Tag: medicare waste

Paul Krugman, Won’t You Help Me Be a Better Person?

I find myself on the wrong side of the facts. Again. So says Paul Krugman:

Still, wouldn’t private insurers reduce costs through the magic of the marketplace? No. All, and I mean all, the evidence says that public systems like Medicare and Medicaid, which have less bureaucracy than private insurers (if you can’t believe this, you’ve never had to deal with an insurance company) and greater bargaining power, are better than the private sector at controlling costs.

I know this flies in the face of free-market dogma, but it’s just a fact.

And Krugman should know. As the following clip shows, this is a guy who always has the facts on his side:

Yes, that was me at the beginning of the clip. Krugman was selflessly trying to instill in me his respect for evidence and his command of the facts. For some reason, I have yet to absorb either.

The proof is in this paper I wrote (and still stand by, for some reason):

Is Government More Efficient?

Supporters of a new government program note that private insurers spend resources on a wide range of administrative costs that government programs do not. These include marketing, underwriting, reviewing claims for legitimacy, and profits. The fact that government avoids these expenditures, however, does not necessarily make it more efficient. Many of the administrative activities that private insurers undertake serve to increase the insurers’ efficiency. Avoiding those activities would therefore make a health plan less efficient. Existing government health programs also incur administrative costs that are purely wasteful. In the final analysis, private insurance is more efficient than government insurance.

Administrative Costs

Time magazine’s Joe Klein argues that “the profits made by insurance companies are a good part of what makes health care so expensive in the U.S. and that a public option is needed to keep the insurers honest.” All else being equal, the fact that a government program would not need to turn a profit suggests that it might enjoy a price advantage over for-profit insurers. If so, that price advantage would be slight. According to the Congressional Budget Office, profits account for less than 3 percent of private health insurance premiums. Furthermore, government’s lack of a profit motive may not be an advantage at all. Profits are an important market signal that increase efficiency by encouraging producers to find lower-cost ways of meeting consumers’ needs. The lack of a profit motive could lead a government program to be less efficient than private insurance, not more.

Moreover, all else is not equal. Government programs typically keep administrative expenditures low by avoiding activities like utilization or claims review. Yet avoiding those activities increases overall costs. The CBO writes, “The traditional fee-for-service Medicare program does relatively little to manage benefits, which tends to reduce its administrative costs but may raise its overall spending relative to a more tightly managed approach.” Similarly, the Medicare Payment Advisory Commission writes:

[The Centers for Medicare & Medicaid Services] estimates that about $9.8 billion in erroneous payments were made in the fee-for-service program in 2007, a figure more than double what CMS spent for claims processing and review activities. In Medicare Advantage, CMS estimates that erroneous payments equaled $6.8 billion in 2006, or approximately 10.6 percent of payments… . The significant size of Medicare’s erroneous payments suggests that the program’s low administrative costs may come at a price.

CMS further estimates that it made $10.4 billion in improper payments in the fee-for-service Medicare program in 2008.

Medicare keeps its measured administrative-cost ratio relatively low by avoiding important administrative activities (which shrinks the numerator) and tolerating vast amounts of wasteful and fraudulent claims (which inflates the denominator). That is a vice, yet advocates of a new government program praise it as a virtue.

Medicare also keeps its administrative expenditures down by conducting almost no quality-improvement activities. Journalist Shannon Brownlee and Obama adviser Ezekiel Emanuel write:

[S]ome administrative costs are not only necessary but beneficial. Following heart-attack or cancer patients to see which interventions work best is an administrative cost, but it’s also invaluable if you want to improve care. Tracking the rate of heart attacks from drugs such as Avandia is key to ensuring safe pharmaceuticals.

According to the CBO, private insurers spend nearly 1 percent of premiums on “medical management.” The fact that Medicare keeps administrative expenditures low by avoiding such quality-improvement activities may likewise result in higher overall costs—in this case by suppressing the quality of care.

Supporters who praise Medicare’s apparently low administrative costs often fail to note that some of those costs are hidden costs that are borne by other federal agencies, and thus fail to appear in the standard 3-percent estimate. These include “parts of salaries for legislators, staff and others working on Medicare, building costs, marketing costs, collection of premiums and taxes, accounting including auditing and fraud issues, etc.”

