Insurance for the Nation's Health

Mark McClellan will be on campus tomorrow to deliver the Rockefeller Center's first lecture in a series commemorating the 100th birthday of Nelson Rockefeller. (Read more here.) Mark's will lecture on "Universal Health Care," a topic that Governor Rockefeller championed more than four decades ago and that remains a leading policy issue today.

In doing some research for the event, I came across this Nixon-era article in Time magazine from May 11, 1970. Here's the big finish:

While every American may be entitled to at least adequate health care, he is not getting it, and will not, until a momentous national debate reaches election-year levels of acrimony and is somehow resolved.

The issue has already been injected into this year's elections by Democrat Theodore C. Sorensen, campaigning for the U.S. Senate from New York, who last week announced his own plan for "universal health insurance." Apart from such standpatters as the A.M.A. and its arch-conservative Republican allies, there is a growing consensus that some national insurance blanket must be thrown over the ailing body of health care.

It may prove to be more of a patchwork quilt, with multicolored squares for sections covered by contracts with a variety of private insurers. If administration is not made too cumbersome, that would be far better than the present non-system with its huge gaps. Walter McNerney, president of the Blue Cross Association and head of a task force soon to report to the President on the nation's health needs, believes that a monolithic system operated by HEW would be wildly inflationary—and not sufficiently innovative. He wants a flexible, pluralistic plan.

But when? The principal difference between proponents of progress is over whether to put the cart of medical-care delivery before the horse of manpower resources, and let the resources catch up with the overburdened cart—or to take the time to breed more medical horses. That means waiting years for the country's health education system to produce many thousands more doctors and tens of thousands more paramedical personnel. Secretary [of Health, Education, and Welfare Robert H.] Finch sincerely believes that the modest expansions of federal health programs that he has submitted to Congress are important steps in the right direction, but will not commit himself to true national insurance. His chief assistant for health affairs, Under Secretary Roger O. Egeberg, thinks that some such plan may very well evolve in "six to seven years." His prognosis is as good as any.

Read the whole thing, to get an idea of what has changed and what has remained the same in this debate, and be sure to stop by Mark's talk tomorrow evening if you are on or near campus.

Health Care 2008

This new page at HealthCentral compares the Presidential candidates' positions on health care, including reform, the uninsured, drug prices, prevention, technology, and stem cells. It also has an interesting graphical representation of the candidates, where you can plot your own views.

Enjoy!

Looking Ahead to Today's GOP Debate

I've got the DVR all set for today's Republican candidates debate. John Harwood of CNBC and the Wall Street Journal has his preview here. As this debate is about the economy, he is looking for three big issues: taxes, spending, and trade.

I don't blog much about trade. I'm a free trader. Economic exchange by mutual consent is one of the things that ties the world together in a positive way. In the absence of some identifiable non-pecuniary externality, Republicans have no business restricting free trade.

I've gone off on the Republicans for their budget policy a number of times. (Here's a good one.) If any of these candidates are going to sway me on budget policy, they are going to have to do two things. First, do not say that tax cuts pay for themselves. Second, say that you are going to balance the budget without reference to a Constitutional amendment. And I'll have to believe them. That's a tall order, given what we've seen so far.

But the most important issues of budget policy are going to come in the form of budget priorities. I hope they all get asked the question of SCHIP funding vs. war funding. That will tell us something about their leadership potential. For very good commentary, see this post at SnowDahlia.

Perhaps Michael Moore Should Run a Taxi Service

I don't know which of the following statements is more surprising. From the AP:

A 35-year-old Canadian woman has given birth to rare identical quadruplets, officials at a Great Falls hospital said Thursday. Karen Jepp of Calgary, Alberta, delivered Autumn, Brooke, Calissa and Dahlia by Caesarian section Sunday afternoon at Benefis Healthcare, said Amy Astin, the hospital's director of community and government relations.

The four girls were breathing without ventilators and listed in good condition Thursday, she said.

Wonderful. And this part:

The Jepps drove 325 miles to Great Falls for the births because hospitals in Calgary were at capacity, Key said.

"The difficulty is that Calgary continues to grow at such a rapid rate. ... The population has increased a lot faster than the number of hospital beds," he said.

For those of you unclear on the geography, their trip looked something like this and would take about five hours at the posted speed limits. About halfway through the trip, they would pass through Lethbridge, which is home to Chinook Regional Hospital, which claims to offer a "high level neonatal intensive care unit." Not good enough? No beds there either? When they were in Lethbridge, they were about an hour away from Medicine Hat, home to this fine institution and its NICU, or two and a half hours plus a border crossing away from Great Falls. They chose the latter.

UPDATE (8/20): At the prompting of a commenter, I found that the doctor's statement about them driving the 325 miles is incorrect, and so too is my travelogue in the last paragraph of the original post (now italicized). Here is a report from the BBC that explains:

A medical team and space for the babies had been organised for the Jepp family at the Foothills Medical Centre in Calgary but several other babies were born unexpectedly early, filling the neonatal intensive care unit.

Health officials said they checked every other neonatal intensive care unit in Canada but none had space.

The Jepps, a nurse and a respiratory technician were flown 500km (310 miles) to the Montana hospital, the closest in the US, where the quadruplets were born on Sunday.

My apologies for the hasty and incorrect post, though this notion that "every other neonatal intensive care unit in Canada" had no space is more of an indictment of the system than my original remarks.

A Great Strides Thank You

It was a fantastic weekend in Grand Rapids for the annual Great Strides walk for Cystic Fibrosis. Here's a picture of Ally's Allies. Allison is sitting on her grandmother's lap near the middle, next to her parents, all with purple shirts on. The picture was taken at the conclusion of the walk, in Calder Plaza. My son and I are on the upper right. My wife and daughter are on the upper left.

