Paul Ryan’s Roadmap for America’s Budgetary Future-Becker

 

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.

 

Comments

[NEH]

Typical. Once again the plan to curb Medical Expenses and its impact on the budget targets the effects and not the causes. Do you really think that the budgeted numbers in terms of tax allowances or deposits into "Medical Debit" cards for the poor and middle class is going to solve the U.S. Health Care issue in the long run? It's time we all woke up to the fact that the root cause of the problem lies in the unrestrained hyperinflation that has and is occuring in the Medical Industry. Are these "allowances" going to be viable in five years, ten years, fifteen years? Probably not and we will be back where we started from. "We can't afford it".

Privatisation via private insurance policies and then allowing "competition" to increase "efficiencies" and thus reduce costs is a fantasy of the highest order. Isn't that what was expected when private Health Insurance was first developed? Then why are health care costs so high and unaffordable today? Is it due to Medicare? Is it due to Medicaid? No. So what are the real driving forces of this Hyperinflation? This is the basic problem that has got to be gotten ahold of and solved. Otherwise, the problem will not be solved either now or in the future.

[Jack]

NEH: Exactly. These guys are becoming sad jokes who "hope" to staunch cost increases by dollar denominated rationing.

While I'm attracted by the idea of breaking the dependence on the employer what is going to happen to the individual going "shopping" for insurance among the stacked deck of "competing" providers? who are doing little more than paying the increasing costs, followed quickly by rising premiums?

One problem that should be obvious, is that of oldsters, all too often strapped for income, or forgetfully, not paying the insurance co premium timely and being all of a sudden "uncovered".

Becker, at least, suggests:

"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."

........... but my understanding of Ryan's nasty little scheme is that of their being no inflation indexing.

[Christopher Graves]

NEH, what do you believe is the cause of "hyperinflation" in health care?

[WebVisible]

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.

[breast surgery scottsdale]

Do not take any breast enlargement medicine without your doctor's consent.

[Larry]

I am not an economist and don't play one on television, but is there any reason to believe that individuals buying insurance would lead to a more efficient market for insurance? Even in businesses that have enough "medical lives" to negotiate a deal with insurance companies, the increases in premiums more often than not approaches (or exceeds) 20% per year (at least in the last ten years).
The behavior of the insurance industry is consistent with the way the incentives are now arranged and that is the fundamental problem that should be addressed.
Even though Rep. Ryan's proposal and the defenses of it are cloaked in the theories that have plausible economic foundations but completely and repeatedly disproven implementations.
It would be nice to believe that individuals buying their own health insurance would get the deal that they want, but it is incredibly naive.
Rep. Ryan's proposal is myopic and childish in it's blind ignorance of the difference between government and effective government.
We have the money to run the government... but the understandable behavior of corporations in shifting their costs (including the costs of government and infrastructure) to somebody else is effectively pooling the money needed in a smaller and smaller portion of society that can afford their own healthcare and security forces and transportation and have a childish and myopic position that cutting resources will lead to a healthy society.

[NEH]

Chris, The list below is not comprehensive and lists only a few of the inflationary tendencies in the Medical Industry:

1. Massive medical intervention in the last six months to a year of life or the first six months to a year of life.
2. Unrestrained application of Tort Law in the Medical Industry.
3. The development of new pharmaceuticals and procedures for the treatment of heretofore untreatable chronic or other conditions and the rise of these conditions within the population.
4. The subsidizing of the World's Medical programs, especially in the area of pharmaceuticals price controls by these Nations and wage and other price controls imposed.
5. The advent of new medical procedures involving the use of costly diagnostic equipment.
6. The advent of new medical procedures involving the use of costly intervention equipment.
7. The general increase in population requiring access to medical care.
8. The general increase in health compromised individuals in the general population.
9. The inefficient system and procedures for Administration and Control of Health Care.
10. The general ageing of the population requireing more and frequent medical intervention.
11. ...

And this is just a short list.

[Curt Doolittle]

@Larry: "but is there any reason to believe that individuals buying insurance would lead to a more efficient market for insurance?"

Yes. For example, look at corrective eye surgery, which has consistently become cheaper over time.

Competition drives down prices. Bureaucracy leads to over-charing and regulatory overhead.

For example, a doctor today must employ four people on average to administer regulatory information whereas, as recently as seventies, it was just one.

[Jim]

Just one tiny example of medical cost inflation:

A patient comes to the emergency room with one of 17 neurological symptoms (dizziness, headache, etc) but no "signs" on physical examination. It is well known that except for amnesia and/or intoxication, 5% or fewer will have a positive non-contrast CT scan of the head. The mean amount of money changing hands from patient or insurer to the provider(s) for that Ct scan is $500. That means that to find the one positive scan (and not all of those will need intervention), twelve scans will need to be done on average. So $12,000 will have to be expended to find the one positive scan. At that rate you might ask if it would be acceptable to do the CT scan on only those patients with certain symptoms AND physical findings. If you ask a trial lawyer, he/she will tell you sure it is acceptable if you think that you can convince a jury that your decision was reasonable. Are the providers willing to take that risk? I think not.

