Medicare and the deficit

By Felix Salmon
November 11, 2010
Kevin Drum, who points out that at heart it says much less about reducing the size of the deficit than it does about reducing the size of the government.

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The most clear-eyed view of the silliness of the deficit commission report comes from Kevin Drum, who points out that at heart it says much less about reducing the size of the deficit than it does about reducing the size of the government. The distinction is a crucial one, since the mathematics of the deficit are simple, and overwhelmingly a function of Medicare expenditures. “Medicare, and healthcare in general, is a huge problem,” says Drum: “It is, in fact, our only real long-term spending problem.”

Medicare is a true fiscal nightmare. The population of the US is aging: the current Medicare enrollment of 47 million will soar to 71 million by 2025. Those people will be living longer, too, and their healthcare costs are certain to continue to rise not only faster than inflation, but also faster than the growth of the economy as a whole. So long as the U.S. commits to pay the healthcare costs of substantially everybody over the age of 65, nothing else really matters, in terms of the long-term fiscal deficit.

Here’s Drum:

Any serious long-term deficit plan will spend about 1% of its time on the discretionary budget, 1% on Social Security, and 98% on healthcare. Any proposal that doesn’t maintain approximately that ratio shouldn’t be considered serious. The Simpson-Bowles plan, conversely, goes into loving detail about cuts to the discretionary budget and Social Security but turns suddenly vague and cramped when it gets to Medicare. That’s not serious.

And here’s Matt Steinglass, commenting on Drum:

Mr Drum writes for a liberal magazine. And here he is saying that the main thing we need to do in order to restrain growth in the deficit and in government spending, which will otherwise bankrupt us, is to cut the biggest government entitlement programme, Medicare. Indeed, this is a bog-standard consensus position among American liberals… Shouldn’t this be shocking? Shouldn’t this be big news for our contrarian press? “Liberals Call for Cuts to Entitlements!” Aren’t we amazed that supposedly big-government liberals want to slash the projected Medicare budget?

The point here is that the deficit commission chairmen are doing everything in their power to perpetuate the intellectually dishonest meme that if we just pare enough excess from the government’s discretionary budget, that can somehow solve the problem of the soaring deficit. It can’t. Liberals like Drum recognize the problem, and can work out the mathematics of Medicare in public. The deficit commission, it seems, can’t.


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How is it intellectually dishonest, if their proposal does in fact reduce the forward deficits and balances the budget by 2037. Can you point to assumptions or calculations that they used which you find suspect/incorrect? My understanding is that they scored it on a static basis as well, so no higher assumptions on economic growth from the tax simplification.

How about we drop the meme that just because you can find someone else who agrees with you on the Internet, that absolves you from actually engaging intellectual opponents?

Simply embarrassing Felix. If we wanted to read another hack who spouts rhetoric without doing the most basic homework, we all know where to find Taibbi.

Posted by TinyOne | Report as abusive

What sort of hellish parallel universe are we in when the same Congress and President that approved a still ongoing multi trillion dollar bailout of Wall Street criminals now turns around and tries to sell us this boatload of tripe? (With my apologies to tripe.)

Posted by Thingumbob | Report as abusive

How could healthcare costs go up and yet magically have no effect on GDP, inflation or tax receipts???

Posted by petertemplar | Report as abusive

Dude, the commission did go after Medicare. They attacked Medicare for the wealthy. You should be delighted. Are you drunk-blogging?

Posted by DanHess | Report as abusive ive/2010/11/the-disappointing-liberal-re action-to-the-deficit-commission/66434/

The left likes to think of itself as being on the side of young people and the future with the right being on the side of the old and the past.

If that were true then the left would be all over this.

Posted by DanHess | Report as abusive

I actually read the PDF from Bowles/Simpson, and I think it is a good starting point.

Yes, we have to reform Medicare, but the way to do that is to reduce health care costs overall. Tort reform, reward efficient health care providers, punish the inefficient.

They also pricked the sacred cow of national defense with some very good ideas including the closing of 1/3 of foreign bases. We spend $600 billion per year on defense, 9 times what our next closest competitor spends. We build F-22 fighters that cost $200 million each, and have never flown a combat mission. Would you rather spend $200 million on a fighter that never flys a combat mission, or the same to pave 200 miles of four lane highway? Or, just not spend the money?

Defense is the biggest entitlement program out there. Really, how can you justify having 50,000 troops in Germany?

Posted by randymiller | Report as abusive

Part of the growth in Medicare costs is due to the aging population. Part is due to our declining national health (less exercise, more bad food). Much is due to our ever-increasing ability to address medical problems with expensive technology. Every novel drug that extends life, every new surgical procedure, bumps the cost of national health care up by that much more.