I would like to say a heartfelt "thank you" to everyone who contributed through this appeal. I'll keep the link to Allison's page and Cystic Fibrosis in the sidebar, for those of you who are interested in how she's doing and in how the treatment of this disease is improving.

Great Strides for Cystic Fibrosis

In what is now an annual event in the Samwick household, the four of us make a trip to Grand Rapids, Michigan, to participate in the Great Strides walk for Cystic Fibrosis. CF is a devastating genetic disease that affects tens of thousands of children and young adults in the United States. Research and care supported by the Cystic Fibrosis Foundation are making a huge difference in extending the quality of life for those with CF. Those of you who conduct or follow the health outcomes literature, or who are curious about how to improve medical treatment in this country, will find this article in The New Yorker from 2004 to be of interest as well.

We walk for the Woodhouse family, dear friends whose daughter Allison has battled this disease every day since birth (and even before). We've learned a lot about courage from her story. If you would like to support us in our efforts to raise money to help children and families like them, then please make a pledge here.

Targeting Medicaid Access

Robert Pear writes in today's New York Times that "Citizens Who Lack Papers Lose Medicaid." His opening paragraph:

A new federal rule intended to keep illegal immigrants from receiving Medicaid has instead shut out tens of thousands of United States citizens who have had difficulty complying with requirements to show birth certificates and other documents proving their citizenship, state officials say.

I'm going to comment first on the policy and then on the reporting. I think it is crazy that the rule was implemented without a provision that presumed that all children were citizens until a fairly long window elapsed during which their parents or guardians could formally establish their status. Pre-natal care should always be included, for the same reasons. There's no reason why the rule has to have the sort of impact during its phase-in period that Pear's subsequent report documents. Say what you like about illegal immigration, Medicaid, or poverty--none of them are the fault of these kids.

Now go back to how Pear wrote that sentence. I don't think his reporting justifies the use of the word "instead" in that sentence. To do so requires him to show that the policy is not making illegal immigrants ineligible for Medicaid. He has not done that. Here are three excerpts from the article that come closest:

“The largest adverse effect of this policy has been on people who are American citizens,” said Kevin W. Concannon, director of the Department of Human Services in Iowa, where the number of Medicaid recipients dropped by 5,700 in the second half of 2006, to 92,880, after rising for five years. “We have not turned up many undocumented immigrants receiving Medicaid in Waterloo, Dubuque or anywhere else in Iowa,” Mr. Concannon said.

[...]

“We’ve seen an increase in the number of people who don’t qualify for Medicaid because they cannot produce proof of citizenship,” said Albert A. Zimmerman, a spokesman for the Florida Department of Children and Families. “Nearly all of these people are American citizens.”

[...]

Wisconsin keeps detailed records listing reasons for the denial or termination of benefits. “From August 2006 to February of this year, we terminated benefits for an average of 868 people a month for failure to document citizenship or identity,” said James D. Jones, the eligibility director of the Medicaid program in Wisconsin. “More than 600 of those actions were for failure to prove identity.” In the same period, Mr. Jones said, the state denied an average of 1,758 applications a month for failure to document citizenship or identity. In 1,100 of those cases, applicants did not provide acceptable proof of identity.

The last one simply shows the policy is having an effect. It does not identify whether the effect is the intended or (presumably) unintended effect. In the first two, claims are made that the effect is largest among the largest population of Medicaid recipients. The effect may even be disproportionately large among the citizen group. But there is no evidence that it is confined to that group. There is no information in the article about California or Texas or even the paper's home state of New York, where we would expect the largest populations of illegal immigrants to be applying.

The fact that a rule is having unintended consequences does not by itself mean that it is not also having its intended consequences.

Is It Really Adverse Selection?

Tyler Cowen of Marginal Revolution weighs in with a very thoughtful post challenging the notion that it is adverse selection, driven by informational asymmetries, that plagues the health insurance market:

To be sure, this is a real point but it is not adverse selection. Adverse selection requires asymmetric information, namely that I know more about my brain tumor than does my potential insurance company. The more likely problem is that the tumor is common knowledge, or would be if I applied for insurance, and the company won't sell a policy for any price cheaper than the costs of treatment. There is no asymmetry of information, rather insurance simply is no longer possible. In the limiting case, imagine that a predictor-demon could forecast your lifetime medical expenditures with certainty, and then blog them by your social security number. Such a person, no matter how healthy, couldn't buy insurance either.

Scream all you want, but that is not inefficient per se (don't complain in the comments about the limits of the efficiency concept, and the cruelness of economists, I'm already on that one, scroll down to #7 under "microeconomics", alternatively you might make a complicated Rawlsian argument.) Covering these people, by the use of government policy, is a transfer, not an efficiency improvement, with an added caveat for imperfect capital markets.

Defenders of the adverse selection argument in reality believe the following: if someone is going to face death, or a very bad medical outcome, and can't buy their way out of it, government should put up the money, at least within limits.

Maybe yes, maybe no, but now we are comparing competing investments and which will bring the greatest utilitarian good and the greatest moral good. I'm far from convinced health care access wins that race or even comes in second.

Why does this matter? Because if it's adverse selection, that leads very quickly to a policy argument for a mandate on coverage and, in this market, a single payer system. Not so fast, say the bloggers at MR, and I think they are right.

