• Funding Medicare

    A recent NEJM paper by Katherine Baicker and Michael Chernew titled The Economics of Financing Medicare travels familiar terrain in the vast kingdom of Medicare woes. You know the story: Medicare is consuming a growing share of our resources and, long-term, threatens the federal government and the wider economy.* So, let’s not retrace those steps.

    The authors include a nice chart, similar to but prettier than one published by MedPAC. (The source for both is the Medicare Board of Trustees.) It helps make a point I have made before but not in any way that helps me find a relevant old post. So I’ll make it again. (It’s possible I never blogged it.)

    Notice how much of Medicare is not funded by dedicated (payroll) taxes or premiums. By eye it looks like it’s at least half in the out years. What’s special about payroll taxes and premiums is that they are dedicated to Medicare. The former is paid by current workers for current beneficiaries, the latter by current beneficiaries for themselves. So, overall, Medicare is nowhere near fully funded by dedicated revenue streams. This should not shock anyone familiar with the design of the program. It was never intended to be fully supported by dedicated funds.

    This brings me to a fact about the program that has received a lot of attention. Ricardo Alonso-Zaldivar, among many (e.g., Kevin Drum), expressed it in an early 2011 Washington Post piece.

    Consider an average-wage two-earner couple together earning $89,000 a year. Upon retiring in 2011, they would have paid $114,000 in Medicare payroll taxes during their careers. But they can expect to receive medical services – including prescriptions and hospital care – worth $355,000, or about three times what they put in.

    (More, related analysis by Eugene Steuerle and Stephanie Rennane.)

    Shocking? Hardly. The Medicare payroll taxes were never designed to support all of one’s future health spending, let alone that of current beneficiaries, as the figure above shows. So, while it is true that the hypothetical average-wage two-earner couple don’t fully fund their future Medicare benefits, it doesn’t reveal any new flaw in Medicare financing. It merely reveals a feature (or bug) built right into Medicare from inception.

    In fact, because of its more progressive tax structure, one might argue that financing more of Medicare via general revenue is the right thing to do. In other words, maybe that average-wage two-earner couple should be paying an even smaller share of their future Medicare spending via payroll taxation.

    Back to the Baicker/Chernew paper, I’ve got one minor warning to readers of it. They write,

    [R]aising taxes to pay for public insurance exerts a structural drag on the economy even if the revenue is spent on care; the same is not true of unsubsidized, privately purchased care or insurance.

    First, note that they are not saying that privately funded care or insurance exerts no structural drag the way tax-financed, public insurance does. They are saying that unsubsidized, privately purchased care or insurance imposes no drag. Since the vast majority of health insurance, if not health care, is taxpayer subsidized (the employer-sponsored insurance tax subsidy counts as, well, a tax subsidy), there is very little unsubsidized, private care or insurance in the US. Moreover, I’ve heard of no serious reform proposal that does not involve subsidies of some form. Baicker and Chernew are not praising any significant facet of our system that exists or is proposed to exist.

    However, is it true that unsubsidized, privately purchased care or insurance would exert no structural drag on the economy? It is well understood that the private medical care and insurance markets are not perfectly competitive and suffer a variety of market failures. For these reasons, among others, people are priced out. People are locked into jobs. Consequently, there would be (and currently are) significant welfare losses that subsidization seeks to address. It can therefore be argued that these markets, even when unsubsidized, pose problems for the economy. So, I have some trouble with the sentence quoted above. But it is just one sentence and not key to the point of the paper. Let’s move on.

    The paper wraps up with a paragraph that would be hard for anyone to disagree with:

    Although Medicare provides invaluable financial protection and access to care for almost 50 million beneficiaries, there’s a limit to what we can finance with limited public resources — public programs cannot pay for all possible care for all people. Different plans for limiting Medicare’s public resources impose risk on different stakeholders: bundled payments shift financial responsibility and risk to providers; fixed premium support shifts them to beneficiaries. Ultimately, benefit and payment structures must be improved in a clinically informed way that’s consistent with high-value care but that also moderates spending growth to keep the program — and the economy — afloat.

