Topic: Cato Publications

Help Wanted: New Medicare Administrator

Dr. Mark McClellan recently announced his intention to resign from the position of administrator of the Center for Medicare and Medicaid Services (CMS). 

Finding a replacement shouldn’t be hard.  The job description is simple.  The next Medicare administrator must run a sprawling program that buys health care for approximately 42 million Americans in every state of the union, and he must simultaneously:

  1. Spend less money on health care (to keep Congress and the Administration from calling for your head);
  2. Spend more money on health care (for example by averting the 5 percent cut in physician payments scheduled to take effect next year) to keep providers from calling from your head - and seniors from doing so once they can’t find a doctor to treat them;
  3. Using modest carrots and no sticks, dramatically improve the mediocre quality of care currently being delivered to Medicare beneficiaries - but don’t interfere with the way in which providers deliver health care, particularly if a low-quality provider has the ear of a congressman or employs lots of people in a swing district;
  4. Buy lots of pharmaceuticals for seniors - but don’t pay too much (because Congress and the Administration will have your head) or too little (or the pharmaceutical companies will stop developing innovative products);
  5. Using inadequate and outdated information, set the price that Medicare will pay for every single good and service that beneficiaries need in every county in the United States;
  6. Assure Congress that you are protecting the program from fraud and abuse, even though your own fraud control personnel have doubts about whether they have the tools to do so, and the program is routinely labeled as being at “high risk” for fraud;    
  7. Prepare Medicare for the impending tidal wave of baby boomers, who will stop paying into the system and will start expecting benefits in 2011; 
  8. Keep a straight face while you explain that Medicare will be there for future generations, even though your trustees have determined that putting just one part of the program in actuarial balance for the next 75 years will require an “immediate 121% increase in the tax rate or an immediate 51%reduction in expenditures;”
  9. Surrender your every waking hour to the thankless task of bailing out a sinking ship while being forced to cheer on the efforts of your bosses (in the Administration and Congress) to drill more and bigger holes in the bottom; and finally 
  10. Walk on water in your (non-existent) free time. 

The last item on the list is obviously a stretch, but the next administrator of CMS will face all of the other challenges. 

How did the Medicare program – born of such high hopes and good intentions – end up in this mess?  What can we do to address these problems? 

For some answers to these questions, along with a satirical perspective on the Medicare program, attend the book forum for Medicare Meets Mephistopheles at the Cato Institute on September 21, 2006.  Sign up here.

Klein on Medicare Meets Mephistopheles

No one is going to accuse the American Prospect’s Ezra Klein of being a libertarian.  (Oh, wait.  I think I did once.) 

Which makes it all the more impressive that he was able to say such kind things about the Cato Institute’s latest health policy book, Medicare Meets Mephistopheles:

[T]he book is actually quite good. I’d happily recommend it to anyone with a basic grasp on health care and a desire to learn a bit more about Medicare. Hyman is a felicitous and fun writer, and he conveys an impressive amount of history and data in as accessible and absorbable a manner as one could hope. I know how tricky it is to make health care a quick and gripping read, and I tip my hat to anyone who is capable of enriching the debate and educating readers by doing so.

Full disclosure: Klein was less enamored with Hyman’s analysis and recommendations.  (Readers can find those comments in Klein’s post over at Tapped.)  Hopefully, Klein will raise his concerns at the Medicare Meets Mephistopheles book forum this Thursday.

Against Equity and Good Conscience, Indeed

Medicare watchers know that the federal government recently – and improperly – sent checks to 230,000 seniors. The checks were supposed to reimburse certain seniors for premiums paid under the new Medicare prescription drug benefit (Part D). But seniors who were not supposed to receive any money at all instead got checks worth an average of $215 – for a total of almost $50 million in erroneous payments.

The feds tried to get seniors to return the money – that is, until the Center for Medicare Advocacy, Inc. filed suit to stop them. In fact, the Center even argued that even though seniors were not entitled to the money, they should get to keep it:

In certain circumstances a beneficiary may be entitled to a waiver of the overpaid refund. Waiver of the overpayment may be available to a beneficiary who was without fault in causing the overpayment and where repayment would be against equity and good conscience.

(Bold and italics in original.)

So not only may seniors pressure Congress to grant them windfalls that they don’t really deserve (e.g., Part D), but according to the Center for Medicare Advocacy, a senior should also get to keep even unlegislated transfers from younger Americans if the senior feels that returning the windfall “would be against equity and good conscience.”

But this is par for the course with Medicare. For more examples of Medicare madness, attend or watch online this Thursday’s book forum for Medicare Meets Mephistopheles, a new book by Cato adjunct scholar David Hyman.

Medicare, Only More Fun

On Thursday, Cato will host a book forum for Medicare Meets Mephistopheles, a new book by Cato adjunct scholar David Hyman. Medicare Meets Mephistopheles takes a satirical look at the crown jewel of President Lyndon Johnson’s Great Society.

Hyman is a rising star in the field of health law and policy. A lawyer and a doctor, he is professor of law and medicine at the University of Illinois Urbana-Champaign. In 2004, he was the lead author of Improving Health Care: A Dose of Competition, the first joint report by the Federal Trade Commission and the Department of Justice. This year, he guest-edited an issue of the Journal of Health Policy, Politics and Law devoted to that report. Prof. Hyman also has a habit of quoting Austin Powers in his law review articles.