Jon Gruber on Health Insurance Reform

Via the Economic Research Initiative on the Uninsured (ERIU), here is an interview with Professor Jon Gruber of MIT, who played a key role in the recent Massachusetts health insurance reform. Here's his assessment of the recent proposal by the Administration (with my emphasis added):

Bush's proposal is a step forward and two steps backward. He's rightly drawn attention to the largest hidden expenditure on health care, the $200 billion a year that we spend on subsidizing the provision of employer-provided health insurance. Basically, people who get paid wages get taxed on those wages, but individuals who are paid in the form of health insurance don't get taxed on that compensation. And if they were, we would raise about $200 billion more a year in tax revenue. This is a very inefficient use of money for several reasons. First, it's very regressive; the richer you are, the bigger tax break you get. Secondly, it's what we call a marginal subsidy; every dollar an employer spends on health care is cheaper than that spent on wages, leading to excessively generous, even gold-plated, health insurance. The third problem is that it props up the system of insurance being tied to employers, extending a number of inefficiencies and distortions in how the labor market works.

However, what the president has done is say 'let's blow up the existing system by taking away the entire employer exclusion and rededicating it to an individual tax break where every person, as long as they were insured, would get an individual tax break of $7,500 or $15,000 per family.' The reason that is two steps backward is that it doesn't address the two things you need to address to get rid of this employer exclusion: 1) he doesn't acknowledge that this system is devoting most of the money to the rich. Under his proposal, the system becomes even a little more regressive than the existing one; and, 2) even more importantly, if you're going to blow up the employer-based system you need someplace else where people can go. Bush doesn't do that, and that's the fundamental flaw. Overall, he has raised an important issue, but he chose to do it in a dangerous context.

I remain convinced that the first reform is to remove the tax exclusion for health insurance premiums. Phase it in over time if you like, but sunset it in any case. Use the money saved--$200 billion a year according to Gruber--to start fixing the gaps in coverage.

How Long Does It Take for the Long Run To Arrive?

Some of the discussion from the last two posts has carried over to Mark Thoma's blog. Krugman responded to Mark as follows:

Aha - I was wondering if anyone would raise that. I was taking it as true to a pretty good approximation that the long-run supply curve for medical services is horizontal. Unless you think that there's permanently limited supply of medical education, or something, why should we think otherwise?

And I would guess that very few people would read Bush's statement to mean that it's bad if other people have extensive insurance, because it drives up doctors' paychecks.

So in a comment, I noted:

Based on Krugman's response (must be nice to have him on speed dial), we're now in the much more comfortable environment in which this is a few economists talking about the magnitude of various key parameters.

One could point out that if he was "wondering whether anyone would raise this point," then he seems to realize that he was going a bit overboard in claiming that "no economic analysis I'm aware of says that when Peter chooses a good health plan, he raises Paul’s premiums."

On the substantive point, one could assert that almost any market has a long-run supply curve that is flat. Exceptions would be made for markets like diamonds--there is a finite quantity available to be mined. At this juncture, it becomes quite relevant how long we think it will be before we are in the long run.

As evidence against this happening any time soon, I don't think the AMA is going to give up its near-monopoly on certifying medical practitioners. Licensed practitioners will be in short supply for a long time even if wholesale medical prices rise. In order to get more services when prices change over this long run, we have to build a lot of buildings--medical schools and hospitals--and fill them with really expensive equipment. I'm guessing that long run will take a while to get here.

A commenter on Mark's blog noted that we could allow more immigration of medical personnel, a policy to which I don't object. Chiming in, Brad DeLong posts his views:

It's not clear to me that Paul Krugman is wrong. It is also not clear to me that Paul Krugman is right. One of the things patients are buying with more expensive health-care plans is the freedom to choose their own doctors, and that gives the doctors they choose some monopoly power in their bargaining over reimbursement rates with the insurance companies.

I don't have a handle on how big this effect might be, however.

I think that makes four of us. I also think that Krugman's larger point about the key market failure being adverse selection rather than moral hazard is right, and I would like to stop having policy makers focus on the tax code to try to improve the health care market. As for constructive solutions, I hope to have more in future posts.

Pecuniary Externalities

For what it's worth, I think Paul Krugman makes some good points about the problems inherent in using the tax code to encourage or discourage the purchase of health insurance in his column today (original here, reposted here). I obviously don't sign on to his characterizations of "Bush and his advisers," and he stops short of his usual call for a single-payer system, so there's no reason to get into that today.

Were it up to me, I'd completely eliminate the exclusion of health insurance premiums from taxable income. That levels the playing field between premiums and other expenses (as the Bush plan tries to do), but it does so without forcing the tax code to be the arbiter of whether something was a legitimate health expenditure or not. It also raises tens of billions of dollars in additional tax revenue that can then be directed to all the other things the government needs to pay for.

However, I found this statement (highlighted in bold) in Krugman's column to be odd:

While proposing this high-end tax break, Mr. Bush is also proposing a tax increase — not on the wealthy, but on workers who, he thinks, have too much health insurance. The tax code, he said, “unwisely encourages workers to choose overly expensive, gold-plated plans. The result is that insurance premiums rise, and many Americans cannot afford the coverage they need.”

Again, wow. No economic analysis I’m aware of says that when Peter chooses a good health plan, he raises Paul’s premiums. And look at the condescension. Will all those who think they have “gold plated” health coverage please raise their hands?

Is he kidding me? That is almost the definition of a pecuniary externality. Wikipedia describes it as follows:

A pecuniary externality is an externality which operates through prices rather than through real resource effects. For example, an influx of city-dwellers buying second homes in a rural area can drive up house prices, making it difficult for young people in the area to get onto the property ladder.

This is in contrast with real externalities which have a direct resource effect on a third party. For example, pollution from a factory directly harms the environment.

Both pecuniary and real externalities can be either positive or negative.

So in the President's defense, there's a very simple argument to be made here. When one person feels inclined, for whatever reason, to purchase more health care services, that puts upward pressure on the price of health care services (if the supply curve is not flat) and thus the cost to everyone else in the market. Normally, we don't pay any attention to this, because that is precisely the mechanism by which a competitive market achieves economic efficiency.

