Means-testing for Medicare

by on October 21, 2006 at 8:10 am in Economics, Medicine | Permalink

I’ve several times advocated the means-testing as a way out of our current and forthcoming fiscal problems.  Greg Mankiw (see also knzn) offers the classic criticism:

…from the standpoint of incentives, means-testing is equivalent to a tax
increase.  As a result, economists worried about the adverse incentive
effects of taxes (like me) should be also worried about the adverse
incentive effects of means-testing.

The point, of course, is well-taken.  But something must be taxed, and Medicare benefits for the well-off are a logical candidate.  They represent the spending of relatively wealthy people, rather than savings.  In behavioral terms, I suspect the negative incentive effects of means-testing are relatively weak.  A person might say "If I get too rich, I’ll get less Medicare when I am old," and work less.  Dollar-for-dollar I expect this effect is weaker than "They’ll take out another few percent this year from my paycheck, maybe I’ll work less."

I’ll stick with means-testing as the least bad way of raising (implicit) marginal tax rates.  Means-testing also gets people away from the seductive but dangerous idea that government should take care of everyone, all the time.

Ed D. October 21, 2006 at 8:33 am

I agree with means testing. I don’t remember the figures but with Social Security at least, the investment, the dollars paid in over a lifetime of work, are paid back with interest in just a few short years.

But my comment is on the fear of dis-incentivizing high income workers. In the 1960s when I was growing up the highest marginal tax rate was 90-some percent. Still my father and his friends, WWII vets all, talked about paying all their taxes and then more. They believed in building community by working hard and throwing some of their good fortune into the community pot. They most certainly were not disincentivized. The reason lies in the counting of status. People work hard not for dollars, but rather status. In our current time the two have become synonomous – sadly so. In the 1960s status was assigned more on the amount of cooperative community building one contributed. Wealth amassed in such a status system was negative, not positive. It signaled that you weren’t contributing. Paul Derringer, the great Cincinnati Reds pitcher lived in my neighborhood growing up. While he was admired for his wealth and style, there was a lessening of his status because he kept his wealth and his contributions to himself – up on the hill there where he lived.

The reason for the change in counting status from community contribution to individual wealth had to do first with the cohesiveness of the WWII generation. They all pulled together through their formative years, thier early 20s, to accomplish a goal together. They became aware of the great power of community. The conservative ideology of the Reagan years stressed the individual and so the counting of status moved that way.

The Other Brock October 21, 2006 at 9:51 am

A person might say “If I get too rich, I’ll get less Medicare when I am old,” and work less. Dollar-for-dollar I expect this effect is weaker than “They’ll take out another few percent this year from my paycheck, maybe I’ll work less.”

No, Prof. Cowen, here’s what people will say: “If get too rich, I’ll get less Medicard when I get old, so I’ll save less.”

Most people don’t have much choice about how much they work: they work however much their employer requires them to. The only way for most people to work less is to retire early.

It’s very easy to save less, however.

Mike Huben October 21, 2006 at 12:14 pm

“Means-testing also gets people away from the seductive but dangerous idea that government should take care of everyone, all the time.”

I’d like to recommend then that universities means test their health coverage. After all, the moral hazard of paternalism is the same whether it is government or an employer providing the health coverage. Perhaps the universities should discontinue health care benefits for the professors, who make much more than the grad students and janitors. This would be a useful experiment, don’t you think?

dan October 21, 2006 at 1:05 pm

“Means-testing also gets people away from the seductive but dangerous idea that government should take care of everyone, all the time.”

More likely, it gets them away from the idea that Medicare is a good idea, because its mostly for “those people.”

joan October 21, 2006 at 1:48 pm

Using means-testing as a way out of our current and forthcoming fiscal problems turns it into walfare program. We have increasing medical cost as percentage fo GDP and a falling wage share as percentage of GDP producing an increasing share of the population that depend medicad for their medical care. If we add most people over 65 we will have nearly half of our population dependent on welfare for their medical coverage. I think we need to look at it as more that a fiscal problem.

