The Republican Plan, I: People Will Die Options

[Snuffysmith]

The Republican Plan, I: People Will Die
http://baselinescenario.com/2010/02/03/the...-die/#more-6252
Go to link for the graphs - Baseline Scenario

with 53 comments

So the Republicans have a deficit reduction and a health care plan, all wrapped into one, the “Roadmap for America’s Future.” It’s being pushed by Paul Ryan, in part because he’s the ranking member of the House Budget Committee, in part because he’s good-looking and articulate, in part to provide the party plausible deniability if it flops (like Bobby Jindal a year ago). The CBO says that it will balance the budget and even eliminate the national debt by 2080. Ezra Klein and Matt Yglesias have commented on it. Klein says, “I wouldn’t balance the budget in anything like the way Ryan proposes. His solution works by making care less affordable for seniors. . . . But his proposal is among the few I’ve seen that’s willing to propose solutions in proportion to the problem.” Yglesias says “it’s totally unworkable.” But they’re both being much too kind.

Ryan realizes that “the deficit problem is a health-care problem,” which he agreed to in an interview with Klein. That’s good. He realizes that to solve the deficit you have to do something about Medicare. That’s good. He also puts forward a logically coherent conservative position. That’s good in itself and especially refreshing after the Bush era (and the unfunded Medicare prescription drug benefit) and all the recent posturing of the Republicans as defenders of Medicare (Mitch McConnell: “Cutting Medicare is not what Americans want.“) Ryan’s plan is basically to cut Medicare like never imagined before.

But everything else about the plan is such an unmitigated disaster I’m going to devote a whole paragraph at some point to thinking about how to label this plan. It will be a long time before we get there, though, broken into a couple of blog posts, because there are so many problems to go over.

This is the key picture, from the CBO opinion letter, which Klein also focused on:

The dark blue solid line is the current projection for Medicare. The dark blue dashed line is Medicare spending under the Roadmap. How does he do it? This will require a bit of context.

The problem with Medicare isn’t that Medicare is particularly generous (with its 20% copays, Medicare is worse than many of the PPOs working people get through their employers), or that it’s getting more generous. The problem is that per-person health care costs are growing faster than government revenues, and to a lesser extent that the ratio of beneficiaries to workers is going up in the medium term. The Obama administration’s approach to the Medicare problem is to try to reduce the growth of health care spending–”Cadillac tax,” Independent Medicare Advisory Commission, experiments in pay-for-performance, cost effectiveness research, etc.–so that cost growth can be reduced while preserving the basic existing level of insurance. A reasonable argument against this plan is that we can’t be sure that the cost reduction measures will work, so the government still bears the risk that the deficit will continue to grow. Fair point, but Peter Orszag would respond that they are trying almost everything that any sensible health economist has proposed.

The Roadmap takes the opposite approach: it puts all the risk of rising health care costs on beneficiaries. In concept, it takes the current amount that the government spends on Medicare and turns that into vouchers that are distributed to individual beneficiaries, who are then free to buy whatever health insurance they can in the free market.

The vouchers are designed to grow slower than equivalent insurance would cost

The trick is that the vouchers are indexed to “a blended rate of the CPI and the medical care component of the CPI.” The plan is to have vouchers grow slower than health care cost inflation. According to the CBO (p. 21), vouchers would grow at an annual rate of 2.7% over the next seventy-five years, while Medicare spending would otherwise grow at an annual rate of 5.0%. (Those are actually nominal numbers; see page 10). This means that over about twenty-eight years, vouchers will double while the value of current Medicare would have quadrupled.

Let’s use some real numbers. When the plan kicks in in 2021, vouchers will average $11,000 per beneficiary (in 2010 dollars). (65-year-olds will only get $5,900 vouchers; $11,000 is the average across the Medicare population. More on that later.) According to the Census, 2008 median household income for households (where the householder is) over sixty-five was about $30,000. Assume median household income grows at about 1% per year (in real terms). By 2021, when the shift starts, median income will be $34,000 and an average two-person household will get $22,000 in vouchers. Assume (and this is a huge assumption, on which more later) that the average household will be able to buy a policy as good as Medicare for $22,000.

By 2049, median income will be $50,000; the vouchers (growing at 0.7% in real terms, after subtracting 2 percentage points for inflation) will be $29,000; and health insurance premiums (for equivalent coverage, assuming 3.0% annual growth) will be $72,000. So after buying Medicare-equivalent coverage, the household will be left with $7,000 for all other expenses. Under current law, by contrast, the household would have $50,000 for all other expenses (since current Medicare is picked up by the government).

What will happen? People won’t be able to afford coverage as good as Medicare is today. People will die.

