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The Myth vs Numeric Reality: HR3200 v Medicare

by Bruce Webb

The current line of attack on Health Care reform from Republicans is that it proposes to Rob Gramma to Pay Pedro. I am not going to address the care for illegals canard today but do want to probe just what HR3200 does for Medicare on net. Starting from the following two charts from the Kaiser Family Foundation.


Summary of Key Medicare Provisions in HR3200
The first chart reports the number proposed to be saved by changes in Medicare and displays the only number you are likely to see cited by opponents: $538.5 billion in cuts. But the second chart shows something interesting, these cuts are offset by an additional $320.4 billion in spending. Meaning that the net cut to Medicare overall is $218.1 billion over ten years. Which matches closely with the one shown in CBO’s $219 bn score shown here:

http://www.cbo.gov/ftpdocs/104xx/doc10464/hr3200.pdf

Still $218 billion over ten years is still something. But lets look at the breakdown. Of the $538.5 billion in cuts $172 billion of it is the result of removing the 15% extra payment per enrollee granted to the private insurance companies offering Medicare Advantage. This extra payment, which made a mockery of the idea that private companies could provide a better product for the same price, was originally designed to subvert traditional Medicare and is no real loss. If we subtract that $172 billion from $218 billion we get a net spending cut to traditional Medicare of $46 billion over ten years representing only a small fraction of the cost to extend coverage to 97% of legal non-elderly Americas.

So why are Republicans pushing this point so hard? Are they really concerned about the specific tradeoffs represented by the above two charts (because wihin Medicare there are winners and losers)? I think not, instead all their crocodile tears about Gramma are disguising real tears at the prospect of the outcome shown in the third row of the CBO table: the $583 billion in extra taxes on the top 1.5% over the next ten years.

Rule no 1 in evaluating Republican proposals and counter-proposals: it’s about the taxes first and foremost. They don’t like paying for services for the working class. Period.

Medicare and "present value"

by reader coberly

Andrew Biggs wrote that current Medicare recipients have not paid enough for the benefits they will recieve. He states that “since this is zero sum, it means that future taxpayers will get less than they pay for.” Here is an excerpt of what he said, followed by my comments.

Biggs said:

unlike Social Security benefits, which increase only to keep up with inflation, Medicare benefits grow in real terms. The Medicare Trustees project that health costs will grow around 1 percentage point faster than the growth of per capita GDP, which in turn they project will grow around 1.3 percent faster than inflation over the next 15 years. So I assume that real Medicare benefits will increase by 2.3 percent each year.

to make taxes and benefits comparable, I convert each to present value terms, assuming a real interest rate of 3 percent. This means that taxes paid in the past have 3 percent interest added each year, to account for the fact that these taxes could otherwise have been invested. Likewise, future benefits have 3 percent annual interest deducted, to account for the fact that retirees must wait to receive them.

So what do we get? This typical person paid around $64,971 in Medicare payroll taxes over his lifetime. Likewise, after netting out Medicare premiums, he’ll receive around $173,886 in lifetime Medicare benefits. The net? He can expect to receive around $108,915 more in benefits than he paid in taxes over his lifetime.

Alternately, let’s put this in terms of return on investment: the typical worker’s Medicare taxes produce an annual compound return of around 6.25 percent above inflation. This is comparable to the return on stocks, without any of the risk. A low-income worker with earnings at half the average wage would receive an 8.45 percent return on his Medicare taxes, while even a high earner at twice the average wage would receive a 4 percent real return—again, without any market=2 0risk.

While we can quibble about some of the assumptions and calculations, the scale of Medicare transfers to current beneficiaries is undeniably huge. And since Medicare’s pay-as-you-go financing is zero sum, these transfers, like similar overpayments to early participants in Social Security, will result in future Medicare beneficiaries receiving far less in benefits than they will pay in taxes.

My objections are below the fold.

My objections to Biggs’ main argument are first that “present value” is not a useful way to evaluate programs like Medicare and Social Security, which are insurance programs. As such they would need to be compared to otherwise similar insurance programs, not to imaginary “investments” with different risks.

Moreover, I question the logic of claiming that Medicare is “zero sum.” It seems to me that for this to be true there would have to be an endpoint at which all the taxes that are ever going to be collected, and all payments that are ever going to be made, have been.

It is easier for me to imagine that while the costs of medical care for each generation might increase so that under pay as you go each “paying” generation pays more than the last, and each “receiving” generation gets “more than it paid for,” this “profit” will continue for each generation in its turn as each subsequent generation lives longer than the last with the benefit of increasingly expensive medical care. It seems likely to me that this approaches a limit, and entirely possible that each generation does a little bit “less better” than the last, but that hardly seems a reason to abandon a program that provides badly needed insurance for each generation in turn.

“Generational equity” is a delusion. Each generation will face different problems like war, depression, inflation, the draft, better or worse weather, compared to which a small difference in the “return on investment” is not worth worrying about… especially an entirely imaginary, projected, difference based on an entirely arbitrary “present value” discount rate. and a complete misunderstanding of the difference between insurance and investment.