Max October 21, 2006 at 2:45 pm

Means testing is wrong. It punishes savers and the successful. Social Security programs were declared to be supplements to savings and pensions when this all started. This is the worst kind of bait and switch.

Youy really stepped in it this time, Big Guy.

Keith October 21, 2006 at 7:40 pm

I’m against means testing, too, on libertarian grounds. Less progressive social welfare programs are less distortionary from an economic perspective.

Let’s have all the government people want, but let’s finance it on a benefits-pays principle, so there is no redistribution. That way, we achieve all of our public goods, with none of that nasty government-based theft that libertarians so rightly deride. If a government program disproprotionately benefits the poor, finance it with regressive taxes. If a government program disproportionately benefits the rich, finance it with progressive taxes.

jim October 21, 2006 at 9:43 pm

‘ll stick with means-testing as the least bad way of raising (implicit) marginal tax rates.

No. Please don’t advocate instituting yet another tax. If you think that taxes need to be raised, then advocate raising rates on existing taxes rather than instituting new ones. Means testing is a burden on the individuals involved, who have to report their income and assets in yet another way (probably with a different definition of income than that used by the IRS, if FAFSA is any guide). It requires another set of bureaucrats to administer it, who will do something like the existing IRS staff, but not quite.

Nor can its side effects be predicted. They arise from the practical difficulties of implementation, as with college financial aid means testing. What will be the period over which income will be assessed to determine means? What happens to people whose means have changed radically since then? Assume I have a heart attack, am treated and the government determines I have the means to pay for the treatment. Does the government reimburse the hospital anyway and then come after me? Or does the government refuse to pay the hospital? If the latter and I don’t, can’t, pay, how does the hospital make itself whole? It still has to cover its expenses.

The income tax is a pattern. Stealth taxes are an anti-pattern.

Anderson October 22, 2006 at 3:05 pm

“They’ll take out another few percent this year from my paycheck, maybe I’ll work less.”

Does anyone besides an economist constructing a hypo ever actually think this?

No, and that tells us something about economics.

happyjuggler0 October 22, 2006 at 3:43 pm

“They’ll take out another few percent this year from my paycheck, maybe I’ll work less.”

Does anyone besides an economist constructing a hypo ever actually think this?

Well, actually it is empirically true. Social Capitalist (i.e. high tax, high spend) Europe has high income tax rates and also extremely high consumption taxes (VAT). The cost of working for money is thus quite high, so they substitute leisure instead. Early retirement, shorter work weeks, and more vacation time are all commonplace in high tax countries in Europe.

Brian October 23, 2006 at 12:51 pm

Means-testing would introduce a huge bureaucracy and the program will lose voter support.

So we have to disguise the welfare portion of SS with huge transfers from the middle class to itself (and also from the working poor to the retired wealthy), to fool people into thinking they’re getting something for nothing so they’ll support it? No thanks. Will Wilkinson shreds the “noble lie” argument here.

The overhead required for means testing may be a concern. If it would be too expensive I’d be happy with just paying all SS recipients the same amount, rather than giving Warren Buffett a bigger government check than a retired factory worker.

Tim October 25, 2006 at 2:25 am

There is another approach. Get medicare out of the business of providing or regulating services in kind. Medicare should become a “medibank” or “medi-insure” and only provide cash compensation to customers. The cash payments from medibank should count as income for tax purposes. This would provide a “means test” by other means.

It may be possible to constrain costs by adopting a “no claim bonus” system comparable to auto-insurance so as to reduce trivial and high admin overhead small claims.

It may even be worth considering a fixed table of payments per insured condition, as distinct from straight cost recovery compensation. The difference would encourage customers to shop around for low cost suppliers and thus pocket the difference. This would help maintain some competitive cost-restraint pressure on medical service providers.

Anonymous October 14, 2008 at 2:15 am

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