The vouchers start out too small for equivalent coverage

Now, there is already one huge assumption built into the above: that, in 2021, $22,000 in vouchers will buy you a family policy as good as Medicare would be. This assumption is patently false. Remember that 65-year-olds will start out with $5,900 vouchers, so a household of two would get $11,800 in vouchers. The average family plan bought through an employer today costs about $13,000, and does not include anyone over the age of sixty-five (meaning that equivalent insurance for older people would cost more if there were a market for it). Furthermore, the $5,900 number is being set today, and will grow from now until 2021 according to the Roadmap formula (average of the CPI and the CPI-M for medical costs)–which means it will be growing slower than health care inflation. So even before the shift begins in 2021, seniors will already be deep in the hole; even in 2021, the vouchers will not be able to buy equivalent coverage to Medicare. (On top of this, insurance will be provided by private insurers with higher administrative costs and less buying power than Medicare, meaning that beneficiaries will get even less bang for their buck.)

People get dumped into the individual market with no protection from medical underwriting

OK, what else is wrong here? For one thing, it dumps all seniors into the individual market. The Roadmap creates state-based insurance exchanges (like the Senate bill), which helps a bit. But it doesn’t address the core problem: the ability of insurers to charge more to people who are sicker, even though it tries to make you think it does:

“Guaranteed Access to Care. The Exchange will require all participating insurers to offer coverage to any individual regardless of the patient’s age or health history.

“Affordable Premium. Under the status quo, plans offering coverage to individuals often charge exorbitant premiums. This proposal solves the problem through independent risk-adjustment among insurance companies. A non-profit, independent board will penalize insurance companies that cherry-pick healthy patients while rewarding companies that seek patients with pre-existing conditions. This solution will ensure health insurers compete based on superior products and price.”

Do you see anything in there saying that insurers can’t set prices based on medical status? Risk adjustment is a valuable tool–if you eliminate medical underwriting in the first place. In that case, insurers “compete” by cherry-picking the healthy people. But if they can price based on medical status, they’ll just charge you whatever they think you will cost them in claims. If you need $60,000 of chemotherapy and they charge you $70,000 for your insurance policy, they get to keep all that money under risk adjustment, because you really are riskier. And chances are you can’t afford a $70,000 insurance policy.

And here’s the entire section on “Protection for Those Who Need It Most”:

“Uninsured individuals with pre-existing health conditions have the most difficult time finding and affording health care coverage. As a result, many individuals with pre-existing conditions often face bankruptcy to pay for health care expenses or, worse, go without treatment. If these individuals are fortunate enough to have group health insurance, their high costs are spread among their coworkers and employers in the form of ever-higher premiums, making coverage expensive for all.

“Ensuring that “high-risk” individuals – those with the greatest medical costs – can obtain high-quality coverage is critical to the success of any plan to reform health care. High-risk individuals face an insurmountable burden in medical expenses themselves, and that burden is often transferred to taxpayers in the form of uncompensated care expenses from hospitals, or the placement of these individuals in Medicaid after having exhausted their financial resources paying for their medical costs.”

Do you see a proposal in there?

The only real backstop for sick people is this:

“Establishing High-Risk Pools. State health insurance high-risk pools will offer affordable coverage to individuals who would otherwise be denied coverage due to pre-existing medical conditions, making coverage affordable for those currently deemed ‘uninsurable.’ States may offer direct assistance with health insurance premiums and/or cost-sharing for low-income and/or high-cost families.”

This is like high-risk auto insurance pools: if you are such a bad driver that no insurer wants you, the state will give you insurance. This is better than nothing, but it’s a lousy solution. People end up in high risk pools because the actuarially fair cost of their insurance exceeds their ability to pay; if they could pay it, the free market could serve them. That means that the state ends up taking a loss on them. So the Roadmap’s solution for sick people is to dump them onto the states–who can decide if they want to let them live (which costs money from state budgets) or die.

The subsidies are insignificant

To recap so far: Median seniors won’t be able to buy Medicare-equivalent coverage when the shift begins. With every decade that passes, the problem gets much worse. Poor people are stuck in the individual market, which will dump them into state high-risk pools. People will die–unless the states step in to fill the gap, which basically means shifting the Medicare cost problem from the federal government onto the states.

The Roadmap does have some help for poor people. People below the poverty line can get about $6,000 in a subsidy to cover out-of-pocket expenses through a medical savings account. People up to 150% of the poverty line get 75% of that subsidy. The problem is that the poverty line for a two-person household with the householder over 65 is $13,030, and 150% of that is $19,545. (By contrast, the Senate bill provides some amount of subsidy to families up to 400% of the poverty line.) But even if this threshold were raised, the subsidies are insignificant compared to the gaps that open up by 2049.