The President is referring to the pecuniary externality generated by a tax distortion in the treatment of health insurance, which interferes with a market achieiving economic efficiency and thus should concern us. It goes as follows. Premiums are fully excludable from income tax, but out-of-pocket expenses are not tax advantaged. That favors health insurance arrangements in which there are low deductibles and high premiums. Such arrangements can lead to higher utilization of health services, since the insured faces no financial cost at the margin once the low deductible has been met. (This is just a standard moral hazard argument.) Krugman may not believe that the relevant behavioral effects are large here, but he's on shaky ground with his "Wow ... no economic analysis ..." comment.

For more on pecuniary externalities, I came across this source.

He Who Pays the Piper Calls the Tune

Robert Pear reported in The New York Times this week that Medicare will begin paying doctors a small bonus for reporting "how often they provide quality care, as defined by the government." Put aside your desires for a small government for a moment. If the government is going to pay for health care, it has the responsibility to ensure that its payments are resulting in quality care. Paying specifically for quality is one way of trying to do this.

Here's a description of what will happen and a little bit of the reason why:

Now, doctors can qualify for a 1.5 percent bonus in the second half of 2007 if they report data on the quality of their care, using measures specified by the government. For example, doctors could be asked to report how often they prescribe a particular drug after a heart attack or how well they control blood pressure in patients with diabetes.

With these statistics, Medicare officials say, they will , in the near future, be able to reward doctors who follow clinical guidelines and perhaps penalize those who flout such standards without justification.

For several years, Medicare officials have advocated a pay-for-performance system, noting wide regional variations in the practices of hospitals and medical specialists.

Here are some reactions quoted in the article. First up, Senator Grassley, a proponent of the bill:

“Medicare now pays the same amount regardless of quality,” Mr. Grassley said. Indeed, he said, Medicare “rewards poor quality,” paying doctors to treat complications caused by their own mistakes.

That's not the only thing it rewards, but it does pay for procedures rather than outcomes. Next, an unsurprising comment from the medical profession:

“This is a very significant step,” Catherine G. Cohen, vice president of the American Academy of Ophthalmology, said Monday. “It’s the first time Medicare has ever paid individual doctors a differential for reporting quality measures. It could impose a significant new burden on doctors’ offices.”

It's hard to imagine doctors don't already keep track of the frequency and conditions under which they apply different treatments. If they don't, that's telling us something. If they do, then it would not be a "significant new burden." And since it is voluntary, it is hardly "imposed."

I'll conclude with my personal favorite:

Representative Pete Stark of California, who will become chairman of the Ways and Means Subcommittee on Health in January, said, “The entire concept of pay-for-performance is offensive.” Doctors, Mr. Stark said, are supposed to provide “quality care” and should not be paid extra for doing so.

Shall we rephrase that as, "Doctors are supposed to provide 'quality care' and should not be paid less for failing to do so?" What's the alternative, holding your breath until they agree to provide quality care?

Gathering information on the type of care being provided is the appropriate first step to ensuring that the money being taxed from workers to pay for the care of elderly is being spent in an efficient manner. If you think that the government is incapable of doing this, then you might consider joining the group of people who think the government should get out of the business of paying for so much of the nation's health care. It doesn't have to be perfect measurement--it just has to result in better outcomes on average.

Working Harder, Not Smarter, in Medicine

In today's Wall Street Journal, Dr. Benjamin Brewer gives as succinct a statement of the morass of treatement incentives in the practice of medicine as you will find:

One of the problems with our medical system is the bias to pay doctors more for performing a test or procedure than for using our heads to make a diagnosis or manage a disease.

Obtaining a thorough history and physical exam and reviewing tests to make a challenging diagnosis pay much less than conducting a battery of tests or performing a diagnostic procedure.

If I spend 30 minutes in an extended office call for a patient with diabetes, high blood pressure and heart disease, I get paid an average of $69. If I remove a skin cyst off the patient's back in that same time, the minor surgery would bring $110.

If I do a screening colonoscopy at the hospital to check for colon cancer for the same patient in the same time, my average reimbursement is $478 with essentially no office overhead. It's no wonder that medical students want to go into procedural specialties like gastroenterology and fewer want to pursue cognitive specialties such as general medicine.

Fascinating. As always, there are tradeoffs involved. There are two types of errors that can be made with respect to procedures: they can be implemented when they were not medically necessary or they can be not implemented when they were medically necessary. As a society, we put a lot of weight on avoiding the latter type of error. The field of medical malpractice exacerbates this. So it is not surprising that we have poor safeguards against the first type of error given the high fees. But if we tried to improve them, we should expect to have more of the second type of error.

Brewer's point about choice of specialty is also a good one. After we had the VoxSon, it became very clear to me that the medical industry tremendously undervalues and undercompensates pediatricians, who epitomize the need for using their heads rather than tests.

Means-Testing Medicare

Robert Pear reports in today's New York Times about a little known feature of the 2003 Medicare Act: the premiums for Medicare Part B will now be an increasing function of a beneficiary's income. Part B is a voluntary supplement to Part A--the hospital insurance part that is covered by payroll taxes. Historically, the premiums for Part B have covered about 25 percent of program costs. The rest come out of the General Fund.

According to the article:

It is expected to affect one million to two million beneficiaries: individuals with incomes exceeding $80,000 and married couples with more than $160,000 of income. For individuals with incomes over $200,000, the premium, now $88.50 a month, is expected to quadruple by 2009.

[...]

