Saturday, July 16, 2011

The New England Journal of Medicine: The Economics of Financing Medicare Tells Us What We Already Know, and Gets Some of That Wrong

Why Can’t We Have Better Health Care Economic Analysis?

A July 13 article in the New England Journal of Medicine, a well respected publication with respect to medical issue takes on the issue of financing Medicare.  The article does three things well (this is not a compliment)

  1. It contributes nothing that is not already known to the discussion of the problem of financing Medicare

  1. It makes mistakes in some of its basic economic analysis

  1. It does not address any feasible solution to the problem (or any non-feasible solution).

The article does nicely illustrate the problem of future Medicare costs with this chart.

Medicare Sources of Non-Interest Income and Expenditures as a Percentage of the Gross Domestic Produc

But the article itself is almost entirely a compendium of documenting the rising costs of health care for seniors that is already known.  Some of the basic errors in economic analysis made in the article are the following.

Specifically, raising 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

No, public financing is merely cost shifting.  There is the same drag on the economy if, say $100 billion of Medicare is paid by taxes or if $100 billion is paid by private purchase care.  For example, reducing taxes to pay for Medicare by $100 billion and shifting that cost to the recipients has a zero net effect on the economy. One group, taxpayers get a $100 billion increase in disposable income, a second group, recipients of health care get a $100 billion decrease in non-health care income.

Medicare Part A (mainly for inpatient expenses) accounts for about 1.7% of the GDP and is largely financed by a dedicated tax on wages (2.9% of earnings, split evenly between workers and their employers but ultimately all coming out of workers’ wages).  

No, the employer portion of the payroll tax is not born by the employee.  Reduce the employer portion of the tax (as happens with high income individuals once they reach the SS max) and see what happens to compensation.  Nothing.  Believe that if the employer's FICA contribution went to zero that your salary (under $100k per year) would increase by 7.65% and you will be sorely disappointed.

Deficit spending on health care also carries an economic cost: taxes are required to pay back any borrowed money (with interest), and rising debt-to-GDP ratios may have calamitous effects on the country’s future ability to borrow

No, sorry but the national debt is not going to be paid back.  It is going to be rolled over.  Interest costs can be a problem, particularly for payments made to foreign holders of the debt, but Medicare costs are not going to consume so much of the budget that financing part of them with borrowings would be a problem. 

The article does recognize and report on some relevant facts.  It recognizes that vouches are really cost shifting

competitive pressure might be increased by increasing beneficiaries’ incentives to choose low-cost plans, but shifting financial responsibility to beneficiaries can also exacerbate disparities and expose beneficiaries to greater financial risk as health care costs rise relative to their vouchers’ value.

And it notes the problem with fee-for-service systems

fee-for-service payment discourages coordinated care, and if Medicare benefit or payment design encourages investment in inefficient resources or inefficient care patterns, that can also drive higher and inefficient private spending.

The conclusion sounds like it comes from a campaign stump speech, all talk, no action.

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.

Yeah, that really helps.

So thanks for a little bit NEJM, but we already know the questions, we need to know some of the answers so next time how about some.

1 comment:

  1. "No, the employer portion of the payroll tax is not born by the employee. Reduce the employer portion of the tax (as happens with high income individuals once they reach the SS max) and see what happens to compensation. Nothing."

    I think that you are wrong on this. From the employer's standpoint, the employer's contribution is fungible with salary as a component of his cost of hiring the employee. So (a) for an employee to be hired s/he has to do work that actually earns profits proportional to salary plus other costs, and (b) in a context where employees are represented by an effective union, they would be able to demand old salary + employer's savings due to changes in the tax code. So the company employee's situation really is identical to the self-employed person's situtation, which is that we both have to actually do work that results in earning all of the "payroll" taxes. That really is our money.