Topic: Cato Publications

Medicare Reform: Just Give Seniors the Cash

Matthew Holt at TheHealthCareBlog.com raises a good question about Medicare’s renewed effort to offer medical savings accounts to beneficiaries:

Those taxpayers who can do basic math might wonder why you’d want to to give healthy Medicare beneficiaries cash for health services that they’re not going to use, while taking that cash away from the pot that pays for the sick beneficiaries that do use said services. But we’ve asked that question so many times before and no one on the free market side dare answer it. And I guess you might say, why not give the taxpayers money straight to the “healthys” instead of laundering it through Medicare Advantage plans as we’re doing it now so that they can hand out free gym memberships to seniors and boost their executives’ stock holdings.

But given that risk adjustment is coming to Medicare Advantage, it may be that that gravy train is ending.

The Medicare MSA concept raises some interesting problems. Fortunately, Holt solves them — though I’m not sure he knows it.

A bit of background: The Medicare Advantage program currently pays private health insurers a flat amount for each senior those plans cover. As Holt notes, that encourages the plans to seek out the seniors whose medical bills will be less than that flat amount. Thus some plans “hand out free gym memberships to seniors” as a way to attract the healthy, profitable ones and avoid the unprofitable sick ones. That can end up costing taxpayers more than if those healthy seniors just stayed in traditional Medicare. 

But as Holt says, Medicare is working on adjusting those payments according to each beneficiary’s health risk. Instead of some flat amount per beneficiary, insurers would receive a payment from Medicare that better reflects each individual enrollee’s expected medical expenses. That way, health plans would have less reason to cater to the healthy or to avoid the sick. 

But once Medicare risk-adjusts those payments, why should the insurance companies get that money? As Holt postulates and Mike Tanner and I discuss in Healthy Competition, why not give it to the beneficiary? Confine it to health care uses, if you like. Healthy people would get smaller payments; sicker seniors would get larger ones. That would enable each to purchase health coverage (high-deductible or whatever) and still have some money left over for their out-of-pocket expenses. Seniors would get more control over their health care and coverage; they would make much smarter cost-benefit decisions than they do now; and Congress could limit the burden that Medicare imposes on taxpayers.

Is the point of the program to help insurers? Or providers? Or seniors? To whom do we want insurers and providers to be responsive?

“We Don’t Have a Colonial Office in the United States”

Go to any event on nation building in Washington these days, and you’ll hear endless bickering about whose fault it is Iraq hasn’t gone better. Maybe it’s DOD’s fault for commandeering the planning process. Maybe it’s the State Department’s fault for not letting Ahmed Chalabi be more involved. Maybe (this is the current favorite) we need a new Goldwater-Nichols Act to unify the bureaucracies behind the sorts of nation-building missions we find ourselves in in Iraq.

During a recent event at the US Institute of Peace, both Marine Corps Major Ben Connable and Matt Sherman, a former CPA official, blasted the State Department for not providing sufficient personnel for the mission in Iraq. As it happened, Bob Deutsch, the deputy senior adviser to Secretary Rice for Iraq policy was in the audience, and, well, let’s just say the sparks flew. A rough transcription of part of Deutsch’s comment is below:

We don’t have a colonial office in the United States. And the kind of—when I hear the criticisms of the civilian side of the government, that the State Department doesn’t have a whole bunch of police trainers that we can send out, that we don’t have a whole bunch of people who know how to run electricity companies, who know how to run oil companies. The Department of Energy doesn’t have people to send out to run oil companies. We don’t have a colonial office. And if we are going to do nation building, in Iraq or elsewhere, we’re going to need one. And I agree that that is a decision—that Secretary of State has made some decisions that we’re going to move the foreign service in directions with our transformational diplomacy in that direction. But it would have to be a larger U.S. government decision that we’re going to do that—which has all sorts of bureaucracy and fiscal implications that I’m not sure we’re prepared to buy off on.

I’m not sure whether to be reassured by the senior adviser’s tepid invocation of “bureaucracy and fiscal implications” that he’s “not sure we’re prepared to buy off on” as the primary obstacle to setting up a colonial office, or alarmed by the fact that he suggests that Secretary Rice has “made some decisions” that the foreign service is going to be “moved in that direction.”