This isn’t a bad thing. Really. But it raises some serious questions:

(1) Are we willing to pay for “best technology” health care for everybody? Or limit “best technology” health care to the wealthy?

(2) Are we interested in continuing innovation to further improve the state of the art? (The US is responsible for more than half the health care advances in the world, an overwhelming share.) Or do we prefer policies that supply the existing technology more cheaply?

Sooner or later, I expect we will find ourselves adopting a cost-conscious health-care system that restricts access to the most expensive procedures. If you care about your personal health and that of your family, you need to plan for sufficient financial reserves to pay for any non-supported procedures out-of-pocket.

Posted by TFF | Report as abusive

My mistake, sorry, i was wrong and a tad rude, the increased means testing is for social security, means testing was not discussed for medicare. ns/NEWS/A_Politics/___Politics_Today_Sto ries_Teases/CoChair_Draft.pdf

I think the biggest part of savings for Medicare is ‘cost sharing.’ When there is cost sharing, the market will work and people will apply economics and intelligence to billions of individual medical decisions.

Posted by DanHess | Report as abusive

Unfortunately, DanHess, transparency must improve dramatically before ‘cost sharing’ can have the desired market impact. Without transparency in pricing, ‘cost sharing’ merely shifts a portion of the cost from government/insurer to individual.

Last time I was in the doctor’s office, I asked “How much is this appointment?” The receptionist had no clue, though she offered to call the billing department if I liked. I asked the doctor. Likewise, she didn’t know the price tag. The patient, of course, is completely in the dark.

If the accountants are the only people who know the cost of a simple medical procedure, how can “market forces” make any headway?

I do read the insurance statements that I occasionally receive (not for an office visit, but any time there is a co-pay that applies against the deductible). They make my head spin! For example, the latest…

Lab: $94
X-Ray & Lab: $33
Medical Care: $149
Amount Charged: $276

Yet under contract with the insurer, these were reduced to the “amount allowed” of $92. The insurer covered $54 of that, leaving a co-pay of $38.

So what did the procedure cost anyways? $276? Or is that merely the bill they hand to the uninsured? As far as I can tell, they received just $54 from the insurer and $38 from us.

Posted by TFF | Report as abusive

It’s the hidden surprises for their corporate sponsors that are the most fun to find! It’s like a game to see how well they can distract us with the obviously crazy stuff (like rolling back Social Security during the Bush Recession) while gems like this slide past with little press notice:

All their proposals limit Congress to collecting taxes on income made within the United States, reducing or eliminating taxes on American expats and revenues companies earn abroad.

Posted by melior | Report as abusive

Very good points. I look at my bills (I get a lot of healthcare) and they are incomprehensible. And very annoying…I don’t mind paying for my deductible, but I am still getting bills for 1.89 (I kid you not) 3 or 4 months later. 1.89!!! REALLY, they are not losing money on administrative costs to send me a 3rd or 4th adjustment for 1.89????
Perhaps more disturbing, I constantly have to tell my encronologist that I am already getting tests she wants done by either my general practictioner or cardiologist. Of course, how many things am I getting done to me that are useless, or even worse, of some risk with no benefit?

Posted by fresnodan | Report as abusive

@TinyOne, it’s intellectually dishonest, because they are not balancing the budget by cutting discretionary spending. (It helps somewhat, but it’s only a small part of their promised savings.) They are balancing the budget by saying that they will cap the growth of spending on Medicaid & Medicare at 1%+GDP, and they offer no concrete mechanisms to do that or any evidence whatsoever that such a cap is possible.

@TFF, that’s exactly how it works, and, if you think about it a little bit, that’s almost inevitable in a system like ours. The only way to get rid of that silliness is to go to a single payer system. Fortunately, it does not affect Medicare/Medicaid, because they are paying predetermined amounts of money for all procedures.

A lot of the stuff you’re proposing is already happening. Medicare is not required to pay for every new drug and every new treatment. They can do all these decisions internally without the intervention of Congress.

One important thing that REALLY has to be done to cap the spending on medicine, is to eliminate all bottlenecks that limit the supply of new doctors. American medicine is very expensive because American doctors are. As long as your average physician makes 5 times the median nationwide household income, and as long as medical schools turn away thousands of students with 4.0 GPAs every year because they don’t have enough room, even though those students are willing to saddle themselves with $200,000 of debt just to get the M.D., the medicine will be expensive.

Posted by Nameless | Report as abusive

How much is the gov’t spending on corporate farm subsidies and petroleum subsidies? These are two un-needed expenditures that don’t provide a very good return for the investment.