In short, the Roadmap balances the budget by slashing medical benefits to seniors far, far below where they are according to existing law. So far that most seniors will have to use up virtually all their income if they want to buy Medicare-equivalent coverage. People will die. Unless, that is, health care costs can be brought down just as fast, which I’ll address in my next post.

By James Kwak

[Snuffysmith]

The Republican Plan, II: You’re On Your Own
http://baselinescenario.com/2010/02/03/the...-own/#more-6255

with 52 comments

In my previous post on the Roadmap for America’s Future, I discussed how the Republican plan is based on converting Medicare into a voucher program and then slashing the vouchers drastically relative to current Medicare spending projections, leaving seniors without the ability to buy anything close to what they get from Medicare today. In that post, I compared projected Medicare vouchers under the Roadmap to projected Medicare spending under current law. If you assume that, in the Roadmap world, the cost of Medicare-equivalent health insurance will be the same as currently projected Medicare spending, then people will die.

But, Paul Ryan would argue, the Roadmap is going to bring down the cost of health care, so the fact that we’re providing less support won’t matter. Put another way, he might say, Obama’s plan also counts on bringing down the cost of health care, so why can’t I make the same assumption? There are two problems with this argument.

The cost control measures are weak

The first is that the Roadmap simply doesn’t do much to reduce health care costs. There’s a lot of talk about things like electronic medical records, but basically it’s just blather, as opposed to the detailed proposals in the Senate bill. The Roadmap pins cost reduction on one thing, and one thing only: eliminating the tax exclusion on employer-provided health care. I think this is a good idea, and I suspect that Peter Orszag does, too, but couldn’t push it through for political reasons. But the idea that it’s going to solve the health care cost problem alone is the kind of fantasy people have when they’ve only taken one semester of high-school economics and think the world works just like textbooks.

For one thing, the tax exclusion is just too small. The median family household had income of $62,621 in 2008, which means it has a marginal tax rate of 15%. (We’re pretty close to the 25% threshold, so I’ll use 20% in what follows.) So without the exclusion, the typical family plan would cost about $16,000 in pretax dollars, not $13,000; the exclusion gives the median family a discount of 20%. Only about 60% of people get health insurance through an employer plan, so the average discount across the population is only 12%. Given that the price elasticity of health care is almost certainly a lot less than one (if you double the price, demand won’t fall in half), the overconsumption due to the tax exclusion must be less than 12%. Yet our per-capital health care expenditures are more than 60% above those of any other advanced country.

I know there are second-order effects blah blah blah, but I don’t see how you can explain our entire health care cost problem as the result of one silly tax policy.

The Roadmap shifts all the risk from the government to households

More fundamentally, let’s assume for a moment that the Roadmap contained a blueprint for health care cost reduction as detailed and likely to succeed as the Senate bill. What if they are wrong? Here we see the real difference between the Republicans and the Obama administration.

In the Democratic plan, if it turns out health care costs don’t fall as fast as they hope, the deficits stay high and they try again. In the Republican plan, deficits fall and people die. In one case, the government budget bears the risk; in the other case, ordinary people bear the risk.

This gets at the fundamental question of what government is for, and maybe the fundamental difference between liberals and conservatives (at least those conservatives, like Paul Ryan, who are decent enough to have a coherent position). I believe that the government exists “for the people”–it exists to provide us things we can’t provide for ourselves solely through a free market.

Social insurance is one of those things. People are risk averse. Between (a) a guaranteed $40,000 per year in retirement and ( a 50% chance of $100,000 per year and a 50% chance of zero, most people would take (a). There are some kinds of insurance, like Medicare, that only the government can provide, because only the government has the fiscal credibility necessary. I know some of you are wondering how I can say “fiscal credibility,” but do you think a twenty-two-year new college graduate can go to Aetna and buy a health insurance policy that will kick in when he turns sixty-five and pay out until he dies? No way. There is no way Aetna can take on that kind of risk.

This is why I wrote a post last summer entitled “You Do Not Have Health Insurance.” Aetna can sell you a policy for one year, but they can’t guarantee that you can have the same policy at a reasonable price next year. That’s not what you want. You want the security of knowing that, for the rest of your life, you will be able to buy a decent health insurance policy for a reasonable price. There is no way a free market entity can provide a product like that. (Life insurance, by contrast, works because life expectancies are more predictable than future health care costs–and besides, life insurance is generally backed by state-level government guarantees.)