At any rate, it’s sure a great time to pick up Chris Preble’s and my Policy Analysis on the topic of building a nation-building office into the State Department.

Fraudulent Identity Fraud Statistics

Slate has a great piece up on the use and misuse of statistics by reporters.

The magic number for journalists covering the identity theft beat has been $48 billion—the estimated annual losses suffered by identity theft victims—which carries the Federal Trade Commission’s imprimatur. … Fred H. Cate, a law professor and director of Indiana University’s Center for Applied Cybersecurity Research, notes that if the estimate were accurate, it would wipe out up to half of the banking industry’s $103 billion profits in 2005. “If those numbers were true, we’d have a banking crisis on our hands,” he says.

When I worked on the Hill, I came to recognize a similar dynamic at play: There were things everyone believed and no one questioned. I called them “political facts” because the source of the fact was consensus rather than any measurement or observation. Repetition of political facts in Members’ speeches and floor statements just made them all the more true.

A political fact relating to identity fraud is that it is a stranger crime, often a product of data breaches, that is conducted mainly over the Internet. It sometimes is, but in my book, Identity Crisis, I point out the results of an actual study showing that:

[M]ore than a third of individuals who had been impersonated in a true identity fraud knew … who the perpetrator was. And in more than half of those cases, the perpetrator was a family member or other relative. Other prominent perpetrators of identity frauds are people in companies or financial institutions with access to personal information, as well as friends, neighbors, or in-home employees of impersonation victims. So much for the Internet being the cause of identity fraud, though it certainly plays a role in some cases.

Alas, … my source was a Federal Trade Commission study.

New at Cato Unbound: Ted Galen Carpenter Replies to Gerecht

Today at Cato Unbound Cato’s own Ted Galen Carpenter argues that Reuel Marc Gerecht’s strategy of bombing Iranian nuclear facilities may be harder than advertised and that “thousands of innocent Iranians would perish in U.S. air strikes.” Such an attack might trigger a “massive regional crisis,” Carpenter says. “America’s troubles with the Islamic world do not yet constitute a war of civilizations,” he writes, “but Gerecht’s strategy could well produce that result.” Carpenter argues that the U.S. should try to persuade Iran to give up its nuke program by offering a “grand bargain,” and if that doesn’t work, should pursue a policy of containment and deterrence, that, while “nerve-wracking,” has proved effective against deadlier and more fanatical regimes.

Don’t miss replies to Gerecht on Friday from Edward N. Luttwak and on Monday from Anthony H. Cordesman.

Fake IDs Save Lives in Iraq

A fascinating AP report says that Iraqis are using fake IDs in light of the recent growth in sectarian killings.  The major groups in Iraq are not distinguishable by physical traits, but they are by name.  To avoid being killed, people are getting false identification cards:

Surnames refer to tribe and clan, while first names are often chosen to honor historical figures revered by one sect but sometimes despised by the other. 

For about $35, someone with a common Sunni name like Omar could become Abdul-Mahdi, a Shiite name that might provide safe passage through dangerous areas.

This illustrates very well how genuinely complex security can be.  At any time, the relevant authorities in Iraq could have decreed that all people get (as near as possible) forgery-proof biometric ID cards and carry them at all times - a great way to batten down a country, right? 

Doing so would have fed directly into the strategy being used by the enemies of peace and security in Iraq today: setting up fake checkpoints and killing people who arrive there members of the wrong sect. Identity cards had a role in the Rwandan genocide just over 10 years ago, as well.

Those who believe that identity cards are a simple route to good security, well, they suffer what is so rightly known as the fatal conceit. Central planning that deprives people of control over their lives can be deadly–literally–in surprising and unpredictable ways.

Thank goodness for the fake ID outlets in Iraq today, and thank goodness the promoters of ”secure ID“ in the United States didn’t take their message to Iraq.

The tradeoffs involved in identification are discussed in my book, Identity Crisis.

HSA Gumbo

A Lousiana blogger named Dr. Hébert offers a skeptical but open-minded critique of health savings accounts. Hébert is board certified in internal medicine and pediatrics. I addressed many of his criticisms in a recent study on HSAs, but I’ll see if I can tackle his concerns head-on – and perhaps more succinctly.