[Jwalker]

Becker on moving Medicare recipients to the private insurance market: "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." Further on: "Competition among insurance companies will increase efficiency in the delivery of medical care, and thereby keep costs down." Is he saying that increasing the population of private demanders will increase competition? If this is correct then it's time to hrow out standard Microeconomic textbooks. As I explain to my micro students, increases in population will shift the demand curve to the right, moving along the supply curve (upward sloping), pushing up prices until a new equilibrium is reached.

Perhaps he assumes new firms will enter the market, shifting the supply curve to the right. With prices and profits at current levels, why has this not yet occured? Does Becker believe the health insurance market is Perfectly Competitive (or close to it) and there are zero economic profits? Given the structure of the market it seems oligopolistic at best, so I would not expect a competitive drive to reduce costs and prices, but a drive to manage the market to maintain economic (excessive) profits.

There are so many things wrong with the Ryan plan it would take up too much space, but Becker should remember his supply and demand model along with market structure and that in the absence of mechanisms to create incentives to drive down costs and/or increase competition, Ryan's plan could devastate retirees by causing seniors to spend much or most of their income on health care, as the CBO and others pointed out.

[Xavier L. Simon]

Guys, the answer to how to lower medical costs is simple: people buying and paying themselves for the medical services they believe they need. I would split Ryan's subsidies into two parts. One would pay for real insurance, that is, catastrophic medical situations. With the other part people will satisfy their regular medical maintenance needs. No more free riding on the latter because of the zero price for medical services.

Beyond that I would do real tort reform, and have the government extract payment from governments that insist on subsidizing their medicine on the back of costly American R&D. For more details go back to some of my comments of past weeks.

By the way, this discussion about healthcare costs will turn out to be entirely academic if the country doesn't learn to live within it's means. Unlike most economists I predict the bond markets will give us at most a year or two before they call it curtains on us. The absolute numbers are just too large for foreign countries, particularly emerging economies and now even Japan to handle. No more Chinese toys and foreign crude on credit.

[Jack]

Curt -- Not a very good example as most (nearly all) insurance companies do not pay for the various corrective eye surgeries.

BTW those too tend to be much cheaper in nearby Canada where some of the tech and machines were invented.

[Jack]

Most of what is on NEH's list is fairly well handled by single payer systems of other "advanced" nation at substantially lower costs.

While I've not been convinced that abuse of tort laws is a net loser in the US (one would have to subtract from the court costs and awards of the more egregious examples of malpractice (or "nuisance suits) and the yet to be defined or measured "defensive medicine", what is gained by practitioners having incentives to avoid malpractice.

But there is an interesting point to be made. Were one who slipped and broke a leg due to negligence on your property, covered by VA or Medicare, unless there was a significant loss of work time, or disability, they'd just go get the thing fixes w/o a potential law suit to determine "fault". Even were there concerns of future costs that might come up from the fall, knowing that the VA or Medicare would take care of them, would lessen the incentive to go after a pile to be set aside for "future medical costs".

Annnnnnnd! the big question! WHY are we subsidizing the much lower cost single payer medical systems that gives our competitors a significant edge in a (selectively) globalized world?? Surely IF we weren't such patsies Big Pharma would spread there development costs over the first world economies.

[Jack]

Xavier: WHAT do "insurance companies" bring the the H/C table? WHY are we bending ourselves into pretzel like shapes to make sure these parasites that don't exist in the single payer nations survive and pay their CEO's more than any 50 Fourstar Generals or any other top earning Federal employees makes?

The answer is pretty well nothing. WERE we even to move to a single payer, voucher type system, those of today's "insurance companies" would either have to go elsewhere to ply their parasitic trade, or put their substantial capital and organizations to good use as PROVIDERS of H/C services who would then compete for subscribers.

THEY could easily handle "front end" risk and provide day to day care and if they were too small (haha!) to "insure" "back end" long tail risk could go see Buffet and lay off any needed "reinsurance" to one of his or other's companies that specialize in that sort of thing.

[Natalie Pace]

Dear Dr. Becker,

Will the ECB decision to raise interest rates put pressure on the U.S. to do the same?

I hope you'll address this in an upcoming blog.

[Cross Country Home Services]

This discussion about healthcare costs will turn out to be entirely academic if the country doesn't learn to live within it's means. Unlike most economists I predict the bond markets will give us at most a year or two before they call it curtains on us.

[Jack]

Cross: Do you suppose many international bond traders know that by comparison to most countries we're lightly taxed and could, had we the will, pass the hat and pay our bills? I know this hasn't been stylish among those claiming to be "conservatives" since President Reagan quipped something about "seeing one deficit is seeing 'em all"

We DID have that brief interval after the "biggest tax increase in history" combined very close attention to spending limitations, coincided with a business boom that ginned up 21 million jobs over 8
years and resulted in full employment and a generally balanced budget.