When the transition is complete in January 2009, according to Medicare actuaries, the total premium for a person with income of $80,000 to $100,000 will be 1.4 times the standard premium. A person with income of $100,000 to 150,000 will pay twice the standard premium. A person with income of $150,000 to $200,000 will pay 2.6 times the standard premium, and a beneficiary with more than $200,000 of income will pay 3.2 times the standard amount.

If the basic premium rises 10 percent a year — a relatively conservative forecast — the most affluent beneficiaries will be paying premiums of more than $375 a month in 2009.

[...]

The Congressional Budget Office says 5 percent of beneficiaries will be affected.

[...]

The Congressional Budget Office estimates that the surcharge will raise $15 billion from 2007 to 2013.

The last excerpt suggests that we are not going to raise big money here. The reaction to the means-testing when it becomes known is likely to be as quoted here:

Theodore R. Marmor, a professor of political science at Yale, said the surcharge was more important for the politics of Medicare than for the financing of the program.

“The new income-related premium is fundamentally at odds with the premises of social insurance,” Mr. Marmor said. “Large numbers of upper-income people will eventually want to find alternatives to Part B of Medicare and will no longer be in the same pool with other people who are 65 and older or disabled. Congress will then have less reluctance to cut the program.”

It is very difficult to means-test a voluntary program. I think that problem is insurmountable here, as long as the means-testing is designed to affect only the top 5 percent or so. I am also not moved by the "fundamentally at odds" complaint. Enormous transfers from young to old under the guise of intragenerational redistribution from the healthy to the unhealthy are at odds with sensible fiscal policy.

When I got to CEA in July 2003, the Medicare bill was already in conference. I read the proposed rules for means-testing based on annual income of seniors and decided I had better get to work. I wrote a memo arguing that it was better to means-test based on lifetime income. I envisioned the tax base to be the average indexed monthly earnings of the individual (or couple), where earnings are defined as those on which the Medicare payroll tax was paid.

Since that memo stayed in DC, I outsource the commentary to Gene Steuerle (remembering him in my thoughts today), who made similar arguments in 1997:

An alternative way to apply the new fee in a progressive manner would be to base it not on annual income, but on the lifetime earnings of individuals, as reported to the Social Security Administration. Most of these lifetime earnings are currently applied to the calculation of something called average indexed monthly earnings, from which social security cash benefits are determined. The social security formula itself is progressive, and grants a higher rate of return to those with lower lifetime earnings.

There are three advantages to this approach. First, the Medicare beneficiary would easily perceive the charge as an additional fee for Medicare, not as something else. Second, the additional charge would be easily administered. Those with high lifetime earnings and higher social security checks simply would find that a higher fee was assessed against them for Medicare. They already pay the rest of their Medicare fee out of their monthly social security check, and the amount withheld is exact. No additional forms need to be filed, and no reconciliation is required at the end of a year. Next year, instead of all beneficiaries bearing an identical additional fee of say, $3, only those with lower lifetime earnings would see a $3 increase, but those with higher incomes would see a larger increase, say, up to $20.

A third advantage is that past lifetime earnings are not as easily manipulated as is annual income for those who are already retired. Like annual income, however, no one measure is perfect, and some adjustments would need to be made -- as they are in the case of social security -- for those who are measured as having low lifetime earnings because they worked in federal or other employment that was exempted from social security tax. While these adjustments would not be perfect, on average I would guess that they still would be more equitable than annual income as a base for assessing the fee.

The memo received a good hearing in the White House, and I even got to visit the conference committee and explain the ideas to the staffers. The ideas didn't prevail, though, largely because this method of means-testing does not include unearned income at any point during a person's lifetime in its defintion of the tax base. I thought that was a very minor point (particularly given the manipulability of unearned income in retirement) compared to the ease, transparency, and robustness of the alternative measure.

Health Insurance and the Cost of Housing

In today's Wall Street Journal, Vanessa Fuhrmans writes about a growing phenomenon: workers at large firms choosing not to enroll in company-sponsored health insurance plans. She notes:

But in recent years these big companies have also increased the premiums, deductibles and co-pays that employees must contribute under these programs, leading many workers to forgo their employers' insurance. Between 1996 and 2004, the number of private-sector employees who enrolled in the health-benefits plans offered to them declined from 87.7% to 81% at big employers, according to new government data.

She notes that one reason for the decline could be more married workers choosing family coverage at the cheaper company, rather than each worker individually insuring at his or her own company. She continues:

But the biggest reason appears to be that even company-subsidized health care is proving unaffordable or providing too little upfront value to many workers. The sharpest drop in participation rates was among large retailers, where the share of eligible workers opting for company benefits fell to 67.3% from 83.8% over the eight years. But health-plan participation in other industries also has declined, even at companies with unions, many of which have fiercely fought employers' efforts to shift more health-care costs onto workers.

And the human interest angle:

Sarah Landis, a nursing assistant at Children's Hospitals and Clinics of Minnesota, says high premiums are why she opted out of her health plan. While a spokeswoman for Children's, which employs around 4,000, says the not-for-profit hospital system has actually lowered employees' share of premiums to 30% of the total, from 50% three years ago, Mrs. Landis says the monthly payment of $543 is about one-third of her income. (A high-deductible family plan is available for $295 a month, and a middle-of-the road-plan is $359.)

"It's a choice between our house payment and health insurance," says 25-year-old Mrs. Landis, who has two young daughters. Apart from her husband's asthma, which requires the couple to pay $70 in prescription drugs each month, all four are healthy, she says. So when her husband left his job to become self-employed three years ago, the family went uninsured. He may take a law-enforcement job so the family can get coverage again soon. In the meantime, Mrs. Landis says, "we just hope we don't get sick."

