The Medicare Discussion Is Bollocks

There’s one segment of the Daily Beast Niall Ferguson piece I cited in my previous post to which I’d like to draw your attention:

And then there was health care. No one seriously doubts that the U.S. system needed to be reformed. But the Patient Protection and Affordable Care Act (ACA) of 2010 did nothing to address the core defects of the system: the long-run explosion of Medicare costs as the baby boomers retire, the “fee for service” model that drives health-care inflation, the link from employment to insurance that explains why so many Americans lack coverage, and the excessive costs of the liability insurance that our doctors need to protect them from our lawyers.

Ironically, the core Obamacare concept of the “individual mandate” (requiring all Americans to buy insurance or face a fine) was something the president himself had opposed when vying with Hillary Clinton for the Democratic nomination. A much more accurate term would be “Pelosicare,” since it was she who really forced the bill through Congress.

Pelosicare was not only a political disaster. Polls consistently showed that only a minority of the public liked the ACA, and it was the main reason why Republicans regained control of the House in 2010. It was also another fiscal snafu. The president pledged that health-care reform would not add a cent to the deficit. But the CBO and the Joint Committee on Taxation now estimate that the insurance-coverage provisions of the ACA will have a net cost of close to $1.2 trillion over the 2012–22 period.

That’s the section that outraged Paul Krugman, who responded in a post also cited in my post. Does it really surprise anyone that total healthcare spending would rise under the PPACA? It covers more people (not nearly enough people to justify the expense and the debate). Of course, it will be more expensive.

At this point the argument seems to be over how fast healthcare spending will rise rather than how to reduce healthcare spending. Even Paul Ryan is content to constrain the increase to GDP plus .5 and nobody really knows how to do that in the context of the present healthcare system.

It’s complete hooey and I’d like to try to explain why. If it were 40 years ago and healthcare comprised 5% of total GDP, he might be onto something but it isn’t and he isn’t. Healthcare spending is already more than a sixth of the economy and closing in rapidly on becoming a fifth of the economy. Under the circumstances it’s looney to talk about GDP growth rate + .5 because healthcare is already such a large component of GDP.

Let’s use a little example. Let’s say that the GDP growth rate is 1.5% per year. If healthcare spending increases by 6%, that’s already 2/3s of all growth. In other words rather than talking about GDP growth rate + .5 we should at the very least be talking about non-healthcare GDP growth rate + .5. Talking about anything else implies that the heatlhcare sector will continue to grow while just about every other sector of the economy contracts. Since healthcare employs fewer people per incremental dollar than just about any other sector of the economy (it’s a mathematically equivalent statement to “wages are higher in the healthcare sector”), that’s a formula for decreasing overall employment. It’s a positive feedback loop.

Advocates will respond that as countries get richer they will naturally spend more money on healthcare. That, too, is hooey. Countries, e.g. Luxembourg, Switzerland with higher per capita GDPs than the U. S. spend substantially less than we do. There’s nothing natural about our spending. It’s an artifact. We’re not getting value for the money we spend.

I honestly don’t see any way of reducing how much we spend on healthcare in the context of the fee-for-service system and his acknowledgement of that reality is the high point of Dr. Ferguson’s article. Both the PPACA and the Ryan plan are desparate attempts at maintaining an out-of-control and unsustainable system.