Also, Medicare’s administrative costs should be understood to include the deadweight loss from the taxes that fund the program. Economists estimate that it can easily cost society $1.30 to raise just $1 in tax revenue, and it may sometimes cost as much as $2.36 That “excess burden” of taxation is a very real cost of administering (i.e., collecting the taxes for) compulsory health insurance programs like Medicare, even though it appears in no government budgets.

Comparing administrative expenditures in the traditional “fee-for-service” Medicare program to private Medicare Advantage plans can somewhat control for these factors. Hacker cites a CBO estimate that administrative costs are 2 percent of expenditures in traditional Medicare versus 11 percent for Medicare Advantage plans. He writes further: “A recent General Accounting Office report found that in 2006, Medicare Advantage plans spent 83.3 percent of their revenue on medical expenses, with 10.1 percent going to nonmedical expenses and 6.6 percent to profits—a 16.7 percent administrative share.”

Yet such comparisons still do not establish that government programs are more efficient than private insurers. The CBO writes of its own estimate: “The higher administrative costs of private plans do not imply that those plans are less efficient than the traditional FFS program. Some of the plans’ administrative expenses are for functions such as utilization management and quality improvement that are designed to increase the efficiency of care delivery.” Moreover, a portion of the Medicare Advantage plans’ administrative costs could reflect factors inherent to government programs rather than private insurance. For example, Congress uses price controls to determine how much to pay Medicare Advantage plans. If Congress sets those prices at supracompetitive levels, as many experts believe is the case, then that may boost Medicare Advantage plans’ profitability beyond what they would earn in a competitive market. Those supracompetitive profits would be a product of the forces that would guide a new government program—that is, Congress, the political system, and price controls—rather than any inherent feature of private insurance.

Economists who have tallied the full administrative burden of government health insurance programs conclude that administrative costs are far higher in government programs than in private insurance. In 1992, University of Pennsylvania economist Patricia Danzon estimated that total administrative costs were more than 45 percent of claims in Canada’s Medicare system, compared to less than 8 percent of claims for private insurance in the United States. Pacific Research Institute economist Ben Zycher writes that a “realistic assumption” about the size of the deadweight burden puts “the true cost of delivering Medicare benefits [at] about 52 percent of Medicare outlays, or between four and five times the net cost of private health insurance.”

Administrative costs can appear quite low if you only count some of them. Medicare hides its higher administrative costs from enrollees and taxpayers, and public-plan supporters rely on the hidden nature of those costs when they argue in favor of a new government program.

Cost Containment vs. Spending Containment  

Advocates of a new government health care program also claim that government contains overall costs better than private insurance. Jacob Hacker writes, “public insurance has a better track record than private insurance when it comes to reining in costs while preserving access. By way of illustration, between 1997 and 2006, health spending per enrollee (for comparable benefits) grew at 4.6 percent a year under Medicare, compared with 7.3 percent a year under private health insurance.” In fact, looking at a broader period, from 1970 to 2006, shows that per-enrollee spending by private insurance grew just 1 percentage point faster per year than Medicare spending, rather than 2.7 percentage points. That still omits the 1966–1969 period, which saw rapid growth in Medicare spending.

More importantly, Hacker’s comparison commits the fallacy of conflating spending and costs. Even if government contains health care spending better than private insurance (which is not at all clear), it could still impose greater overall costs on enrollees and society than private insurance. For example, if a government program refused to pay for lifesaving medical procedures, it would incur considerable nonmonetary costs (i.e., needless suffering and death). Yet it would look better in Hacker’s comparison than a private health plan that saved lives by spending money on those services. Medicare’s inflexibility also imposes costs on enrollees. Medicare took 30 years longer than private insurance to incorporate prescription drug coverage into its basic benefits package. The taxes that finance Medicare impose costs on society in the range of 30 percent of Medicare spending. In contrast, there is no deadweight loss associated with the voluntary purchase of private health insurance.

Hacker nods in the direction of non-spending costs when he writes, “Medicare has maintained high levels of … patient access to care.” Yet there are many dimensions of quality other than access to care. It is in those areas that government programs impose their greatest hidden costs, on both publicly and privately insured patients.

Mr. Krugman, won’t you please help me care about the facts as much as you do? It just seems like such bliss.

Let the Market Cut Medicare?

