Interview with Charles Blahous-part 3

Part 3 of my interview with Charles Blahous focusing on Medicare. Here is part 1 (General); and part 2 (Social Security).

Charles Blahous, one of the two public trustees for Social Security & Medicare, is a research fellow at the Hoover Institution, and was the Deputy Director for the National Economic council from 2007-09, and served as a Special Assistant to the President for economic issues from 2001-07. He is the author of Social Security: The Unfinished Work (2010: Hoover Institution).

Below are the questions I submitted to Dr. Blahous, and his answers.

  • What is the relative impact of demography as compared to cost inflation in explaining Medicares’ financing problems?

Pre-2035, demography is the bigger factor.  Ultimately health cost inflation would become the larger factor.  This in my view is hugely misunderstood.  Yes, health cost inflation is a huge issue, but it’s a harder factor to predict, and it doesn’t actually become Medicare’s biggest problem for some time.  We first have to come to grips with the number of years for which individuals receive support under Medicare.

  • What are the benefits and negatives of Medicare being financed by payroll taxes and general fund revenues?

The big negative is a lack of a transparency.  We just put out a report and the big headline was, “Medicare insolvent in 2024.” Well, that doesn’t tell much of the story, given that this describes Medicare Part A only, and Parts B and D never go insolvent by statutory construction.   The Medicare cost problem is manifested primarily through pressure on the general budget, an issue that is really obscured by part of its having a separate payroll tax structure and trust fund insolvency projection a la Social Security.  These different pieces of the puzzle don’t go together very well.  General revenue financing is what you adopt when you mostly want upper-income people to pay for something; a separate payroll tax is what you adopt if you place a higher priority on all program participants funding their own benefits.  These two are mixed together in current Medicare without much rhyme or reason.

  • What are your views of the cost saving approach represented by the Independent Payment Advisory Board (IPAB)?

As a Trustee, I really can’t have a view.  If the law states that the IPAB will produce a certain amount of savings and that it will occur unless Congress acts to override it, then we have to assume those savings will materialize. But as a long-serving Senate staffer, I’m much more skeptical.  I can’t count the times that we have turned to mechanisms like this to produce savings in Medicare, only to have Congress override the savings when they begin to bite.  If we have the political will to cut spending, then cut it.  If we don’t have the political will, then IPAB doesn’t have much of a chance. The fact that IPAB was a product of a bill supported by one party while strongly opposed by the other makes its long-term prospects even weaker.

  • Do you think Medicare costs can be slowed to sustainable levels without addressing cost inflation in private health insurance?

Too often, Washington policy makers tend to act as though federal health spending is the passive victim of runaway cost growth in the private sector.  But most of the academic literature suggests that the opposite is true; you have Finkelstein’s research showing that expansion of federal health insurance benefits was a major factor in driving national health inflation, and you have Kotlikoff’s showing that the growth in government-provided benefits has generally fueled per-capita cost growth not only in the US but throughout all advanced economies.  So step one here has to be to constrain the growth of uncapped federal support.

  • If you could bring about one health policy change during this Congress, what would it be?

Are we talking about the realm of the possible, or am I king for a day?   Our societal priorities seem to center around providing support for the typical health care expenses of those in need, and on providing protection from catastrophic health care costs for everyone, so that the lottery of life doesn’t randomly target some among us for suffering, despair, and the poorhouse.  If we scaled back the full smorgasbord of federal health programs to providing basic catastrophic insurance for everyone, and provided means-based support for routine expenses, then the rest of us could cover our own routine expenses and it would cost us a whole lot less to do so.  But this Congress obviously isn’t going to do that.  I suppose that as a trustee, the one thing I’d wish for is that we not proceed with plans to spend hard-won Medicare savings on this new health entitlement.  If we really want a new health entitlement, it should be able to finance itself; we shouldn’t finance that with the same money that we are claiming will extend the solvency of Medicare.

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