Medical care, like retirement costs, are consumed on a “daily bread” basis. Unless you can show that you have a better way to pay for it, with adequate guarantees, talking about it in “present value” terms is false precision and solving the wrong problem. This doesn’t mean that we ought to ignore projections of higher future costs, but it does mean we don’t need to cut off our own heads to avoid the future high cost of living.
_________________________
by reader coberly

Are Medicare Administrative Costs High?

by Tom Bozzo

A few weeks ago, reader Pete emailed a link to Real Clear Politics, where Tom Bevan cited an analysis by Robert Book of the Heritage Foundation that purports to show that Medicare administrative costs, widely claimed (e.g.) to be far lower than comparable private sector costs when expressed as a fraction of expenditures, actually are higher when expressed on a per-beneficiary basis. This got its share of big-league attention at the time, with Greg Mankiw linking, Andrew Gelman reporting the result with some skepticism, and Paul Krugman offering the always worthwhile advice never to trust Heritage Foundation analysis. More recently, Gelman posted to the effect that Heritage is shopping Book’s administrative cost claim (among others) as part of a broadside against government-run health care.

What seems to have gotten less attention is that even using Book’s preferred comparison (i.e. administrative expense per beneficiary instead of administrative expense as a fraction of outlays), the claim is bunk. This is because Book, referencing an analysis by Benjamin Zycher of the (also right-wing) Manhattan Institute, takes a reasonable proposition — that the federal government incurs some Medicare-related costs not explicitly included in the Medicare budget — and proceeds to allocates billions of dollars with little or no causal nexus to the Medicare program as Medicare administration costs. Book and Zycher call the resulting total of the budgeted and allocated costs the Medicare administrative costs and get the result that Medicare administration costs more than private-sector insurance per beneficiary. Unfortunately for them, the result does not withstand a sane allocation of the federal expenditures they consider.

Details and a couple of ironies below the fold.

Directly measured Medicare administrative costs are 38 percent lower than private sector costs on the per-beneficiary measure Book prefers. Thus one must find a lot of unmeasured Medicare cost to make Medicare look relatively costly in administration. Indeed, Zycher and Book manage to come up with an allocation of indirect costs amounting to roughly 80 percent of the directly reported Medicare administration expenses.

The sign that something is seriously amiss is the large assignment of costs from the “administration of justice” function. For Fiscal 2005, Zycher locates $42.1 billion in such costs in the federal budget and assigns $7.2 billion of that to Medicare, representing 75 percent of the indirect cost assignment. That’s the share of Medicare costs in nondefense discretionary spending, an allocation method (which happens to assign a quite high share of costs to Medicare) that Zycher defends on the grounds that military justice is administered via the defense budget.

Neither Zycher nor Book seem to have given much consideration to what the “administration of justice” money is actually spent on, and particularly that much if not most of it might be spent administering justice (at least notionally) on behalf of society as a whole and not just other federal programs. But there is such a thing as the Expenditure and Employment Statistics from the U.S. DOJ’s Bureau of Justice Statistics. For FY2005, DOJ statistics indicate that $40 billion was spent in three main categories as follows: “police protection” ($22.5 billion), “judicial and legal” ($10.9 billion), and “corrections” ($6.6 billion). Those figures include both spending on federal government programs and transfers to state and local government.

So if you were to think that even two or three billion dollars a year was being spent policing the Medicare program and locking up Medicare fraud perpetrators, then it would have to be that the federal courts are jammed with Medicare cases and not, say, civil litigation, drug prosecutions, etc. There is, though, evidence of the actual scale of Medicare fraud prevention expenses. The FY2010 budget includes $311 million for Medicare “program integrity” activities, which is a 50 percent increase over FY09. The interagency Medicare Fraud Strike Force program filed 125 criminal cases [PDF] from March ’07 to July ’09, leading to prison sentences for 122 people averaging 49 months. DOJ’s share of the increase is $19 million for FY2010, according to the CMS budget justification [PDF]. So we’re looking at on the order of tens of millions of dollars in expenditures for other agencies policing the program, not billions.

So almost all of the $7.2 billion should be taken away from the allocated indirect Medicare expenses. Being generous to Book and Zycher and taking away only $6 billion reduces the per-beneficiary expense for FY 2005 from Book’s $509 to $356. That compares to $453 for private sector insurance. So without addressing any of the other questionable expense allocations, Medicare administrative expense per beneficiary is at least 21 percent lower than that of private insurance.

Zycher also allocates an array of “general government” expenses in proportion to Medicare’s share of total federal expenditures. Among the main contributors here is the cost of running the legislative branch and administering the tax system. From an economist’s (versus an accountant’s) perspective, it is questionable whether much of these properly represent marginal or incremental costs of Medicare (something which Book, a PhD alum of the Chicago economics program, could be expected to consider in a perfect world). For that matter, a program such as Medicare may well require less than it’s expense share of certain expenses as it’s funded largely through a simpler-to-administer tax and may not require the amount of legislative attention as much smaller discretionary programs.

But that doesn’t really matter, since the general government costs a la Zycher are not enough in themselves to make Medicare administration more costly per beneficiary than private insurance.

As for the ironies, here are a couple. First, the “direct” Medicare administrative expenditures include a portion of the subsidies provided to private insurers under the Medicare Advantage program — a bit of Bush-era corporate welfare that subsidizes the private sector so that it can compete with traditional Medicare. Second, much of Medicare administration, for instance claims processing, is contracted out. So much of the comparison is of private sector entities operating under different incentive systems.

