Guest Post on The Health Care Blog
Quick note: I have a guest post up on The Health Care Blog titled The Health Care Cost Shifting Myth. It reviews the literature on health care cost shifting, the idea that providers charge private payers more to recoup losses due to low payment levels from public programs.
The conclusion is clear from the title: very little cost shifting actually occurs, nothing like the dollar-for-dollar shifting some claim. It is a far better approximation to assume zero cost shifting. The notion that health care providers shift costs should be stricken from our minds. It leads to incorrect conclusions and policy recommendations.
Analysis of the “Hierarchy of Hungry Cannibals” Game
Last week I posted a game theory problem I called “Hierarchy of Hungry Cannibals.” Though it is a simple idea the problem statement is long so I won’t re-post it here (go back and read it if you need to).
I think most people can put themselves in cannibal number 1’s shoes (or whatever) and make what seems to be the best choice. If cannibal 1 doesn’t eat Meathead he won’t fall asleep and he won’t be at risk of being eaten. That’s safe. In fact, every cannibal could make that choice. But, perhaps surprisingly, not all have to.
This is an iterative game. That is, the players (cannibals) do not all chose their strategy (eat or not eat) simultaneously. Each waits for his turn while other players (cannibals) make their moves. Cannibal 2 can’t decide what to do until cannibal 1 does so. 3 has to wait for 2, and so on.
There are two key ideas in solving iterative games. One, which applies to all problems in game theory, is to put yourself in the shoes (or whatever footwear) of each player (cannibal) in turn. The second key idea for iterative games is to start your analysis at the end of the game, with the choices of the last player to move. After thinking about the last move, work backward through the choices of the other players: cannibal 10, then 9, then 8, then 7, etc. This solution method is known as backward induction.
The last cannibal to make a decision is number 10. He has to wait until numbers 1, 2, …, 9 decide whether or not to eat, in turn. Since number 10 is the lowest in the hierarchy there is no cannibal below him who will eat him if he sleeps. He can eat without risk. Therefore, if given the chance, he eats.
Having figured out what cannibal number 10 will do, conditional on number 9’s choice, let’s work backward to cannibal number 9. He knows cannibal 10 will eat him for sure if he eats and sleeps (because as we argued above, cannibal 10 can eat risk free). So cannibal 9 will certainly not eat (and, so, not fall asleep), whether given the choice or not.
Now move back a step to cannibal 8. He knows cannibal 9 will certainly not eat him (he can’t or he’ll be eaten, as argued above). So cannibal 8 can eat risk free if given the chance, just like cannibal 10. So far we have determined that cannibal 10 will eat if given the option, cannibal 9 will not, and cannibal 8 will. We can continue the backward induction making the same arguments as above (exercise left to reader). What we will find is that the strategies the cannibals will adopt if given the choice are:
- Don’t eat
- Eat
- Don’t eat
- Eat
- Don’t eat
- Eat
- Don’t eat
- Eat
- Don’t eat
- Eat
So every even cannibal can eat without risk and will do so if the opportunity presents itself. Every odd cannibal cannot eat or he will be eaten. Thus, number 1 will pass on Meathead, and Number 2 will eat Meathead. Though number 2 will fall asleep, number 3 can’t eat number 2 or he will himself be eaten because that is the preferred strategy of number 4. Since number 4 isn’t given a chance to eat he can’t do so. The same goes for the rest of the cannibals 5, 6, 7, …, 10. None are given a chance to eat, even though some would if they could. That is, the final outcome is:
- Doesn’t eat
- Eats Meathead
- Doesn’t eat
- Doesn’t eat
- Doesn’t eat
- Doesn’t eat
- Doesn’t eat
- Doesn’t eat
- Doesn’t eat
- Doesn’t eat
Therefore one cannibal eats (number 2) and no others do, and all cannibals live (for today). My next post about this game will show how it is a (very) simple model of nuclear proliferation (far too simple, really).
Hierarchy of Hungry Cannibals
Here’s another fun problem the solution to which illustrates fundamental concepts in game theory. (Other game theory problems and posts are listed under the game theory tag.) This problem is not hard to grasp but it takes a lot of words to set it up:
Ten cannibals live on an island. Their culture is very hierarchical and highly values rationality. To make the hierarchy explicit they’ve named themselves 1, 2, 3, …, 10. The order of the hierarchy corresponds to their number-name. Number 1 is dominant, 2 is second, and so on down to the lowly number 10.
