Will Medicare cost reductions stick?

The graph above, which portrays Medicare as a percentage of gdp, is from this SSA piece.  In contrast, Matt Yglesias, Kevin Drum, and others have touted a new short essay as evidence for the claim that the Obama health reform plan will succeed on the cost control front, or at least offer a reasonable chance of succeeding, or at least offers some components which will not be reversed.  Here is one key paragraph:

Virtually all of the Medicare cuts enacted in 1990 and 1993, which accounted for a significant portion of the savings in those large deficit-reduction packages, were implemented. And most of the savings enacted in 1997 other than the SGR cuts – nearly four-fifths – were implemented as well.

Given that Medicare spending growth slowed significantly more than was anticipated after 1997 – in 1999, for the first time ever, it was actually lower than the previous year’s level – and the budget was balanced in 1998 for the first time in 28 years, it is surprising that Congress did not scale back even more of the savings enacted in 1997. There is little likelihood that the positive budgetary outlook that encouraged some easing of the 1997 cuts will return in coming years.

See also Box 2 in the piece (which starts slowly, so skip ahead to the meat I am citing).  If you're wondering about discrepancies between these numbers and the SSA graph, the latter is as a percentage of gdp.

My view is this: the aggregate data show that Medicare expenditures, as a percentage of gdp, have expanded at a healthy clip for every medium-run period you can find since 1973.  I don't doubt that the future — like the past — may well show some shorter periods which look better than others but cost control has never worked in the past on anything but a temporary basis.  Citing a bunch of short periods of time doesn't convince me; they didn't stick!  And only one three-year batch of cost controls showed up, as a success, in the aggregate historical data at all.  (Would you believe a worsening alcoholic who pointed to many days or even weeks where his rate of drinking was declining and also mentioned that he drank less for a few years starting in 1993?  Or maybe this reminds you ever so slightly of the debates over recent global cooling and short vs. long-term trends?  Most progressives recognize that a few years of cooling do not contradict the evidence about the long-term trend and yet here is an odd flip of emphasis on a few short-term improvements.)

In Figure D you'll also see that the savings from the 1993-1996 partially period are offset by later, more rapid increases in Medicare spending as a percentage of gdp.

Three additional points are worth consideration:

1. The period of Medicare cost savings, in the early to mid 1990s, coincides roughly with a more general period of cost savings in health care, due to managed care.  This was soundly rejected by the American public, both in their roles as consumers and voters.

2. There will be more and more older voters in the years to come.

3. We should give at least some consideration to a "mean reversion" theory, by which current cost savings increase the pressure for future splurges.  I don't want to push this view too hard, but the aggregate data, as I eyeball them, seem to imply "do not reject" for this hypothesis.

On the other side of the ledger, you might argue, pro-Obama, that the very act of passing the legislation represents a countervailing force against this long-run trend of rising costs.

You can still argue for the bill on this basis: "Congress will increase future spending on Medicare as much as it can.  Any other expenditures in the meantime serve a "stuff the beast" function and slow down the future rate of growth on Medicare expenditure.  We'd rather spend the money on extra coverage now, realizing that the threat of future fiscal crisis will force later Medicare cuts."

That's not my point of view, but it's what I think the debate on cost control boils down to.  The best case scenario for the bill is that it won't much help cost control, may not hurt it, but by pre-emption will result in more money spent on coverage and less money spent on old people.


Actually, Congress can continue to cut medicare spending under the Obama plan, if Republicans do a reversal of their previous positions.

You see, a friend of mine was the staff director of the Senate Finance committee during the time when the Republicans were in charge of the Senate. Their plan, and, ironically, Grassley was one of the leaders, was to cut medicare reimbursement levels.

What happened was illustrative of what we have today: the Democrats pummeled the Republicans with ads that the "Republicans Are Cutting Medicare". The Republicans learned a lesson the next election cycle, a lesson which they are playing on the democrats this election cycle.

No, I am a little more optimistic: if what we have done in the past is to be more generous to hospitals on the premise that they covered uncompensated care, having health reform that forces people to pay for what they eat (by carrying insurance or paying into a pot if they don't), then some of the pressure will be off on hospitals for higher reimbursement paid by those who do pay.

No, if we can just get the Republicans and Democrats to hold hands, claiming that the world has changed, and cut reimbursement levels (or at least not increase them), we'll do all right.


Yes. That's what people have been saying all along, I think.

You can't simultaneously get increased coverage and major cost control in the same piece of legislation. Can't be done. Pisses off too many people at once.

Instead, you increase coverage as close to universal as possible. You do as much as you can about cost control while keeping the bill viable. Maybe you set up a framework for approaching the issue of cost control, to "get out in front" of the issue.

But basically you treat health care reform as a two-part piece of legislation, kicking the can of truly painful cost control measures down the road. This seems like a perfectly reasonable legislative strategy. Although it is annoying that politics does not allow both problems to be solved in one fell swoop.

The problem of course is that Republican "starve the beast" is also a two-part legislative strategy, also a logical pursuit of its goals.

The outcome of these chess games is a really shitty fiscal situation.