Finally, Zycher argues that even the inclusion of indirect costs understates the true cost of Medicare as it does not factor in the the economic burden of funding Medicare through distortionary taxes. There’s less to this than meets the eye, regardless of how distortionary you think a payroll tax of a few percent might be. The problem is that such Medicare tax distortion as there may be is not incurred against an alternative world of complete markets and perfect competition. Real insurers charge at least average incremental costs (and thus exert some market power in the sense of being able to charge prices above marginal cost), and in the current private system many losses are uninsured or uninsurable. Insofar as universal public health care provision can (or would) address a number of the private sector market imperfections, it’s at least a matter for careful analysis which system has the bigger economic losses.

Re-tooling the Medicare/medicaid model

rdan

I read the Op-Ed in the Boston Globe and asked Doug to write a piece or pieces in a more detailed fashion. There have been allusions to this issue as a cost factor, but no policy consideration here to date.

Post by Doug Brown

Due to the complexity of organizations today, there is commonly a “silo mentality” that develops where one department often doesn’t know what another is doing. Employees are good at looking at the “trees” within their silo, but very few are seeing the forest. We have all seen it. The result is usually organizational dysfunction. Nowhere is this more pronounced than at one of our largest government agencies – the Centers for Medicare and Medicaid Services (CMS). What’s worse, this dysfunction has enormous consequences for the cost and quality of health care that is delivered in this country. And yet, as we embark on the most significant reform to our health care system in over forty years, no one is talking about this issue.

In a July 20 Op Ed in the Boston Globe entitled Retooling the Medicare/Medicaid Model, I explored this issue. Specifically, I highlighted a program in Massachusetts that successfully breaks down the silos between these two programs to do what’s best for patients.

This care delivery model, called Senior Care Options, pools funding from Medicare and Medicaid to allow private organization to integrate care for dually eligible individuals (those eligible for both Medicare and Medicaid, and some of the most costly individuals on our public programs) to provide truly coordinated care that is patient centered and cost effective. The model has been very successful in keeping seniors out of expensive nursing homes and making them happy and satisfied. So the question is: in light of what seems to me to be such an obvious opportunity, why aren’t more states doing something about it and why aren’t more people talking about it?

I received a number of interesting responses to my Op Ed, some of which speculate on this question. One was from Renee Markus Hodin of Community Catalyst, a well respected consumer advocacy organization. She reported that her organization has been trying to make headway on this issue for years. They even got a provision inserted into the original House health reform bill to specially protect and encourage more SCO programs. But the provision was eliminated, apparently due to a misunderstanding. I am told it was opposed by some beneficiary groups “who were wary of the provision being abused by states that want to dump their duals into private plans and/or by plans that were not committed to providing the kind of care delivery system that we see under the SCO program.” That has not been the experience of SCO at all. But unfortunately, it seems that some of the new “Special Needs Plans” (SNPs) that were created recently by Congress to try to address dual eligibles are not working as intended and do not fully integrate care like SCO does.

The beauty of the SCO program is that there is a three-way contract; between the state Medicaid agency, Medicare and the SCO. This is critical to ensure full integration among both programs. Renee tells me they are trying again and hoping to garner more support.

I received another response from Jennifer Baron, a senior researcher at the Harvard Business School. She too has been working on this issue for a number of years. Here was her post to the online version of my Op Ed:

In April 2008, Harvard Business School Professor Michael Porter and I published a case study profiling Commonwealth Care Alliance (CCA), one of the three organizations offering a SCO plan. This case is one of the few examples we’ve found of a high-value approach to insurance coupled with an innovative care delivery model. Invariably when the case study is taught, students approach us after class to inquire how they can become involved with CCA or SCO.

We’ve found it particularly inspiring that under the pooled Medicare/Medicaid payment model, CCA managed to successfully serve one of the most complex and costly patient populations on the planet. In 2006-7, the only patient population for which CCA’s costs exceeded average premiums was the institutionalized population. Average premiums for the frail elderly patients who remained outside of institutional settings all exceeded costs. Talk about aligning financial and patient incentives!

My understanding is that once SCO graduated from a demonstration to a Special Needs Plan in 2009, the single three-way contract with Medicare and Medicaid – one of the most innovative aspects of the reimbursement model – disappeared. Though both Medicare and Medicaid continue to fund the plan as a SNP, I believe they must now contract separately with participating organizations.

For additional information, the CCA case study abstract is posted on the Institute for Strategy & Competitiveness website.

My best judgment of why this is not getting better traction is twofold: first, Medicare and Medicaid are incredibly complex and few inside and outside of healthcare really understand either one, let alone the way they intersect (that is why I tried hard to make my Op Ed explain the issue as simply as possible; you can let me know whether I succeeded). Second, we have lacked leadership and focus at the federal level. CMS has become such a large bureaucracy that it is overwhelming to even think about how one might reorganize it so that it better serves patients. But in my view it must be done. I remain very hopeful that with a new administration and a new focus on health reform, we have a unique opportunity to finally address this issue. I would love to hear your thoughts and ideas on the subject, including ways we might try to help make this happen.
_____________________________________
by Doug Brown

CBO: Long Term Budget Outlook Part 3-Yes it is the Medicare/Medicaid

by Bruce Webb

In comments on the last post MG was challenging 2Slugs contention that the real issue was Medicare, while BuffPilot was accusing me of ignoring Obama spending. Well I am on my way out the door and will let the CBO do the talking for me:


That near term temporary light blue peak? Obama stimulus spending. That rising tide of deep blue? Medicare and medicaid.

