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The Paul Ryan budget plan

I’ve now read it and here are a few comments:

1. The macro projections are very weak, not worth the time of criticism (more here).

2. Ryan nails our dysfunctional, “who is really responsible for paying for Medicaid?” structure.  That said, I’ve long preferred the federalization of Medicaid.  Block grants to the states may be better than the status quo, however (the size of those grants is a logically distinct question).  Within state budgets, police and education are often the alternative to Medicaid costs.  Are we so sure that Medicaid produces the maximum benefit for the money?  Low-quality moralizing about the poor is not an answer to this question.

3. That said, Medicaid should be one of the last parts of the health care budget to cut.  More of our health care aid should be like Medicaid, which is relatively cheap and also targeted at those who really need the assistance.  The correct Medicaid decisions depend on other budget choices, but ideally Medicaid is low on the list of recommended cuts, even if it may require some cuts.

4. With either the block grants or the Medicare vouchers, I would urge maximum transparency.  Health care costs are increasing by about five percent a year.  That means a fixed value voucher loses about half its real value, in terms of command over health care resources, within fourteen years.  (It’s a bit more complicated than that, since not all health care costs are proportional price increases to currently available services.)   If that is the decision we are going to make, let us understand it as such.  I would add that Ryan’s opponents don’t avoid this kind of dilemma nearly as much as they think they do.

5. It would be nice to have a scientific estimate of how much fixed value vouchers would lower the rate of growth of health care costs.  I’m not convinced the effect here is large, but I’d like to see it studied more closely.

6. Ryan’s budget repeals ACA and thus in the semi-short run it could considerably increase Medicare costs.  There is no reason why Ryan’s plan shouldn’t keep the most fiscally responsible aspects of ACA.  Ryan exempts the current elderly from any Medicare cuts at all, see David Leonhardt’s remarks.

7. Over a ten-year time horizon, the Ryan plan increases the debt rather than decreasing it.  Take that as a sign of how hard fiscal reform is going to be.

8. As I’ve already blogged, the vouchers idea won’t help cut health care costs.  Let’s create some multiple public options within Medicare, some of which would allow people to trade health care benefits for cash.  Democrats are supposed to be “pro-choice,” right?  Or is that only for abortion?

9. I’m all for cutting the corporate income tax, but 35 to 25 percent isn’t impressive.  Let’s eliminate it altogether.

10. There’s not nearly enough on reforming the dysfunctional supply-side of our health care institutions.  Nor does science or basic research receive much discussion.

11. The plan does some strange things, such as repeal Dodd-Frank resolution authority, which most people, even Dodd-Frank critics, think is a good idea.  Ezra summarizes the entire list of budget changes.

12. The more the Democrats criticize this plan, the more it helps Ryan and the more it hurts the Democrats.  It reframes sticker shock, and the entire debate, simply to argue about $6 trillion in budget cuts.

13. #12 is the bottom line here, since the plan is not intended to be enacted into law.  Points #1-11 pale in comparison to #12-13.

Here is Reihan, and Megan, and Ezra on the CBO.

Do private vouchers help control health care costs?

Basically not.  Austin Frakt writes:

Why is the market-based Advantage voucher system not helping to control Medicare costs? The answer is that health care cost control is tough, technically and politically. Provider groups typically resist it. When it pertains to Medicare, beneficiaries resist it too. By adding another private-sector layer to the program–health insurers–the Advantage program invites a third source of political pressure. Rent-seeking by providers and insurers, as well as the power of the beneficiary constituency, align in their encouragement of higher Advantage payments. Congress, apparently, is willing to yield to that encouragement.

So, it’s really no surprise that Advantage plans have not, to date, been part of a Medicare cost control solution. Congress has not consistently been willing to say no to the combination of powerful interests that advocate for higher payments to private plans. Given the track record, it is also not unreasonable to conclude the mandatory voucher program Ryan advocates wouldn’t save money either. As Krugman suggests, it could even be worse because in time 100% of beneficiaries would be enrolled in vouchers, not the 24 percent that are enrolled today.

