You Can Limit Our Deductibles, but it Won’t Reduce Our Health Care Bills

When the Obama administration recently delayed its mandate on out-of-pocket health costs, experts and politicians started debating whether this delay affects our longer-term ability to implement Obamacare. I don’t think it does, but I also think we’re missing the bigger point. Once again, the United States is facing the total disconnect between our nation’s health care policies (whether Obamacare, Ryancare, or “your favored politician’s name here”-care) and the simple, unavoidable arithmetic of health care costs.

Let’s examine the latest example. Obamacare includes a mandate on insurers that out-of-pocket health care costs cannot exceed $6,350 for an individual or $12,700 for a family, numbers often cited as “catastrophic.” At first glance, these limits may sound high: six or twelve thousand dollars is a sizeable expense. But consider: households spend an average of $23,000 a year on health care. If it is considered catastrophic to ask some households to pay $12,000 in out-of-pocket expenses, then how can—or, more accurately, how do—all households cover costs that average almost twice as much?

A similar mathematical conundrum is playing out in another part of Obamacare. Congress determined that we shouldn’t have to pay more than 9 or 10 percent of our income for a moderately comprehensive health policy in the new health exchanges. But
consider: health costs now average about one-fifth of personal income and one-third
of money income. So how do we cover the difference?

The simple answer is that if we don’t pay in one way, we pay in another. Mandate any new limit on what consumers have to pay directly—on out-of-pocket deductibles, Medicare co-payment rates, drug costs under the Part D legislation pushed by President George W. Bush, or our share of the cost of health insurance in President Obama’s new health care exchanges—and those expenses don’t simply disappear. They just get tacked on somewhere else.

Of course, I’m only talking about averages. So you might object, “Well, at least I’m not the one who pays.” Perhaps true, but not as much as you might think.

Perhaps you are fairly healthy and have lower health needs. Insurance policies, however, shift costs from the unhealthy to the healthy. That’s as it should be, but the cost of insurance adds to any out-of-pocket cost. Moreover, since unhealthy households tend to have lower incomes to start with, and on average probably can’t cover even average costs of $23,000, healthy households probably pay at least that average amount and probably more to cover the income shortfalls from the less healthy. So being healthy doesn’t let us off the hook.

Perhaps you are middle class or even poor. The government’s health policies redistribute costs from those with higher incomes to those with lower incomes, including the retired. We might think that we avoid paying these high health costs by shifting tax burdens to the rich. Unfortunately, government health costs are already so high that the middle class has to share in the burden of paying for them.

More importantly, even if those health costs could be placed entirely on the rich, the rest of us would still pay what are called opportunity costs. When our elected officials require that a tax be spent on health care, they simultaneously decide that it can’t be spent on education or training or highways or other goods and services. The decline in education spending in recent years while health costs continued to rise provides only the latest piece of evidence.

Regardless of cost shifts to the healthy and those with higher incomes, we still pay a lot ourselves, only indirectly. In particular, we pay through lower cash wages when employers purchase health insurance, an important but often ignored aspect of the slow growth in cash compensation for over three decades. We also pay a decent amount through our own taxes, including federal income and Medicare taxes and all those state excise and sales taxes, often on businesses, that get passed onto us in the form of higher prices on what we buy. Finally, we pay a lot by borrowing from China, Japan, oil-exporting countries, and, more recently, the Federal Reserve, and then passing those outstanding balances and interest payments to our children.

And if paying a lot isn’t bad enough, these methods of paying help insure that we don’t always get our money’s worth. There’s fairly clear evidence that for every $100 of costs pushed into indirect and hidden budgets, our costs rise by more than $100 as health care providers find it easier to raise their prices.

So, the next time someone tells you that we can’t afford health costs that are only a fraction of what we actually pay, ask him where he thinks the extra money comes from.


Growth in Income and Health Care Costs

Worried about the stagnation of income among middle-income households? Or about the growth in health care costs? The two are not unrelated. In fact, middle-income families have witnessed far more growth than the change in their cash incomes suggest if we count the better health insurance most receive from employers or government. But is that all good news? Should ever-increasing shares of the income that Americans receive from government in retirement and other transfer payments go directly to hospitals and doctors as opposed to other needs of beneficiaries? Should workers receive ever-smaller shares of compensation in the form of cash?

