Arnold Kling  

Thoughts on Medicare

Twilight of My Liberal Idol... Elasticity Bleg...

Megan McArdle writes,

My (partial) list of the interesting questions:

1. Is Medicare well structured to provide good health care to the elderly?
2. Is Medicare encouraging today's workers to save less than they will ultimately need? In other words, is the program likely to be severely curtailed in the future, leaving workers who counted on it worse off than they would have been had it never existed?
3. Is Medicare encouraging, or discouraging, the medical innovation that could make future generations better off?
4. What is the deadweight loss of the taxation required to pay for Medicare, and does this represent a good use of our money?
5. Is this massive transfer from old to young just? Does this answer change if it turns out that future generations are likely to massively trim the program?

My answer is that Medicare is a bad program on many fronts: badly structured, economically and medically destructive, and a fairly injust transfer of resources. But none of those things have anything to do with eye-popping NPV figures. A bad program doesn't become a good program just because it's cheap.

She is suggesting that we should take one of my favorite arguments about Medicare, that it is the fiscal equivalent of the Titanic, off the table. I can see her point.

As a matter of economics, I think that the weak points of Medicare are its savings-discouraging and deadweight loss aspects (points 2 and 4 in Megan's list of questions).

The main benefits of Medicare are psychological. For old people to worry about medical expenses is very stressful. My mother-in-law could afford to pay for all of her medical care herself. But one could argue that at the margin she would suffer more psychological discomfort from doing so than would the younger, less affluent people whose taxes are taking care of her.

I am not enough of a paternalist to beat the drum for this psychological stress-transfer story. But I suspect that when all is said and done, it's the best (only?) thing that can be said for Medicare as we know it.

Comments and Sharing

COMMENTS (17 to date)
Dr. T writes:

I agree with all of Arnold Kling's points, though I believe that the adverse medical effects of worrying about bills is overstated. I have observed among many elderly an excessive concern with leaving an inheritance. The "I'm spending my children's inheritance." attitude is rare.

If we are to eliminate Medicare, most people will need to fund a post-retirement healthcare investment account. Then they will be less worried about medical expenses, and, since the money is 'earmarked' for healthcare, they will not feel guilty about depleting their estates.

Bill Drissel writes:

Modern medical is one of our greatest blessings. Why anyone would want to risk it by contamination with government is more than I can understand.

Bill Drissel

Matt writes:

We have to deal with quantum effects on the left side of the income distribution.

Under the quantized wealth theory, the poorest among us have the minimum unit of wealth, and the next unit of wealth makes them twice as wealthy as their neighbors. Poor communities using local exchange markets have volatile times dealing with neighbors who are suddenly twice as wealthy, though still poor. But, quantization is probably correct, and probably explains the highly volatile nature of being poor.The authors mentions this quite extensively.

Micro-credit attempts to provide the next unit of wealth over time, again, the innovation is to make up in time the deviation from the norm that the next wealth addition causes.

Matt writes:

Typical mistake, belong on the micro-credit posting!

Floccina writes:

IMHO Medicare makes no sense.
1. The least effective medical care spending is that spent on old people.
2. Since the rich tend to live much longer than the poor
3. The most effective care in to infants.
4. Many old people do not even aspire to live longer but accept the care because it free and the Doctors take control at some point.
5. In the current formulation Gov. does not have much pricing power.

I sometimes wonder if we need religious organizations to handle care at the end of life because we (the young not necessarily the old) seem unable to handle the death of loved one.

Dan Weber writes:

For people trying to finance their retirement, health care is always the big unknown, because it can (and almost assuredly will, barring accidental death) rise tremendously.

And it's very hard to insure against this by buying policies on the open market, since the risk is so high.

Floccina may have a point that health care dollars spent on the elderly are poorly spent, but it would be political suicide for anyone to even hint at that.

shayne writes:

There is a perspective of the U.S. health care system that I have rarely, if ever, see applied to discussions of this subject. The U.S. health care system is currently, and has been for more than 30 years, in what could be termed a build-out mode. A great deal of national income is and has been diverted to the health care industry - both from governmental programs such as Medicare/Medicaid and from voluntary diversion of returns to labor in the form of employer paid health insurance.

The net effect is that the baby boom generation that has produced the national wealth of the last 30 years or so have also funded this health care system build-out, if only through tolerating current income diversion, in anticipation of the surge load that generation will place on the system in the future. It is now, as that generation begins to become an increased load on the health care system they've funded, that the U.S. begins to truly test whether the build-out was adequate.

