Means testing for Medicare

by on July 20, 2008 at 7:22 am in Medicine | Permalink

Let’s first quote Mark Thoma’s response to my column; it is indirectly a good summary of what I argue:

I believe the political argument that giving everyone a stake in the
program helps to preserve it has more validity than Tyler does, market
failures (some of which hit all income groups) probably play a larger
role in my thinking about government responses to the health care
problem than in his, and I have more confidence than Tyler that a
universal care system has the potential to lower costs.

And now here’s me:

…the idea of cutting some government transfers provokes protest in
some quarters. One major criticism is that programs for the poor alone
will not be well financed because poor people do not have much political
power. Thus, this idea goes, we should try to make transfer programs as
comprehensive as possible, so that every voter has a stake in the
program and will support more spending.

But even if this argument
holds true now, it may not be very persuasive when Medicare costs start
to push taxation levels above 50 percent. A more modest program, more
directly aimed at those who need it, might prove more sustainable in
the longer run.

Americans have supported the growth of many
programs aimed mainly at the poor. Both Medicaid and the Earned Income
Tax Credit have grown rapidly in size since their inception. The idea
of helping the poor and not having the government take over entire
economic sectors was the original motive behind welfare programs, in
any case.

Furthermore, the argument for comprehensive and
universal transfer programs does not meet the ideal of democratic
transparency. If taking care of the poor is the real value in welfare
programs, those programs should be sold as such to the electorate. We
shouldn’€™t give wealthier people benefits just to €œtrick€ them, for
selfish reasons, into voting for greater benefits for everyone, the
poor included.

Here is another point:

Advocates of health care reform tend to be long on ideas for expanding
care and access, but short on practical solutions for cost control. The
argument is often made that single-payer health care systems in Canada
or Europe are cheaper than health care in the United States. But
Medicare is already a single-payer plan, yet its costs are
unsustainable.

Note that I am calling for higher benefits for the poor and lower benefits for higher-income groups.  That’s not a popular stance, not even with egalitarians.  In fact I view the contemporary left as oddly ill-prepared on the health care issue.  Electorally speaking, the issue is fully 100 percent in their court (and they are used to pressing it aggressively), until of course they get their way and have to "meet payroll," so to speak.  One attitude is to cite Europe and think that the production possibilities frontier can expand under better management of the U.S. system, even as you cover an extra 40 million people.  Another attitude is to face the notion of trade-offs. 

Here is the full column.  (By the way, I think that HSAs are ineffective as health care reform and that the so-called "right" is floundering on
this issue, just to get in my equal opportunity smack on the blog.)

Addendum: You can make a good argument that (some) public health programs are the best health care investment of all; I just didn’t have enough space in the column to cover that issue.

Second addendum: Greg Mankiw didn’t read so closely.  It’s not "an income tax surcharge on sick, old people."  It’s a reallocation of benefits toward people of greater need.  Is any benefit less than infinity an "income tax surcharge"?

Third addendum: Here is Paul Krugman on the topic.

Ward July 20, 2008 at 8:15 am

The argument against a wide range of prices and services in health care seems to be that inequaltiy or experience will mean that the poor get less quality than the rich who can pay for it but suppose the goal is nutrition. Is eating food from Food Lion or WalMart lower quality than Food from WholeFoods? Much of it is marketing and the customer experience. If people are willing and able to pay for let’s say, the right to not be forced to wait for 30 to 60min to see their doctor, does that make them healthier than those who pay less but have to wait for non emergency type care? This is already happening with lasik surgery I think it would not be difficult to allow it to spread.

KipEsquire July 20, 2008 at 8:37 am

I guess we’re just supposed to forget the pesky fact that “the rich” pay a lifetime of Medicare taxes (with no wage cap as with Social Security) and just meekly accept the notion that they’re no longer entitled to benefits. You yourself note that “lifetime earnings” should be the mean-test, but “lifetime taxes” suddenly become irrelevant. Go figure.

If we’re going to means-test Medicare, then can we at least be intellectually honest about it — by eliminating the Medicare tax, raising federal income tax rates by the requisite amount, and presenting Medicare for what it would in actuality become: a health-care dole for the (somehow) “indigent” middle class.

a student of economics July 20, 2008 at 10:30 am

Is any benefit less than infinity an “income tax surcharge”?