The politics of Medicare are such that Ryan’s idea, paying for care entirely through private plans, costs more. That’s not due to a market failure, but a political one. Congress likes to spend money; insurers, providers and beneficiaries like to receive it. Congress spends even more when it can satisfy those interests under the guise of a seemingly pro-market, pro-competitive program.

Yglesias and Krugman have a good public choice critique of this aspect of the Ryan plan.  Ezra says the Ryan plan will end up reviving Simpson-Bowles, and more comment here.  Here is praise for the Ryan plan from Chris Edwards.  Here is Arnold Kling on morality.

The way to turn the Ryan plan into genuine cost control is to offer people a choice of 5-10 “public options,” some of which involve converting future Medicare benefits into current or future cash.

Choice-based Medicare cost controls

Let’s say it’s 2027 and I’ve just turned 65.  I fill out a Medicare application on-line and opt for a plan with superior heart coverage (my father died of a heart attack), not too much knee coverage and physical therapy (my job doesn’t require heavy lifting), no cancer heroics (my mother turned them down and I wish to follow her example), and lots of long-term disability.

Is that so terrible an approach?  Is it obviously worse than having the Medicare Advisory Board make all of those choices for me?

Over the next few days you will read a lot of “downgrade and dismiss” directed at Paul Ryan and his plan and indeed it is quite possible his proposal is not a workable one (I haven’t read it yet).  But don’t fall for the downgrade and dismiss bait, keep on returning to the question of how much individual choice should be allowed into health care cost control.  Why not divvy up the cost control work between the Board and some degree of individual choice across Medicare benefits?  You don’t have to combine that choice with the cost-increasing aspects of Medicare Advantage-like plans.

Many ACA defenders simply do not want to enter into a debate where the framing is “we’re all for cost control, when it comes to Medicare benefit selection it’s a question of government board vs. individual choice.”

I can think of a few reasons why individual choice will sometimes fail as a method of cost control:

1. Individuals have serious misconceptions about the science, or the badness of a particular condition, even in light of government or other third-party advice.  Or perhaps individuals simply do not understand the nature of all of the choices at hand.

2. Perhaps an individual will choose “no coverage for lung cancer,” but the government cannot precommit to the outcome of no coverage.  Of course as cost control becomes more pressing, we’ll have to learn precommitment for at least some issues, one way or the other, so this cannot be a decisive objection. The entire premise behind the discussion is that we cannot cover all treatments through government subsidy.

3. Over time, perhaps a government Board can rebalance the mix of coverage better than an individual can.  People age, possibly lose some mental faculties, science advances, costs change, and so on.

Those are good arguments.  They are good arguments for a mixed system.  They are not good arguments for ruling out all individual choice of benefits.  They are not good arguments for ruling out a scenario like that outlined in the first paragraph of this blog post.

Here is Megan McArdle on the difference between boards and individual choice:

It seems quite likely to me that vouchers are going to be better at controlling health care cost growth than a central committee.  Every committee decision that cuts off a potentially useful treatment (and I’m afraid it can’t all be back surgery and hormone replacement therapy) will trigger a lobbying explosion from affected groups.  Each treatment is a decision with a small marginal cost to the taxpayer; it’s in aggregate that they become expensive.  Which means that the congressional tendency is always going to be to override–and while there are supposed to be structural barriers against this in the bill, they aren’t very strong . . .

Whereas if you put the decision about what treatments to cover in the hands of the patient, the lobbying you face is to increase the overall value of the voucher.  To be sure, this will have a larger (and therefore more powerful) group behind it.  But it will also come with an enormous pricetag, making it much harder for our politicians to rationalize the decision.

There are lots of comments from Reihan here.  Ezra associates the Ryan reforms with Medicare Advantage.  Maybe so, and maybe that’s bad, but we return to how much individual choice should we allow into health care cost control, with or without the cost-increasing aspects of the Ryan plan.

We shouldn’t let “downgrade and dismiss” distract our attention from that fundamental question about individual choice.

Medicare and adverse selection

Brad DeLong attempts a Theory of Mind task:

Tyler Cowan [Cowen] would probably say: tough. If you were born with a tendency toward high cholesterol you ought to have known that by age 20 and been busily saving all your life in order to pay the extra expected costs of treating your heart diseases. But I don’t think the rest of us are willing to say that a bad dice roll in the genetic lottery plus an absence of foresight should doom you to an early, untreated death.