I agree with the concept of a single payer system. Medicare actually is far more efficiently run than private insurers in that the administrative costs are a very small fraction of the money spent compared to the massive administrative costs of private insurers.

Also, making existing medical technologies more affordable seems much more reasonable to the alternative of having more newer and much more expensive tecnologies enter the market. I’m not saying we need to stop r&d, but we need to focus on affordable access for more people, and improving education on preventive means of healthcare. A large part of the problem is that those who can least afford medical care end up having to wait until thier health is already in a weakened conditon to get coverage. If we took better care of ourselves, with the aid of education and preventive measures, the savings would be dramatic.

Posted by soulbearer | Report as abusive

As is pointed out here the key to reforming the cost of healthcare is to reform our expectations, that we cannot afford open ended treatments or tests.

Healthcare is a very slippery slope, because you are not just paying for a simple service and then receiving that service, you are paying for a concept, health. What this means is that the parameters of what it takes to meet that are constantly expanding, new tests, new treatments. So if you have a payer committed to paying for an open ended service, and an industry founded on developing new things, you will by that the nature of that equation have spiralling costs.

Posted by ERhoades | Report as abusive

“How much is the gov’t spending on corporate farm subsidies and petroleum subsidies?”

Gov’t spending on farm subsidies averages 0.15% of GDP.

Posted by Nameless | Report as abusive

“The only way to get rid of that silliness is to go to a single payer system.”

I’m guessing that this happens within five years of Obama’s health care bill being fully implemented. By the law of action/reaction (economic version), the changed incentives provided by the law will result in significantly changed behavior — vastly greater costs and lower revenues than expected. As a result, the total cost to the federal government will balloon beyond the CBO numbers at the time the bill was passed.

The good news is that this is likely to be primarily a transfer of costs from the private sector to the public sector. I don’t expect the ACTUAL cost of health care to be increased that dramatically, but people will naturally take advantage of the generous subsidies.

In any case, a tidal wave of people leaving private plans and joining the public plans will naturally push us towards the simpler single-payer system. Seems likely to happen sooner rather than later.

Posted by TFF | Report as abusive

There are three other areas Obamacare did not address:

1. Tort reform to save doctors from exorbitant malpractice insurance, thus driving up the cost of their services – estimated savings: up to $500B annually.

2. Tax fat. If we tax alcohol and tobacco, because they are bad for us, we should tax fattening foods, too. The US spends 1.5X more than any other country on healthcare, yet we rank 30th in overall health, mostly due to obesity. The true cost of obesity in the form of additional diabetes, cancers, heart disease, etc, is the single greatest contribution to our overweight healthcare expenses.

3. Streamline the FDA approval process. Companies have to spend far more on getting approval of safe products in the US than any other country. Many of these products have been approved for years in other countries. As a result, the cost of these products are greater in the US.

Posted by netvet | Report as abusive

netvet, those proposals sound attractive but none of them are 100% clear-cut.

I personally favor tort reform, but you want to make sure that patients have appropriate recourse in cases of gross negligence. I’m sure the system can be improved, though.

Taxing “fat” sounds tempting, but what exactly are “fattening foods”? Foods that contain fat? Foods that contain carbohydrates? Foods that contain calories?!? Modern nutrional science (peer-reviewed, not Atkins) supports a diet that includes substantial amounts of oils. Whole grain, plant-based diets, rich in fruit and vegetables. In that light, taxing corn chips may be the wrong way to go.

As for the FDA approval process, you ultimately have to decide between safety and efficiency. The Vioxx problems made the FDA reluctant to accept anything without STRONG evidence of safety. I’m happy to reverse that, but understand that many drugs will come on to the market with serious side effects that are not well understood until years later.

While you are at it, make sure you include some protection for the drug companies against lawsuits stemming from those serious side effects.

Posted by TFF | Report as abusive

Regarding eliminating the “Doctor Fix” in Medicare:

In some areas Medicare fees paid to MDs are so low that, after overhead, there is minimal income for the MD providing the care and taking on the liability of seeing the patient. (see 2:51 EST blog entry)

Consider the position as an MD in practice, who is lucky if her/hid overhead is only 50%. Current plans call for cuts in fees of 21%, reducing the income from a medicare visit by an additional 42%.

It may become economically impossible to accept new medicare patients into a practice
The bottom line for adults: Find a generous good hearted MD who is at least 15 – 20 years younger than you are to be your primary care physician, and good luck getting specialist consultations. The alternative is to have a corporation in charge of your health care. Kaiser appears to be one of the best in this regard.