It’s not a matter of the benefit being less than infinity, it’s that you propose for the benefit to decrease with income. In other words, Greg believes the incentive effects are equivalent to an income tax surcharge — the more you make, the more you have to pay for a given level of medical care.

Only in your proposal, it only applies if you are old and sick — i.e. it’s not broad based but targeted at medicare recipients.

It’s a reallocation of benefits toward people of greater need.

Are you now arguing that there would be no net savings from your proposal just a reallocation of spending?

RW Rogers July 20, 2008 at 11:53 am

Portraying Medicaid as a good example of what those with political influence and power are willing to fund when they don’t personally benefit seems like a bad idea to me. While it is true that funding has gone up, it is false that the coverage for those covered by it in almost every state meets a standard that the average insured American would consider remotely acceptable if applied to themselves.

john goodman July 20, 2008 at 12:12 pm

Means testing is okay, as far as it goes. But that does not solve the underlying problem. It just shifts the problem from government to seniors. And under most proposals seniors would not get any new tools (like HSAs) to deal with it.

The problem is that health care costs are growing at twice the rate of growth of income. And that problem is not going to be solved unless someone is forced to choose between health care and other uses of money.

No health savings accounts??? Tyler, what can you possibly be thinking?

I’ll say more about this on my blog tomorrow.

John Thacker July 20, 2008 at 12:34 pm

While it is true that funding has gone up, it is false that the coverage for those covered by it in almost every state meets a standard that the average insured American would consider remotely acceptable if applied to themselves.

Fair enough, RW Rogers. But if you’re going to say that, you should acknowledge that, e.g., neither does the Canadian or British health system meet a standard that the average insured American would consider remotely acceptable if applied to themselves. As Professor Cowen notes, Medicare already is single payer, and much more expensive than such plans in other countries.

Americans don’t consider acceptable the very cost savings that single payer (and other government-run) health care is supposed to provide. That’s independent of whether those savings are reasonable and efficient or not.

Bob Murphy July 20, 2008 at 2:19 pm

Well, since no other libertarian purist has pouted yet, I will Tyler (if you’re still checking the comments):

(1) In the whole column, not even a one-sentence nod to the fact that the free market would do a better job than the federal gov’t spending hundreds of billions? Or do you not agree with that?

(2) In essence, higher earners would receive lower benefits instead of facing the prospect of higher taxes, as current trends predict. This policy reflects an ethic of individual responsibility — namely, that people who have earned well throughout their lives should be expected to take care of themselves, precisely so that the truly unfortunate can be helped.

Actually, I would say that an ethic of individual responsibility means that nobody owes you anything, and that if you want charity you should go to a church or the United Way. If you are successful and earn a lot, you can buy more medical care than someone who doesn’t produce much. How does an ethic of individual responsibility seem to mean the exact opposite in your book?

(3) And now I will really hit below the belt: Typically in these countries, higher earners receive lower pension benefits — and that helps to maintain strong and robust welfare states.

When you were in grad school, Tyler, did you dream you would be writing NYT columns giving advice on how to maintain strong and robust welfare states?

My disclaimer: I had heard from a bunch of people that Tyler Cowen was the smartest libertarian alive (or something like that). I know you have distanced yourself from Austrian economics, so I don’t criticize any of your stuff on that score. But don’t you still consider yourself a libertarian? If not, then I apologize for my rant. But if so, I really am surprised at how readily you concede that the feds should be running health care.

a student of economics July 20, 2008 at 2:54 pm

Bob Murphy writes: “…the fact (sic) that the free market would do a better job than the federal gov’t spending hundreds of billions?”

Do you have any evidence for that, or as Krugman suggests, is it pure ideology? (http://krugman.blogs.nytimes.com/2008/07/20/does-not-compute/)

The overwhelming weight of the evidence in fact suggests exactly the opposite of your beliefs.

Lord July 20, 2008 at 3:14 pm

Americans don’t consider acceptable the very cost savings that single payer (and other government-run) health care is supposed to provide.

I no longer believe this to be the case.

Lord July 20, 2008 at 3:47 pm

Have to agree with Krugman. Means testing would merely lock the elderly into the existing failing healthcare system if not cause it fail even faster.

There is no market for healthcare. No pricing information is available. No competition exists between providers. No information is available as to effectiveness. No incentive exists to control costs. It is just one huge failure.