The stagnation of cash incomes in the middle of the income distribution now goes back over three decades. Consider the period from 1980 to 2011. Cash income per member of a median income household, which includes items like wages and interest and cash payments from government like Social Security, only grew by about $4,300 or 27 percent over that period, when adjusted for inflation. From 2000 to 2010, it was even negative. Yet according to data from the Bureau of Economic Analysis, per capita personal income—our most comprehensive measure of individual income—grew 72 percent from 1980 to 2011.

How do we reconcile these statistics?  By disentangling the many pieces that go into each measure.

Growing income inequality certainly plays a big part in this story: much of the growth in either cash or total personal income was garnered by those with very high incomes. So the growth in average income, no matter how measured, is substantially higher than the growth for a typical or median person who shared much less than proportionately in those gains. But personal income also includes many items that simply don’t show up in the cash income measures. Among them is the provision of noncash government benefits, such as various forms of food assistance.

Health care plays no small role. In fact, real national health care expenditures per person grew by 223 percent or $6,150 from 1980 to 2011, much more than the growth in median cash income. If we assume that the median-income household member got about the average amount of health care and insurance, then we can see how little their increased cash income tells them or us about their higher standard of living.

Getting a bit more technical, there’s a danger of over-counting and under-counting health care costs here. Some of the median or typical person’s additional cash income went to extra health care expenses, so the additional amount he/she had left for all other purposes was even less than $4,300. However, individuals pay only a small share of their health care expenses; the vast majority is covered by government, employer, or other third-party payments. So, roughly speaking, typical or median individuals still got well more than half of their income growth in the form of health benefits.

The implications stretch well beyond middle-class stagnation. Employers face rising pressures to drop insurance so they can provide higher cash wages. For instance, providing a decent health insurance package to a family can be equivalent roughly to a doubling of employer costs for a worker paid minimum wage. The government, in turn, faces a different squeeze: as it allocates ever-larger shares of its social welfare budget for health care, it grants smaller shares to education, wage subsidies, child tax credits, and most other efforts. Additionally, the more expensive the health care the government provides to those who don’t work, the greater the incentives for them to retire earlier or remain unemployed.

In the end, the health care juggernaut leaves us with good news (that our incomes indeed are growing moderately faster than most headlines would have us believe) as well as bad news (that health care remains unmerciful in what it increasingly takes out of our budget).

Cumulative Change in Income & Health Expenditures


On Dementia, Cost-of-Living Adjustments, and the Right Way to Reform Programs for the Elderly

While the increase in dementia among the elderly and the president’s proposal to change the index used to provide cost-of-living adjustments (or COLAs) to Social Security recipients have both received prominent headlines recently, the discussions have largely been independent of one another. Yet any principled attempt to reform our elderly programs, including Social Security, Medicare, and Medicaid long-term care, should consider them together.

A well-designed reform of elderly programs could and should accommodate some of the cost problems associated with dementia by back-loading a larger share of benefits in Social Security to older ages when these and other needs of old age increase. COLA adjustments, whatever their other merits, front-load the system by cutting back on benefits for the oldest the most and those in late middle age or their 60s hardly at all. That the president and Congress have limited ability to engage in these types of discussions and tackle multiple goals at the same time is yet one more example of how our political processes increasingly block us from fixing what ails us.

In a well-cited RAND study, Michael Hurd and his coauthors estimate that dementia-related care purchased in the marketplace will cost somewhere close to $0.25 trillion in 2040 (in 2010 dollars). That sounds like and is a lot of money, but Social Security and Medicare are expected to rise to cost over $3.5 trillion in that same year. Although I am greatly simplifying by ignoring such factors as how much of the $0.25 trillion would be covered by individuals and not the government or the effect of entitlement reform on costs, the raw comparison speaks for itself.

Simply put, some of the private and public budget problems associated with dementia, Alzheimer’s, and other growing problems for the older among the elderly could be addressed by providing higher cash benefits in older ages. Whatever the aggregate size of Social Security in general, one could pay for this reform by cutting back on benefits in younger ages of Social Security “old age insurance” receipt. This would not solve all the associated problems of dementia, but it would be a simple, effective, easy-to-administer step in the right direction. And, by concentrating benefits more in older ages, it would encourage working longer at a time when employment rates for the population as a whole are scheduled to decline.

