Tyler Cowen has several of the same reactions to Cong. Paul Ryan’s proposed strategy for Medicare reform that I did yesterday. See especially #8
8. As I’ve already blogged, the vouchers idea won’t help cut health care costs.
and the first part of #10
10. There’s not nearly enough on reforming the dysfunctional supply-side of our health care institutions.
James Kwak is much more critical:
There are two ways that government spending on health care can go down. Either health care itself is getting less expensive, or the government is just paying for less of it. Hint: it’s not the former.
“A private health insurance plan covering the standardized benefit would, CBO estimates, be more expensive currently than traditional Medicare. Both administrative costs (including profits) and payment rates to providers are higher for private plans than for Medicare. Those higher costs would be offset partly but not fully by savings from lower utilization. . . . Moreover, CBO projects that total health care spending for a typical beneficiary covered by the standardized benefit under the proposal would grow faster than such spending for the same beneficiary in traditional Medicare under either of CBO’s longterm scenarios.â€
So instead, what’s happening is the government is just paying for less health care. It’s doing this because the vouchers are designed to grow in value more slowly than the cost of health care. That’s where all of the cost savings come from.
Think about it. Does this accomplish anything? Yes, we have added a positive amount to the government’s fiscal balance. But we have done it by taking a larger amount from our aggregate household fiscal balance.
According to the CBO in the current fiscal year roughly $1 trillion of healthcare spending will come from federal tax revenues and federal borrowing (another way of describing federal spending). That’s about 7% of GDP from federal government spending on healthcare alone. Real GDP is roughly what it was a decade ago. Healthcare spending is growing at roughly 5% per year. Assuming no real GDP growth, here’s what the federal share alone of healthcare spending would be at different rates of growth as a percentage of GDP:
| Percent growth | 10 Years | 20 Years |
| 5% | 11% | 18% |
| 8% | 15% | 32% |
| 10% | 18% | 46% |
and that’s ignoring demographic changes which will almost certanly cause federal healthcare spending to be higher than that. Such is the magic of compounding.
Giving some individuals choices (remember: the Ryan proposal exempts those over 55 from the proposed reform) will not cut costs. Unless you assume that healthcare providers are willing to take a voluntary pay cut, they will potentialize those who are willing to pay and that will increasingly be those who are covered under old-fashioned Medicare.
Although you can reduce the federal government’s long term (i.e. over 30 year) liability as a result of healthcare spending by using the approach in the Ryan proposal, you can’t cut costs while preserving reasonable standards of public health that way. And you will increase federal spending on healthcare over the next 10 to 20 years as Tyler Cowen points out and as I’ve illustrated above.
Yes, there is a Medicare and healthcare crisis. It is probably already too late to deal with it and preserve the general contours of the present system. And the longer we wait to deal with it the more it will have choked from our economic growth.
Since you’ve done it a few times now: it’s Cowen, with an e.
I remain convinced that we really need to have universal health care reform. Trying to address just Medicare is messy. OTOH, maybe the Ryan plan could lead to universal vouchers.
Steve
Thanks. Fixed.
To Kwak’s comment:
Who cares? Once the spending has been removed from the mandatory, tax-supported column over to the personal, individual supported column, it becomes little different from personal consumer spending that is directed towards clothing, fine dining, real estate, automobile, etc. The nation isn’t facing a crisis because home square footage and building standards have increased over the years thus making homes more expensive. We’re not facing a crisis because some people choose to spend their money on luxury cars. We’re not facing a crisis because more and more people eat outside of their home on a regular basis. These are all spending choices and so too is the decision to spend more on one’s medical care. The thing with personal spending is that it can be changed willingly by the consumer making utility decisions.
Unless you assume that healthcare providers are willing to take a voluntary pay cut, they will potentialize those who are willing to pay and that will increasingly be those who are covered under old-fashioned Medicare.
The power of this lobby is time-limited, that is they will die out, all of them, in a mater of decades. We don’t even have to wait for them to die out for the hypothetical price escalation to be tamed in that their power as a lobby will be diminished as the pipeline to their ranks is cut-off by the age limit. This means that price caps can be imposed without incurring the wrath of god from everyone single person who is nearing the retirement age.
Divide and conquer.
The vouchers “hit” is just that if we just do fat vouchers, and don’t fix anything else, it won’t be enough. Duh.
I really hate this standard trick. It accepts an idea as without internal flaw, but then suggests that even if we X, then some Y could still be a problem.
This is not an argument against X. It is an argument against Y.
In this case X is the voucher, and Y is industry lobbying and agency issues.
The lobbying and agency issues are with us now. Not doing X doesn’t fix them either.
Yes, we have added a positive amount to the government’s fiscal balance. But we have done it by taking a larger amount from our aggregate household fiscal balance.
Um, won’t that be true of any effort to balances the budget? Raising taxes would do that. Cutting federal outlays to SS would do that. Cutting defense spending would do that to, as it would either cut personnel and/or military pay, or cut defense programs that provide civilian employment.
Or am I missing something?
These are all spending choices and so too is the decision to spend more on one’s medical care. The thing with personal spending is that it can be changed willingly by the consumer making utility decisions.
That’s true, but the thing with medical spending is you can spend the same amount this year and get less than you did last year. That’s potentially true of everything, or course, but it is stone-cold-lock certainty in medical spending. Where’s the utility decision when you get priced out of your insurance? The decision is you don’t get healthcare unless you end up in an emergency room. That is perhaps not the ideal outcome.