Tag: Medicare

Ron Paul on the General Welfare Clause

Now that Rep. Ron Paul is again a presidential candidate, his constitutional views will come under increasing scrutiny, as happened yesterday when he was interviewed by Chris Wallace on Fox News Sunday. Not surprisingly, critics immediately leapt on Paul’s “crankish view” that Social Security, Medicare, and other such programs are unconstitutional. Even Wallace seemed taken aback, citing the document’s General Welfare Clause:

The Congress shall have the Power to lay and collect Taxes … to pay the Debts and provide for the common Defence and general Welfare of the United States.

“Doesn’t Social Security come under promoting the general welfare of the United States?” Wallace asked, incredulously.

One does not have to agree with everything Paul has said or stood for over the years to grant that he has a point, and a very important one. It’s a mark of how widespread our constitutional misunderstanding is that so many Americans take it for granted, at least until the Tea Party came along, that most of what the federal government does today is constitutional.

In a nutshell, the Constitution was written and ratified to both authorize and limit the government created through it. It was designed to do the latter not through the Bill of Rights – that was an afterthought, added two years later – but through the doctrine of enumerated powers. Article I, section 8, grants the Congress only 18 powers. Nothing for education, or retirement security, or health care: Those responsibilities were left to the states or to the people, as the Tenth Amendment makes clear.

So what about the General Welfare Clause, the first of Congress’s 18 powers? To be sure, the clause was inartfully drafted, like several other provisions in the Constitution. But it was understood by nearly all as granting Congress the power simply to tax (in limited ways: see the full text). The terms “common Defence” and “general Welfare” were meant merely as general headings under which the 17 other specific powers or ends were subsumed.

In fact, the question came up almost immediately, during the ratification debates, and in early Congresses as well, so we have a rich record of just what the General Welfare Clause meant. Here, for example, in Federalist #41, is James Madison, the principal author of the Constitution:

Some, who have not denied the necessity of the power of taxation, have grounded a very fierce attack against the Constitution, on the language in which it is defined. It has been urged and echoed, that the power “to lay and collect taxes, duties, imposts, and excises, to pay the debts, and provide for the common defense and general welfare of the United States,” amounts to an unlimited commission to exercise every power which may be alleged to be necessary for the common defense or general welfare. No stronger proof could be given of the distress under which these writers labor for objections, than their stooping to such a misconstruction…. Had no other enumeration or definition of the powers of the Congress been found in the Constitution, than the general expressions just cited, the authors of the objection might have had some color for it…. But what color can the objection have, when a specification of the objects alluded to by these general terms immediately follows, and is not even separated by a longer pause than a semicolon?

Indeed, as was often asked: What was the point of enumerating the 17 other powers if Congress could do anything it wanted under this single power? The Framers could have stopped right there. They didn’t because they meant for Congress to have only certain limited powers, each one enumerated in Article I, section 8. And taxing for the general welfare limited Congress even further by precluding it from providing for special parties or interests.

Nor does it change anything to note, as Wallace did yesterday, that the Supreme Court upheld the Social Security Act in 1937 – as if that settled the question. As a practical matter it settled things, of course, just as Plessy v. Ferguson settled the “separate-but-equal” issue in 1896, only to be reversed in Brown v. Board of Education in 1954, and Bowers v. Hardwick settled the issue of homosexual sodomy in 1986, only to be reversed in Lawrence v. Texas in 2003. It’s well understood that the 1937 Court, cowed by Franklin Roosevelt’s infamous Court-packing threat, simply reversed 150 years of understanding and precedent concerning the doctrine of enumerated powers. And that removed the Constitution’s main restraint on federal power – not by constitutional amendment but by judicial fiat.

But it’s not been “extreme liberals” alone, Wallace went on to say, who’ve read the Constitution as the 1937 Court did, noting that conservative Justice Antonin Scalia recently told a congressional gathering: “It’s up to Congress how you want to appropriate, basically.” To be sure, from fear over “judicial activism,” many conservative judges have bought into the New Deal’s constitutional revolution. Perhaps the most that can be said on their side is that the Court cannot alone, this late in the day, reverse these mistakes.

In fact, this unconstitutionality cannot be undone overnight even by the Congress. Here again there are practical concerns, as Paul has recognized. Vast numbers of people have come to rely on these welfare schemes, however unsustainable they are in the long run, as has become increasingly clear. If constitutional fidelity can serve to spur fiscal discipline, however, we may yet slowly work our way out of our present and long-term fiscal dilemma. But that felicitous result will not happen until we admit both our infidelity and our indiscipline – the two are intimately connected.