There is some research to support Mrs. Landis as more than an anecdote. Three years ago, Helen Levy and Thomas DeLeire raised the questions, "What Do People Buy When They Don't Buy Health Insurance and What Does that Say about Why They Are Uninsured?" With emphasis added, they found:

Using data from the 1994 through 1998 Consumer Expenditure Surveys, we compare household spending on 16 different goods (food at home, food away from home, housing, transportation, alcohol and tobacco, interest, furniture and appliances, home maintenance, clothing, utilities, medical care, health insurance, entertainment, personal care, education, and other) for insured versus uninsured households, controlling for total expenditures and demographic characteristics. The analysis shows that the uninsured in the lowest quartile of the distribution of total expenditures spend more on housing, food at home, alcohol and tobacco, and education than do the insured. In contrast, households in the top quartile of the distribution of total expenditures spend more on transportation and furniture and appliances than do comparable insured households. These results are consistent with the idea that poor uninsured households face higher housing prices than do poor insured households. Further research is necessary to determine whether high housing prices can help explain why some households do not have insurance.

Wal-Mart and Health Insurance in Maryland

From Michael Barbaro of the New York Times, we learn that "Maryland Sets a Health Cost for Wal-Mart,"

The Maryland legislature passed a law Thursday that would require Wal-Mart Stores to increase spending on employee health insurance, a measure that is expected to be a model for other states.

[...]

Under the Maryland law, employers with 10,000 or more workers in the state must spend at least 8 percent of their payrolls on health insurance, or else pay the difference into a state Medicaid fund.

There are some possible loopholes in this law. The state has put a tax on payrolls--expect payroll growth to lag in coming years, whether from fewer new stores in the state or from lower raises. As it is written up here, the law doesn't seem to distinguish whose health insurance is paid for with the 8 percent--expect the company to contribute more at the margin for higher paid workers than for those most likely to take up Medicaid. The law only applies to firms with 10,000 or more workers in the state. With 53 stores and 17,000 workers in the state, perhaps Wal-Mart would sell some stores to get down below the 10,0000 threshold or try to reclassify some workers, like those who drive the trucks, as being employed by a store in a nearby state.

It will be interesting to see whether the law has its desired outcomes. Another approach the legislature might have taken would be tax any employer (regardless of size) for a portion of the Medicaid payments made on behalf of its employees or their dependents and used the proceeds to lower tax rates on all businesses. This approach of cost-sharing or experience-rating is more like what states do for their unemployment insurance programs.

Gilbert Gaul Earns a Voxy

We bring the Voxy out of retirement to honor Gilbert M. Gaul's series of articles in the Washington Post this week on the waste in Medicare spending. He gets off to a good start last Sunday in "Bad Practices Net Hospitals More Money," the first of the series:

As far back as 1999, federal and state regulators began to receive complaints that the heart surgery unit at Palm Beach Gardens Medical Center in Florida was a breeding ground for germs.

Dust and dirt covered some surgical equipment. Trash cans and soiled linens were stored in hallways. IV pumps were spattered with dried blood. One patient's wife said she saw a medical assistant tear surgical tape with his teeth.

State inspectors in 2002 found "massive post operative infections" in the heart unit, requiring patients to undergo more surgery and lengthy hospital stays.

In a four-year period, 106 heart patients at Palm Beach Gardens developed infections after surgery, according to lawsuits and government records. More than two dozen were readmitted with fevers, pneumonia and serious blood infections. The lawsuits included 16 patients who died.

How did Medicare, the federal health insurance program for the elderly, respond?

It paid Palm Beach Gardens more.

Under Medicare's rules, each time a patient comes back for another treatment, a hospital qualifies for an additional payment. In effect, Palm Beach Gardens was paid a bonus for its mistakes.

Medicare's handling of Palm Beach Gardens is an extreme example of a pervasive problem that costs the federal insurance program billions of dollars a year while rewarding doctors, hospitals and health plans for bad medicine. In Medicare's upside-down reimbursement system, hospitals and doctors who order unnecessary tests, provide poor care or even injure patients often receive higher payments than those who provide efficient, high-quality medicine.

This moral hazard problem exists everywhere in the economy where actions are imperfectly monitored. The problem here is that Medicare is a $300 billion a year program that is rife with hidden actions. The classic economic answer is to pay based on performance (or the quality of care), assuming that there are measures of performance that are informative about the actions taken. In an environment like health care, where there are lots of random factors that can affect outcomes, the following statistic is particularly disheartening:

Medicare has difficulty controlling waste because of deficiencies in the way it monitors and enforces quality standards. Its oversight system is fragmented, underfunded and marred by conflicts of interest, records and interviews show. For every $1,000 that it pays to hospitals and doctors, it invests just $1 or $2 to oversee and improve patient care.

Plenty of progress has beeen made in health outcomes research. Some of the most interesting work is done by a team at the Dartmouth Medical School on the geographic variation in health care spending, compiled in the Dartmouth Atlas of Health Care. This work figures prominently in the article:

One result: striking variations in what Medicare pays for care in different states, or even neighboring Zip codes. In 2001, the typical Medicare patient in Los Angeles cost the government $3,152 more than a comparable patient in the District. A patient in Miami cost $3,615 more than one in Baltimore.

Those disparities cannot be explained by differences in local prices or rates of illness, said John E. Wennberg, a Dartmouth physician and an expert on geographical variations in medical care. Rather, higher spending is related to the number of specialists, hospital beds and technology available. "If you have twice as many docs in a community," said Wennberg, "you end up with twice as many office visits."

Yet most high-spending states rank near the bottom in quality of care, Medicare data show. Louisiana ranked 50th in quality yet first in Medicare spending in 2001, the most recent year available. New Hampshire was first in quality but 47th in spending.