The center-right consensus is that in order to balance the budget and improve health care, Congress needs to overhaul Medicare using some form of voucher or premium support.  Whereas the current program offers an essentially unlimited subsidy for medical care, under these options Congress would give each enrollee a fixed subsidy with which they could purchase private health insurance.  But how should Congress determine the size of these fixed subsidies?

The House GOP approved a budget under which Congress would pick the amount.  Beginning in 2022, all new enrollees would receive a voucher.  The average voucher amount would be equal to the average amount Medicare currently spends per enrollee in 2011, adjusted for overall inflation.  Congress would adjust the actual voucher amount for each enrollee based on health status and income, so some enrollees would receive larger and some would receive smaller vouchers.  But since the average voucher would grow at the rate of inflation (i.e., about 2.5 percentage points slower than per-enrollee Medicare spending currently grows), this approach would reduce Medicare spending over time.

A drawback of this approach is that opponents can (and do) demagogue it, claiming that the vouchers would be insufficient and seniors would die for lack of medical care.  This demagoguery ignores two important factors.

First, as Peter Orszag and President Obama themselves loved reminding us during the ObamaCare debate, there is lots of wasteful spending in the Medicare program.  Orszag frequently cites the Dartmouth Atlas, which estimates that one third of Medicare spending is pure waste.  Since the amount of the House GOP’s vouchers would be based on per-enrollee Medicare spending, they would essentially give Medicare enrollees 50 percent more money than they would need to purchase all the beneficial medical care that Medicare currently provides.  The vast amount of wasteful Medicare spending is a disgrace.  But when converting to a voucher system it’s an absolute boon, because it provides a huge margin of safety.  It means that enrollees could reduce their medical consumption by one third without harming their health.

Second, the anti-reform demagogues presume that vouchers would do absolutely nothing to make health care more efficient.  Vouchers would make the nation’s 50 million heaviest consumers of medical care cost-conscious in a way they have never been before.  Like an old man trying to send back soup at a deli, they will force providers to cut costs and thereby make their vouchers go farther.

It is because of this second factor that Yuval Levin proposes a different way of setting the voucher amount(s).  Levin proposes to use a competitive-bidding process.  Under this approach, everyone in Medicare would receive a voucher equal to the second-lowest bid that health plans submit to provide a standard package of benefits.  Enrollees could then apply their voucher to any private plan or even a government-run plan.  Under this approach, enrollees would still be cost-conscious: if the health insurance policies they choose cost more than the voucher amount, they would have to make up the difference; if the policies cost less, they would keep the savings.  Levin argues that this cost-consciousness would also lead enrollees to put pressure on providers to cut costs, and therefore the amount of the second-lowest bid would automatically grow at a slower rate than per-enrollee spending under the current Medicare program.  ”In such a system,” Levin writes, “the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula. ” Voila!  The competitive forces of the market would cut Medicare spending.

The best evidence that competitive bidding will reduce Medicare spending is that the durable medical equipment manufacturers have fought efforts to impose it on them.  So while I’m not hostile to the idea, I don’t think it’s an improvement over the House GOP plan.

First, Levin calls competitive-bidding “the Confident Market Solution” because he is confident that markets will reduce the cost of health care.  I’m confident of that too.  But I’m also confident that rent-seeking will be present in Medicare, no matter what reforms Congress enacts.  I am far less confident that markets will reduce costs faster than rent-seeking will increase them.  My sense is that politicians will be much more likely to hold the line on rent-seeking if they actually draw one.

Second, House Budget Committee chairman Paul Ryan (R-WI) crafted a House budget that proposed to reduce the growth of Medicare spending using hard, score-able numbers.  Hundreds of House members likewise stuck their necks out by voting for it.  The Confident Market Solution essentially undercuts those folks by telling them they should not have done something so bold and courageous.  Levin is no doubt correct that a competitive-bidding process that doesn’t specifically commit Congress to reducing Medicare spending growth is more politically feasible than a voucher plan that does.  When politicians choose the more politically perilous option, however, reformers should tell the world why that was the right thing to do.

Third, Levin would include a public option in the competitive-bidding system.  I am also confident that the government would heavily subsidize that health plan until it drove private insurers (and any hope of cost-cutting innovations) out of the market.

I’ve discussed what I think is a better approach to Medicare reform here and here.