on a doctor in more ways than clinical medical care, and the doctor balancing time and energy among patients. Many ethical decisions involve questions of this sort. That is why I am drawn to virtue theorists such as Plato and Aristotle for insight into these kinds of dilemmas.
I think that there was a slide that government involvement in health care started that perhaps has led us to these kinds of troubling cases becoming more unbalanced in the way they are addressed by medical professionals and institutions. When people paid out-of-pocket for most of their medical services, doctors did not attempt to jack up the prices to take advantage of people who were in a vulnerable position. There was very likely some price discrimination that allowed the doctor to charge those who could afford it more to compensate for treating those who could not afford the regular prices. While the doctor benefited from this pricing strategy to some degree, in most cases, it was not a ruthless attempt to "shake-down" the patients. Again, there was a balancing act at work, but, as far as I know, it was not exploitative of the patient.
Then we got employer provided private insurance for a broad range of medical services (which was instituted as a way to evade wage controls in WWII) followed by Medicare and Medicaid. These trends lessened the personalistic quality of medical care. Doctors, clinics, and hospitals felt free to drop the balancing act that we both have been referring to and proceeded to charge all that they could get. Afterall, it was faceless, impersonal institutions that were being billed. Why not get what you can? As a response to this problem, these government and insurance companies instituted forms of price controls that create shortages and other distortions in the market. That is why reducing the role of third party payers is an important aspect of reforming our payment system for our medical care.
But now, it seems, that this mindset of doctors and clinics charging what the market will bear is beginning to shift to include the patient in addition to the large institutions. That is what I see at work in the experience that I described above. Doctors and clinics have become used to the larger income from the third party payers and are looking to make up the difference from somewhere and that somewhere is us. The third party payer system raised their expectations and it is hard for the medicals pro's to adjust. If we had a real market all along with people directly paying for most of their regular medical care, prices would be much lower than they are now with doctors and hospitals retaining the ethos of balancing their own needs and desires with those of their patients rather than attempting to max out their income. So, it is governmental intervention that created this imbalance. And if government involvement continues, even as it does under the Ryan Plan although the Ryan Plan is an improvement, these imbalances will continue.
Posted by: Christopher Graves | 04/18/2011 at 06:26 PM
Exactly Christopher; for many years I have been studying the process of evolution you describe, which is an integral part of change and development. Elsewhere I have written how “progress,” by which I mean increases in the carrying capacity of societies, happens through specialization and economies of scale. These require the continuous development of new mechanisms for coordination and rules for achieving it, rules that need to be tested, adapted and disseminated before they are fully effective. The material part is easy to see and explain. The related values and cultural norms are an entirely different story. On the whole I think the material components are growing much faster than societies are able to adapt their values and cultures, including their governance capacities, and that is why I think history shows that every society eventually collapses.
My interest has been from the perspective of less developed societies, but I have observed that the process, at least the process I’ve come up with, seems to apply everywhere (that is why I zeroed in on the particular process). All countries, institutions, and agglomerations of people develop a culture of their own. That culture very much determines how people behave in that particular environment. In the US there have been major cultural changes over time, particularly since the Industrial Revolution reached its shores in the 19th century and then with the start of the Progressive Movement in the 1910s. It then accelerated dramatically in the 1960s. I am still trying to understand that last change but I think it is what created the current chasm between urban and nonurban, left and right, Democrat and Republican. They have become two entirely different cultures with a completely different worldviews.
In the medical dimension I have been observing fascinating changes. It began when I had a heart attack 15 years ago. By pure luck I drew the head of cardiology as my doctor—he was on duty. He had just come from the Mayo Clinic. My hospital was very dysfunctional and to this day it remains so when coordinating specialties; they haven’t developed a good system of rules and a culture to make it work. Today I still have problems getting my various specialists to talk to each other, and they are all in the same building. My cardiologist eventually gave up and went back to the Mayo Clinic. Yet before he did he exhibited an entirely different behavior and method of operation. For him coordination and collaboration was everything, and I benefitted from it. At one point I had to have a procedure done and to my amazement he showed up to observe and, I suppose, consult and contribute if necessary.
The Mayo Clinic works well, my hospital not yet although it is finally in the black. In those fifteen years it has gone through various managements. The most recent is by MedStar, a large conglomerate, the very kind that supposedly will now help improve medicine and reduce costs—once the government learns how to tailor incentives correctly, and for which they are launching various pilot programs—under the new healthcare law. Since MedStar there have been notable improvements but mainly to the administration side, including a central data base for each patient. Doctors, however, still don’t coordinate well (they normally don’t even look at the work and conclusions of other specialists; I get printouts where I underline stuff I want other doctors to see).