QED.

Discuss.

Here’s your Medicare Part D

by Divorced one like Bush

Time for some real numbers. This example is also an example for people to understand the need for fixing our system of paying for health care. Because, even in the senior years, the cost can bankrupt you.

My parents, 2008 adjusted gross income $43,291. $19,745 is capital gains from a one time sale of land. This land was taken by the state of RI via eminent domain law. See, Fidelity didn’t have enough land (300 acres via a low rent to the state in exchange for some jobs) if Dow Chemical was going to put a plant there. Dow never built. The land was worth around $400K on the open commercial market. They got $180K divided by 3. The land was in the family for centuries.

$15,502 in SS not taxed.

My step-father is in the nursing home. Mom is currently paying the bill because they own the house. It’s around $6500/m. He’s on a few meds. 9 to be exact.

The Plan: No deductible. $2700 in total drug costs (co-pay plus plan pay) covered before the “coverage gap”.

Total expense as of 4/30: $2804.20. Coverage Gap: $4350. Amount toward the Gap: $1098.06 Balance of TrOOP (true out of pocket): $3251.94.

After the “Coverage Gap” he enters Catastrophic Coverage. The cost is $2.40/generic, $6/brand name.

So, he’s in the nursing home. He might be able to get off of 1 maybe 2 of these if we can get him home. Still, the cost of his meds have been running $370/m. Now that he has entered the “Coverage Gap” the cost will be $700/m. That is 4.6 months of paying before the rest of the insurance kicks in sometime in September 2009.

$43,291 – $19,745 (cap gains) + 15,502 (SS) = $39,048 to live on.
$39,048 – 4350 (Coverage Gap) = 34,698.00 to live on.

Of course, some things have changed since the “crash”. $8149 of that $34, 698 was dividends. They cashed out this year. So, that leaves $26,549 to live on. We could have waited the crash out, but see, dad’s in a nursing home. Either the home takes it, or the economy takes it. Either way, it’s not there to generate money from money.

$26,549 – $5989 (property tax) – $3922 (utilities) – $3038 (Insurance) – $5230 (auto expenses) = $8370 to live on.
Last year there was $8328 in medical expenses EXCLUDING meds. I don’t expect that much this year, but there could be at least half that. Mom needs some stents for the renal arteries before her vascular system pops from the very high Bp.

Total medical, out of pocket expenses, 2008: $9484. Potential this year: $8,000 to12,000 approximately not including the nursing home costs. That is $26,680 to date. Even if he is home, there will be cost for home care help.

What does someone do who is not in their position? Of course, if the medical is as last year, they will be in the hole financially.

World Economic Meltdown: Crisis for Social Insurance Solvency? Or opportunity to Kill It?

by Bruce Webb

Well the Republican Party and economic conservatives generally have made their position clear, they are openly using the current meltdown as an opportunity to kill Medicare and Social Security as they exist today. We saw this at the Stimulus Summit where the very first question by the Republicans, coming from Senate Minority Leader McConnell, was to ask Obama if he would commit to supporting the Conrad-Gregg plan for Social Security, a plan that starts from the position of crisis and only asks what kind of reform it needs (and if you guessed a combination of benefit cuts and a transition to PRAs you probably hit the mark). And in releasing the Republican counter-budget Ranking Member Ryan made eliminating Medicare for workers currently under the age of 55 in favor of an array of private insurance options a central part of the plan. I’ll leave the Medicare issue for Ezra and the people at TPM Republicans: Let’s Privatize Medicare! and focus on Social Security

It is no secret that Republican’s opposed the creation of Social Security in 1935 and the array of social programs established by the Great Society in 1964-65. Not only do many of them believe that Social Insurance is not a proper function of government, many believe it is unconstitutional, and some agree with Milton Friedman that such programs are immoral and a danger to freedom itself. But they also recognize that these programs are widely popular, attacking them directly having traditionally been seen as certain political death, Social Security and Medicare being seen as the Third Rail of American Politics.

The funding crisis that faced Social Security in the late seventies was seen by these people as their great opportunity. But they recognized that they couldn’t just shut down Social Security overnight they needed to supply a replacement mechanism and a transition plan. And so was born the IRA, the Individual Retirement Account and the Ferrara Plan. (This version is from 1997 but the plan itself dates back to before 1983.) They missed their chance in 1983, and the bitterness is palpable, for example Butler and Germanis called it a ‘fiasco’. So they retooled and moved on adding other plans to the Ferrara Plan, all however having as a central element the ultimate elimination of Social Security in favor of Personal Retirement Accounts. The problem is that all plans share the same three challenges: first how do you finance the transition for older workers who do not have time to build a private retirement plan, second how do you provide an equivalent return for workers making under the median, and three how do you do all that at a cheaper cost than just fixing Social Security via a payroll tax increase of less than 2%?