"Some people who do not carry insurance have no intention of using hospitals."

Gee, all I need to say is I do not intend to use a hospital. Hmmm. And, if I do need to use the hospital, and cannot pay, guess what, I get to pay your hospital bill.

Free riding. Intentions do not save free riders.

My take would be, that when we have the political will, as seen during those few years, we are able to cut costs. It is not a question of can but rather will.

This quote from the essay is particularly interesting:

"A large number of the proposals involve Medicare, which has been a leader in developing and testing effective payment reforms that private insurers later adopt widely. As the largest U.S. purchaser and regulator of health care, Medicare exerts a major influence on the rest of the health care system; its reimbursement and coverage policies have served as models for private insurers and other public programs. For example, many private insurers follow Medicare’s lead in approving coverage of new medical technologies. Over the years, the private sector has also typically followed Medicare’s lead in adopting new payment mechanisms — including the prospective payment system for hospitals and fee schedules for physicians. [4]"

Here is an example why medicine is so expensive--

I'm confused. Tyler's graph of Medicare history shows Medicare's costs staying the same as Medicare's influx of funds. Growth is at a linear rate. However, if nothing is done, growth in Medicare costs will rise at an exponential rate, eventually causing a default in the US Government, causing a global depression. If Congress continues to act the way it has in the past, then future costs will be reduced to the level of funding. How is Congress doing nothing an improvement on Congress enacting health care reform? Is it because Tyler Cowen dislikes the increase in funds from the cadillac tax?

Andrew, the bill doesn't even go so far as to bring costs down to the level of the influx of funds. Nobody who knows what they're talking about is claiming the bill will permanently solve Medicare's long-term fiscal imbalance, let alone create a surplus. It merely reduces the size of the problem and delays it by five years. If Congress' natural instinct is to maintain costs at the level of funding, then the bill will reduce the deficit and reduce long-term expenditures, and is an improvement on the status quo. Therefore, Tyler Cowen's evidence works against him. That's not based on looking at the 1999 "hiccup"; that's from looking at all the evidence from 1973 to the present.

So, am I understanding the chart right that about half of the funding comes from "general fund" taxes? And this is considered break even?

Bill, the point is they are only free riders if they free ride. If they don't free ride, then the taxes, fees, or the velvet glove wallet massage or whatever you want to call it represent free riding on them.

I was having an argument with someone regarding medical spending, he was trying to assert that a bunch of 'supply side' reforms like tort reform and loosening medical license requirements would usher in an era of ultra cheap medical care thereby eliminating the need for all reform.

A minor insight I had was that when you say something has become cheap, you are also saying something else is more expensive. In other words, a doctor's visit today might cost $100, so 2 visits = 1 Wii. If tomorrow a visit costs $10, then 20 visits = 1 Wii. One way to look at this is to say visits have become cheap. But another way to look at it is to say Wii's have become more expensive. Is it sensible to think that Wii's will become 20 times more useful to our lives than a visit to a doctor?

Where this is going is one way to look at medical spending is not quite that it has become more expensive but it has increased in value faster than other things. We spend more on medical care as a % of income today because a visit to a doctor has become more valuable. A loaf of bread, likewise, has also probably gotten a bit more valuable (if nothing else the nutritional label is probably more helpful today than it was 25 years ago) but the important thing is that its growth in value hasn't been as fast as a doctors visit. As a result, a hundred years ago you could pay for a visit with a loaf of bread, today you need 100 loaves.

If medical care becomes more valuable faster than everything else, the pressure on gov't will be to keep spending more and more on it just as everyone and everything else has been spending more on health care. Why not? It's gotten better faster than most other things, Wii's included.

The question about bending the curve, then is only relative to everything else. If medical care continues to improve faster than everything else, spending as a % of GDP will go up no matter what and that's OK. If it doesn't either because everything else starts getting better faster or medical innovation falters then the curve will truly be bent...but that may not be something to hope for.

"Bill, the point is they are only free riders if they free ride."

This is a contingency transaction: no one free rides unless they (a) get sick and (b) can't afford what they are assessed. But, that is the point: they don't know until they roll the die. And, that is a free ride risk WE assume based on THEIR willingness to take the RISK and have us pay if (a) and (b) occur. The point is: we pay for those who--if events a and b ocurr--, and, that contingency risk, and that payment, IS a free ride.

You know this is free riding. No one wants to pay for your decision to take a risk. And, if your decision to take a risk also means my healthcare costs are higher, and that, because you are not in the pool, that a pre-existing exclusion cannot be avoided, you are a cost and a free rider.

OT do the Amish show that reducing insurance is the best route to reducing costs:

Question: What is the average life expectancy of Amish men and women and what is the number one cause of death in the Amish communities?

Answer: It is the same as for all persons in the United States, no different than for other groups of people. Answer coordinated by THE BUDGET [Editor: According to US Government Statistics, the average life expectancy for Caucasian men is 74.3 and for Caucasian women is 79.9. The leading cause of death is heart disease.]