A week ago they ate the last humans on the island, and they aren’t interested in the other flora or fauna available. The cannibals are now very hungry.
A moment ago a human named “Meathead” showed up, his sailboat having blown off course. Being the dominant cannibal, number 1 has the first option of eating Meathead. No other cannibal is permitted to touch Meathead before number 1 makes a decision as to whether or not he eats Meathead himself.
If number 1 eats Meathead he will get drowsy and fall asleep. (We assume cannibals always sleep after eating and at no other time. So these cannibals are very tired, as well as hungry.) If number 1 eats and sleeps, the number 2 cannibal has an opportunity to eat the number 1 cannibal while his defenses are down. But if number 2 eats number 1 he himself will fall asleep and he may be prey to number 3, and so on to number 10. If a cannibal eats the next dominant one he risks being eaten himself by his immediate subordinate during his slumber.
However, number 1 may choose not to eat Meathead. In that case, number 2 gets to make a decision about eating Meathead. If he eats Meathead he will sleep. If he sleeps he may get eaten by number 3 (and number 3 may then be eaten by number 4, and so forth). If number 2 passes on Meathead then number 3 gets a crack at Meathead…and so on.
Just to be explicit, cannibal number n may only eat Meathead (if given the option) or eat cannibal number n-1 (and only if n-1 is asleep). Cannibal n is not permitted to eat any other cannibal.
Number 1 gets the first move. What does he decide? What are the decisions of the other cannibals? Which cannibal, if any, eats Meathead? Which other cannibals, if any, eat? Which cannibals, if any, are eaten? Remember, these are rational cannibals. In fact, you can assume they all know the others are rational. (If you like, assume common knowledge of rationality.) That is, each will eat if (s)he can do so risk free. None will eat if it means certain death. I’ll post analysis on Monday and discuss an application in a subsequent post.
Health Reform and Medicare: A Senior Moment
I don’t normally post more than once a day. But I’ve just got to say something about the nonsense that the Obama Administration is saying about health reform and Medicare, and the political box they’re in with seniors. The Administration would like us to believe that cuts to Medicare proposed to help pay for health reform will not have any effect on the benefits seniors receive from the program or how much they pay out-of-pocket for them.
As reported by the Associated Press (AP), during an AARP forum in July Obama said “Nobody is talking about cutting Medicare benefits.” AP also reports that Obama and his supporters say cuts to Medicare would strengthen Medicare by reducing fraud, abuse, and inefficiencies. They would also include reducing overpayments to insurance companies that operate private plans under the Medicare Advantage (MA) program.
What does the Administration think cuts to MA will do? They well know what will happen, as do I. MA and its predecessor programs have a long history, one that has been studied by health economists. The academic literature is unambiguous in its predictions that in response to lower payments MA plans will leave the market. Those that don’t will cut back on benefits and/or increase beneficiary cost sharing.
Translation: seniors will lose access to some insurance options and/or pay more for less. Seniors are correct to be concerned about these reductions in benefits.
I hope, however, that many seniors will also recognize that the MA program is bloated. While some seniors may benefit from the overpayments MA plans receive, they do so at the expense of other taxpayers and other seniors who do not enroll in an MA plan (they pay higher premiums to subsidize MA expenses). I do not think it is right that MA plans are so generously paid. I agree with Obama’s plans to cut payments to MA plans. But he is not being honest when he claims that seniors will not see benefit reductions.
This is obviously a huge political problem. Seniors vote and in large numbers. That’s precisely why Obama and Democrats are spinning their Medicare plans so hard. That’s also why Republicans are positioning themselves as the guardians of Medicare. (This, by the way, is a tremendous political flip-flop.) Obama is in a political tight spot with seniors. He needs to draw money out of Medicare to pay for health reform. Seniors voting their narrow interests may turn on Obama because of it.
