You Can’t Take That Away From Me

September 12, 2017

Is this “the end of progressive government?” asks E.J. Dionne in The Washington Post. Do Republicans intend to break “America’s promise to seniors and to the poor?” asks Jon Cohn in The New Republic. Will the Republicans leave “the old and the poor without health care,” as Ezra Klein suggests? There’s no question in Paul Krugman’s mind. The “savings will come entirely from…denying medical care to those who can’t afford to top up their premiums,” he says. It’s “radical,” “irresponsible,” and “extreme,” adds Dionne.

They’re writing about the Medicare reform in Paul Ryan’s Republican budget plan. That’s the reform he devised with former Clinton-era budget director Alice Rivlin, which mainly reflects a bipartisan proposal made by a Clinton-era Medicare reform commission. Perhaps this is as good a time as any to introduce:

Goodman’s Rule                   Everyone is entitled to become hysterical;
For Civil Discourse:              but only on topics you actually know something about.


before reminding everyone that all these critics were unapologetic supporters of ObamaCare. Now take a look at the graph below. I’ll explain it below the fold.

The top (dark blue) line in the graph shows projected Medicare spending based on the trend for the past four decades. Basically, the growth rate of real per capita spending on medical care in the United States (4%) has been about twice the rate of growth of real per capita income (2%). Medicare has roughly kept pace with spending by everyone else.

You don’t need to be an economist or mathematician to know that this relationship is unsustainable. If you are consuming something whose price is growing faster than your income, eventually it will crowd out every other thing you are consuming. If we somehow managed to stay on the path we are on, today’s teenagers in their retirement years would have nothing to eat, nothing to wear, no place to live — but they would have really great health care.

Obviously, the path we are on leads to an impossible place. So the only question is whether we are going to get off the current path in a planned, orderly way or whether we are going to let unplanned chaos do the trick.

The bottom (yellow) line in the graph shows the path of Medicare spending under the health reform bill Congress passed last year. Whereas the path we are on is the rate of growth of GDP + 2%, under ObamaCare the growth rate will be close to the rate of growth of GDP + 0%. This means that under the new health reform law, Medicare will grow no faster than national income.

What will keep Medicare spending at such a low growth rate? The Obama administration has a long list of ideas for making the health care system more efficient — electronic medical records, pay-for-performance, evidence-based medicine, coordinated care, integrated care, managed care, etc., etc. But since there is no evidence that any of this will work, it also has a fall-back strategy: price controls. Under the legislation, Medicare payments to doctors and hospitals will fall further and further behind what all other health plans are paying. According to the Medicare Actuaries Office, Medicare payment rates will be below Medicaid’s before this decade is over.

There will be a price to pay for all of this in terms of access to care. From a revenue perspective, seniors will become less desirable as patients than welfare mothers. Medicaid patients in many places today have difficulty finding doctors who will see them; and they turn to community health centers and the emergency rooms of safety-net hospitals as the next best alternative. In just a few years, the elderly and the disabled will join them. Meanwhile, the supply of services will contract, with an estimated one in seven hospitals leaving Medicare by the end of this decade.

The middle (red) line shows Medicare spending growing at GDP + 1%. Although this line is not an estimate of the Ryan budget proposal, it reflects the stated goal of a number of reform proposals, including President Obama’s deficit commission (Bowles/Simpson), the Domenici/Rivlin proposal and the Rivlin/Ryan proposal, which is basically the Medicare component of Ryan’s budget proposal and which we have previously described here.

Before going further, note that whatever you think about the Ryan proposal, if it’s “draconian” then ObamaCare is twice as draconian. If Ryan’s idea breaks Lyndon Johnson’s compact with the elderly (Jon Cohn’s description), then ObamaCare breaks it twice over.

Other than the magnitude of the spending cuts, the two approaches are different in this respect:

  • ObamaCare keeps paper benefit promises in place, but steadily reduces the price it will pay for them. This is how the administration can claim that the elderly have not lost any benefits. They haven’t lost any “promised benefits.” But if the fees Medicare will pay become so low that no doctor will provide services for those amounts, this is a distinction not worth making. If seniors cannot get care at these artificially low prices, they will have to pay out-of-pocket for concierge doctors and other services.
  • The Ryan approach promises not a fixed package of benefits, but a fixed sum of money for each retiree (adjusted for expected health care costs). If other Ryan reforms fail to slow the overall rate of growth of health care spending, retirees will have to add money from their own resources to be able to have the full insurance package Medicare would have provided under current law.

Both these approaches could involve substantial shifting of costs to seniors. The difference: (1) ObamaCare shifts twice as much as Ryan and (2) Ryan leaves the marketplace with incentives to meet seniors’ needs and the flexibility to do so, while Obama incents the market to abandon seniors and seek more lucrative patients elsewhere.

We have previously described ObamaCare’s expected impact on seniors, based on the analysis of Rick Foster, Medicare’s Chief Actuary, former Medicare Trustee Tom Saving and Harvard health economist Joe Newhouse. The results are grim.

We have also previously described the Ryan plan and suggested ways to make it better. In fact, with additional reforms a Ryan-type plan could take us to midcentury with seniors having the same type of benefits Medicare now promises (but delivered more efficiently) and with a payroll tax rate no higher than the one we have today.

Let me conclude by announcing that we are accepting nominations for the worst violator of Goodman’s Rule for Civil Discourse. This passage has no close rival at the moment:

Oh, and for all those older Americans who voted GOP last year because those nasty Democrats were going to cut Medicare, I have just one word: suckers!

— Paul Krugman