April 28, 2011


This post is background material for the discussion tonight on Virtually Speaking A-Z, which will be live at 8pm Eastern, and available as a standalone podcast shortly after midnight.  Stuart Zechman and I will be talking about the policy and politics of Medicare reform.  The following material draws heavily (to the point of some copying and pasting) on email written by Stuart.

Source material for this discussion includes the following:

Ezra Klein’s Health of Nation’s post for The American Prospect

OECD Health data

J Oberlander’s  Is Premium Support the Right Medicine for Medicare?

The  Heritage Foundation’s How to Transform Medicare into a Modern Premium Support System

Ezra Klein’s Washington Post interview with Henry Aaron

Henry Aaron’s and R D Reischauer’s The Medicare Reform Debate: What is the Next Step?

The House GOP Budget: The Path to Prosperity

Bowles-Simpson Report: The Moment of Truth

Health Care Systems

There are three components to any health care policy: patients, providers and payments.  How providers are paid for the delivery of services to patients is what we mean by a health care system. There are four such systems in place  in the US today:

Fee for Service

People who do not have health insurance pay for medical services as they go.  When a young couple decide to commit to monogamy, and, in doing so, stop using a condom for birth control, they go together to a Planned Parenthood clinic,  get tested for STDs and receive a prescription for contraception.  They pay cash for the services they receive for the provider, Planned Parenthood.

Fee for service systems are obviously universal–if only because there are some treatments that are not considered efficacious and will not be covered by any form of private or government insurance, and some providers that insist on operating only on a fee-for-service basis.

Private Health Insurance

People who have health insurance through the private sector pay, often in conjunction with their employer, a monthly premium that covers their receiving health care services from providers. These plans are complex–there are rules about which providers the patient can visit and have the services received during the visit be covered by this insurance. “Insurance” is also something of a misnomer. Insurance usually is something that protects an individual or firm from high-cost, low-probability events (floods, car theft, death).  In the case of health insurance, the premiums are more like pre-payments for services to be rendered than they are like  insurance in normal parlance. Of course, there is such a component to most private health insurance plan, although in the US that catastrophic coverage is frequently limited by the insurer to some maximum amount.

Germany and Switzerland have a private insurance health care system.

Public Insurance

In this case, the provider is paid directly by the government for services delivered to a patient. The patient may or may not pay premiums to the government, but, in any case, the provider bills the government, and gets paid directly by the government. This is how Medicare and Medicaid work. The providers are private entities, and bill for their services.  Public insurance can also be called a single payer system.

Canada has this kind of system.

Socialized Medicine

In this system, the providers work directly for the government, receiving a salary, regardless of what services they deliver. The Veterans Administration works this way.

The UK and Cuba have socialized medicine systems.

There is nothing inherently ineffective in any of the last three methods.  There is a big problem with patients, in rich countries like the OECD, who operate on a fee for service basis.  Some predictable number of them are going to have something catastrophic happen, and it is not considered good public policy to simply let them die because they were unlucky.  In effect, in the US, Medicaid becomes the insurer of last resort.  The individual mandate, in place in Massachusetts and due to be implemented in the Administration’s PPACA program, addresses this problem by requiring all patients to acquire private insurance through regulated insurance exchanges.

But the other three systems operate in other parts of the OECD each work much better than the US, delivering better mortality and morbidity performance at roughly half the cost:


USA, health care price per person, per year, 2008:             $7,538

UK, health care price per person, per year, 2008:                $3,129

Germany, health care price per person, per year,  2008:     $3,737

Percent of GDP Spent

USA, health care as a percent of GDP, 2008:                         16.0%

UK, health care as a percent of GDP, 2008:                            8.7%

Germany, health care as a percent of GDP, 2008:                 10.5%

As the population of the US ages, these costs are expected to grow at an annual rate in the high single digits, about 8 or 9 percent a year. So although it is obvious from these numbers that the real problem is that the US health care system sucks–that there is a major failure of system design–the focus has been on the Medicare program, using the aging population as a justification for changing how Medicare works.