What to do? One thing that occurs to me that Obama might have done and perhaps still could is to acknowledge that MA plans will become less numerous and less generous. However, he should at the same time point out that unlike in the non-elderly market, Medicare beneficiaries have a public option in traditional fee for service Medicare. Benefits under that option are not being cut and all beneficiaries have access to it. Obama can say that he is looking for ways to preserve traditional Medicare, reduce the rate of increase in its premiums (which would occur if MA were not overpaid), and provide all Americans with the same health insurance security that seniors enjoy. That message is forthright and sounds like the win-win Obama is trying to convey with his less than honest claim of no cuts to Medicare benefits.
The Public Plan: Political Commentary on a Legislative Review
This post has been cited in the 3 September 2009 Health Wonk Review, hosted by The Ludicious Project.
A reader sent me Jacob Hacker’s 20 August 2009 paper Public Plan Choice in Congressional Health Plans, written for the Institute for America’s Future. The paper is a well researched and thorough review of current congressional activity with respect to the public plan element of health reform. It explains the rationale for a public plan, the variations in design currently under debate, the limitations of those designs, and how they can be improved.
Hacker (Professor of Political Science, UC Berkeley) sees a threefold role for a public plan. I’ll call it the “three Bs”: (1) as a benchmark on cost and quality that private plans will need to meet in order to compete, (2) as a backup option that would provide security to those lacking good group insurance options, and (3) as a backstop to force down costs over time with payment and care delivery innovations.
To meet these goals, Hacker argues that the public plan must (a) have an immediate network of existing providers, such as presumptive participation of Medicare affiliated providers (as stipulated in the House health reform bills); (b) set provider rates administratively like Medicare as opposed to negotiated rates like those of private plans (such a provision only exists in the House Ways & Means and Education & Labor Committee bills); (c) be accessible to larger employers in the future (as is the case with all bills passed out of congressional committees to date); (d) include incentives for innovation in quality improvement and cost reduction (true of all committee bills passed to date); and (e) include government drug price negotiation that applies to Medicare as well (as in the House Energy & Commerce version). These five criteria, if met by a public plan, would likely be sufficient for a public plan to meet the three Bs Hacker specified: benchmark, backup, and backstop.
What Hacker’s paper is not (and is not meant to be) is a defense of the concept of a public plan. Therefore, what follows is not a critique of his paper. I’m just using it as a springboard to get a few things off my chest. Were Hacker’s paper a defense of the public plan idea it would have to establish that a system with private insurers only cannot more efficiently or effectively achieve the three Bs.
This is not a foregone conclusion. There are other nations (for example Switzerland, about which Krugman wrote recently) that have a private plan based universal coverage program. If one is going to argue that we must have a public option then one must show that a private based system such as Switzerland’s (or those of other nations) cannot do just as well here.
In comparing the likely effects of a private-only system, remade in some fashion by reform, with some public plan proposal one has a choice to make. Either one considers the likely effects of political forces or one does not. But one has to make that choice equivalently for both imagined systems. One can’t meaningfully compare a politics-free best-case outcome of one approach (like a public plan) to a politically corrupt version of another (like a private-only system). Doing just this is a favorite tactic of both sides in the debate over a public plan. It is an intellectually corrupt tactic. Don’t fall for it.
Let’s look at the politics. If you consider the extent to which health reform legislation produced by congressional committees to date meet Hacker’s five criteria (lettered (a) through (e) in the third paragraph of this post), you will find that only two of the five key elements are unambiguously more favored than not. (Hacker provides a convenient table at the end of his paper that makes this plain.) This relatively low level of support for these key elements is one of many signals consistent with the idea that a public plan in the form he advocates is not politically viable.
One reason for this inconvenient truth is special interests (of course). There is a subtle reason why one cannot ignore special interests that is not often mentioned in commentary on the politics of health reform. It isn’t just that special interests can weaken or kill a good plan up front (which they may well do), but they can undermine it later. That is, providers and insurers can undermine a well intentioned public program through rent seeking that makes a mockery of cost controls. We see this routinely in Medicare already via higher physician and plan payments despite prior legislation meant to control such things. We would see the same phenomenon with respect to a public plan for the non-elderly.
But politics will muck up everything, not only a public plan but also the regulatory regime meant to reform a private-only system. Thus, the right comparison in forecasting how things will turn out one way versus the other is to consider a politically corrupted public plan relative to a politically corrupted private-only system. Which is more likely to produce outcomes we’d like to see?