    But, of course.

    *Aside: It’s a bit unfair to blame Medicare for this, as growing health spending is a health system wide problem, but the subject of the paper is Medicare and what’s true system wide is true of that program.

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    • Well unfortunately I have to contradict this statement

      “The paper wraps up with a paragraph that would be hard for anyone to disagree with:”

      at least a little bit. It is not that I disagree with the paragraph, it is that is does nothing to contribute to the solution. The sentence

      “Ultimately, benefit and payment structures must be improved in a clinically informed way that’s consistent with high-value care but that also moderates spending growth to keep the program — and the economy — afloat.”

      is totally useless, it sounds like what a politician would say, Look, we all know the problem, but unless these authors have a solution which will meet the criteria stated above, they really ought to spend less time writing and more time thinking.

    • It may be worth noting that Medicare Part A (hospitals, etc.) is paid for with the revenue from the payroll tax, and Part B (doctors and other providers) is paid for by general revenues.

      Now go look at that graph again.

    • Health insurance premiums are very unpleasant to pay, but I am baffled as to why they would cause a “drag on the economy.”

      Americans have paid life insurance premiums, car insurance premiums, fire insurance premiums, et al, for many years, granted in relatively smaller amounts………and these were considered neither a drag nor a spur to the economy.

      About 70% of health insurance premiums find their way into the bank accounts of health care providers. These providers then buy newer cars, new houses, etc. (Check out the parking lot of your local hospital.)

      The remaining premiums go either to insurance company employees, stockholders, or into the stock market as premium reserves.

      Why this drags the economy more than, say, casinos, is not clear to me.

      In fact, since 99% of health care money is spent with other Americans, as opposed to imports, one might even say that health care is propping up the economy.

      (Michael Mandel has written articles on this.)

      I welcome being corrected if I have missed something.

      Bob Hertz

      • First, it’s pretty well established that there are market failures that cause welfare losses in health care. That’s the sense in which there is a drag. It’s not the paying of premiums, per se. It’s the fact that the market is very far from perfect.

        Second, most health insurance premiums are tax subsidized. In other words, we’re financing some part of them via the tax system. If taxes are a drag, why not this too?

        LATER: To clarify, I am not saying the employer-sponsored tax subsidy is a drag because it is the lack of paying of taxes. (How could paying taxes be a drag and not paying taxes also be a drag?) I am saying that the preferential treatment of health insurance distorts the economy and the labor market, which is a source of drag.

        • I am a veteran insurance agent with one class in Paul Samuelson economics in 1968, so I suspect I might mangle some terms.

          My own cracker barrel economics is best captured in Jamie Galbraith’s article on The Misunderstood Welfare State.

          His basic point is that inefficiency and budget overruns have been preserving employment. An efficient economy would have horrific unemployment.

          His view as I absorbed it was that productivity produces poverty, generally, and it is the non-productive labor-intensive service industries like health care that have been postponing an awesome collapse.

          The mortgage and housing industry also produced numerous, un-offshorable, unproductive jobs during the 1990’s.

          When this industry collapsed and health care ran out of tribute money,
          the job market went South.

          If health insurance was not subsidized, the number of Americans with health insurance would shrink down toward the 5 to 15 percent who have unsubsidized disablilty and long-term care insurance.

          It seems to me that the nation would be worse off if that happens.

          Employment in health care would really collapse without subsidies.

          I really like your blog and would welcome any comments.

          I am also a little lost on what is a market failure.
          Health care does have a severe Cadillac effect, in that health care and health insurance do not come in all price ranges.

          If the only cars allowed on the road were Cadillac SUV’s, we would have a car crisis too.

          This I see as due to licensing and regulation. Is it a market failure?
          I do not know.

          Thanks for any comments,

          Bob Hertz
          The Health Care Crusade