By reading the General Welfare Clause in isolation, therefore, Wallace and others turn the Constitution on its head. Rather than a document aimed at limiting government, it becomes a document authorizing unlimited government. And let’s be clear: The basic issue here is nothing more – nor less – than legitimacy. Do we live under the Constitution, or don’t we? If Ron Paul’s views on this fundamental question are “cranky,” so too were those of Madison, Jefferson, Washington, and the rest of the Founders we revere.

HHS Plays Chicken Little — Again

USA Today reports on a new Obama administration study:

On average, uninsured families can pay only about 12% of their hospital bills in full. Families with incomes above 400% of the poverty level, or about $88,000 a year for a family of four, pay about 37% of their hospital bills in full, according to the Department of Health and Human Services study.

Oy, where to begin?

This is pre-existing conditions all over again.  In the hope of saving ObamaCare from the gallows, the Obama administration is blowing a real but relatively small problem way out of proportion.

The best data indicate that the problem of the uninsured not being able to pay their medical bills is real but relatively small.  “Uncompensated care” for the uninsured accounts for just 2.8 percent of health care spending. To put that in perspective, 30 percent of Medicare spending is pure waste, according to the Dartmouth Atlas. Moreover, studies show that the uninsured who do pay their bills pay so much more than private insurance does that they more than make up for the uninsured who don’t pay their bills.  That is, total uncompensated care may be negative.

This HHS report adds nothing to our understanding of this problem. Everyone already knows that nearly everybody would have a hard time paying an expensive hospital bill if they didn’t have health insurance.

In fact, this report detracts from our understanding of the problem. It essentially says that if all uninsured people were to experience a hospitalization, only some of them would be able to pay the entire bill for some hospitalizations—not necessarily their own hospitalization—with their liquid assets.  That’s as non-illuminating as saying that very few “D” students could afford to pay four years of college tuition (say, $100,000) with the money in their bank account:

  1. Just like few “D” students are headed to college, very few of the uninsured are going to be hospitalized.  Not only are most of the uninsured young and healthy, but most of them buy insurance as they get older.
  2. The “D” students who do go to college probably won’t be attending the most expensive colleges.  Likewise, the uninsured who are hospitalized are likely to have relatively less-expensive episodes of care.
  3. Of the “D” students who attend college, some would be able to pay for some of their tuition from their bank accounts.  But rather than tell us how much of these hypothetical medical bills the uninsured could pay, HHS reports the number that would be unable to pay these hypothetical medical bills “in full,” and that total billings for those hypothetical hospitalizations—not the unpaid amount—account for 95 percent of medical care provided to the uninsured.
  4. Some of those “D” students could obtain student loans and pay off their tuition over time.  Likewise, some of the uninsured will be able to borrow money or sell their houses or cars to pay their medical bills.  But HHS doesn’t account for the ability of the uninsured to borrow, nor does it count their ability to tap non-financial assets like cars and houses.

In short, HHS bent over backward to make this problem appear bigger than it is.  Moreover, they couched their misleading findings in ways that lent themselves to even greater exaggeration.  For example, the above quote from USA Today,

uninsured families can pay only about 12% of their hospital bills in full.

paints a far darker picture than what HHS actually found:

On average, uninsured families can only afford to pay in full for about 12% of the admissions to hospital (hospitalizations) they might experience.  [Emphasis added.]

It’s almost as if HHS was hoping reporters would misreport their findings in a way that made the problem sound worse.

How Not to Criticize Medicare Vouchers

Over at The Incidental Economist, Austin Frakt challenges a couple of claims I made on NPR about Medicare reform.  (Here’s how NPR reported my comments in print.)

My claims are pretty simple.

  1. If Medicare subsidizes enrollees by giving them a fixed amount of money, much like Social Security does, they would be more cost-conscious than they are under the current open-ended subsidy, because enrollees who avoid wasteful spending would themselves get to keep the savings.  Put more plainly, people spend their own money more carefully than they spend other people’s money.
  2. Health insurers and health care providers would compete to serve these cost-conscious Medicare enrollees on the basis of both cost and quality.  Prices would fall while quality improves.

I’m not really sure to what extent all this would occur under the Medicare reforms the House passed a couple of weeks ago, because we don’t yet know to what extent each enrollee’s subsidy would resemble a fixed amount of money.