Lord July 20, 2008 at 4:08 pm

Why should one assume a free market can do better when none exists? That alone pretty much says it has failed. You may say it failed due to government, but it would take government to create free markets in the first place. You may say it failed because it could not compete with government, but that just says it is less efficient where efficiency includes the collection of funds to pay for it. You may say it is or should be a matter of choice, but democracies are also about choice. You may say governments also fail, but I would say they need to succeed even to make free markets possible.

Bob Murphy July 20, 2008 at 4:55 pm

FYI, I am not going to Krugman’s article and posting comments, nor am I trying to argue with you guys (gals?) here about free markets in health care. I had just assumed that Tyler Cowen thought the best of all possible worlds would be a completely privatized system, and that any concessions he made to government programs were because of political feasibility.

I’m not conceding that you folks are right, I’m just saying we’re not going to get anywhere arguing this on a blog. But since I had this idea that Tyler Cowen was a big libertarian, I was surprised by this article, that’s all.

J Thomas July 20, 2008 at 6:00 pm

A single payer plan would have the same effect; by insuring ALL Americans those under 65, 255 million people, who are the healthier Americans, would bring down expenses enormously and make Medicare cost effective and a good insurance model.

My concern is that it would have to be pretected from Congress. Get a few years of GOP majority, and they fund it in a way that’s designed to prove to the public that the single-payer insurance is unworkable, and what happens then?

We get stuck with a single system that doesn’t work. The GOP gets to point their finger at Democrats and say it couldn’t have worked and it’s been proven. Meanwhile, the system is broken for everybody. If we can’t protect a single-payer system from the GOP we’re better off without it.

The GOP is kind of at war with the USA, and in wartime you don’t want to provide your enemy with big juicy targets to attack.

Hopefully Anonymous July 20, 2008 at 7:20 pm

I’m curious, what is Mankiw’s better idea? I know he’s widely respected as an economist, and smart people (hello Terry Tao) seem to link preferentially to his blog over other blogging economists. Thus I read his blog a lot more than I would otherwise. Because I think you and some other blogging econommists (many out of GMU) write much better economic blogs. The main things I dislike about his blog are: (1) the content-empty zinger posts, and (2) he doesn’t allow comments, and hence there’s no follow-up participatory interaction between him and his commenters to read.

BTW, your NY Times op-ed was a great read, both as policy and as propaganda (“democratic transparency”, and coded signalling to the presidential candidates that they may want to do this AFTER getting elected).

Cliff July 20, 2008 at 8:42 pm

Robert recht,

I have to bring this up every time health care is discussed. You cannot conflate health insurance with taking money from young people and giving it to old people. There is absolutely no reason that an insurance company could not insure only people over 65 and make a profit. In case you forgot, the purpose of insurance is to smooth out expenditures- with insurance you pay MORE to have less variance. Obviously, age and expected health care costs are not an obstacle to buying insurance.

Only when you require a company to take any person and charge them all the same price (group employee health plans) does covering people over 65 become unprofitable. Now you have a massive transfer from the young, who are cheap to insure, to the old who are expensive to insure- because they all pay the same rates. The young subsidize the old by paying more than their fair share. Similarly, the health-conscious and cautious subsidize the reckless. The healthy subsidize the ill. We incentivize illness.

Frankly group plans are an abomination. This is the catastrophe that is wrought when health insurance is tied to wealth transfer. Now few people can see clearly what the difference is. If we want to buy health care or even health insurance for old and sick people, fine, but at least let the premiums that are paid reflect the actual price.

J Thomas July 20, 2008 at 9:11 pm

“My concern is that it would have to be pretected from Congress. Get a few years of GOP majority, and they fund it in a way that’s designed to prove to the public that the single-payer insurance is unworkable, and what happens then?”

This is predictable only because the Dumb-o-crats were handed a free market system and did everything in their power to make that system fail so they could make the case for nationalizing our healthcare system.

However the internecine war started, we’d be stupid to expose big projects to it until there’s a relative peace. We managed to get the Federal Reserve system to be somewhat independent of politics, although not enough so in recent years. We can’t afford to create a national healthcare system that we alternately build and tear down. A whole lot of people would have their lives depend on it. I don’t want the GOP to kill a lot of americans because they’re mad at Democrats.

