One simple point on Social Security reform

by on September 22, 2010 at 8:21 am in Economics | Permalink

Social Security offers cash benefits, whereas Medicare is an in-kind benefit, in the form of health care (which in turn is distinct from health, itself another in-kind benefit).  Therefore always cut Medicare first.  (Addendum: a better phrasing here is "At current policy margins, or those we are likely to encounter, always cut Medicare first.")

That's all.

Addendum: Ezra Klein comments.

JSK September 22, 2010 at 8:25 am

Well Medicare is targeted better, I would say..

Joseph September 22, 2010 at 8:41 am

I think that this is a very compelling insight. After all, adequete medical care does not matter if one is starving or homeless (or it may matter but it might not be the priority).

libert September 22, 2010 at 8:47 am

The argument being that cash benefits are more efficient than in-kind benefits. Presumably, this is because one can always use cash to buy health care.

But this is only true in a world without adverse selection causing the individual market to be overpriced. If this is a problem (although it may not be in a couple years, with the new health care law), $1 of Social Security benefits cannot necessarily purchase the same amount of individual health insurance as $1 of Medicare benefits (since Medicare avoids the adverse selection issue).

I agree with Tyler’s conclusion, but not for the reason he gives.

a September 22, 2010 at 9:16 am

“But this is only true in a world…”

It’s also only true in a world where people don’t make bad choices.

Zeppelin September 22, 2010 at 9:35 am

Well, Medicare offers a cash benefit as well — it pays for part of the Medicare premium. How would welfare change if I increased monthly SS benefits by $1 and decreased the monthly Medicare premium by $1?

Andrew September 22, 2010 at 9:42 am

“Well, Medicare offers a cash benefit as well — it pays for part of the Medicare premium.”

Excuse me while I clean my brain off my computer.

Richard A. September 22, 2010 at 10:11 am

“Therefore always cut Medicare first.”

Tell that to Republicans. With SS, Republicans only have to fight the recipients, but with Medicare they not only have to fight the recipients, they also have to fight an even more powerful medical industrial complex.

Silas Barta September 22, 2010 at 10:34 am

What libert and Aaron said. Plus, it is more costly from the taxpayer side to *provide* a highly-liquid benefit than an illiquid one, so the benefit cancels out. The elderly will certainly redeem all their dollars for consumption of scarce goods and services, while they won’t necessarily redeem all of their claims for the medical services they’re legally entitled to.

And any rent to the (narrowly-defined, as you point out) health sector will just help to rein these programs in when it’s time!

Whose side are you on?

Andrew September 22, 2010 at 10:44 am

He’s right folks.

In fact, buying healthcare at the end of life is the worst time to buy it even beyond economics considerations (because economics, or economists don’t seem to care about ROI).

http://en.wikipedia.org/wiki/Reliability_theory_of_aging_and_longevity

Bill September 22, 2010 at 11:27 am

You have adopted the language of those who seek to preserve inefficiencies in medicare as “cutting medicare”–it would be better to say making medicare more efficient.

Here is an example from political history which also has ironic relevance to today: A friend of mine was the staff director for the Senate Finance committee during the 90s–a time when the Republicans were in the majority. To reduce the federal deficit and correct overpayments in medicare, Sen Grassley let the charge to reduce medicare spending through various mechanisms. The Senate Finance committee passed a bill to reduce medicare expenditures to providers and improve oversight.

How did the Democrats respond?

By advertising that the Republicans were “cutting” Medicare, when all they were doing was giving hospitals and doctors less than they wanted. They also said that Grandma was going to be pushed under the train and there would be rationing.

Sound familiar. Understand why Grassley used those terms. Understand why the Republicans said the Democrats were cutting medicare benefits to finance the health care bill.

So, rather than saying “cutting Medicare”–which sets off a whole bunch of bells and whistles in the mind of the electorate–be careful of the terms you use.

Let’s call it making Medicare more efficient and taking waste out of the system if you want to get anywhere and have a beneficial effect.

Bill September 22, 2010 at 11:45 am

By the way, it will be easier to cut medicare–or rather reduce medicare expenditures–because Medicare has been used in the past to subsidize hospitals, particularly in rural areas and in poor urban areas, because those hospitals either needed technology but did not have clientele who had insurance, or because they were poor and the hospital had to provide uncompensated care.

But, with the healthcare bill, hopefully there will be less private uncompensated hospital care–more people will be purchasing insurance and there will be coverage for the poor. So, there should be a way to reduce medicare expenditures and quit using it as a cross subsidy for other activities.

Finally, with electronic billing and electronic medical records, the government (or actually the private firms that are hired to admninister and monitor medical payments–will be in a better position to detect fraud and abuse, or just plain wastefulness–care that doesn’t or will not lead to any result.

Yancey Ward September 22, 2010 at 12:32 pm

Bill,

Maybe, if you actually have more money coming from the private sector. If not, and I don’t see the evidence yet that there will be, you are just reducing payments from Medicare by replacing it with money from Medicaid, the states, and the subsidies given to private purchasers of insurance. And all of this assumes the legislated cuts in Medicare remain- something I would have to say is much less than a 50% probability based on past political observations.