The value to economists and others of applying this perspective is multi-fold:
First, the baby boom generation has already paid for the overwhelming majority of the U.S. health care system build-out, in anticipation of their own future load to the system, out of their past/current earnings. The current health care system is far more capable, in terms of capacity, quality of care and availability, than would have been the case had the baby boom generation not tolerated income diversion to that purpose.
Second, most discussions/projections anticipate that the health care system build-out phase (cost increases) will or should continue at a similar pace in the future. That is probably not the case. The current system will be transitioning from build-out to maintenance phase, which can and will be less expensive than the build-out phase. That transition may be "forced" to some degree due to the income production capacity of the younger generations and their tolerance for income diversion, as indicated by Megan and others, but I doubt that the catastrophic projections are realistic.

One of the lessons I learned from Arnold's "Crisis of Abundance" is that most of the current U.S. health care system is under-loaded at current demand. Each of the citations of excessive procedures, duplicative procedures and other apparent inefficiencies are artifacts of a current system that has excess capacity. That excess will become fully loaded and consumed as the baby boom generation retires. But it is highly unlikely that further capacity expansion will be desirable - the future income diversion will most likely only be to maintain, not expand the system.

spencer writes:

Shayne -- interesting analysis. Where can I see more about this point?

shayne writes:

To spencer:

I wish I could refer you to other sources - as I indicated, I have not seen this perspective addressed in any debate, discussion or writings on this topic, other than my own. I was tasked with preparing a final paper for a graduate ethics course and selected health care as a topic. Arnold's "Crisis of Abundance" was one of the most valuable sources I used for the paper, and as I indicated, many of the inefficiencies Arnold cited struck me as being artifacts of a system that is currently operating with excess capacity. (Sorry, I've spent many years as a system engineer, so I tend to recognize/evaluate things in those terms.) The questions that I addressed were how did we get to an excess capacity system in the first place (how and why did it evolve) and will it be excess or adequate capacity in the future?

In any event, this strikes me a valuable perspective to apply to the analysis of current and future situation of U.S. health care system, future projected load, and future projected funding. I don't wish to minimize the severity of the subject, but I suspect that much of the current analysis and discussion suffers from static and conventional perspectives, i.e., the U.S. probably doesn't need to divert as much of it's future earnings to increasing capacity. To an increasing degree, it will be required only to sustain existing capacity.

Also, I recognize the subject as being horribly complex. There are far more nuances to consider than what I've discussed here. That is similar to the problem Megan eluded to in her forum - folks typically won't allow the space required for full treatment.

spencer writes:

Question to Arnold on Medicare.

One of the points made about Medicare is that because it is a third party payee it encourages excess demand for medical care. But wouldn't this actual encourage medical innovation because there would be a smaller resistance to trying new innovations?

At a minimum I would find it hard to see why Medicare discourages medical innovation significantly more or less then private insurance would. Private, profit driven insurance should be more concerned with the effectiveness of new innovations then Medicare. If so, this would seem to discourage innovation.

Lord writes:

Since few of the young believe Social Security will be around, the idea Medicare could induce reduced savings is ludicrous. Medicare, if anything, is the institutionalization of value the wealthy place on living longer. Most of the poor won't live long enough to benefit from it substantially, but only through future generations when costs of advanced treatments fall significantly. Medicare provides a vast subsidy to innovation, large portions of which would never take place without it to cover overhead. It doesn't offer the best use of money for the most people, but by far the best use for the wealthy. Is this massive transfer from old to young just? (Got that one right I see) It is their future, and if that is way they see best to spend it, it just shows how wealthy we all are.

Arnold Kling writes:

My presumption is that Medicare increases innovation, because it increases demand. There may be some subtler, second-order effects that I have not considered.

In other countries, government-funded health care is strongly biased against innovation. But I do not believe that is the case here.

Bill Drissel writes:

Shortly after my post above at 2008.1.9, 8:35pm, I read Stephen Goldberg’s account of the sclerotic bureaucracy at Indiana’s Family and Social Services Agency that caused two million unnecessary office visits by the state’s “neediest citizens”. Goldberg: [The state employees] “lacked the critical skills necessary to handle the agency’s transformation”. See:

Look at the bungling (probably illegal) incompetence described in Daniel J Bernstein’s experiences at:

The important points here are that (see Buchannan) the internal goals of the bureaucrats replace the external goals of the legislation and public interest. The bureaucrats cannot fix the problems of bureaucracy.

Do we really want our children’s health care to come from the Post Office or the Bureau of Indian Affairs?

Bill Drissel

brooksfoe writes:

[Comment removed pending confirmation of email address.--Econlib Ed.]

MarkT writes:

Thanks to Shayne for a very insightful analysis.

I agree with Bill Drissel's points in many contexts but I don't think they are directly applicable to Medicare which at the governmental level is - relative to other agencies - efficient in what it does.