But this is not the discussion we’re having. Instead, the president and many budget reformers put forward a proposal to adapt what many believe is a better measure of cost-of-living or price changes and apply it to almost all government programs, including Social Security. As a technical matter, a COLA adjustment doesn’t affect the growth in initial Social Security benefits for those who retire, only the inflation adjustment they get after they retire. At that point, they get a small annual cut—e.g. 3/10 of 1% the first year, 6/10 of 1% the second year, and so forth—that compounds every year in retirement, so that by the time beneficiaries are in their late 80s or 90s, some 25 or 30 years of lower COLAs add up to a cut in benefits of as much as 10 percent.

Social Security has never adjusted upward the earliest retirement age for increases in life expectancy. Instead, it reduced the earliest age from 65 to 62 in 1959 and 1962. As a consequence, the share of benefits going to those with 15 or more remaining years of expected receipt has risen dramatically over time, and the share to those with, say, less than 10 years of remaining life expectancy has declined. The COLA proposal, even with some very old age adjustments suggested by the president, would add to this long-term trend of making the program ever less available in relative terms for those in truly old age.

This is not to say that the COLA proposal should not be adopted. Who can oppose trying to measure something better? But attempts to fix systems like Social Security and other elderly programs one parameter or adjustment at a time cannot easily meet multiple worthwhile objectives. Similarly, efforts to back-load the system to meet the needs of true old age, as suggested here, should be coordinated with further adjustments—say, in minimum benefits—to avoid discriminating against those with shorter life expectancies.

With or without a better COLA, therefore, reform of Social Security and other elderly programs requires a more comprehensive approach if we are to meet the needs of old age as they evolve over time. Shouldn’t dementia be a higher priority than early retirement?  If we’re going to spend $3 trillion or more annually on Social Security and Medicare by 2040, do we really think that the allocation of those funds be determined by formulas set in years like 1935 or 1965 or 1977, when much of the current system was cobbled together?


Who Is Insured or Not Insured by Government?

One of the many dilemmas surrounding federal health care policies is that the government only partially insures most people when it subsidizes health care, but we want to pretend that once “insured” we are all entitled to the maximum health care available. This puts a lot of weight on the definition of “insurance” and creates misunderstandings about what the government does and does not do.

This issue came up in a column by Bruce Bartlett, who notes that Republicans may now oppose an individual mandate, but they do support (directly or indirectly) a mandate on hospitals to provide emergency care. Moreover, while ignoring their effective support of this mandate, and the effective taxes necessary to pay for it, Republicans maintain that the emergency-care mandate means that everyone has some amount of insurance coverage, however partial it may be.

This debate raises the question of what it means to be “insured.” No government plan covers everything. For those soon to have access to the exchange subsidy available through Obamacare, the “silver” and “bronze” plans that could be subsidized still cover only some costs. Medicaid, in turn, generally pays providers less than do other insurance plans; as one result, the more highly paid (and, often, more highly skilled) providers are less available. Similarly, Medicare does not cover all health services, including long-term care, and some doctors now refuse new Medicare patients, though that system’s payment rate is still higher than Medicaid’s.

You may argue that you want equal coverage—if some people get Cadillac coverage, everyone should. However, no elected official from either party seems willing to raise the taxes necessary to pay for such an expensive system. The reason is obvious: such health care would absorb all the revenue currently raised by the federal government and then some, leaving nothing for other government functions.

Even then, some people would step outside the system and buy a Mercedes policy, so inequality in health care would remain. Thus, the notion that everyone gets the same health insurance coverage, even in the most nationalized health system, is pure myth. But if people are not going to receive the Cadillac or Mercedes coverage from government that others obtain privately, how should Congress design policy with those multiple gaps in mind?

I don’t think there is any easy answer, but I do think that researchers and analysts should be more precise when reporting on “insurance” coverage. For example, the Congressional Budget Office produces counts of how many people would be insured under various options, but such estimates by themselves are misleading. Insured and not insured for what? For instance, if everyone received a simple (say, $5,000) voucher, with few restrictions other than that it must cover health care, almost everyone would buy at least a $5,000 insurance policy. On the other hand, if government dictated that the voucher had to be used to buy an expensive plan that many people couldn’t afford, then supplying a voucher would not produce fairly universal (yet partial) coverage.