I wish I knew the answer to that question. But, I confess that not only don’t I know, I’m not even sure which one I want to see work out best. Therefore I’m not a full throated supporter of one way versus the other. Whichever reform path we follow I hope we produce the best possible system of its type, accounting for political realities. With respect to the public option, that seems to be what Hacker wants as well, though he ignores political realities (again, not a critique, just a fact). A companion piece of comparable quality as Hacker’s that outlines the best possible private-only system would be a welcome contribution to the debate. (Any readers who know of one, please send it my way.)
Happy 100th: A Retrospective
I recently surpassed my 100th post. I’ve blogged about 50,000 words. Have you read them all? If not, you might have missed some of the following. They’re twelve of my favorite posts out of the first 100 or so, in chronological order.
- Medical Billing Errors (3/17/09). My first post. It describes the frequency of errors in medical bills and how to avoid them and includes the story of the largest error I ever found.
- Reading Krugman (3/31/09). I’m proud of this post because it was cited by a Nobel Prize winning economist as “interesting,” driving about 10,000 readers to The Finance Buff, where it originally posted. It is about economists’—and Krugman’s—reaction to Treasury Secretary Geithner’s bank rescue plan.
- The US Healthcare Rip-Off (4/13/09). This is a review of the literature that explores the reasons why U.S. health care costs are much higher than those of other OECD countries. Clearly this is still a relevant topic.
- Health Insurance in Retirement, Part I: How Much Health Care Will You Use? (5/12/09). This is the first of a two-post series on selecting health insurance in retirement. This is a very challenging topic and this series is a good place for near-retirees to begin to think through the issues.
- An Illustrative Welfare Analysis of Google Reader (5/19/09). This post offers (I believe) an easy way to grasp the concepts of neo-classical economic welfare analysis. Plus it advertises one of my favorite free products: Google Reader.
- Sweet Frugality: Lessons in a Cup of Tea (5/28/09). Several readers thought this was an amusing story about my realization of just how much sugar I consume.
- Pre-Theater Dinner Auctions (6/4/09). What happens when an economist has nothing to do while waiting for a restaurant table? This post has the answer.
- Two-Sided Markets, Part I: Gender-Based Price Discrimination at the Nightclub (6/16/09). This post explains the economics of gender-based price discrimination at nightclubs (i.e. the situation in which women pay less than men for entry). In doing so it explores the basics of two-sided market theory.
- My Adventure on Bling St. (7/8/09). Escapades in selling a large diamond. It is quite amazing what happened.
- Investment Planning: The Series (7/14/09). The first post in a long series on investment planning that describes the process from end-to-end. I think this series should be helpful to anyone beginning to think about investing.
- Umbrella Problems (7/15/09). I’m still pondering a question posed to me during a graduate school oral exam about an absent-minded professor and her umbrellas.
- The Game (Theory) within the Game (8/24/09). I thought this post was about as much fun as one can have with game theory in a short blog post. (Actually, I’m fond of my prior game theory posts too.)
Multi-Period Planning and Asset Allocation
This post has been cited in the Carnival of Personal Finance, hosted by Stretchy Dollar.
This is the seventh in a series of posts on investment planning. For those who haven’t read that first post (or have forgotten), I’m soliciting feedback (tips, tricks, links, etc.) that I will cite and use in the final post of the series. Here’s a list of the other posts (number 8 to appear in next week):
- Investment Planning: The Series
- Household Budgeting the Easy Way
- Budget Tracking and Projections (with Quicken Tricks)
- Willingness, Ability, and Need
- Estimating a Retirement Budget
- Need for Risk: The Details
- Multi-Period Planning and Asset Allocation [this post]
- Investment Planning: Reader Tips, Tricks, and Links
In the prior post in this series I illustrated how to compute the real return required to meet a future investment goal given a fixed real monthly amount to invest. Because downside risk increases with expected return (no free lunch), it is sensible to take more risk at a younger age than at an older age. At a younger age one has more time and ability to recover from a loss (one can work harder, take on another job, forego expenses, etc.). In the years just before retirement those options are more limited.
