Medicare and Overall Health Spending

MIT’s Amy Finkelstein argues that much of the increased use of technology in American medicine (what I term “premium medicine” in Crisis of Abundance) has been induced by Medicare, which reduced out-of-pocket costs and thereby increased the demand for care.

Perhaps the easiest place to grasp her work is at an archived presentation at the AEI, particularly the powerpoint slides that may be found as a link there. Also, see links given by Tyler Cowen.

Finkelstein compares the change in insurance coverage induced by Medicare across different states–in some states the elderly were relatively well insured prior to Medicare, and in other states they were not. Using this “natural experiment” methodology, she finds that Medicare accounts for a large share of the increased spending on health care since 1965. However, she does not find any corresponding increase in health. She does, however, argue that Medicare had a very large risk-reduction benefit, by saving the very sick from having to suffer huge financial costs.

To me, this suggests trying to maximize the insurance benefits of health insurance (reducing financial risk) while minimizing its distortionary effects. The proposals in my book would head in that direction.

My proposals are politically radical but economically sensible, as the research of Finkelstein reinforces. You can hear more about Crisis of Abundance at this this Cato event on August 29th, which also will feature journalist Sebastian Mallaby and Democratic wonk Jason Furman.

How Did You Like the Cybercrime Treaty Debate?

Perhaps you weren’t aware of the Senate’s debate over the cybercrime treaty. You would be like most people. The Senate quietly approved the cybercrime treaty yesterday.

The treaty is the product of years of diligent work among governments’ law enforcement departments to increase their collaboration. It lacks a dual criminality requirement, so Americans may be investigated in the United States for things that are not crimes here. And it applies not just to “cyber” crimes but to digital evidence of any crime, so foreign governments now may begin using U.S. law enforcement to help them gather evidence in all kinds of cases.

 But you already knew that if you were following the debate. You were following the debate, weren’t you?

P4P Hubris

Dr. Rob Lamberts also comments on my paper on pay-for-performance (P4P) in Medicare. Lamberts (like Holt) seems to have blogged that paper having only read the press release. Though the paper probably would answer most of the questions they raise, I’ll respond to two of Lamberts’ comments.

1. Lamberts argues that a P4P experiment in Britain’s National Health Service (NHS) refutes my claim that “provider-focused P4P incentives can encourage inappropriate care or reduce access to care for patients with multiple illnesses or low incomes.”

Not quite. A P4P scheme can avoid those effects, but not without causing other problems. For example, the financial incentives could involve only additional payments to physicians and no payment reductions for “low-quality” care. That’s what the NHS did; physicians’ gross incomes increased by an average of $40,000.

A rewards-only approach reduces the incentive for physicians to avoid very sick or very poor patients, who make it difficult for the physician to meet the performance goals. However, that approach makes the P4P effort more costly. Lamberts himself suggests that Medicare’s P4P efforts should be budget-neutral, which would make it more likely that physicians would give outlier patients inappropriate care, avoid those patients, or otherwise game the system.

Another way the NHS experiment avoided inappropriate care or a reduction in access for outliers was by allowing physicians the discretion to disregard as many of their patients as they wished when calculating their compliance score. But the availability of such “exclusion reporting” also gave physicians an opportunity to game the system. Rather than provide the desired type of care to their patients, physicians could use exclusion reporting to increase their incomes without changing their behavior. The authors of the study cited by Lamberts note: “More research is needed to determine whether these practices are excluding patients for sound clinical reasons or in order to increase income.”

2. Lamberts writes that the Brits “were able to achieve astonishing improvements to their quality numbers and improve physician incomes at the same time.”

Of course, these two ends are not in conflict. It’s easy to get people to do what you want when you dangle $40,000 in front of them.

But we can’t even be sure that the NHS P4P experiment made any improvements in quality — much less astonishing improvments in quality. Although median reported achievement was an impressive-sounding 83.4 percent, according to the authors of that study:

There is no baseline with which to compare performance in the first year of the U.K. program, although the quality of care was already improving before its introduction.

If we don’t know what compliance rates were before the NHS introduced financial incentives for compliance, and quality was improving anyway for other reasons, how do we know whether or how much their quality numbers improved, or how much of that change was due to P4P? 

If we don’t even know that, we certainly don’t know whether the effort was worth the $3.2 billion the NHS spent in 2004.

Medicare Reform: It’s All about Control

Matthew Holt of The Health Care Blog takes a thoughtful stab at my recent paper on “pay-for-performance” and Medicare. 

Pay-for-performance is one of those hip health policy buzzwords that comes with a catchy acronym: P4P. The idea is that private insurers or the government can improve health care quality through financial rewards for providers who deliver what the payer considers “quality” care. P4P stands in contrast to “pay-for-volume,” which is how third-party payers have traditionally paid providers.

My thesis is that P4P has promise, but is very, very tricky. A bureaucracy that rewards providers for what it considers high-quality care can actually encourage low-quality care for the poor saps who happen not to be the average patient. 

There’s nothing wrong with P4P, so long as patients who are getting short-changed have the right to opt out (i.e., switch insurers). P4P’s potential is sure to be lost if the Centers for Medicare and Medicaid Services (CMS) get into the game. For example, since Medicare’s P4P scheme would be emulated by Medicare Advantage plans and other private insurers, many patients would have no escape.

Holt tries to link (reconcile?) my opposition to P4P in traditional Medicare (and support for P4P in Medicare Advantage plans) with my suggestion that Medicare should subsidize seniors with a risk-adjusted voucher rather than coverage. Let me see if this helps thread the two together:

There’s a difference between helping someone in need and making all her decisions for her. Medicare has traditionally tried to do both, offering subsidies to seniors but also dictating what their coverage looks like, payment rates, etc.  If CMS starts defining “quality” for 45 million seniors (and by extension, millions of non-seniors), the government will be making even more decisions that it’s really not qualified to make. Better that Congress just give seniors the cash and let them make their own decisions about coverage and care and quality. Markets have a funny way of helping people make those decisions.