Alternatively, one can’t assume that a highly regulated system will automatically provide whatever care is specified, since what it pays affects which providers participate in the system. The implicit assumption—and I am not judging it here—may be that many providers are so overpaid that cutbacks would have only limited effect on the care provided or the quality of the doctors and nurses who would accept a lower-paying career.

The ideal but difficult approach for researchers and budget offices, I think, is to note as best as possible what coverage is provided by regulation or subsidization of emergency rooms, Medicaid, Medicare, exchanges—indeed, of each government engagement in the health care economy. Note the expected gaps, whether in preventive care, higher-priced doctors, drugs, or other services. Finally, compare the extent to taxpayers and insured individuals avoid coverage gaps by paying higher taxes or more for their insurance.

In any case, a dichotomous count of who is “insured” or “not insured” is too simplistic. Almost any government health insurance policy is partial in care and cost. If Republicans want to claim that emergency room care is a type of insurance, then they should also acknowledge what is not insured through that mechanism and the implicit taxes on those who end up covering the emergency room cost. If Democrats want to claim that vouchers provide less insurance than a more regulated system, then they, too, should specify just what additional insurance they claim will be covered, at what cost to whom. Both parties should also make coverage comparisons for systems that are equally cost constrained.


What the Public Doesn’t Understand About Social Security and Medicare

An earlier short highlighted my research with Caleb Quakenbush into how much people pay in Social Security and Medicare taxes over a lifetime, and how much they receive in benefits.  For instance, we found that a two-earner couple making an average wage who turned 65 in 2010 would have paid $722,000 in Social Security and Medicare taxes over their lifetimes, but would receive $966,000 in benefits.

These types of numbers often generate outraged debate over how much seniors are “owed” based on what they “paid in” to Social Security and Medicare.

But there is another, more philosophical, issue that these numbers cannot address.  Americans do not pay their taxes into a personal account that they can take out, plus interest, when they retire.  The money paid into Social Security and Medicare has always been chiefly paid out immediately to older generations.  The only exception has been some trust funds which have always been modest in size and are shrinking.  Thus, Social Security is effectively a transfer system from young to old, and always has been.

We may feel that because we transferred money to our parents, our kids, in turn, owe us.  But we must take into account also how much they can or should afford for this task as opposed to their own current needs for themselves and their children.  Think of a one-family society, where three kids support their parents, but then those three kids have no children of their own (or only one or two children).  What those three kids gave their parents informs us only slightly on what they can or should get from their own children if there are none or fewer of them.  Likewise, when demographics change and there are fewer workers to support an aging population, society has to make adjustments, regardless of what some may otherwise think is “fair” or what they think is their entitlement.

For articles inspired by this research, see a recent PolitiFact.


Social Security & Medicare Lifetime Benefits

How much will you pay in Social Security and Medicare taxes over your lifetime? And how much can you expect to get back in benefits? It depends on whether you’re married, when you retire, and how much you’ve earned over a lifetime.

I recently published with Caleb Quakenbush “Social Security and Medicare Taxes and Benefits Over a Lifetime: 2012 Update” which updates previous estimates of the lifetime value of Social Security and Medicare benefits and taxes for typical workers in different generations at various earning levels based on new estimates of the Social Security Actuary. The “lifetime value of taxes” is based upon the value of accumulated taxes, as if those taxes were put into an account that earned a 2 percent real rate of return (that is, 2 percent plus inflation). The “lifetime value of benefits” represents the amount needed in an account (also earning a 2 percent real interest rate) to pay for those benefits. Values assume a 2 percent real discount rate and all amounts are presented in constant 2012 dollars.

While no major changes in Social Security or Medicare law have occurred since the last update, these estimates reflect alternative assumptions provided by the Center for Medicare and Medicaid Services (CMS) actuaries that lawmakers will cancel a draconian scheduled cut in Medicare payment rates to physicians and other scheduled spending reductions. The result is significantly higher projected lifetime Medicare benefits than current law assumptions would indicate.

Below is a sample table from the brief, for a two-earner couple both earning Social Security’s average wage measure. This set of calculations assumes that workers retire at age 65.