Translating this notion into expected return, it is sensible to aim for greater return (and more risk) in the earlier years of one’s investment plan and to settle for lower return (and lower risk) in the later years. To illustrate how this might be done, let’s consider a two-period plan with equal length periods. Generalizing to more periods and/or periods of varying length is straight forward.
Using the example of the prior post, suppose a 35 year old investor needs to build a $626,800 nest egg over a 30-year span with $725 to invest per month. We used the Bankrate.com savings calculator iteratively to determine that he required a 5.4% real return over that span. Now let’s break this plan into two periods of 15 years, one for ages 35-50 and one for ages 50-65. The investor wishes to take less risk in the second span and more in the first.
Suppose he expects to achieve a 7% real return in the first period (one can debate whether this is realistic). At this rate he can build up $229,798 by age 50 (calculated using the MSN Money savings calculator). With this much saved by age 50, he can settle for a real return of about 4.5% in the second period to reach $626,800 by age 65 (calculated using the Bankrate.com savings calculator). The astute reader will have noticed a degree of arbitrariness in this exercise. How should one allocate return (risk) across periods? Should the investor described above aim for a lower (more realistic) return in the first period, requiring a higher one in the second? I do not think logic alone can answer this question. One has to use one’s own subjective judgment.
With the next step we penetrate even deeper into the jungle of subjectivity. How does one select investment vehicles expected to obtain the return(s) computed in the preceding step? The ways are manifold; it is an underdetermined problem. This is the question of asset allocation about which a great deal has been written and many debates waged. The equity/bond ratio is the most basic decisions, but there are many others: the domestic/international mix of equity, the nominal/inflation-adjusted mix of bonds, whether or not to use market capitalization weights, whether or not to use index or managed funds, the placement of funds for tax efficiency, among others.
To my mind, some issues are settled, either by reason or empirics, or both. For instance, I’m convinced of the superiority of diversification, low fees, certain tax efficiency strategies, and indexing. Even with these as necessary constraints on choices, there is a lot of room for variation.
Ideally, one would like the portfolio expected to provide the required after-expenses, after-tax return with the lowest expected risk. In principle, with a precise definition of risk one could back test a wide range of strategies and select the optimal one. By equating risk with variance modern portfolio theory specifies an optimal (efficient) portfolio. To find the optimal portfolio one needs to estimate future asset correlations (recent past asset correlations can be found at assetcorrelation.com). However, asset correlations fluctuate, and predicting future correlations with useful precision is problematic (as discussed on the Bogleheads Investment Forum). This approach is just not practical, at least not for the average non-institutional, do-it-yourself investor.
The best one can do is to select a style of portfolio according to one’s taste and tune the percentage allocations to match an expected return. Fortunately, there are plenty of places to learn more about asset allocation issues. My favorites are the Bogleheads suite of sources: The Bogleheads’ Guide to Investing (new edition expected out in the fall of 2009), the Bogleheads Investment Forum, and the Bogleheads Wiki. TFB has reviewed many other relevant books. Using these (or others) as guides, one can select a class or style of portfolio that suits one’s taste and that is consistent with the constraints implied by the analyses presented in this series.
With that, I conclude my portion of this summer project on investment planning. The next post will be based on your assignment (given in the first post of the series). In it I will share reader inquiries and comments and provide any tricks, tips, and links that have been sent to me by others throughout this series.
The Game (Theory) within the Game
It’s the bottom of the 9th. With a man on first and no outs the hometown team is down a run. While the pitcher and catcher conference at the mound the TV play-by-play commentator hypothesizes, “They’re thinking about how to handle Speedy Joe on first. If he steals he’ll be in scoring position.”
The color commentator opines, “They’re over thinking this. The statistics show that attempting to steal in this case is no better than not. The chance of reaching second is the same if Speedy Joe attempts to steal as it is if he does not. Lightning Lefty should just pitch and not worry about Speedy Joe.”
It is likely the color commentator is right that the probability of reaching second is the same whether a runner attempts to steal or not. But the color commentator cannot be right about his advice for Lightning Lefty. In fact, one can draw these conclusions knowing almost nothing about baseball and a little bit about game theory (or by having an very logical mind, which is almost the same thing).