Answer is below the fold.

Umm, well it turns out that you can’t meet all three challenges at the same time. The various plans tackle this problem in different ways but even after their changes in benefits by changing the indexing they end up with results as seen here.
This table is from the LMS Plan. In each case you end up with substantial transfers from the General Fund, in some cases exceeding those needed to finance scheduled benefits in the system as designed. And remember this is after changing the benefit formula. That is if we examine LMS we see that while it proposes the least amount of transfer it also produces poorer results for lower income workers. When LMS was scored the payroll gap under traditional Social Security was 1.92%, in other words an immediate increase in FICA would have been projected to deliver 100% of the scheduled benefits over the 75 year window. Whereas LMS proposed a package of tax increases and benefit cuts for workers under the cap of 4.2% with the following projected result.

The authors of LMS recognized the problem of selling a 4.2% solution to a problem scored at 1.92% that produced worse results for many lower earners and tried to mitigate the problem some.

However, all three of us support the use of progressive matches to augment the personal accounts of low-income workers as long as a funding mechanism for the matches is identified. Thus, we would support, for example, integrating a paid-for Saver’s Credit with Social Security PRAs so that low-earners would have their PRA contributions matched by the government. We did not incorporate such a provision in our plan because changes to tax policy outside of Social Security are beyond the scope of our proposal.

. Which translates to even higher transfers from the General Fund. And while it may not be charitable my suspicion is that they didn’t include such a proposal because they didn’t like how it scored.

So how do you sell a crappier result at a higher price? Particularly when your Party is out of power? You seize on every opportunity to claim that the current system is ultimately unsustainable and will have to be replaced by something, anything. Moreover since that will require sacrifices by everyone it is important that the plan be bi-partisan, which in practice is meant a compromise on ground pre-established by the Blue Dogs and the Republicans. Hence the demand by McConnell (with implicit threat of withholding support for Obama’s stimulus and budget plans, which of course they did anyway) that Obama embrace Conrad-Gregg. Which in practice means embracing some combination of benefit cuts and PRAs.

What is fatal to such a sales campaign is the prospect that people will listen to Coberly who will helpfully point out you can get a 100% result with less than 2% of payroll (or 1.06% per CBO’s August estimate) or that they will listen to Rosser/Webb who point out that economic growth needed to fully fund Social Security as is is not that high by historical standards and moreover would need to be at those levels to fund PRAs anyway. That is you need to keep people from looking at the numbers or at least undermine people’s faith in them.

Which explains the assault launched last week by Biggs, and this week by his colleague Hassett with an assist from the WaPo. What do you do when people are hearing rumors that Social Security is fully funded until 2041 or 2049? Well you simply change the definition of what ‘funded’ and ‘surplus’ mean, and point out that using a particular version of a data set that February one-month numbers failed to meet your new test, imply that that will continue to be true forever and suggest that the only solution is to sign on in advance to a plan prepared by a bi-partisan group. Hence Hassett this week Recession Bites Into Social Security’s Surplus

We have all been so busy whining about bonuses at American International Group Inc. and arguing about the so-called card- check legislation that we forgot to watch the Social Security surplus. While we were looking away, that surplus disappeared, eight years ahead of schedule.

And what is to be done about this new, recession caused crisis?

That means benefits payments will be under more stress than they have been in modern times. To the extent that the federal government continues to pump money into assorted bailouts and rescues, it will undermine its ability to support a retirement program that is now a drag on the overall picture.

The only responsible course is to do what reformers have been advocating for at least a decade, a step that worked in 1983: Establish a bipartisan commission to recommend fixes to Social Security, and implement them now. The myth that we can postpone reform because everything is just fine has been exposed as such. The time to act is now.

If this sounds familiar to the language deployed in creating the President’s Commission in 2001 or Bush launching his actual assault on Social Security in November 2004 it is not an accident. Because Cato and people and organizations aligned with it have always had the same goal in good times and bad, in 1983, in 2001, in 2004 and now in 2009 they insist that the only answer is to transition Social Security to a system based on Private Retirement Accounts. In fact the original title of Cato’s program makes that abundantly clear, it was called the PROJECT ON SOCIAL SECURITY PRIVATIZATION. That was a little too open so they changed it to Project on Social Security Choice but don’t be fooled, they are working backwards from their preferred solution.

These people wished that Social Security and Medicare had been strangled in their respective cradles, now that they are mature they want to weaken them progressively until they can be drowned in Grover Norquist’s bathtub. None of this is about improving retirement security, all of their plans start with guaranteed benefit cuts that in some cases exceed those of allowing Social Security to go to depletion, and many of them come at a higher cost to workers than just fixing the current system via payroll tax. No it is all about pissing on FDR’s grave and preventing Social Security from becoming the template for achieving universal health coverage. The people at Cato are committed to blocking any expansion of government that might increase transfers from the wealthy down the income scale, regardless of the overall social utility. Arguments that most European health care systems deliver better outcomes to more people at a lower cost leaves them cold, if it means higher taxes on the real upper income folk then no deal. On the other hand they have no objections to an LMS plan that increases taxes on people making up to the 90% income level (but no higher) while delivering crappier benefits to current and future generations of workers. So it really isn’t about overall tax levels or intergenerational equity, like everything else on the agenda of the economic right it all ultimately boils down to taxes on the wealthy and/or reversing the legacy of ‘class traitor’ FDR.