Since I believe none of that, I will offer no grade.  Nor do I believe in privatizing Medicare, as another part of Brad’s post (“In Tyler Cowen’s world, those who want to buy Medicare almost surely cannot. The market to sell and buy medical risk is unlikely to exist.”) seems to suggest and it was only last week that I distinguished my view from this, endorsing the Yglesias-Krugman argument that privatized vouchers bring higher costs.

I do believe in a core set of Medicare services, topped off with the ability to choose how much of your extra benefit comes in the form of either Medicare or Social Security benefits (cash).  It is nonetheless an interesting question whether that system would encounter adverse selection as a major financial problem.  A few points:

1. When it comes to the elderly, adverse selection as a problem is overstated.  The real problem is usually a high degree of information about many conditions, so often insurance is difficult per se.  It’s not the asymmetry of information that is the core issue, it is the existence of lots of information, and that is one of Arrow’s subtler points.  That distinction matters a good deal for mechanism design.

2. An old person might know better his health care condition, but not know better his expected health care costs.  That is a critical distinction.  You can’t reach age 60 and credibly say: “I’ve been healthy so far, I guess my lifetime health care costs will be low.”  It’s not even clear whether the healthy or the unhealthy will have lower health care costs in their later years; the unhealthy might die rather quickly and decisively.  Adverse selection on the grounds of health care costs need not be high and arguably actuaries can estimate those as well as the individual himself.

3. Perhaps most importantly, adverse selection in this context doesn’t have to be a problem; if low cost people take some cash it could be that the system is working well (if only on grounds of equity), not badly, and remember this is all tax-financed.

4. You can imagine patients visiting a combined doctor/financial analyst service at age sixty and asking for the best information and whether they should take the cash or the fuller Medicare package, possibly leading to adverse selection in terms of program finances.  But a lot of people don’t listen to their retirement planners either.

5. When choosing a future benefits package, if impatience for cash (one cognitive bias) outweighs overestimation of the value of medical care (another cognitive bias), my preferred system will work not so well.  If the net bias is runs the other way, the system will capture some but not all available gains from trade.

6. The general approach of “give everyone some basic benefits for free, and then allow everyone to top off at some opportunity cost” applies to food (food stamps), education (free K-12), housing, and now, with ACA, to health coverage for the non-elderly, among other areas.  And yet many people think the approach is morally outrageous.  The correct way to proceed is not to lash out, but to start by admitting in which spheres the approach makes sense, and then seeing how far outwards those arguments can radiate.

How the bill will evolve

Many Americans will receive subsidies for insurance, from what I understand roughly in the range of 6k to 12k.  Many other Americans — namely those who already have health insurance — will not receive direct subsidies of this nature.  Yet the subsidy-receiving and non-subsidy-receiving Americans will very often belong to the same income classes.

This disparity does not bother me personally (I have other worries about the subsidies), but I believe it will be very unpopular once it is publicly understood.  One way or another, the "firewall" between the exchanges and the employer-supplied system will break down.  Some people will want to spread the subsidies, others will want to limit them.  Yet the former is budgetarily problematic and the latter will be politically difficult.

A second and related issue is that the differences in reimbursement rates — across private insurance, Medicare and Medicaid (highest to lowest) — will become a more pressing issue.  For one thing, Medicaid patients will be crowded out by those buying private insurance on the exchanges, plus they will be crowded out by the growing number of Medicaid (and Medicare) patients.  There will be pressure to fix this problem and the difference in rates will lead to growing supplier gaming, queues, quality differentials, and so on.

Over time, reimbursement rates across programs (insurance subsidies, Medicare, Medicaid) will converge to an increasing degree.  Subsidies will be increasingly determined by income class rather than previous insurance history. 

In the limiting case (I'm not suggesting we will get there), everyone will receive means-tested subsidized vouchers for regulated private insurance.  In this strange way, Medicare and Medicaid could end up partially privatized and Ezekiel Emanuel — a voucher advocate — will end up being more influential than his brother Rahm.  We will have to live with the problems of means-testing to a higher degree than today, but we will have something closer to a unified system, as do most other countries with universal coverage.  There will be political pressure for compulsory health care savings, as they have in Singapore, to lower costs of finance.