This situation in baseball is a well-known game within the game. With speed on first, it is a duel between pitcher and runner. The runner presses for advantage with a big lead. The pitcher changes his delivery to the stretch and demonstrates his best pick-off moves forcing the runner to dive back to first. TV networks know about this game, which is why they often split the screen and show both runner and pitcher, or they show the action from the third base camera so both can be seen in the same shot.
Simplifying the situation a bit, the runner has two choices: to run or not. The pitcher has two choices: to throw to first (in attempt to pick the runner off) or not. Of course neither does exclusively one or the other all the time. They randomize their play to keep the opponent guessing. In fact, the color commentator told us that pitchers and runners have randomized their play such that the probability of the runner reaching second is exactly balanced in the case the runner attempts to steal and he does not. (I’m ignoring the role of the other players involved in the game for simplicity.)
In fact, it must be so, or else the pitcher or the runner is not playing optimally. Imagine if the probability of reaching second were higher if Speedy Joe didn’t attempt to steal. Well, in that case his best play is to not attempt to steal because it maximizes his chance of reaching second. Knowing that, Lightning Lefty’s best play is not to try to pick him off (which runs the risk of throwing the ball away, letting Speedy reach second with ease). But if Lightning isn’t going to attempt a pick-off, Speedy should attempt to steal. But if Lightning knows Speedy will attempt to steal, he’ll try to pick him off, and so on, back and forth. You can see this is not an equilibrium. One can make a similar argument by imagining the other case, that the probability of reaching second is higher if the runner attempts to steal.
In game theory lingo, there is no pure strategy solution (Nash equilibrium) for either player. Neither Speedy nor Lightning can do just one thing all the time and neither can assume the other will do just one thing all the time. Both must play a mixed strategy of randomizing between the two choices each has. As argued above, it is illogical for the optimal random mixes of the two players over their respective strategies to give rise to a probability of success for one choice higher than the probability of success for another. Once you make such an assumption, you get caught in an infinite loop of indecision, as above.
This is a fundamental truth in game theory. The probable payoff for each of the pure strategies (attempt to steal, not attempt to steal; pick-off throw, no pick-off throw) that are mixed together by a player must be equal. The probability Speedy will reach second if he attempts to steal must equal the probability he will reach second if he does not.
However, that does not mean Lightening Lefty should ignore Speedy Joe as the color commentator suggested. That would be akin to Lightening playing the pure strategy of not making any pick-off throws to first. We know from above that a pure strategy cannot be optimal. The only way optimal (Nash equilibrium) play is achieved is if Lightening plays the mixed strategy that all pitchers play: throw to first with some probability strictly greater than zero and strictly less than one.
The color commentator got it wrong. Lightening Lefty is correct to worry about Speedy Joe and to talk things over with his catcher. Were I in the booth I’d have said, “The catcher is reminding Lightning to play a mixed strategy Nash equilibrium.” Maybe there’s a reason I’m not on TV.
Careful What You Wish For
This post originally appeared on The Health Care Blog. Numerous comments to the post can be read there, but I’m no longer reading new ones posted on that site. If you’d like me to see your comment on this, post it here (or in both places).
On the left are those who would like health reform to include a strong public plan, one that could negotiate large provider discounts, driving down the cost of medical care. On the right are those who think health insurance should be provided only privately. I’m neither left nor right. I consider myself a realist and an empiricist.
A reasonable reading of the political tea leaves suggests that health insurance for the non-elderly will remain largely a private affair. (See the Debating the Public Option in The American Prospect by Paul Starr, Robert Reich, and Robert Kuttner.) Therefore, I’d like the private insurance market to work well. I’m also very familiar with the Medicare experience (and its problems) with both public and private provision of insurance.
So is Kerry Weems, the former acting administrator of the Centers for Medicare and Medicaid Services (CMS), the agency that oversees Medicare and Medicaid. Weems was interviewed recently by John Iglehart, the founding editor of Health Affairs, a respected journal of health policy (Doing More With Less: A Conversation With Kerry Weems, Health Affairs, 18 June 2009). Based on his experience managing Medicare and Medicaid, Weems had some interesting things to say, some of which I summarize below.