Two-Earner Couple: Average   Wage ($44,600 each in 2012 dollars)
Year cohort turns 65 Annual Social Security  benefits Lifetime Social Security  benefits Lifetime Medicare benefits Total lifetime benefits Lifetime Social Security  taxes Lifetime Medicare taxes Total lifetime taxes
1960 19,000 264,000 41,000 305,000 36,000 0 36,000
1980 30,800 461,000 151,000 612,000 196,000 17,000 213,000
2010 35,800 579,000 387,000 966,000 600,000 122,000 722,000
2020 37,800 632,000 427,000 1,059,000 700,000 153,000 853,000
2030 41,200 703,000 664,000 1,367,000 808,000 180,000 988,000

More background information on these calculations can be found at: http://www.urban.org/socialsecurity/lifetimebenefits.cfm.


An Extremely Mucked Up Medicare Debate

Or

Democrats and Republicans Favor Medicare Cuts and Then Deny It

Medicare is taking on a primary role in the presidential race. The discussion often turns to whether the program should continue in its current form, with more direct government controls over costs, or shift its emphasis to vouchers or premium support plans. Let’s try to set the record straight.

Lowering Medicare spending growth over the next 10 years from, say, an additional $500 billion to an additional $400 billion means spending $100 billion less on covered services. It doesn’t matter for budget purposes the source of the saving. It is a benefit reduction.

Both presidential candidates claim to save money on Medicare without cutting benefits.  President Obama says his reforms “will save Medicare money by getting rid of wasteful spending…that won’t touch your guaranteed Medicare benefits. Not by a single dime.” Meanwhile, Governor Romney promises that his “premium support” plan will save money while still providing “coverage and service at least as good as what today’s seniors receive.”

But politicians aren’t the only ones dispensing that free-lunch rhetoric. Even highly respected journalists and researchers get pulled into it.

Consider two New York Times stories. After the first presidential debate, Michael Cooper, Jackie Calmes, Annie Lowrey, Robert Pear and John M. Broder said that President Obama “DID NOT CUT BENEFITS by $716 billion over 10 years as part of his 2010 health care law; rather, he reduced Medicare reimbursements to health care providers.” A few days later, David Brooks cited an AMA study of a premium support plan put forward by vice presidential candidate Paul Ryan and Democratic Senator Ron Wyden, saying that “costs might have come down by around 9 percent with NO REDUCTION IN BENEFITS” [cap emphases mine].

Can you see what is going on? Politicians, reporters, and experts all recognize that cost growth must be brought under control. But they also want to suggest that benefits won’t be reduced—if only we go with a particular approach.

It’s one thing to say that we can spend $100 billion less on health care so we can use the money better for education or tax cuts or paying off our debt. But it’s another thing to pretend that we can get $100 billion more in educational benefits or money in our pockets and absolutely the same quality of health care.

We know from personal experience that certain medical procedures, at the end of the day, are worthless or worse. But there’s no budget line called “worthless health care” that our elected officials can bravely vote to reduce.

Instead, we are left with blunt instruments to control costs. A Medicare board may recommend or members of Congress may elect to cut payments to providers, as they have done many times in the past. One can argue such cutting may not produce a great loss in services, depending upon how providers and consumers react. But no loss whatsoever? Come on! Try lowering government payments for anything—rental vouchers, school lunches, highways—and see if the same services are provided.

Similarly, suppose that Congress puts more Medicare recipients into a premium support system, like Medicare Advantage–type plans run by health maintenance and similar organizations. The system then limits the growth rate of payments to those groups. Again, there’s less money to go around.

Both the regulatory and voucher approaches have a precise accounting correspondence. If the government spends $100 billion less, then it purchases $100 billion less in services and makes $100 billion fewer payments to providers.

Back to the presidential and vice presidential debates. Directly trying to control prices for individual services may not have the same effect as trying to control the total amount paid for all services under a premium, and vice versa. But no candidate can deny that he favors benefit cuts relative to today’s unsustainable promises.

To add to the confusion, each side talks as if some idealized system of cost control or premium support exists. Almost inevitably, we will be taking ideas from both approaches.  We’ll cut back on high reimbursement rates when we believe the effect on actual services would be moderate and, at the same time, use limited budgets to encourage providers to operate more efficiently. For instance, we might lower the payment rates for many operations faster and simultaneously induce more Medicare recipients to opt into groups like Kaiser-Permanente that make many allocation decisions within a fixed budget.