“Reforming” Medicare

In 1995, Henry Aaron and R. D. Reischauer proposed a basic reform to Medicare designed to stop the runaway growth in costs.

Five central facts will shape the debate on the future of Medicare. First, Medicare enjoys overwhelming support among the American electorate, a popularity that is well deserved because the program has achieved all of its
designers’ major objectives. Second, the cost of providing Medicare benefits is projected to rise very rapidly and will exceed projected revenues by ever larger amounts. Third, legislative reform of the entire health care system is
now off the political agenda and likely will remain so for years to come. Fourth, there exists a strong and broad consensus against raising taxes. Fifth, dramatic changes are taking place in the way health care is financed
and delivered for the non-Medicare population

Their way of addressing this problem was a policy change they called “premium support.”

We propose converting Medicare from a “service reimbursement” system into a “premium support” system. Rather than paying for all services on a stipulated menu, Medicare would pay a defined sum toward the purchase of an insurance policy that provided a defined set of services. As with private insurance for the working population, plans could reimburse any provider the patient chooses on a fee-forservice basis (the current method Medicare uses for most beneficiaries), contract with a PPO, or operate through an HMO. Plans could manage care in any of the ways now in use or that might arise in the future. All Medicare beneficiaries ultimately would receive a predetermined amount to be applied to the purchase of a health plan providing defined services

How would this lower costs? That’s pretty simple. By setting the “defined sum” low enough to reduce government expenditures. But does that really lower costs? Or does it just divide them up differently, so that the patients are paying more of the bills themselves, either through direct payment for uncovered services or through the purchase of insurance that is greater than the “defined sum”?

In fact, the idea is that by making the patients pay more for provider services, they will buy less. They will stop “over-utilizing” health care services.  Any proposal that intends to reduce costs by limiting “utilization” is a bad proposal. For instance, Bowles-Simpson, like Aaron’s 1995 proposal makes MediGap insurance illegal, so that participants will have to pay more out of pocket on every encounter; MediGap insurance covers copayments and deductibles.  Likewise, the GOP budget proposal, and Aaron’s premium support plan also are designed to shift more of the cost of care onto the Medicare participants.

And it’s not unreasonable, given the history of  the administration’s deep concern for “stakeholders” like pharmaceutical companies and managed care providers, that we should be concerned that, sometime in 2013, the Obama administration reluctantly concludes that a premium support program is the only way to save the US from the horrors of budget deficits.


April 21, 2011

Chelsea Green author Bob Cavnar and DailyKos diarist Fishgrease join us to discuss the British Petroleum oil disaster that took place a year ago yesterday.  Bob also wrote an op-ed for the Houston Chronicle that ran yesterday.

There were several other painful realities that became apparent during the disaster of last summer. First, the industry did not know how to contain a deep-water blowout. Second, it is still using 40-year-old oil cleanup technology. And third, blowout preventers have a high failure rate. Unfortunately, having witnessed the results of these hard lessons, we still haven’t done much to correct these failures. To be sure, there are companies now being formed to do deep-water containment. In typical fashion, though, the effort is diluted, with smaller companies utilizing Helix Energy Services, a private, for-profit operation, and the majors forming a co-op called the Marine Well Containment Company. It’s unclear what will happen in the next accident, such as who pays if a small operator goes bankrupt after a large spill, not a trivial matter. Some advances will come eventually in spill cleanup, but will be slow unless the government takes a leading role, which, so far it is wont to do.

Which leaves us with the blowout preventer. Everyone in the industry has known for years that blowout preventers have a high failure rate, but no one really focused on that failure rate until the BP blowout. The recent forensics report from Det Norske Veritas on the Deepwater Horizon blowout preventer probably raised more questions than it answered, especially after managers for the study admitted to flaws in its own computer models that led to its conclusions and recommendations. The solution from the industry and the federal government? Let’s go back to work with no fundamental changes or redesign, depending completely on the subsea well containment companies when the next failure occurs.