In general he paints an ugly picture of a public plan. If you’re hoping health reform includes a strong public plan you should be careful what you wish for, and you should read the interview to see what problems a public plan might have. This is not to say a public plan is better or worse than private plans. It is just to say that one should expect that a public plan will likely experience certain types of problems. Now on to the summary of the Weems-Iglehart interview.
On Congress. Congress has not treated CMS well because funding it is not as sexy as funding other agencies overseen by the same appropriation subcommittees: the National Institutes of Health and the Centers for Disease Control and Prevention. A consequence is that CMS has insufficient resources to fight waste, fraud, and abuse. For example, according to Weems,
“CMS’ annual expenditures [are]…more than the economies of all but twelve nations, and CMS carries out its responsibilities with a staff of 4,600 people. Social Security is of comparable budget size and handles its dollars with about 66,000 people…”
On Medicare Advantage. Weems feels that private plans under Medicare advantage can offer “better care at lower or the same costs” as traditional fee-for-service Medicare.
On Payment Errors. Medicaid has a payment error rate of 24 percent, meaning that the payments paid to providers are either incorrect or unverifiable 24 percent of the time.
On Waste, Fraud, and Abuse. Investigations of waste, fraud, and abuse under Medicare and Medicaid have yielded a return of $17 for every $1 spent. However, far too little is spent in the fight. Therefore, a considerable amount of waste, fraud, and abuse exist under Medicare and Medicaid. (See the recent stories on fraud in Miami, Detroit, and Denver.)
On a Public Plan under Health Reform. Weems thinks a public plan is “a bad idea because the government has a difficult time selecting only those providers who deliver high-quality care. There is a risk that a lot of resources will be wasted on poor care.
On Political Pressure. CMS administrators get a lot of pressure from Congress to treat certain providers more favorably than they might deserve. Such political meddling is a handicap in properly administering a public insurance plan.
On Physician Payments. The American Medical Association (AMA) has considerable influence on physician payments through its Resource Based Relative Value Scale (RBRVS) Update Committee (RUC). Weems thinks the resulting payments have “contributed to the poor state of primary care in the United States.” (Weems’ anti-RUC statements sparked a blogosphere debate (hat tip: Kate Steadman of Kaiser Health News). Rebecca Patchin, Chair of the Board of Trustees for the American Medical Association wrote on the Health Affairs blog that CMS is under no obligation to follow the RUC’s recommendations and she cites examples where it has not done so. On the Health Care Renewal blog, physician and Brown University professor Roy Poses asks “why does CMS rely exclusively on the RUC to update the RBRVS system, apparently making the RUC de facto a government agency, yet without any accountability to CMS, or the government at large?”)
On balance, it is clear that Weems is not impressed with the public provision of health insurance under Medicare and Medicaid. Some of the sources of problems could in principle be remedied. However, if Congress were to implement a public plan under health reform there is no assurance it would not suffer from at least some of the problems that plague traditional Medicare and Medicaid. I think the most challenging are political pressures, including rent seeking on the part of providers, and a potential inability for a public entity to selectively contract based on quality.
Client L, Parts 3 & 4: From Budget to Need for Risk
I’ve had four meetings with a friend to help him organize and plan his financial future (posts about the first two meetings are listed under the Client L tag). Since I last wrote we’ve met twice. In that time L has completed a household budget. It revealed that his family has excess income that is not required to meet current consumption, even after accounting for current 401(k) savings. Therefore, L and his family can afford to put some more money away (in Roth IRAs, in 529 plans, and the like) for the future.
Using his current household budget, L and I worked out his retirement budget (see Estimating A Retirement Budget) and, with that, his need for income in retirement (see Need For Risk: The Details). The next step is to use the Ballpark Estimate calculator (or other retirement calculator) to determine what average rate of return he requires to achieve a level of savings that will support the retirement income he’ll need.
One can do more work to refine and tailor one’s risk/return trajectory over time (and I’ll describe how to do that in my investment planning series), but just doing the above is enough to get a rough sense of how to invest one’s funds. With this as guidance, we will begin to look at the options available at Fidelity and in L’s 401(k) plan. Likely soon he’ll be ready to select an asset allocation and specific funds.
Also, over the next week or so L will figure out whether he and his wife are eligible for establishing Roth IRAs. It is possible one or both of them may have to take advantage of the elimination of the AGI limits on Roth conversions in 2010.
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