Here are Hébert’s main concerns, saving the biggest for last.

1. HSAs favor the wealthy. Yeah, that’s pretty much true. But the fault here lies more with the problem that HSAs attempt to correct. The federal tax code has exempted employer-sponsored insurance premiums from payroll and income taxes for over 60 years. The wealthy get the biggest tax breaks from that exemption. (See neat graphics to that effect on pp. 14-15 of my paper.) But money saved or used to purchase health care directly is subject to both types of taxation. That causes people to rely on health “insurance” more than they should. HSAs are an attempt to level the playing field between health savings and out-of-pocket expenditures on the one hand and third-party payment on the other. So extending to HSAs a tax break that already benefits the wealthy naturally will benefit the wealthy more than the poor. Since eliminating those tax breaks entirely doesn’t seem politically feasible, HSAs are the best shot we’ve got for fixing what the tax code has done to the health care sector.

2. Employers won’t pass the savings on to workers. HSAs make it easier for employers to provide less health coverage, because they and/or their workers can contribute money to the worker’s HSA tax-free. But if employers cut back on coverage, how can we be sure that employers will “pass on this savings to their employees by paying higher wages”? In the short term, we can’t be sure; employers could just pocket the savings. (If there are any savings – the rising cost of health insurance could eat up any potential wage increase even if employers cut back on coverage.) It’s in the long run that economists agree that non-cash compensation reduces cash wages. And it’s in the long-run that premium savings will be passed on to workers.

3. HSA rules discriminate against those who want traditional insurance. Okay, I have to agree with Hébert again. And with Jason Furman of NYU. It is inconsistent for HSA supporters to say that people are smart enough to shop around for medical care, but not smart enough to choose their own health insurance. That’s one reason I’ve proposed turning HSAs into “large” HSAs, where you would get a tax break on up to $8,000 in HSA deposits ($16,000 for families) and you could use that money to buy whatever kind of health insurance you prefer.

4. HSAs are not a good deal for those with high expected medical expenses. As I discuss in my paper, HSAs may be unpopular with people whose health insurance currently pays for what are essentially uninsurable expenses. In order for insurance to work, coverage has to be confined to expenses that are unknown. If you try to force insurance to cover known expenses, you drive people out of the market – because they know you’re just trying to extract wealth from them. This is not an argument against subsidies, only an argument against trying to cram subsidies into “insurance.” As I wrote in an exchange with Matthew Holt from TheHealthCareBlog.com:

My preference is to let insurance markets do all they can do to improve efficiency, particularly by encouraging patients to pay directly more often. Some people will still require assistance, though with a more efficient health care sector their numbers should be smaller. We should subsidize those who remain directly, with cash.

But that hardly means that chronically ill patients won’t like HSA coverage. As the Congressional Research Service notes, HSAs could be popular with many such patients because they offer much more control over one’s medical decisions.

5. HSAs won’t result in higher quality care. Hébert gives two reasons. First, patients not always in a position to shop around, because you can’t comparison shop when you’re on a gurney. Yet as I wrote in my paper:

Most health care spending occurs in circumstances under which the patients can comparison shop. For example, emergency room care accounts for only 3.3 percent of health expenditures. Hospital and nursing home care combined account for 45 percent of personal health care expenditures, yet many hospital expenditures are discretionary. Spending on physicians, prescription drugs, home health care, and other services accounts for 55 percent of personal health care expenditures. Those data suggest that a large share of health care spending does allow time for considering one’s options.

Hébert’s second reason is that medical billing is too complicated for patients to comparison shop. Yet the scenarios he offers are no more complicated than comparing prices for cars or houses or mobile phones with calling plans – and consumers comparison shop for all of those things, sometimes all at once. When they need help finding value, they find an agent (e.g., realtors) to guide them. Which brings me to Hébert’s main critique.