Here’s what Frakt does with my claims:

[A]s I heard these words I wondered if we had any evidence on hand about the relationship between lower premium subsidies and health care cost inflation. Indeed we do! Premiums in the commercial market are subsidized by the government at a lower rate than those in Medicare. [Emphasis added.]

He then throws up the chart, shown below the jump, showing that for common benefits, the rate of growth in per-enrollee spending is “pretty similar” in Medicare and private insurance.  He concludes: “With data like this, I think we need to reexamine some of our theories about what lower premium subsidies can do.”

Oy, where to begin?

First, Frakt does not actually challenge my claim.  My claim is that voucher-like Medicare reforms will lead to reductions in the per-unit cost of producing certain goods and services, and therefore to lower prices. Frakt responds with data on health care spending.  When someone predicts that P will fall, introducing into evidence what has historically happened to P x Q is no kind of rebuttal. The confusion Frakt sows is rooted in the fact that both prices and spending can be accurately described as costs.  Such confusion could be avoided were everyone to honor Cannon’s First Rule of Economic Literacy: Never say costs when you mean spending.

Second, though the tax preference for employer-sponsored health insurance distorts relative prices the same way an open-ended subsidy does, it is not a subsidy.  This isn’t really relevant to the matter at hand, but it’s worth emphasizing to avoid such silliness as this.

Third, it would be great if there existed one chart that would settle once and for all whether Medicare or a free market does a better job of containing costs.  Alas, this is not that chart.  Frakt uses it to make a less-ambitious point about the effects of larger versus smaller policy-induced price distortions, but its shortcomings nevertheless confound that comparison, too.  In addition to measuring increases in spending (whose effect on social welfare is ambiguous) rather than increases in cost (which are always bad), this chart handicaps private insurance by leaving off three or four years of explosive growth in per-enrollee Medicare spending (1966-1969).  Worse, it reeks of endogeneity problems.  Amy Finkelstein finds evidence that Medicare itself increases spending among those with private insurance (mostly by increasing hospital capacity), and that this effect has grown over time.   Moreover, as Medicare spending rises, so do average marginal tax rates, which increases the price distortion created by the tax exclusion, which increases spending on private insurance.  For all the play it gets on the Left, this chart serves no useful purpose that I can discern.  Economists should be embarrassed to use it.  If it were a farm animal, and social scientists farmers, they would have to take it behind the barn and put a bullet in its head.

Fourth, we are not yet at the point where we need to reexamine the theory that demand curves slope downward.  There is ample evidence to show that Medicare enrollees will respond to voucher-like reforms by choosing more economical health plans, and that health plans and providers will respond with greater efficiency.  Thomas Buchmueller reports:

Two notable experiments…took place in the mid-1990s: the University of California (UC) and Harvard University both offered a menu of plans that varied in generosity, but adopted a “fixed dollar contribution” policy. The plans also varied significantly in cost, so employees had a greater incentive to consider price when selecting a health plan…

In both cases, employees were quite sensitive to price, and were willing to switch plans to save as little as $5 per month in out-of-pocket premiums…In addition to this demand response, participating insurers lowered their premiums in order to compete for enrollment.

Fifth, there is plenty of evidence that prices can and do fall in health care – from research on the markets for laser-eye and cosmetic surgery, to the work of Clay Christensen and his colleagues, to the research of David Cutler and Mark McClellan.  (If spending increases while prices are falling, it is because changes in Q dominate changes in P – which could be due to all these open-ended government subsidies and other price distortions.)

Finally, as a response to the general theme of that NPR story: we’re a long, long way from the point where we have to worry that reductions in the growth of Medicare spending are going harm enrollees’ health.  Relying on data from the Dartmouth Atlas, President Obama’s Council of Economic Advisers reminds us that “nearly 30 percent of Medicare’s costs [spending!] could be saved without adverse health consequences.”  And there is plenty of evidence, from the RAND Health Insurance Experiment and elsewhere, that plans with greater cost-sharing or care management reduce utilization without harming patients’ health.

I cannot fathom what has opponents of Medicare vouchers so spooked.  It cannot be the effects that vouchers would have on Medicare enrollees and taxpayers.

Tuesday Links

  • “Given America’s large-scale, long-term nation-building mission in Afghanistan, another chapter remains unfinished.”
  • It doesn’t make a lot of sense to refer to a government whose intelligence service assists military efforts by al Qaeda and the Taliban against U.S. troops in Afghanistan as an ‘ally.’”
  • “Terrorists are not superhuman.”
  • “Physicians must either make up for this shortfall by shifting costs to those patients with insurance — meaning those of us with insurance pay more — or treat patients at a loss.”
  • Is America in a libertarian moment?