Medicare acknowledges that its system rewards bad care. Officials have only recently begun to address the problem.

This year, Medicare began requiring hospitals to report their performance on a handful of measures, such as how many heart attack patients received recommended beta blockers and aspirin. Officials say the reports will pressure hospitals to improve and save money. But officials don't use the data to punish poor performers or to steer patients to the best performers.

That last step is critical. A bit later in the article, we learn of more efforts underway:

Recently Medicare officials have begun an effort to transform the way the program pays for care, with a renewed focus on quality. Congress also has joined in, mandating that Medicare try ways to increase competition and link payments to quality.

Medicare has a pilot program to reconfigure how it pays for patients with chronic conditions such as diabetes, heart disease and kidney failure. While relatively small as a percentage of all patients, these beneficiaries account for about half of all money spent. Medicare is testing the idea of paying doctors a single, all-inclusive fee for managing each patient's care, linking the payment to whether the patient gets better.

Another initiative is studying the effect of paying doctors and hospitals small bonuses when they provide preventive treatments such as an annual eye exam for diabetics. Recently, Medicare also began tapping its databanks to give patients access to basic information about the quality of care provided by hospitals, nursing homes, home health and dialysis centers. Much of the information is now reported by the health care providers and posted on Medicare Web sites.

By linking payments to performance, Medicare hopes to shift the culture of medicine away from automatically doing more. In theory, that could lead to savings and improve care.

This is what we would hope for: case management of the highest cost conditions, payment based on best practices, and greater information dispersion through the customer base. The series contains quite a bit more information and good writing.

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Tax Credits for Health Insurance

A quick update to two posts last December about the tax treatment of health insurance: The Tax Policy Center has posted a brief and a discussion paper by Len Burman and Jonathan Gruber on the impact of various policies to provide tax credits to promote health insurance coverage. The bottom line seems to be that the President's plan gives the lowest cost per newly insured person, though reaching only a small proportion of those currently uninsured.

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Greg Ip Earns a Voxy

Brad DeLong often titles his posts "Why Oh Why Can't We Have a Better Press Corps?", and Andrew Sullivan often names his posts after and gives awards in (dis)honor of journalists who make outlandish statements. I would like to introduce my own award--the Voxy--to be bestowed occasionally on journalists in the mainstream media who make exceptionally lucid and thoughtful contributions to the public discussion. Feel free to e-mail me with nominations.

The inaugural award goes to Greg Ip, for his article in yesterday's Wall Street Journal, Medicare Ills Make Social Security Look Fit. Read the whole thing. I'm just going to focus on some excerpts that show why the article is noteworthy. Greg begins with an observation:

Reforming Social Security occupies countless scholars, commissions and legislators. Reforming Medicare, the program that could really wreck the budget, gets almost no attention at all.

He's right. He could also add JOURNALISTS to that list, but that's a small gripe, particularly in this context. He continues:

The mismatch between the programs' problems and the energy devoted to them is striking. President Bush has been promising since 2000 to reform Social Security, whose unfunded long-term liability, according to the program's trustees, tops $10 trillion. Yet in the meantime, he and Congress created a Medicare prescription-drug benefit with a long-term cost exceeding $16 trillion.

Yes, that's basically right, too. According to the 2004 Medicare Trustees Report (see Table II.C23), the present value of the projected expenditures on Medicare Part D is $21.9 trillion, or 2.4% of GDP. (I would have called this the long-term cost.) Beneficiariy premiums and state transfers are projected to offset $3.6 and $1.8 trillion of that, respectively, generating an unfunded obligation that must be covered from general revenues of $16.6 trillion (after rounding), or 1.8% of GDP.

There are two caveats to comparing this $16.6 trillion directly with the $10.4 trillion in unfunded obligations for Social Security. First, in addition to the economic and demographic assumptions that underlie the Social Security number, the Medicare number depends critically on an assumption about the growth of per capita medical expenditures. The disparity could be higher or lower than $6.2 trillion even if the $10.4 trillion projection is completely accurate. Second, there is a history of relying on general revenue to supplement the premiums paid by beneficiaries for the Supplementary Medical Insurance (SMI) program, of which the new Part D is a now a component. Some general revenue financing appears to be part of the design.

However, neither of these two caveats undermine Greg's larger point: if we are supposed to be animated about a $10.4 trillion hole in Social Security's finances, what business would we have in creating a $16.6 trillion hole in Medicare's finances? And for pointing out that inconsistency, Greg earns a Voxy. Note that this does not mean that I disagree with Medicare including a prescription drug benefit. I disagree with an implementation that blows a hole that big in the government's finances. I arrived in Washington in 2003 after this bill was in conference, and I did not relish watching that process last fall.

In fact, Greg retains the Voxy despite including a quote from me in his article that will render yours truly unconfirmable for future positions in government:

So how to fix Medicare? One way is to raise the age at which retirees qualify for benefits, as is often proposed by Federal Reserve Chairman Alan Greenspan and others for Social Security. "Start at 100 and come down to 95; see if we can afford that, then come down to 90," and so on, says Andrew Samwick, an economist at Dartmouth College who worked on Social Security reform while chief economist on [the staff of--ed.] President Bush's Council of Economic Advisers. "There is some age at which the system is in balance."

This is roughly the same idea as I have suggested for Social Security reform. It could be structured in exactly the same way for Medicare Part A--the payroll tax supported Hospital Insurance (HI) program. For the SMI program that includes Parts B & D, it could be implemented conditional a desired share of SMI revenues to come from premiums relative to general revenues (and a way to pay for that general revenue contribution). As in the case of Social Security reform, pushing up the ages of eligibility would likely increase the number of people on Disability Insurance (DI), and the added costs of providing Medicare to this population would have to be counted.

