Wednesday, August 24, 2011

It's Not a Long-Term Deficit Problem

I think everyone has already linked to CBPP's piece on the effects of raising the Medicare minimum age from 65 to 67 already, but just to add in my two cents: the key context for all of this is that what people call a long-term budget problem is really only an artifact of the long-term health care costs problem.

As long as health care costs (and, as the popular ages, demand for services) continue to spiral up, it's going to create huge problems. That's true if the problems are mainly found in government budgets, or in the private market. After all, if you completely eliminated Medicare or any other form of government-subsidized health care, you would no longer have a federal budget problem...but the economy isn't going to be very happy if seniors stop buying whatever they are currently buying and rapidly blow their savings on health care. Or, as CBPP points out, if companies go broke paying for retiree health benefits.

The bottom line is that unlike a real budget problem, which could be solved by either cutting spending or raising taxes, the problem here is a broader economic problem, and it calls for a broader economic solution. That was the point of all the cost-control efforts in ACA, and believe it or not there are some hopeful signs that perhaps it's going to work. Of course, maybe it won't. The point is that cost-shifting away from the government ("cutting spending") which absolutely can work to solve purely budgetary problems just won't work in this case.


  1. Yep, this is definitely the story.

    Our current health care costs are wildly out of whack. In 2007, US health care spending was an OECD-highest 16% of GDP, almost double the OECD average.

    So, even though Medicare (and Medicaid) does a better job containing price increases than private plans, its cost increases are projected to account for the bulk of the long-term debt problem.

    As the CBO explained, “[t]he bulk of that projected increase in health care spending [on Medicare and Medicaid] reflects higher costs per beneficiary rather than an increase in the number of beneficiaries associated with an aging population.”

    (I've made this point over at my place, in a couple chart-enlivened posts called "The Long Term Debt Problem Is Health Care Costs").

    The bulk of our discourse about fiscal policy, health care policy, and even about the deficit specifically, fails to account for this reality.

  2. “...but the economy isn't going to be very happy if seniors stop buying whatever they are currently buying and rapidly blow their savings on health care.”

    If you’re assuming that seniors would purchase the same services at the same prices when they’re spending their own money -- that‘s not necessarily the case. Price competition would bring down costs further. And if we _are_ simply shifting fixed costs onto the laps of seniors, is that really a problem? The role of social policy should be to protect the poor, not subsidize the spending of middle and upper income folks.

    In terms of the wider economy, shifting costs onto seniors wouldn’t change total spending since every dollar the government spends is taken from some other part of the economy (or in the case of deficit spending, our future economy).

  3. "Price competition would bring down costs further."

    That's not how health care costs work in the real world. Here's the theory of why that is, from Kenneth Arrow: Short version: most med costs are big, unpredictable expenses, which can only be purchased in great haste with expert advice. So we need insurance. So decisions are made not by the consumer, as in buying a car or a clock radio, but by intermediaries. The consumer choice model that works so well in almost all markets simply doesn't in this one.

    That's the theory, here's how it manifests: the public share of health care expenditure in the USA (45%) is less than any other OECD country. What does that private price competition bring about? Total spending for health care accounted for 16% of the country’s GDP, the highest share among the OECD and almost double the OECD average; On a per capita basis also the U.S. spent the highest with a total of $7,290 which is two-and-half times the OECD average.

  4. reflectionephemeral: There is almost zero price competition in health care -- it doesn't necessarily have to be that way. A lot of expenses are routine and even predictable, especially for the elderly. There's no reason that everything has to be paid for by insurance.


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