Monday Links

  • “Sadly, in Egypt’s case, a freely elected civilian government may prove powerless in the face of the deeply entrenched and well-organized military.”
  • “Washington politicians from both parties, and bureaucrats, have for decades successfully decreased our freedom and liberties as they have regulated more and more of our lives, including our retirement.”
  • “The Ryan proposal correctly focuses on achieving debt reduction through spending cuts, but this very gradual debt reduction schedule is a weakness that could lead to its downfall.”
  • “Nearly two years ago Sen. McCain, along with Senators Graham and Lieberman, was supping with Qaddafi in Tripoli, discussing the possibility of Washington providing military aid.”
  • Cato media fellow Radley Balko joined FOX Business Network’s Stossel recently to discuss your right to make video recordings of police, and why exercising that right frequently is vital to liberty:


Tuesday Links

  • A bombing campaign by either Israel or the United States would rally the Iranian people to support an otherwise unpopular and incompetent regime.
  • What else will it take to rally the so-called fiscal hawks to the cause of reducing spending, balancing the budget, and averting national bankruptcy?
  • Senator Franken’s Pay for War Resolution is a superficially a step in the right direction; but when it comes to war, the Senate could probably easily rally a 60-vote supermajority to override any offset requirements.
  • It should be easy to rally around Paul Ryan’s Medicare choice plan, since seniors will lose benefits in the long run anyway.
  • Tax reform proposals are rallying back on both sides of the aisle–will any of them stick?


Why Should Social Insurance Reform Not Affect Those Over Age 54?

House Budget Committee Chairman Paul Ryan’s budget plan is ostensibly for FY 2012, but it contains reforms with far-reaching implications for the nation’s fiscal condition.

Most of the action in his plan is on the spending side and mainly on health care entitlements: Medicare and Medicaid.  Many pundits on the left are claiming it is a political document rather than a serious budget proposal, especially because it lacks details on many of its proposed policy changes. 

One thing that stands out, as pointed out by David Leonhardt in the NYT, is that Ryan’s plan exempts people older than age 55 from bearing any share of the adjustment costs.  They should, instead, be called upon to share some of the burden, Leonhardt argues — a point that I agree with.  If seniors are receiving tens of thousands of dollars more than what they paid in for Medicare, then they should not be allowed to hide behind the tired old argument of being too old to bear any adjustment cost.  Indeed, seniors hold most of the nation’s assets and a progressive-minded reform would ask them to fork over a small share to relieve the financial burden that must otherwise be imposed on young workers and future generations.

The numbers presented by Leonhardt are computed by analysts at the Urban Institute.  However, those numbers aren’t quite as one-sided as Leonhardt and Urban scholars suggest, because they only compare Medicare payroll taxes by age group to Medicare benefits.  A large part of Medicare benefits (Medicare’s outpatient care, physicians’ fees, and federal premium support for prescription drugs) are financed out of general tax revenues, not just Medicare taxes. General tax revenues, of course, include revenues from income taxes, indirect taxes, and other non-social-insurance taxes and fees.  Seniors pay some of those taxes as well — especially by way of capital income and capital gains taxes — but the Urban calculations fail to account for this.  That means that the net benefit to seniors from Medicare is smaller than Leonhardt claims in his column.  I don’t know whether it would bring the per-person Medicare taxes and benefits as close to each other as they are for Social Security, however. (See Leonhardt’s column for more on this point.)

Leonhardt also notes that Chairman Ryan’s proposal leaves out revenue increases as a potential solution to the growing debt problem.  Leonhardt argues that wealthy individuals (mostly large and small entrepreneurs) received high returns on assets during the last few years (pre-recession) and could afford to pay more in taxes.

But it would be poor policy to raise these entrepreneurs’ income taxes — that would distort incentives to work, invest, innovate, and hire in their businesses.  Instead, policymakers should consider reducing high-earners’ Medicare and Social Security benefits (premium supports under the Ryan plan) in a progressive manner, including allowing them to opt out of Medicare and Social Security completely if they wish to.

During recent business trips to a few Midwestern towns, I met several investors and professionals in real estate, financial planning, and manufacturing concerns, most of whom expressed their willingness to forego social insurance benefits during retirement.  So there seems to be some public support for such a reform of social insurance programs.