Getting my hospital to operate like the Mayo Clinic is going to be a very major challenge. I used to be a manager and one of the toughest, if not the very toughest challenge was to change and mold a corporate culture to the demands of new technologies, products and client needs. I could make it work in small groups but taking it to anything over 20 to 40 people was nearly impossible and often required getting rid of many of the old timers, not a very pleasant prospect especially when you are weighing loyalty to a company with changing needs (at the hospital I’ve noticed that the departments that work better have all new faces after many failed tries with the old ones).
It is tough, tough, tough and probably the source of much of our societal resentments. That is why above I mentioned that material change is much easier to adapt to and get right, and can thus move much faster than adapting to the new values and cultures required by change. Over the years I have developed a good understanding of the process—parts of it are currently breaking down quite seriously in our society—but how to fix it is another matter. At least I think I know what needs to be worked on and maybe even how but I still need to finish writing it all up.
PS. Changing a corporate culture takes a lot of “nonproductive” time and money. The only successful one that I know of and have studied is also the only big bank that fared well in the recent financial crisis, JP Morgan Chase. Its CEO, Jamie Dimon, didn’t get caught up in the mortgage and derivative frenzy because according to him it just didn’t smell right and wasn’t adding value. He even took some derision and lost a few clients. Many years ago I worked for the man, Lew Preston, who created that discipline when it was JP Morgan. He was a tough ex-marine with a very deep sense of values and of doing right by other people and the community. Rather than fire people he retrained them; sometimes he practically shutdown the bank and turned it into a school where the new direction and values were deeply inculcated on every employee (note that in the more effective armed forces more time is spent training and creating a culture than in any other organization). It paid of many decades later.
At least in some part the financial crisis was the result of innovation moving much faster than even the specialized culture of the banking community was able to absorb. This innovation was a specialization of risk. Derivatives broke risk down into its various components which were then sold to people who supposedly could use them to hedge an opposing risk. In the 90s my unit trained bankers in emerging economies and the experts used to tell me how very dangerous derivatives were because other supposed experts didn’t really understand them. I have to admit that despite my various degrees I still don’t understand many of them myself. I still see articles by mathematicians disagreeing with each other on some of the inherent risks. This has been a clear case of specialization moving much faster than man’s capacity to assimilate its characteristics and learn how to manage them. And I believe that we are not yet out of the woods; it is one reason why I want large banks broken into smaller banks.
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I do not think that personally paying for insurance will improve patient scrutiny of health care spending and therefore will not reduce the rate of rise of medical costs. While patients will have to pay for, and therefore by disinclined to purchase uncovered items, they will agree to any expense that their insurance covers. To even begin to make this work there must be high deductibles with health savings accounts or some similar idea.
As an aside I think that "preventative medicine" is the big hoax of the 21st century. In 45 years practicing medicine I don't think I (or to my knowledge any of my colleagues) have ever gotten anyone to make major life changes (quit smoking, lose 50 pounds, quit drinking, give up drugs) despite many hours of "counseling". All this idea will do is increase costs by funding a whole new group of "providers" who will claim that they are unsuccessful because they have inadequate funding. No doubt these new "preventative medicine providers" will produce some "data" to show that for every dollar spent on "preventative medicine" the tax payer saves $100.
Posted by: Harold Helbock | 04/21/2011 at 09:17 PM
"As an aside I think that "preventative medicine" is the big hoax of the 21st century. In 45 years practicing medicine I don't think I (or to my knowledge any of my colleagues) have ever gotten anyone to make major life changes (quit smoking, lose 50 pounds, quit drinking, give up drugs) despite many hours of "counseling""
.... Interesting. Do we need to do more research to learn more about why folks drink too much and why we have an obesity epidemic?
Among my suspicions, having seen some info on cattlemen NOT cutting back on bovine growth hormone 30 days? before slaughter? Or? as most EU nations don't allow the stuff anyway, is that crap getting into heavy meat eaters? Also, we know there is a link between poverty and obesity; cheap fast fried foods etc. Should we let our corps profit from foods not conducive to human health??
In auto insurance we've discounts for safe drivers and penalties for those who speed or crash too often. If we are to be good citizens in an insurance pool or single payer group, should we get into similar incentives/reminders in H/C? I suppose it might not fit well with "fee for service" as docs might fear losing customers were they to rat them out to the insurance carrier.
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A much bigger problem is presented by the expected growth in government spending on medical care and retirements during the next several decades.
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