The last year has been an odyssey where the disaster in the Gulf led many to hope that finally we were going to focus on a comprehensive energy policy, improve safety and protect the environment. To the disappointment of many, including me, none of these objectives was reached; indeed, they are not even being contemplated as all of our politicians, having just finished a re-election cycle a few months ago, are gearing up for the next one that comes a little over a year from now. We don’t want to let trivial things like protecting human life and the environment interfere with the game of politics, do we? It seems that, even in the face of catastrophe, we really haven’t learned any of the important lessons we desperately need to learn.

This failure to face up to the inevitability of a recurrence of a serious deepwater oil spill is systemic.

Of course, spills happen on land, too. I’ve spent a lot of time in Bradford County, Pennsylvania–where there was a fracking spill on the Horizon disaster anniversary.


April 7, 2011

The starting point for the A-Z discussion is Jay Newton-Small’s transcription (Yay!) of her interview of Paul Ryan regarding the (mind you) official GOP 2012 Budget proposal.  The interview is a treasure trove, in itself , and in the meta-analysis of what journalists in Beltway do.   Stuart and I will be referring to a number of  resources as we discuss the document.

My discussion with Brad DeLong a couple of weeks ago is one such resource (transcript (pdf)).

Paul Krugman has a wealth of material on the proposal:

Memory Hole, Tax Cuts Not Deficit Cuts, Unicorns, Housing Unicorns, Gullibility?, Heritage Follies, When I’m 55,  Really?

The arguments Ryan uses to support his budget, and to reject Keynesian economics as discredited “outliers” in the economics profession are demolished by Brad Delong and by Krugman, calling into question even the intellectual honesty of the New Classicist/Real Business Cycle theorists.

Matt Yglesias notes the plan is expressly designed  to reduce income transfers from rich to poor.

And Robert Kuttner asks the question that’s been plaguing me: Is Obama in?

Stuart’s answer? Pretty much on board, actually. Do click through to read the report he refers to. Ryan’s plan for Medicare is the New Democrat plan.

Here’s  DeLong at Virtually Speaking on the economics underlying Ryan’s plan:

The issues that actually had been settled at least among the working consensus of mainstream economist since 1829 now appear to be completely up for grabs. And the most puzzling thing is I at least can’t figure out what the coherent argument on the other side is. That it’s very clear that some like say, Nobel prize winner, Robert Lucas at the University of Chicago believe that special interventions into the banking sector or government fiscal expansion can’t help reduce unemployment in a situation like we have today. That the only thing that can work is normal monetary policy. And it’s also very clear that Lucas believes that the economists in power who say otherwise whether they’re Christry Romer or Larry Summers or whoever, are kind of corrupt people.


Brad DeLong:

Someone like Lucas not only believes not only that the fiscal multiplier is zero, that he doesn’t believe that anyone else he regards as reasonably smart, and he does regard Christy [Romer] and Larry [Summers] as smart could possibly believe that the fiscal multiplier is anything other than zero.

Jay Ackroyd

But as you say in that post, there’s evidence that says they’re simply wrong.

Brad DeLong:

There’s a bunch of evidence suggesting that it’s wrong, and there’s also no theoretical argument for why it should be zero.

Jay Ackroyd

And there’s also

Brad DeLong:

There is a theoretical argument that the tax cut multiplier should be zero, which hinges on the identity of consumers and taxpayers and requires things like not immigration, no childless people, the distribution of benefits from the distribution of taxes levied in the future be the same of tax cuts given in the present, etc. etc.

Jay Ackroyd

But they literally say

Brad DeLong:

There’s no argument on the spending side.

Jay Ackroyd

They literally say that the government employing people to build bridges will not raise the employment level.

Brad DeLong:
Yeah. That’s what Eugene Fama said explicitly, on his weblog at the start of 2009.

That’s what Lucas said. He said that there is nothing to apply the multiplier to. Indeed, that’s what Friedrich Hayek said when he gave a seminar back in 1932 in Cambridge, England at the end of which according to Robert Skidelsky Richard Kahn raised his hand and said “Are you telling me that if I went out and bought a new overcoat it would have no effect on unemployment?” and Hayek supposedly said “Yes.”