Posted by Laumilo | Report as abusive

The biggest problem is that people DON’T TAKE THEIR HEALTH SERIOUSLY. That’s why we don’t have to know the ‘price’ of an ‘item’ or ‘service’ when we go see a Doctor. We have insurance and it will be covered. Well, we need to move away from that model. If we think that healthcare is just another product, well, then we need to let marketforces do it’s work.

People should be held accountable for their health. The best way to improve that is through education. Based on factors to be determined (for instance sex, age, occupation, gene factors, location, etc) each person should get a annual ‘budget’ for certain expenses. What you don’t use get carried over so that in old age you have accumulated (hopefully) enough credits to sustain your deteriorating health.

Off course exceptions need to be built in for things beyond your control, like accidents for example. It surely is not an easy problem to solve, BUT PEOPLE NEED TO TAKE THEIR HEALT MORE SERIOUSLY AND NOT RELY ON INSURANCE to cure it all.

Posted by habakak | Report as abusive

I belive we are moving to a 2 tiered system of healthcare in the United States (one similar to 75% of the rest of the world.)

The poor and the middle class will get “generic” medicine where they see a nurse practitioner / midwife level of care and can get any medicine so long as it’s on wal-mart’s $4/month list.

Beyond that goverment funded cheap/cost effective system there will be a private payer system where if you want anything truely costly than you need to fund that A. out of pocket directly, B. via extreemly expenceive privatly purchaced insurance, or C. have a community fundraiser where you beg freinds, family, and strangers to support your care.

In healthcare spending emotion dominates the debate in society where mathmatics will eventually rule out. Coldharted though it may seem there is no return on investment in the healthcare of those who have exited the workforce. Spending a few % of GDP to eliminate needless pain and suffering is a worthy goal.

Spending 25% of GDP to artifically extend lifespans without consideration of quality or PURPOUSE of those additional years seems absurd… but then again I’m 32… I might feel differently when I’m 62.

Posted by y2kurtus | Report as abusive

y2kurtus, it matters little how you feel when you are 62. What matters is how the 32 year old workers feel when you are 62. Is why I’m not counting on anything.

Posted by TFF | Report as abusive

@ y2kurtus OUCH!!

As someone about to turn 57 that sounds pretty harsh. TFF is right. It matters not what you think at 62 if the youth are going to abandon ensuring you are cared for. Maybe 50 will once again be too old? It wasn’t that long ago that 30 was over the hill!

We are the baby boomer generation and there will be a lot of new legislation and changes because it was such a growth period in a short span. When we are all gone, will those younger then you feel less kindly towards the elderly (such as your kids) having heard your generation speak harshly of the aged as they grew up?

Hopefully the decisions made will be with care and forethought because afterthought usually means people suffer.

I know many people retired who are busier now then when they worked and many volunteer hundreds of hours in a month. My 88 year old Dad still gardens a half acre by hand. Not even a rotor tiller. So who will decide whose quality of life and what age might deserve to be extended?

Business has no business being involved in health care. You may end up with a 2 tier system. but whatever happens, it will have to be tweaked many times and so it should be to remain efficient. Our Canadian system was also shunned, but few complain now.

It works and when it doesn’t it gets tweaked, because we all see the benefit and are willing to pay (less then you all do ) for Universal healthcare. It needs an overhaul as well due to the same baby boomer/ technology updating problems you will encounter, but we will still pay less then Americans in per capita costs.

An efficiently run system (if it ever gets to a place where it can be efficient and that does mean Government /state run) will take the burden off medicare by making it work for the people, not the shareholders and the Capitalist machine.

If 20% of premiums goes to profit of your insurance company before health coverage and yet you make such a statement about the elderly, everyone best hope that train of thought isn’t on the main track.

Posted by hsvkitty | Report as abusive

hsvkitty, only y2kurtus can speak to what he meant by “quality and purpose of those additional years”, however consider the following study from 2002:  /PMC1464043/

“From 1992 to 1996, mean annual medical expenditures (1996 dollars) for persons aged 65 and older were $37,581 during the last year of life versus $7,365 for nonterminal years. Mean total last-year-of-life expenditures did not differ greatly by age at death.”

While the costs have increased over the last 15 years, the balance appears to be similar. A more recent article estimates that 27% of Medicare goes towards last-year-of-life care.

Most intriguing, there appear to be metropolitan areas that aggressively treat the dying in the ICU while other cities are more likely to go with hospice care (at half the cost). Frankly, I hate hospitals — hospice treatment sounds more attractive in my final months (even if I don’t “live” quite as long). That might have been what y2kurtus was talking about?

Posted by TFF | Report as abusive