The Republican platform is that people are better off on their own. The marketing behind this idea is impressive. Remember Bush’s “ownership society,” which meant that you “owned” your retirement? Given the choice between owning your retirement and having it guaranteed by someone else, why would you possibly choose the former? Yet that’s the message.

The Roadmap is an extreme version of this ideology. The implicit premise is that we have to screw ordinary people–or at least make them bear a high degree of risk–in order to save the government budget. But what is the government budget? It’s a pile of money that we contribute and that our representatives are supposed to spend on things we can’t buy for ourselves individually. I know that those representatives make mistakes, are borderline corrupt, etc. But Medicare is exactly the kind of program that we want government to provide–a program that shifts risk from individuals to the government, and thereby the country as a whole–and that’s why it’s so popular, even with Mitch McConnell (on even-numbered days).

Gutting Medicare helps the federal deficit, but it does it by shifting the burden dollar-for-dollar onto individuals. Actually, it’s worse than that, since Medicare does a better job of keeping administrative costs and reimbursement rates down than private health insurers. It’s a net loss to the people as a whole, and that’s what matters.

But . . . it’s a net gain for the rich. Medicare is funded by a flat tax of 2.9% (unlike Social Security, there’s no wage cap, so it’s not actually regressive–well, it’s somewhat regressive, since the tax is only on wage earnings, not investment income). So the amount you contribute is a percentage of your income. But the amount you get back is more or less the same for everyone. So effectively Medicare redistributes money from the rich to the poor. The Roadmap actually makes Medicare slightly more progressive, by reducing vouchers for people with high incomes. (For example, couples making over $400,000 will only get 30% of the standard voucher; but that means their incomes are more than 8x the average and they get 1/3 the benefit.) But the big thing it does is drastically shrink the size of Medicare, so in 2040 it is 3.8% of GDP as opposed to 10.9% under current projections (CBO letter, page 6).

So the net effect is to take a redistributive program (that is the whole point of social insurance, after all–we don’t know who will be rich at age 65, so we’re willing to hedge our bets) and slash it to less than 40% of its projected size.

What would I do? I think that social insurance is good (because otherwise poor old people will die) and that people want it (because they are afraid of being poor and dying). Everyone agrees that we should do what we can to bring down health care costs in general and to make Medicare more efficient. But assuming for the moment that that isn’t enough to prevent deficits from ballooning, I think we should increase the Medicare payroll tax (or, better yet, income taxes, which are progressive) to fill the gap. Paul Ryan and the Republicans think we should let people fend for themselves.

Remember, all the money we’re talking about belongs to all of us. Either we tax ourselves, put it in a pool, and provide health insurance for all seniors; or we don’t tax ourselves, put it in our wallets, and hope that we’ll be among the lucky few rich enough to pay for health care when we retire. (I know there are efficiency arguments as well, but they break both ways, since Medicare itself is more efficient than private insurers; and in any case, because of risk aversion, we should be willing to give up some expected output in exchange for better security.)

That’s the choice.

Update: Austin Frakt says that I estimated the impact of the tax exclusion incorrectly.

By James Kwak
http://baselinescenario.com/2010/02/03/the...-own/#more-6255

[Snuffysmith]

The Republican Plan, III: Comic Relief

with 36 comments

(This is a multi-post series on the Republicans’ Roadmap for America’s Future. Part I was on how it slashes Medicare spending. Part II was on how it shifts risk from the government to individuals.)

The Roadmap brings up the issue that there is little price transparency in the health care market. This is the solution:

“The environment resembles what existed in the securities markets before the stock market crash of 1929. Abuse, fraud, and misinformation about the nature of stocks and the rules governing their purchase were rampant. In response, the Securities and Exchange Commission [SEC] was formed with the main purpose of bringing transparency to the market and restoring consumer confidence.

“With the increasingly rapid transformation of the financial markets and the growing complexity of financial transactions, the private sector began to take a more prominent role in developing accounting guidelines; and eventually the SEC began relying on the private sector to establish the basic standards by which it would be regulated. Since 1973, the SEC has recognized the nongovernment Financial Accounting Standards Board [FASB] as the authoritative standard-setting organization for financial accounting and reporting information. While the SEC has statutory authority to establish such financial standards, it has historically adopted FASB rules. The SEC allows the private sector to establish its own disclosure standards, so long as it demonstrates the ability to fulfill the responsibility in the public interest. The authority to enforce the standards, however, falls solely to the SEC.

“Applying this model to the health care industry will allow all stakeholders to come together, without heavy-handed government intervention, to establish uniform and reliable measures by which to report quality and price information.”

Enron? WorldCom? Self-regulation? FASB, the SEC, and the securities industry are their example?

By James Kwak