He keeps the Voxy because he shows where a "raise the eligibility age" strategy may come up short:

But it's not a cure-all. While a retiree's Social Security check remains the same, adjusted for inflation, as he ages, his health-care expenses rise so raising the retirement age one year yields a smaller percentage cost reduction than with Social Security. And it's politically unpalatable.

Greg's right again. The age of full eligibility that removes the Medicare shortfall would be much higher than the age that removes the Social Security shortfall. Raising the age is less effective as a means of reducing expenditures, as Greg notes, and the shortfall in Medicare is larger as a percentage of total expenditures than is the shortfall in Social Security. Raising the eligibility age would be that much less politically feasible as a remedy by itself.

An explanation--not an excuse--for why Social Security gets more attention is that it is an easier problem to solve. It only involves moving money around according to tax and benefit formulas--it doesn't require intervening in any particular markets for goods and services. This doesn't mean that it has gotten no attention. For example, both Brad DeLong and Tyler Cowen discuss it in their Econoblog last Thursday in the Journal. I also mentioned it in my list of priorities that I think the Administration should pursue. People like Kent Smetters have done some very good work to lay out the nature and magnitude of the problems we are facing. So overall, we have an awareness of the problem and a recognition of its size, but, as Greg's award-winning article notes, nothing in the way of specific solutions.

Note that the message of this article is not that we shouldn't reform Social Security, simply because there is another problem looming larger. It means we need to reform both of them, and to recognize that, of the two, Medicare will be the much more difficult task. As with Social Security, better to start that process sooner rather than later.

Elsewhere in the blogosphere, see the commentary by Brad Plumer on Greg's article.

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Brilliant Deduction?

A comment on my last post on the tax treatment of health insurance pointed to a December 8 editorial by John Cogan, Glenn Hubbard, and Dan Kessler in the Wall Street Journal, "Brilliant Deduction." According to the editorial:

We propose a simple change to tax law that would cut unproductive health spending, reduce the number of uninsured and promote greater tax fairness. For anyone with at least catastrophic insurance coverage, all health-care expenses--employee contributions to employer-provided insurance, individually purchased insurance and out-of-pocket spending--would be tax-deductible. The deduction would be available to those who claim the standard deduction and to those who itemize.

Is this a good idea? Maybe. Is it a better idea than eliminating the excludability of health insurance purchases from income and using the higher tax revenues to provide refundable tax credits to lower income households who purchase insurance, as I suggested in my first post on this topic? I don't think so. Here are my reasons:

1. Both proposals eliminate the tax distortion between insurance premiums and out-of-pocket expenses. Both would serve to encourage plans with lower premiums and higher co-pays and deductibles, providing better incentives for consumers to economize on their health care purchases.


2. Administratively, the CHK plan seems much more difficult to implement. The proposal to eliminate excludability requires only one piece of information on the W-2 form--an indication of whether the person has purchased insurance through the employer plan--or an analogous document from an insurance company in the case of non-group purchases. With the CHK plan, every purchase of health care now needs to be documented and submitted to some entity, whether the government or a benefits management company, and then reimbursed. These companies need to be periodically audited to make sure they are allowing all valid expenses (and only valid expenses). This entails a large amount of paperwork, particularly in the sort of high-deductible plans that CHK envision. My own experience with my employer's flexible spending account does not make me optimistic.


3. In terms of equity, the CHK plan suffers from the same problems as the current system. If we believe that the income tax is supposed to tax income, regardless of how it is spent, then we judge the equity of the proposal by how much of the tax deductions for health care go to different income groups. Even under CHK, high-income households will derive the largest benefits because they have higher tax rates and greater rates of coverage. CHK argue that this is an improvement over the current system, but it is clear that it is still less progressive than the alternative--eliminate the excludability and redistribute the incremental revenues back to low-income households for refundable tax credits.


4. In terms of efficiency, the biggest issue is that the CHK plan lowers the overall cost of health care by expanding tax deductibility. Thus, we expect more health care to be purchased (before making allowances for the improved incentives). Eliminating excludability in favor of tax credits can have the same incentive effects without lowering the overall price of a good that is already overconsumed. In a comment on the original post, Tom Miller points out (in his point #4):
   

   On another front, expanding tax deductibility to all out-of-pocket health expenses would indeed add new misincentives to spend more on health care than it’s worth. By making OOP spending appear to be “cheaper” with a pre-tax discount, it would dilute the cost constraining effects of the recent shift already underway toward higher levels of cost sharing (deductibles and coinsurance) in today’s employer-sponsored health plans. Unlike tax-advantaged Health Savings Accounts, it would only reward taxpayers for spending health care dollars today, instead of saving them for tomorrow. Replacing one set of third-party payers (insurers and employers) with another one (the Treasury, on behalf of invisible taxpayers) won’t make individual consumers much more sensitive to the real costs of the health care decisions they make. A better way to level the playing field is to level down, instead of leveling up, by reducing the tax rate differential imposed on everything else we earn, save and spend. Eliminating the current tax exclusion for health insurance could be swapped for an equivalent across-the board reduction of about three and a half percent in all marginal rates for personal income taxes.

   This is a reasonable point, with an alternative suggestion about what to do with the tax revenues generated by removing excludability. Tom also has some useful suggestions about how exactly to generate better incentives through the tax code.

Overall, I don't think the CHK plan is better than my alternative, but it does have one advantage politically. It lowers the individual tax burden, whereas mine leaves it about the same (by intent). In the current political climate, tax cuts can pass, but large redistributions--even ones that increase both equity and efficiency--are probably dead politically.

UPDATE: Follow the discussion elsewhere in the blogosphere, including Arnold Kling, The Lowest Deep, and Marginal Revolution.

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