Everytime you see someone from Cato or AEI argue that ‘The time to act is now’ (as Hassett does) understand that the unstated sub-text is ‘before we lose this opportunity to set Social Security on a path to privatization’. The goal never changes, only the circumstances in which they have to operate.

The Fierce Urgency of "Nothing" (the Democratic plan for Social Security)

by Bruce Webb

Andrew Biggs references an editorial from the Charleston SC Post and Courier Advance Entitlements Reform

However, President Obama’s major entitlement-reform offensive strikes on the Medicare front. He proposed, in his speech to Congress, to deliver “quality, affordable health care for every American” while also bringing runaway costs under control. That challenging goal contradicts the president’s contention, in the same speech, that he doesn’t believe in “bigger government.”

But just as Democrats, including then-Sen. Obama, shouldn’t have rejected President George W. Bush’s Social Security reform proposals without offering coherent counterproposals, Republicans who oppose President Obama’s health-care ideas should offer tangible counterproposals on Medicare reform, too.

And then Biggs comments as follows

In 2005, there was little public or media pressure on Democrats to put their own Social Security reform plan on the table; it was sufficient that they merely oppose President Bush’s plan. I suspect the same won’t be true for Obama’s health proposals, so those who wish to take a different path on health care shouldn’t be complacent that opposition is enough.

The second assertion is perfectly sound, every serious person agrees that the current track of medical inflation is unsustainable, either we need to restrict coverage even more or find some other way to control costs in a way that allows us to maintain or hopefully expand coverage, doing “Nothing” not being a credible alternative. But the same is not true for Social Security, the situations are just not as symmetrical as Biggs would have us believe. Before explaining why I want to include the two paragraphs immediately following from the Post and Courier editorial.

The status quo will lock Medicare on a track toward a balance-sheet train wreck. Medicare trustees warned last year that the system, on its present course, would run out of money by 2019.

Unfortunately, such familiar alarms about Medicare — and Social Security — have long fallen on deaf ears, perpetuating delays in dealing with their problems. With each buck-passing postponement of the hard choices required to achieve long-term solvency, the tasks get more expensive, and thus more likely to send politicians running for cover.

Oops. There are a couple of errors operating here. To see what they are you can follow me below the fold.

As to Medicare. First of all Medicare is not a monolith, its various Parts draw their funding from different sources. That is Part B-Doctors and Part D-Drugs draw their funding from the General Fund and as such cannot “run out of money” anymore than the Defense Department can. The decision of whether to finance visits to the doctor’s office vs buying F-22s is a policy choice and not on a inevitable track to anywhere, still less a “balance-sheet wreck”. So that is error number one.

Error number two is a little more subtle. Medicare Part A-Hospital, which makes up just over half of overall Medicare is indeed funded by payroll taxes whose surpluses and deficits are credited to the HI (Hospital Insurance) Trust Fund. And that Trust Fund is indeed slated for depletion in 2019. Does that mean that Part A will “run out of money”. Well no, not in the sense that the editorial implies. To see why we need to step back and look at the language of the 2008 Medicare Report itself.

Under the intermediate assumptions the HI trust fund is projected to be exhausted in 2019, the same year as in last year’s report but at an earlier point within the year, due to slightly lower projected payroll tax income and slightly higher projected benefits than previously estimated. For the 75-year projection period, the actuarial deficit is virtually the same as in last year’s report, at 3.54 rather than 3.55 percent of taxable payroll.

If we unpack this a little we see that not much harm was done by doing “Nothing” in 2007, you got a little slippage in the date of Trust Fund Depletion offset somewhat by a tiny bit of improvement in the actual actuarial deficit. In contrast lets look at the equivalent passage in the 2007 Medicare Report

Under the intermediate assumptions the HI trust fund is projected to be exhausted in 2019, 1 year later than in last year’s report, due to slightly higher projected payroll tax income and slightly lower projected benefits than previously estimated. For the 75-year projection period, the actuarial deficit is little different from that in last year’s report, at 3.55 rather than 3.51 percent of taxable payroll.

That is if you had just jumped from the 2006 Report to the 2008 you would have seen HI Trust Fund Depletion pushed back by a year even as the actuarial gap increased from 3.51% to 3.54%. This isn’t an argument for doing “Nothing” for Medicare but it renders this from the editorial as being somewhat over heated: With each buck-passing postponement of the hard choices required to achieve long-term solvency, the tasks get more expensive. Well maybe yes and maybe no. Because as we can see the process is not linear, better payroll receipts can push the depletion date back, worse ones can move it up, but in the end Medicare Part A can never run OUT of money in the absolute sense, it can only run SHORT of money. The distinction may seem academic but it is the difference between maybe needing to ration care and cutting off Medicare altogether. The Post and Courier is shouting apocalypse while reality is stating problem. This is particularly so when the proposed solution to some projected shortfall necessitating rationing in 2019 is just to start rationing care today, that just defines the problem as the solution.