It would be good if such vouchers could evolve in the direction of emphasizing catastrophic care and eventually they will have to.

Massive pressure will be put on such vouchers if either health care consumes 30-40 percent of gdp or income inequality continues to rise.  In the former case, subsidies become increasingly expensive and involve extraordinarily high implicit marginal tax rates (earn more, your subsidy declines in value).  In the latter case, it becomes increasingly difficult to ensure "near-equal" levels of health care access at feasible subsidy levels.  Those pressure points are not unique to the Obama bill, but they become especially critical under the evolutionary scenario I am outlining.  Perhaps we would give up the ideal of near-equal access, but that day is a few decades away.

Addendum: Here is Bryan Caplan's scenario, which means the bill will not work; my above post is assuming that problem is solved by raising the penalty.  I am reading long lists of why the bill is so good but few proponents are analyzing that problem. 

The economics of managed care

Here is my latest NYT column and these are some relevant excerpts:

Conceived in its broadest form, managed care can be run by the government, as in Britain, or left in the hands of a regulated private sector. Because the United States already has substantial private-sector capacity, and because many Americans are suspicious of government controls, the private route is the most likely option. Individuals would choose among competing providers – and those providers would try to offer the most appealing bundles of services, relative to cost.

The current tax exemption for health insurance benefits could be modified to encourage more cost-effective delivery systems, including forms of managed care that meet quality standards. For the elderly, the current Medicare fee-for-service method could be transformed into voucher programs for managed care treatment. Of course, people could go outside their network for additional services, if they were willing to pay.

It’s not well advertised, but the Obama plan would move in this direction. Many people receiving new health insurance coverage would be enrolled in Medicaid, which already relies on managed care for about half of its patients.

On a national scale, effective managed care will require the right mix of reputation and regulation to enforce provider commitments, and will need some reframing and renaming to make it palatable. It could accurately be called “competitive, choice-based single-payer coverage.”

…On the other hand, for reasons of perceived fairness, some people may be more willing to accept a “no” answer on health care from a government agency than from a private company. If so, we run the risk of limiting our care choices just because we’re more squeamish about one kind of “no” than another.

You'll note that this is a proposal to come after the Obama plan (or whatever else we do), not in lieu of it.  It's not a competing idea but rather a recognition that rationing is coming in one form or another, even if some of the cost control proposals work.

There was not nearly enough space to deal with numerous points, including the following:

1. What are the pluses and minuses of competitive managed care offers vs. government-run single-payer systems?  Or compare voucher-based competitive managed care — for seniors — to a much stronger Medicare advisory board.  Under the former scenario, individuals choose, upfront, which services won't be reimbursed.  Under the latter scenario, "experts" make that choice for everyone, subject to the constraints of politics.  Which will lead to better outcomes?

2. I suspect the biggest problem with the voucher-based idea is when patients need to switch providers, say if they dissatisfied or if they are moving geographically.  To what extent would the required regulations here mimic some of what the Obama plan does to insurance companies?  Or could we just transfer how Medicaid handles managed care right now?

3. If people do not trust their managed care providers, can we expect a mutual, cooperative, or non-profit form in those markets?  If so, how many of the advantages of markets over governments do we lose?

4. What are the ethics of converting fee-for-service Medicare into vouchers for managed care?  In theory the role of government is to provide public goods, not private goods.  Which health care treatments for the elderly can be considered public goods and which not?  Is there an argument that paying more and more and more falls under this category of public goods?  I am skeptical on this point.  I think  we have been pioneering a revolution in government, namely by assigning most expenditures to private goods.  In the long run that is simply not sustainable.

Few people would think that a ne'er do well brother would be justified into taking $50,000 from you to prolong his life (with p = 0.17) for another three months.  (Bryan Caplan has made a similar point.)  So why do we approve of comparable transfers through the public sector?

5. I am struck by how many people, over the last year, claim we don't know how to make cost control work.  There is plenty of evidence that managed care lowers the rate of cost growth, we just don't want to do it.

I also should note that the ideas of Arnold Kling were an influence on this column.

Addendum: Arnold Kling comments.