Ted Marmor, one of Medicare’s leading advocates, will comment, as will Robin Wilson, a visiting professor of law at Washington & Lee University.

The forum will be held at noon this Thursday at the Cato Institute, and will be followed by a luncheon. Other details, including how to preregister, are available here.

Furmanology

CHICAGO—The only nice thing about being stuck on an airplane (aside from free soda) is the chance to catch up on one’s reading. On this trip, I (finally) turned to Jason Furman’s article “Our Unhealthy Tax Code” from the premiere issue of Democracy. I address Furman’s objections to health savings accounts in a recent paper. (Refreshingly, we actually agree on one or two things.) But Furman also commits what I think is an important error when discussing tax deductions for health care. 

Congress exempts employer-provided health benefits from income and payroll taxes, which costs the federal government an estimated $200 billion per year in lost tax revenue. Furman describes this as the federal government “spending approximately $200 billion annually in subsidizing employer-provided insurance.” But that is flat incorrect. A tax deduction allows workers to keep more of their own income, provided they engage in a desired behavior — in this case, obtaining employer-sponsored health insurance. It is not government spending because the government cannot spend money that it never possesses. Nor is it a subsidy, because to subsidize means to transfer resources, and again the government never possesses those resources. The tax deduction may have the same effect on government revenues (and the economy) as government spending for the same activity. But that still doesn’t make it spending

Suppose I robbed Peter and gave his money to Paul. Suppose alternatively that Peter gave his money to Paul because I threatened to punch him in the nose unless he did. In the first scenario, I would be spending Peter’s money on Paul. But in the second, Peter would be spending his money on Paul.  I wouldn’t be spending anything. I merely would be threatening to assault Peter unless he did what I said. 

A more precise way of describing such tax deductions would be to say that they create price distortions between favored and non-favored activities. If a health insurance policy and a plasma TV each have a nominal price tag of $5,000, the fact that health insurance is tax-deductible reduces its price relative to the TV. (If the price distortion is greater than my preference for the TV, the tax deduction will induce me to consume the less-valued option, creating economic losses.)

The distinction might seem semantic, but it has important normative implications. Furman despises the tax deduction for employer-sponsored health insurance on equity grounds: The wealthy get larger tax deductions than lower-income workers. (I despise it too, for different reasons.) A government spending program that disproportionately subsidizes upper-income workers would be offensive to more people than a policy that merely lets some workers keep more of their own money. The former description suggests (assumes?) that the money belongs to the state, and that the state has the right to spend it on something else at its discretion. The latter suggests (correctly) that the money belongs to the people who earned it, and for the state to spend that money would require a $200 billion tax increase.

To anticipate a predictable objection, I am aware that the federal government itself prefers the former description, and the term tax expenditures. It is hardly surprising that the federal establishment chooses the description that presumptively increases its claim on society’s resources. That it is a convention makes it no less incorrect.

More Evidence on Coinsurance and ‘Skimping’

PHOENIX—In a recent paper on common criticisms of health savings accounts (HSAs), I discussed the concern that, since HSAs encourage greater price-sensitivity, they will encourage patients to forgo necessary medical care. I found that most of the evidence points to the opposite conclusion: Price-sensitive patients do not seem to “skimp” on necessary care.

The latest issue of Health Affairs includes an article that adds more weight to that conclusion. Dana Goldman and colleagues examined the effect of different levels of cost-sharing on privately insured patients with at least two of the following diagnoses: cancer, kidney disease, rheumatoid arthritis, and multiple sclerosis. The out-of-pocket costs for specialty drugs that treat these diseases can be quite high. For example, median out-of-pocket drug spending for cancer patients was $336 dollars (in 2004), but ran as high as $12,000 for some cancer patients.

What was striking about this study was that greater cost-sharing did not cause those patients to cut back on their drug expenditures. According to the authors:

[C]oinsurance did not significantly affect the level of spending at all once a patient initiated specialty drug use. What is most striking about these results is how inelastic demand is — that is, how insensitive patients are to price — in comparison to traditional pharmaceuticals, for which it is not uncommon to see responses of 30–50 percent when copayments double.

For emphasis, the authors include the following figure, which shows pharmaceutical spending among kidney patients as a function of the coinsurance rate:

Effective Coinsurance Rate For Kidney-Related Products And Spending, 2003–04

The coinsurance rate seems to have little effect, which suggests that when patients need medical care, they don’t cut back when exposed to more of the cost.

Despite these results, the authors argue against greater cost-sharing for specialty drugs, both because the drugs tend not to be used by patients who would not benefit, and to protect those patients from financial hardship. Yet that recommendation does not seem to follow from their findings. First, those drugs may not be subject to overuse at present. However, as the authors recognize, the market for specialty drugs is set to expand dramatically, which increases the potential for moral hazard when cost-sharing is low. Second, if those patients are suffering serious financial hardship, it isn’t apparent from this study: They are still able to obtain the drugs they need.

The authors seem to have a preference for pooling the cost of specialty drugs — which is fine. Personally, I’m agnostic: I think consumers should make that choice according to their own preferences. But this study’s empirical results do not illuminate whether it is better to have individual patients bear those costs, or to have those costs borne by the entire insurance pool — an option that could possibly make coverage unaffordable for other patients, whether now or in the future.