6. HSAs equal less health care, and that’s bad. Hébert’s biggest concern seems to be that HSAs will cause people to cut back on their medical consumption, particularly visits to primary care physicians. The way HSAs are set up right now, many primary care visits are not be covered by insurance, although preventive care may be covered below the deductible. That means that patients may face actual tradeoffs if they want to go to the doctor, and will therefore demand more value. If primary care physicians provide as much value as Hébert believes, he should have nothing to fear from cost-conscious patients. But if it turns out we are wasting money even on primary care – and there’s evidence to suggest that is the case – then maybe primary care physicians will have to focus more on providing value.

Hébert predicts that HSAs will meet the same end as HMOs. I disagree, because HSAs give people more control over their health care decisions, and people are not going to want to give that up. HMOs did exactly the opposite. But Hébert offers a testable hypothesis to which I hope we both shall return in the coming years.

(Hat tip to Trapier Michael, the hardest working man in health policy.)

As the Supply Curve Shifts…

Today’s New York Times runs an oped on the supply of physicians by David C. Goodman, an investigator with the Dartmouth Atlas of Health Care. The Dartmouth Atlas does invaluable work documenting the waste that exists in Medicare and other parts of the U.S. health care sector. Goodman critiques a recommendation by the Association of American Medical Colleges that the United States increase its output of doctors by 30 percent to meet the needs of the growing number of elderly Americans. That critique is excellent as far as it goes, but it seems to miss half the picture.

Goodman argues that increasing the number of physicians will do nothing to improve the quality of health care. He cites the sort of data for which the Dartmouth Atlas is famous:

Many studies have demonstrated that quality of care does not rise along with the number of doctors. Compare Miami and Minneapolis, for example. Miami has 40 percent more doctors per capita than Minneapolis has, and 50 percent more specialists…

The elderly in Miami are subjected to more medical interventions — more echocardiograms and mechanical ventilation in their last six months of life, for example — than elderly patients in Minneapolis are. This also means more hospitalizations, more days in intensive care units, more visits to specialists and more diagnostic tests for the elderly in Miami. It certainly leads to many more doctors employed in Florida. But does this expensive additional medical activity benefit patients?

Apparently not. The elderly in places like Miami do not live longer than those in cities like Minneapolis. According to the Medicare Current Beneficiary Survey, which polls some 12,000 elderly Americans about their health care three times a year, residents of regions with relatively large numbers of doctors are no more satisfied with their care than the elderly who live in places with fewer doctors. And various studies have demonstrated that the essential quality of care in places like Miami — whether you are talking about the treatment of colon cancer, heart attacks or any other specific ailment — is no higher than in cities like Minneapolis.

In other words, doctors in some areas of the country order up a lot of health care that seems to benefit no one but the doctors themselves. All that apparently value-less health care costs workers and taxpayers tens of billions of dollars per year.

But Goodman does not address an equally important question: whether an increase in physician supply could make health care more affordable. In the standard supply and demand model, loosening a constraint on supply shifts the supply curve to the right, which reduces prices. With third-party payers, the process gets pretty attenuated – probably more so when the government is paying than when a private insurer is paying. But that’s not the same thing as saying it breaks down. In fact, it’s hard to believe that increasing the supply of anything by 30 percent over time wouldn’t have an effect on prices.

Goodman might have noted that (1) the persistence of expensive, low-quality care and (2) a relatively unresponsive price mechanism are both enabled by the same same feature of the America’s health care sector: our over-reliance on third-party payment. As Mike Tanner and I noted in Healthy Competition, we even nose out Canada in terms of the share of medical care purchased by third parties.

Fixing that problem could address both cost and quality problems. Miami patients would be less likely to let their doctors order up useless tests if those patients are paying, say, 5 percent or 10 percent of the cost. And price is much more likely to respond to supply shifts if you have 200 million price-sensitive purchasers as opposed to a few hundred third-party payers, not all of which are price-sensitive.

Goodman’s Dartmouth colleague John Wennberg has recommended using medical savings accounts to cut out some of the waste in Medicare. Here’s an idea for getting rid of even more useless medical care: just give Medicare beneficiaries a lump-sum payment, adjusted for their individual health risk, and let them purchase medical care and coverage until it stops providing them value.

That might even change the political dynamics enough that we could eventually put to bed these wasteful political discussions about whether we should allow 30 percent more people to become doctors each year.