I’m afraid this may be a problem we can’t solve without a world war. Get a long involved world war going, where we have to make big sacrifices for the national interest over a period of 5 or 10 years, and then we can build some sort of new system after it’s over. If we go 5 years with most of our health care going to the military, and the civilians just soldier on with a limited amount of rationed care, part of the problem will have died off during the war and the rest will be a lot more amenable to some sort of reasonable system when we’re ready to build one. The private insurance adjusters would have been mostly drafted during the war; we won’t be ready to go back to the old ways very easily. We can design something that makes sense, from the ground up. And people won’t have such high expectations for results.

Mike Huben July 20, 2008 at 9:58 pm

If communist true believers claimed that communism never failed, because real communism hadn’t ever been tried (just those bastardized versions in Russia and China), libertarians would be laughing their asses off.

Yet here we have James explicitly making the same sort of idiotic claim for markets (and numerous other libertarian commenters making the claim more implicitly.)

Krugman’s got it right: libertarians are bleating “Does not compute! Does not compute!”

Jay July 20, 2008 at 10:27 pm

Jacob:

I’d say the Ag. industry is more regulated than the medical industry. Then again, I’m just piling on another industry that the government has screwed up big time. Atleast I can feel safe that the sugar I over pay for was made in the U.S. not in dirty Brazil.

DWAnderson July 21, 2008 at 12:52 am

I don’t see that Mankiw has misunderstood you. More here.

Hopefully Anonymous July 21, 2008 at 4:33 am

I just read the Krugman piece. Talk about “bald assertions” -he just baldly asserts that means testing isn’t part of a solution . Also, he seems to want to keep Cowen on the libertarian reservation (hey, don’t throw away this dialectic, it gives the two of us representational privilege) when Cowen didn’t claim means-testing as a libertarian approach. The throw away line about personal responsibility, if read fairly, seems propagandistic, not as part of Cowen’s core argument for means-testing. I’m disappointed by Krugmans’s approach, which is more argument-seeking and status games than reaching for the best policy. This member of the crowd awards status points to Cowen, and subtracts them from Krugman and Mankiw.

SB July 21, 2008 at 3:14 pm

Health care consumes 16% of GDP, and one-fourth of that cost is administration (paper pushers and millionaire CEOs). That inefficiency comes out to 4% of GDP. Nearly 50 million Americans have no health insurance. Every day Americans, living in a rich nation, are faced with a choice between bankruptcy and losing a loved one. Or a choice between $25,000 in debt and not having a finger reattached. And so long as we listen to libertarians those problems are only going to continue or worsen. Go out into the real world, see how other nations have solved these problems. By all means see the documentary “Sicko” and watch videos of hospitals using taxicabs to dump incoherent uninsured patients on city streets. And please read and understand Paul Krugman.

“Does not compute! Does not compute!” I think that says it all….

Nick Danger July 21, 2008 at 4:05 pm

Lord writes: “Why should one assume a free market can do better when none exists? That alone pretty much says it has failed. You may say it failed due to government, but it would take government to create free markets in the first place. You may say it failed because it could not compete with government, but that just says it is less efficient where efficiency includes the collection of funds to pay for it.”

You are right, Lord, just as the medieval guild system is crushing evidence that free entry into labur markets would never work, and the distribution of bread by the government in the Soviet Union proves that markets could never distribute bread successfully.

Nick Danger July 21, 2008 at 4:15 pm

Oops, somehow my paste in the above comment failed — I thought I had pasted in:
“If communist true believers claimed that communism never failed, because real communism hadn’t ever been tried (just those bastardized versions in Russia and China), libertarians would be laughing their asses off.”

Jacob Oost July 21, 2008 at 7:38 pm

SB, you use the rhetoric of somebody who has facts and logic on their side, you are just missing the facts and logic.

It’s hard to take somebody seriously when endorse debunked propaganda like “Sicko.”

Want to see the real Cuban health care system? The one for regular Cubans, and not visiting tourists or high-ranking government wonks?

http://www.therealcuba.com

Katie July 29, 2008 at 8:59 pm

The idea that people are going to shop around for the lowest cost option is ridiculous. When my husband was real-time experiencing his retina detaching, low cost providers were the last consideration on our list; we went straight to the nearest emergency room. By the way, when we got the bill for my husband’s surgery, it was $27,000 – but with the “in-network” discount, it was $6,000. One of those numbers is criminal, but I don’t know which one. Either we’re paying hospitals so little they can’t cover costs, or we’re ripping off those with marginal insurance.

The medical system is a clear example of market failure, and no one has been able to come up with a way to fix it. Consequently, the best solution is government regulation.

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