Yes, there will still be some seniors who are ill-equipped to do that. But that small minority of seniors already needs — and gets — similar assistance. They can be taken care of without turning the rest of the health care sector into a high-cost, iffy-quality, rent-seeking cesspool. 

Not as Easy as Right and Wrong

Over at The American Prospect, Matthew Yglesias takes issue with the assertion I made yesterday that if Kansas is ever going to have peace over creationism and evolution, parents must be given the right to take their public education dollars and choose their children’s schools. Instead of forcing parents to support – and constantly fight to control – one school system, why not let them choose the institutions they want?

Yglesias argues that whether it’s parents or government that decides what children will be taught, kids will have no choice in the matter. The question to him, then, is “who is likely to teach most children the right stuff?” If it’s government, then there’s no need for choice.

That sounds reasonable enough. That is, until you consider how incredibly hard it often is to know, and to get people to agree on, what constitutes “the right stuff.” Creationists, after all, are just as sure that they are right about Darwin as evolutionists think themselves to be.

Of course, in education, Darwin is just the beginning: Is phonics-based instruction the right or wrong way to teach reading? Should American history be taught in a “traditional” way that focuses on the nation’s great achievements, or is it right to focus on the country’s flaws? What amount of time should students spend studying fine art instead of, say, physics?  Is it wrong for a student newspaper to run an article critical of the school’s principal? And so on…

Clearly, when it comes to countless disputes in education, what is truly right or truly wrong is very difficult to know. With that in mind, we must answer the question: Is it better that government impose one idea of what’s right on all children, or that parents be able to seek freely what they think is right for their own kids?

At the risk of contradicting myself, I think the latter is the obvious right answer.

Republicans for Big Brother

The Cato Institute has noted for some time that conservatives and Republicans have abandoned their limited-government principles when it comes to health policy.  Examples can be found here, here, here, here, and here

The New America Foundation just made our job a little easier, by producing a paper titled, “Growing Support for Shared Responsibility in Health Care.”  In this context, “shared responsibility” means allowing the government to force all Americans to purchase health insurance – a power the Left has craved but no government had dared assume until Massachusetts did so this year.

The paper helpfully compiles a list of comments that Republicans and Democrats have made in support of this new expansion of government power.  The Republicans included:

  • Massachusetts Gov. Mitt Romney (no surpise there)
  • Former Bush HHS Secretary Tommy Thompson
  • California Gov. Arnold Schwarzenegger
  • Former Bush Treasury Secretary Paul O’Neill
  • Former House Speaker Newt Gingrich

One might add to that list the Heritage Foundation (whose health policy scholars wrote the Massachusetts mandate) and Ronald Bailey of Reason magazine. 

Next to those, Schwarzenegger is probably the biggest disappointment, having once bragged that Milton & Rose Friedman’s PBS series Free to Choosehas changed my life,” and that “Being free to choose for me means being free to make your own decisions, free to live your own life, pursue your own goals…without the government breathing down on your neck or standing on your shoes.”  Now that he’s governor, “being free to choose” presumably means being free to choose for you.

This new expansion of state power would be less frightening if it delivered more affordable or higher-quality health care.  But as Mike Tanner demonstrates in two papers on the idea (here and here), it will do neither of those things. 

Unfortunately, there has been too little debate within the limited-government camp over this idea.  This is in part because Heritage Foundation scholars have repeatedly declined to debate Cato scholars or other free-market critics of their proposal.

Until we’re able to have that fuller debate, here’s a helpful algorithm for judging this and other health care proposals:

  1. Does it limit government power?
  2. If not, move on to the next proposal.

Ned Lamont, Fiscal Conservative?

A Washington Post feature says that Connecticut Senate challenger Ned Lamont’s website shows him to be “a fiscal conservative, a social liberal and a foreign-policy moderate.” (The Post also refers to Lamont’s 150-word statements on the issues as “elaborate position papers,” which seems to reflect low expectations for political discourse.) Since I expressed doubt a couple of days ago about the existence of fiscally conservative Democrats, I was intrigued.

So what does the website show? Lamont is indeed socially liberal, for better (opposition to gay marriage bans, creationism, the Terri Schiavo intervention, stem cell restrictions, and other schemes to impose conservative moral values on other people) and worse (support for hate crimes laws, affirmative action, and other schemes to impose his moral values on other people).

But “fiscal conservative”? Let’s go to the tape. On his website he promises to spend more money on national health insurance, universal preschool, all-day schools, “an overarching plan for clean energy and energy independence,” and “a serious, long-range infrastructure plan to upgrade our schools, public transportation, highways, our sewage treatment, and our levees in below sea-level areas [and] a transportation strategy which interconnects cities and suburbs, inner cities and jobs and affordable housing, and ports and airports.” Sounds expensive.

(As a good big-government liberal, he’s also opposed to school choice, private Social Security accounts, and free trade. But our subject today is taxes and spending.)

Virtually all the references to “budget” on Lamont’s site are boasts of how he increased various budgets as a city councilman. He has declared his opposition to earmarks, but of course earmarks – while notorious – are only a tiny part of the federal budget. Nowhere does he promise a balanced budget. He does promise to roll back Bush’s tax cuts – that is, to raise taxes – but that would hardly be sufficient to close the current deficit and pay for his sweeping spending plans, even if higher marginal tax rates did not reduce work, investment, and tax revenue.

Alas, the search for a fiscally conservative Democrat continues.