Still the editorial’s overall point on Medicare is sound, the Republicans really just can’t be the party of ‘No’ on Health Care. But the same is not true of Democrats on Social Security. When Biggs states the following he is establishing a false parallel.

In 2005, there was little public or media pressure on Democrats to put their own Social Security reform plan on the table; it was sufficient that they merely oppose President Bush’s plan.

First of all there was some media pressure, it is just that the push-back came in the form of ‘There is no crisis’ on the sensible grounds that there was a big difference between a problem that probably would manifest itself by 2018 or so (Medicare) and certainly would do so before mid-century (Health Care generally) and a problem that might manifest itself by 2041 and was in any event on a much smaller scale (Social Security). To lift my own comment from Biggs (additions in italics).

Democrats had a coherent counterproposal. It just was too simple to be comprehended by the Post and Courier.

Take 1.89%. Payroll gap per 2004 Report Add four years of ‘Nothing’. Result? 1.7% Payroll gap per 2008 Report
http://www.ssa.gov/OACT/TR/TR04/II_conclu.html#wp86802

Now you can take other starting and ending points. For example I could take 2004 and 2006 and get the results 1.89% and 2.02%. Or I could change measures and use 2004 and 2008 to yield 2042 and 2041. And then if you like do some elaborate calculations to calculate the savings or loss in current dollars of not implementing a fix in 2004.

No one has to agree with Dean Baker that this is just a Phony Crisis promulgated by people “who say they want to fix the roof (but) actually want to knock holes in it”. And there may be some force in the argument that unfunded liability over the Infinite Future Horizon creates serious issues of inter-generational inequity that will need to be addressed at some point or another. (Personally I am with Dean and think the latter argument is hooey.)

But wherever you land on the fundamental question the twin assertions of “We can’t afford to wait” and “The cost will only get greater if we delay” just are not supported by the historical record from 1997 to 2008. Now oddly they were supported by that record from 1993 to 1996 and retrospectively they may end up being supported by the record from 2008-2011. But from the actual standpoint of March 2009 there just isn’t a whole bunch of the “Fierce urgency of Now” operating.

The 2006 Report was quite the disappointment, the outlook as a percentage of payroll having darkened significantly since 2004. Did this mean the “There is no Crisis” people of spring 2005 had egg on their face? Well not really because you could calculate with some precision the Cost of Inactivity between any two time points. And knock on wood for all ‘current participants’ in all years and for all ‘future participants’ in every year but 2006 the cost of sticking with the Democratic plan of “Nothing” as a plan for Social Security has been negative, that is workers have been left dollars ahead.

“Nothing” is not a particularly compelling plan, it doesn’t fit neatly within the conventions of reporting on policy. Which doesn’t mean it has not proved to be a numerically sound plan. Since 1997.

That is there is no such thing as SocialSecurityMedicareMedicaid and it is not at all hypocritical for Democrats to have refused to endorse some type of reform for Social Security in 2005 while demanding Republicans get off the stump on Medicare in 2009. You simply get a fiercer urgency from 2019 than you do from 2041 (or 2049).

“Nothing”. The numerically proven plan for Social Security since 1997.

“Nothing”. The ‘so far we have dodged the bullet’ plan for Medicare. 2019 is not a drop dead point for Medicare, it doesn’t actually effect Parts B and D in the first place and only effects Part A in minor ways to start with (the actuarial gap being just under 1% of payroll at that point), we have the time to get Medicare the right “Something” and should. But that doesn’t mean Democrats have any obligation to budge on Social Security.

Krugman was Wrong today

Ken Houghton

Or at least optimistic.

McCain is going after Medicare and Medicaid.

But Douglas Holtz-Eakin, Sen. McCain’s senior policy adviser, said Sunday that the campaign has always planned to fund the tax credits, in part, with savings from Medicare and Medicaid. Those government health-care programs serve seniors, poor families and the disabled. Medicare spending for the fiscal year ended Sept. 30 is estimated at $457.5 billion.

At least he made it official.

Call those Florida relatives now.

UPDATE: PGL beat me to this one by about half an hour and is much nicer about the proposal than I over at Econospeak. (Then again, I’m not a “deficit hawk”—precisely because of reasons like this.)

Soc Sec XXXIII: Medicare Finance

I don’t claim to have studied Medicare in depth. They send me the Reports in the same envelope with the Social Security Reports and I browse through them, but that is pretty much it. So this post is more of a call for people more informed on aspects of Medicare to chip in. But I want to throw out some basics. For those who want to follow along the 2008 Report can be found here:

First while there is no such thing as MedicareMedicaidSocial Security and while I firmly believe that the deliberate lumping of them together as ‘entitlements’ is mostly a weasel-word effort that allows attacks on SS via the backdoor, there is a certain structural overlap. All six Social Security Trustees serve on the seven member Medicare Trustees board where they are joined by the Administrator of the Centers for Medicare & Medicaid Services. Which means when we score the outlook for Social Security we are also in part scoring the outlook for Medicare crisis because the Medicare Trustees not surprisingly adopt the Intermediate Cost assumptions of the Social Security Trustees, after all they are not schizoids. This has some implications which I will get to after laying down a couple more basics.