Question: Do the Amish go for health care services? How do they deal with technological advances of health care? Do the Amish allow the Doctors to go all out when they are ill or do they place restrictions on medical care provided? Do they believe in immunizations?

Answer: The Amish use local doctors, dentists, eye doctors, etc., and will go to specialists and hospitals as needed. They make use of advances in health care that are used in hospitals, etc. They generally try home remedies for ailments first before going to a doctor or the hospital. They also are inclined to go to Mexico for major treatments because of the cost of medications. [Editor's note: The Amish do not participate in medical or insurance plans and instead pay for all medical costs themselves.] The children do get immunizations (although not all may do so just as not all Englishers may do so either). Answer coordinated by THE BUDGET.

I also am puzzled by this statement: "This proposal ignores the principals of insurance: that with the law of large numbers and everyone in a pool, rates come down and, using community rating, you can deny pre-existing condition exclusion. Both the free riders and you are better off."

How could the free riders be better off? I don't think you understand the concept of insurance. It is not to lump everyone into one giant pool and give them the same rate- that would only redistribute wealth from the good risks, the healthy, the safe, to the bad risks, the ill, the careless. That has absolutely nothing to do with insurance.

The point of insurance is simply to reduce the variance of the individual. If the insurer has good actuarial tools, it can take the variance off the individual for a reasonable price- but it is still at a price. The individual who insures pays significantly more on average that one who does not. With a large portfolio, the insurer's variance can be limited in percentage terms.

Unfortunately, actual health insurance is not what people want- what they want is "free" health care. That's where the group rating comes in, which is simply taking money from healthy people and giving it to sick people by charging them the same premiums when they should be completely different.


Cost containment isn't even the main consideration. See the chart above. And we already have a socialized system, it's called Medicare, see the chart above. And did you see this quote, it's not even me saying it this time.

"As the largest U.S. purchaser and regulator of health care, Medicare exerts a major influence on the rest of the health care system; its reimbursement and coverage policies have served as models for private insurers and other public programs. For example, many private insurers follow Medicare’s lead in approving coverage of new medical technologies. Over the years, the private sector has also typically followed Medicare’s lead in adopting new payment mechanisms — including the prospective payment system for hospitals and fee schedules for physicians. [4]"

We probably spend more than other countries because we can. And we should. It's healthcare for God's sake. But we should get more for our money than we are getting. The system sucks. The government made the system. And the solution is not to put people like me at the mercy of the medicare or broader market by paying a subscription to the existing service. And other countrie's cost growth rates are right around what ours is. A previous post showed that at current rates, South Korea will be paying what we pay in about 10 years based on continuation of past compounding.

Here's a simple story to illustrate what I'm talking about. A few years ago my wife and I went to Shoprite with a very specific shopping list my late mother-in-law made. We substituted a lot of items we couldn't immediately find and as a result she was disappointed with the cost. Let's say we spent $100. We then learned her shopping list was not about items she needed but about the items on sale and Shoprite's sales require a careful eye (you get the discount by buying, say, 3 cans of peas....buying 2 doesn't work).

So next time, since we knew what we were doing, we spent only $80 on the same amount of food. This is an example of the first type of cost containment.

Now suppose my mother-in-law decided to spend an extra $30 on food. She choose this because she'd rather have more food in the house than, say, more cleaning supplies or more clothes or more in her savings account. This would be a failure of the 2nd type of cost containment. I would say that with health the first type of containment worked but we don't see that because its hard to measure when, at the same time, we are collectivelly choosing to spend that savings and then some on more health.

Good point Tom. This line of argument about what a future Congress will do seems pretty weak to me. Suppose a libertarian Senator introduces a bill to abolish Medicare entirely. By Tyler's reasoning this should not be considered as a relevant cut in spending because if it passes some future Congress will come under incredible political pressure to reverse it.

But this is not relevant. If today Congress passes a bill that cuts spending that's a spending cut. If tomorrow another bill is proposed to reverse that cut, that is a spending increase. It's just that simple. A bill that cuts spending today cuts spending today, its not an argument against it to say that tomorrow some future Congress may reverse that cut. That's an argument to make tomorrow when such a bill is actually considered!

Healthcare added almost 700,000 new jobs in the last 2 years. Stimulus funds encourage this even more by training more and more folks to get jobs doing new medical tests and so on.

And we think that at the same time we'll be able to bring costs down? Who is going to pay for all those extra tests and all those extra salaries? Santa, or the Easter Bunny?

Cliff said, "premiums...should be completely different [for sick vs. healthy people]"

But isn't that one of the problems with health insurance? You can't differentiate between sick and healthy people anyway, so you have to charge an average premium, which invites adverse selection, as the healthy opt out. That's the point of the individual mandate: it throws everyone in the risk pool, reducing both premiums and inefficiency.

On a completely separate point, isn't insurance about pooling risk among different groups? It's less-and-less like insurance when you start segregating and breaking down the risk pools. Indeed, if you take your argument to its logical conclusion, there should be a different premium for each person based on his or her health and the health care services he or she consumes. Of course, that's not health insurance at all, but rather just pay-for-service care. The point is that the business of insurance necessarily involves "group rating."

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