In contrast to the McArdle post, I do think it is legitimate to worry about the fiscal implications of even a good program. By way of analogy, national defense is a good program and seems to work well in defending the country but it is a fiscal nightmare and we are no doubt spending more than we need.

shayne writes:

Spencer, MarkT:

Thank you for the kudos, but I should acknowledge that the perspective I offered isn't an analysis, it is merely a (unique) perspective from which to approach an analysis. Perhaps I can restate it in a bit more analytical fashion: it strikes me that much of the discussion assumes the current U.S. health care system to have a future value of zero. The stated NPV of future, baby boomer health care costs (~ $55 Trillion) assumes not just the complete replacement costs of the current system (capacity, availability and quality), but a doubling or tripling of capacity. While that may follow from governmental accountancy rules, I'm not convinced it's realistic for economic analysis.

I did review Megan's questions above, in light of my perspective and would offer the following responses:

Questions 1. and 2) Medicare isn't providing health care, the health care system (existing and future) is providing it. Medicare merely helps offset part of the costs of care. Additionally, neither Medicare nor Social Security were ever intended to provide for the full load of either retired health care costs or retirement, respectively. They were envisioned to provide only basic, sustaining level support. Beginning an analysis, or even discussion, of Medicare's future outlays under the assumption that Medicare alone, under future worker support alone, is not realistic. The more relevant question is, can the current health care system - in terms of capacity, availability and quality - service the future demands of the baby boom generation load? Applying the build-out versus maintenance level cost difference perspective, it isn't likely that current build-out cost rates are sustainable (the fiscal "Titanic" Arnold alluded to), but it is likely that future maintenance cost rates will be. It's not likely that a great deal more build-out is even desirable - reference Dr. Kling's "Crisis of Abundance".
Question 3.) The fractional contribution of Medicare outlays to the health care system build-out to date have already covered a commensurate portion of "innovation" cost. As stated in the earlier post, the baby boom generation is already "better off" for having funded the build-out via previous and current diversion of returns to labor. To some degree, a transition to a "maintenance" funding level for the U.S. health care system will degrade the rate of medical advance, but the real issue is whether the system can provide adequate capacity, availability and quality.
Question 4.) I'm unconvinced that there is or ever will be a dead weight loss. The baby boom generation has already (via forced [Medicare] and voluntarily) funded the build-out to date through previous and current diversion of income - marginal cost and marginal benefit balance, or will when the boomer generation loads the system. The generation X and Y contributors have current access to the increased capacity funded by the previous generation as do the living parents of the baby boomers - current benefit, with little direct cost. In the future, when the baby boom generation becomes a load to the system, Gen X and Gen Y will at least not be exposed to the majority of the build-out costs.
Question 5.) This question is only valid if one assumes a perpetual rate of cost increase commensurate with current build-out rate rather than transition to maintenance cost levels. The question of what is "just" isn't relevant, nor is an assumption of "massive [cost] transfer from old to young." The assumption is defective in that it assumes the future value of the investment-to-date in the existing U.S. health care system is zero. Yes, it would be "unjust" to burden gen X and gen Y with the total costs of supplying all capacity, availability and quality of boomer health care, but that isn't the case. Most of it (at least capacity/availability build-out) has already been paid for - by the boomers themselves. The NPV estimate of $55 Trillion assumes all current capital stock investment in the U.S. health care system would not only have to be completely replaced (at future cost), but doubled or tripled over the next 30 years or so. I'm not convinced that is the case.

Regards Medicare - the program itself doesn't appear to be defective, but propagating the notion that it was, is or ever could be the sole source of health care funding is defective. Also defective is the approach of performing an economic analysis of the subject solely on the basis of governmental Medicare accountancy rules - ALL current costs, for ALL current recipients are borne exclusively by ALL current labor, for ALL of eternity, in addition to the assumed zero future value of the present system. The problem is with the governmental accountancy system (and defective underlying assumptions), not the health care system.

Contrast the capacity, availability and quality of the U.S. health care system with those of the European, centrally planned systems. Over the previous 30 years or so, with a mandated, fractional payroll Medicare contribution and the balance as voluntary contribution, the U.S. has built a health care system that currently suffers from a "Crisis of Abundance". Conversely, the centrally planned European health care systems, over the same period of time, and through far larger mandated income diversion, has evolved a health care system that is overloaded at current demand and is deemed to be wholly incapable of addressing Europe's projected boomer generation load.
As Clive Crook stated, "God help Western Europe." He seems to be stating that, if the future U.S. is "No Place for Young Men", as Megan believes, Europe shouldn't be considered an attractive alternative. I agree. I would add, "God Bless the American Boomers."

Jon_Smackenrow writes:

British Health is like British Dental Care. Ya, the British have teeth but...

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