First Medicare is not a single program with a single funding source, instead it is made up of Medicare Parts A, B, C & D.

Medicare Part A is Hospital Insurance and is paid for through payroll tax deductions, 3.01% in 2006. This tax differs from that of Social Security in one respect: it is not capped. But for the most part the better Social Security performs on the revenue side, the better Part A and its HI Trust Fund do, in short they track and overall we have seen the same progress in pushing out dates of Trust Fund Depletion. Somebody can fact check me on this but I believe that when Clinton entered office HI Trust Fund depletion was scheduled for 1999 or about seven years of cushion. By the 2007 Report that date had been pushed back to 2019, which was an increase of a full year over 2006. Why the improvement? Well the Trustees tell us it was “due to slightly higher projected payroll tax income and slightly lower benefits than previously estimated”. In other words their revenue model was too pessimistic, they used Intermediate Cost. Now the 2008 Report reports that Trust Fund Depletion is still scheduled for 2019 but several months earlier in the year than the 2007. Why the slight deterioration? “due to slightly lower projected payroll tax income and slightly higher projected benefits than previously estimated. For the 75-year projection period, the actuarial deficit is virtually the same as in last year’s report, at 3.54 rather than 3.55 percent of taxable payroll. ” I don’t know the reason for the slightly higher projected benefits, but the reduced payroll tax income can be explained in three words: ‘crappy fourth quarter’. Social Security OAS was on track to beat revenue expectations right through September, then the floor fell out.

But the larger picture remains the same, if the economy outperforms Intermediate Cost then the Medicare HI Trust Fund gains more revenue and the outlook should improve. This is complicated somewhat by medical inflation, if most of your overall GDP growth is coming from increased medical costs then the net might end up negative. Which is where you readers come in, any thoughts on how this offsets?

Medicare Parts B, C, & D are mostly funded via the General Fund suplemented by premiums from beneficiaries. Part B is Doctors, Part C is Medicare Advantage (private insurance alternative) and Part D is Drugs. As General Fund programs they are not particularly walled off in the way Part A is with results we saw playing out last week.

Opponents of Medicare don’t have much of an opening on the Part A side, not when its financial health has been improving even if the face of soaring medical costs overall. And you only have to pick up the paper or know someone who has been hosptialized for even invasive surgery. Chances are pretty good you get maybe one night and boom out you go.

Which leaves them left to attack B, C, & D. Which leaves them in a quandary. Part D is a Bush initiative and hugely favorable to Big Pharma, while Part C is hugely favorable to private insurance companies. Which leaves Part B-Doctors. So how did they propose to do this? Follow me briefly below the fold.

It was rather diabolical really. Prior to the introduction of Part C & D costs were roughly split between A & B with A being the bigger brother of the two. And given their different roles and different funding schemes there was little reason to cross compare them. If a doctor getting paid under B was able to give in office care in a way that avoided hospitalization then A saves some money while the spending ratio shifts towards B. On the other hand if B is not taking Medicare patients you may have to wait for that stroke to kick in before being able to get hopitalized under A, at much higher cost thus sending the A/B ratio the other way. While I’ll defer to others on the cost specifics (S-T-R?) it would seem to the outside observer that keeping people out of the hospital (A) via preventive care (B) and simple generic medications for heart and chloesterol (D) would have to be cheaper than the alternative. On balance it would seem that long term the goal should be to get the overall ratio of medical resources to A down and to B & D up. Which is where the 45% rule steps in.

The 45% rule came in with the same bill that introduced Parts C & D, the Medicare Modernization Act. You can see MMA’s basic provisions at Wiki. http://en.wikipedia.org/wiki/Medicare_Prescription_Drug,_Improvement,_and_Modernization_Act
But to see discussion of the 45% rule try this: http://www.ncpssm.org/news/archive/vp_45_percent_trigger/

What the 45% rule does is establish a trigger. As soon as the General Fund share of Medicare hits 45% then cuts to Part B are created immediately. Note not to Parts C & D, both equally funded by the General Fund, that would take away from the Insurance Industry and Big Pharma. Nope lets pass the entire cost onto doctors.

Well that is just nutty. If this trigger were based on some overall share of GDP then it would make some sense but instead it is based on a ratio between the various components that is not directly related to overall deterioration or improvement in the health care system. If Doctor B takes on ten new Medicare patients and is able to keep three of them out of the hospital by prescribing a $1 a day generic supplied by Pharmacist D, who cares if Hospital Administrator A doesn’t get to bill medicare. We got three less people with heart attacks or strokes. Yet under the 45% rule the better preventive care gets the closer you get to the trigger. Counterproductive doesn’t begin to describe it. Unless of course your real goal is to force doctors to turn away Medicare patients to start with and so prove that this program is just another example of ‘Big Government is the Problem’.

Why do I say diabolical? Because they doubled down. First they set up a totally irrelevant ratio between A & B and then saddled the B side with additional obligations in the way of C & D and so practically guaranteeing the trigger. The system was set up to fail an artificial test and so pave the way for privatization under insurance company friendly Part C. Maybe others can see this in some other light, which I guess is what comments are for.

Health care mavens? (And don’t hesitate to comment or pose a question about Social Security, I just didn’t have a dedicated SS post prepared.)