Kevin H September 22, 2010 at 12:42 pm

What if people bought only drugs with cash, but got healthy off Medicare? Wouldn’t the benefit to society be more positive with Medicare even if each individuals personal decisions would always be more optimum with cash? Isn’t society allows to be socially optimizing rather than individually optimizing?

Some of the commentators points about food being more important than healthcare if certainly valid, but that changes from ‘always’ to something highly contextual.

Bill September 22, 2010 at 2:39 pm

Yancey,

I see you agree with me: “Maybe, if you actually have more money coming from the private sector. If not….”

Removing free riders — persons who can afford insurance but choose to be uninsured — should permit a reduction of medicare payments which have been used to cross subsidize rural and urban (poor) hospitals.

I am not saying that Grassley will not argue for goosed hospital medicare payments for rural hospitals or that Schummer will not try to get money for inner city teaching hospitals via medicare, but the argument for cross subsidy — uncompensated care — should be reduced.

Bill September 22, 2010 at 4:01 pm

Klein’s article also talks about some efforts to repeal part of the healthcare bill that deal with reducing costs.

Since a large portion of uncontrolled medicare costs is end of life care, and since we don’t want the government to “throw grandma under the train”, perhaps we can have gradma’s kids involved in end of life care, and let them have some skin in the game.

To wit the following modest proposal:

The cost of care in the last year of a person’s life gets taken out of the estate (with the exception in the case of surviving spouse or dependents).

This way, children who stand to inherit (and, who, by the way, benefit from medicare because they would otherwise have to pay for their parent’s care) would have an incentive that their parent did not receive futile care and would be involved in overseeing end of life care and costs.

Simple solution for solving medicare’s cost at end of life care. We would have fewer unobserved heroic efforts and better intrafamily discussions as to the cost and value of care.

Jonah Thomas September 22, 2010 at 7:08 pm

Bill, are you asking people to predict which year their old relatives will die?

Let’s say grandma is a spry 68 and she needs a knee replacement. But after she gets the replacement she feels so spry that she gets into a drag race and dies in an auto accident. That means the cost of her knee replacement is taken from her estate.

So if you are in charge of your relative’s health care, and you want to preserve your inheritance, every time you authorize treatment you are betting that she will live another year. Ideally she should manage to live one full year after her last expensive treatment, without much expense, and then die.

I like the idea of limiting useless treatment while a person is dying. If we’re going to do painful and expensive things, and the result is that the person recovers and lives well for some extra time, that’s different from painful and expensive things that only extend life while the painful treatment continues. But I’m not sure this is a good approach to solve that problem.

Tim S September 22, 2010 at 8:23 pm

Frank,

In no reasonable way is health insurance anything like fire insurance. People who purchase fire insurance expecting to collect more than the premiums in a given year are generally called “arsonists.” In contrast, there is nothing abnormal about predicting that benefits will be greater than premiums with health insurance.

In other words, a bona fide purchaser of fire insurance is trying to buy insurance (i.e. engaging in a financing transaction to reduce risk). A bona fide purchaser of health insurance is really trying to buy health (i.e. attempting to purchase an intangible asset).

Jonah Thomas September 22, 2010 at 11:08 pm

Bill, end-of-life expenses are a hard decision for most people. Morticians make their living off that. People pay money they can’t afford for elaborate funerals because they make the decisions when they aren’t thinking straight.

I think it’s important to distinguish between end-of-life treatment and treatment that might lead to recovery. If you’re pretty sure you aren’t going to improve then going through lots of invasive indignities (that happen to be expensive) while you die is something that a lot of people would decide ahead of time they don’t want.

But if you don’t know whether they might pull out of it and have years of gratifying living afterward, then it’s a different decision. Are you killing them because it’s too expensive to give them the treatment they need?

If you ask your doctor, he is likely to give you an answer that won’t upset you too much. So it could help some if anybody could look at the usual results. Adjust the population you search across however you want to get people who are in some ways like the patient in question.

I doubt that children usually push for extreme expensive procedures for their elderly parent in the last year of the parent’s life. Do they often go for laser eye surgery, hip replacement, breast cancer surgery etc then? “Hey, it’s free! Let’s get all the surgery for her we can, the government will pay for it!” Not usually. The doctor explains that the patient is old and tired and so is the breast cancer, and it’s unlikely to be a big problem before death from other causes. Similarly for other expensive stuff. Isn’t it the last few weeks that are the issue, when the patient is dying and they go for heroic measures to keep her breathing, that fail?

And is this the time you want to offer her child a devil’s bargain? “Here’s the deal. You can authorize treatment for your mother or you can cut it off and watch her die. If you do the treatment and she lives for one year afterward then Medicare will pay for it and it won’t cost you anything. But if she does die within the next year, you pay the whole cost. You feeling lucky sonny?”

Whether or not that’s the gamble you want to offer him, at least give him a chance to look at the odds.

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