Ferreting out the truth in this Medicare debate also requires looking beyond health care. Benefit losses in health care must be contrasted with benefit gains elsewhere. Yet even health care will likely be much worse if we continue to borrow hundreds of billions of dollars more from unfriendly nations and let excessive debt inhibit economic growth.

Bottom line: both parties favor cutting Medicare benefits, or, more accurately, slowing down the rate of benefit growth. The issue isn’t whether but how this can best be done.


Governing After Over-Promising

For almost anyone following closely our presidential candidates’ statements, it is absolutely clear that each pledges more than he can deliver. As a result, we must vote for the candidate who can better govern after over-promising.

Consider especially the big three items driving upward the budget deficits: growth in health costs, growth in retirement costs, and the tax cuts that keep passing our bills and related interest costs onto future generations. One simply can’t balance the long-term budget without dealing with these three. Yet both Obama and Romney remain largely silent about what we might have to give up in these arenas for years to come.

Social Security reform? “We can easily tweak the Social Security program while protecting current beneficiaries, ensuring that it’s there for future generations,” President Obama says. “[I am not] proposing any changes for any current retirees or near retirees, either to Social Security or Medicare,” Governor Romney proclaimed at the first presidential debate.

Medicare? The president fights to retain long-run hopes for “well over $1 trillion” in cost savings that he thinks are in Obamacare. But the Congressional Budget Office says that Obamacare raises health costs overall and that any long-run savings are just that, long-run, as well as uncertain. Romney would replace Obamacare and restore additional Medicare-directed spending.  CBO numbers say that simply abandoning Obamacare would add to the deficit since the bill also includes tax increases and other measures that more than offset the health cost increases.

As for premium support or vouchers versus traditional Medicare, the candidates do engage in a debate, but generally over changes that would be phased in at some time long distant from when they need to tackle the deficit.  Taxes? Romney proclaims that his reform would reduce revenues or at best be revenue neutral: “We are not going to have high-income people pay less of the tax burden than they pay today. […] I do want to bring taxes down for middle-income people.” He would also cut tax rates by 20 percent and “keep revenue up by limiting deductions and exemptions,” or perhaps he would do less, if those limits don’t supply enough revenues.  Obama, in turn, holds with his promise from the last campaign for no tax increases for anyone making less than $250,000. Analysis after analysis shows that keeping this promise would entail only modest progress on the deficit.

Discretionary spending? Although not one of the big three drivers of our budgetary problems, both candidates would pare it dramatically as a share of GDP, but their campaigns only  emphasize what they would protect. Obama would invest in education, and Romney now likes Pell grants, though he would give Big Bird some liposuction. Romney says he would somehow maintain a higher defense budget than Obama.

These candidates are not the first to try to tell us how much they will do for us or at least how they will absolve us—particularly the woe begotten middle class—from sharing in any future budgetary fix. Their complication, even compared with previous presidential elections, is that their new promises stack onto an extraordinary and unprecedented number of unsustainable promises already put into law. I understand why they are scared to death to tell us what reforms might really be required; we voters often jump on the honest candidate and, hence, bear some responsibility for what we get. But that means that in deciding for whom to vote, we must speculate on just which pledges either candidate would violate.

Should we prefer the candidate more willing to declare “oops” once elected?

Do we vote for the one whose future contradictions we believe will be less likely to affect our favorite interests?

Do we favor the politician more adept at dissimulating his past statements?

Consider many of the recent budget agreements and systemic reforms that required us to give up something. Reagan abandoned his opposition to removing tax breaks both in the budget agreements and the major tax reform legislation he signed. He also reversed his previously successful efforts to provide zero and often negative tax rates on some investments. Clinton abandoned his pledge for a tax cut soon after being elected. George H.W. Bush famously abandoned his “no new taxes” pledge. And while poor H.W.’s dissimulation efforts were unsuccessful, conservative and liberal pundits still place Reagan and Clinton high in their respective pantheons.

The president is the only elected official who represents all the American people. The office demands a higher order of integrity and just plain arithmetic discipline than does the role of candidate.  In the end, therefore, we probably pick whomever we think better recognizes that the switch from candidate to president is more of a leap than a transition.