Shortly there after......... well, you know how the tale ends, with the trillion/decade tax cut and a trillion or so "defense" of our once fair nation, along with the detritus of a badly mangled "banking dereg". Few lived happily ever after.

[Cross Country Home Services]

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.

[Christopher Graves]

Thanks for your reply to my query above, NEH. I do not disagree with your list of contributing factors to rising health care costs. Some of these trends are good but can, admittedly, increase costs. But even so, I do not see that given your list of causes of rising costs why you do not see Medicare, Medicaid, and, I might add, private insurance, all third-party payers, as primary factors in rising health care costs?

[supra shoes]

Thanks for your reply to

[NEH]

Chris, Medicare, Medicaid and private health insurance are not primary causes of the hyperinflation in Medical/Health care. At best, they are secondary or tertiary causes. When costs go up, they respond by increasing the pay out and for the private insurers, increasing policy rates and hence individual costs and for Medicare and Medicaid, they begin to consume a greater and greater portion of budgetary dollars available. This is more of a reaction to the effects of hyperinflation, which creates a secondary or tertiary cause of the inflation by increasing the amount of money going into the system. This is a classical definition of "inflation" (to much money chasing to few goods or services). Yet, it is not the primary cause as articulated by the classical definition. The current Medical Industry hyperinflation does not fit the classical model of inflation. So, simply targeting a secondary cause will not solve the problem of hyperinflation; if the primary causes are not first dealt with and controlled.

[Marc Freed]

Providing a Tax Credit instead of a Tax Deduction for the individual purchase of health insurance is exactly the right thing to do. In terms of incentives, it tells individuals that their health care is their responsibility and that neither their government (through taxation) nor their employers (through employee-sponsored health care) will stand between them and their medical care providers. Assuming a minimum tax rate of 10%, anyone with a gross income of at least 10x the Tax Credit ($23,000 for an individual, $57,000 for a family using Ryan's numbers) will be able to take care of his or her own health insurance needs. The few Americans whose incomes do not meet these thresholds will require subsidies that can be paid directly to their insurers.

In terms of the economics of this pricing, the insurance providers will compete to offer policies that cost little or no more than the amount of the tax credit since most people will not care to pay more than that amount for insurance. To the extent that higher income earners are willing to pay more, the insurance companies will be able to compete for sales of premium policies.

Breaking the link with employment is, as you point out, a benefit for labor market mobility. It is also a boon for employers who can get out of the business of providing this particular benefit to their employees.

[NEH]

Marc, "Breaking the link with employment is, as you point out, a benefit of labor market mobility. It is also a boon for employers who can get out of the business of providing this particuliar benefit to their employees"? You do realize that without employment, for whatever reason, the individual's cash flow stops and that under this unemployment specter most Americans cannot afford Health Insurance period. Do you really think insurers will provide coverage agratis? Not withstanding Tax credits or Deductions. Individual insurance? Private insurers use a pooling method and or "preexisting" clauses to minimize their costs overall, the use of individual supplied insurance will require a massive change in the way Health Insurers do business. Otherwise, there will be a massive windfall to the Insurance industry (which is why they probably lobbied for this approach). Is this going to happen? Probably not. Furthermore, if employers are no longer required or compelled to provide health insurance as a benefit where does this cost savings go? As an increase in employee salary or wage? Or is it simply taken off the table and into the pocket of the employer (another Lobby at work)? Simply enriching them at the expense of the Public and its Health.

This is but a shell game at work. To think that health insurance can be separated from employment is but a fantasy. The shell game only works if there is full employment, all the time, without Recessions, Depressions and other forms of Economic discontinuties that affect employment or labor. Remember, the majority of Americans are not independently wealthy, free from the encumberances of employment or economic discontinuities.

[Xavier L. Simon aka Xavier]

NEH, you should read Adam Smith, get better acquainted with how the market works.

[NEH]

Xavier, If I were interested in the pros and cons of the Corn Laws in 19th Century Britain I'd read Smith. However, we're in 21st Century America dealing with a budget overload and health care issues. As for Smith being the end all in Political Economics, that is a bit of a stretch, even in explaining the less than simple market forces. Which the "Wealth of Nations" does in a most simple style. It's really too bad that most Americans and our Politicians view Smith's and Ricardo's works as the "Bible" and end all of Political Economics. Although, they do make a good door stop.

Now let's broaden the Political Economic sphere a bit. May I suggest the works of Alexander Hamilton, Mathew Carey, Daniel Raymond, Henry George, Henry Carey, Friedrich List as a start. We've moved far from the days when simple Heterodox economics could explain the Economic Universe. It's like using Newton to try and explain the modern universe of Quantum Physics, Relativity, and other special and general conditions that are now known to exist and call into question the basic Newtonian Universe, both at the Macro and Micro level.

Time to move on to the far more modern fields of Non-Heterodox Economics. My favorite being Thermodynamic Econ.. Too bad most of our leaders and policy makers education isn't up to it and so we suffer as the result.