Arnold Kling  

I Don't Understand Mark Thoma

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He writes,


But focusing on the immediate problems brought about by tax cuts and military spending should not divert us from the more formidable problem of solving the escalating health cost problem. If Obama wins and tries to institute some form of universal care, it will be opposed as a budget breaker (and for other reasons), but I think universal care will help a lot in bringing down health care cost growth.

There is health care spending paid for by the private sector. Call it P. There is health care spending paid for by the government. Call it G.

The problem with G is that it is busting the budget. I do not understand how reducing P and raising G represents a solution. Even if you think that government can do health care more efficiently, you are still raising G and making the budget problem worse.

P can grow as a percent of GDP as much as it wants to, and be as wasteful as it wants to, without affecting the fiscal outlook. Only G affects the fiscal outlook.

What happens when you take people out of P and put them into G? You might make people's lives better (that's a separate disagreement). You might increase the overall efficiency of the health care system (another separate disagreement). But you do not improve the fiscal outlook. You make it worse.

I absolutely do not see how anyone can say otherwise.


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COMMENTS (22 to date)
ryan writes:

thoma, krugman, delong, and co. always talk about how social security is fine and the primary factor in the looming fiscal crisis is rising health care costs. this affects the fiscal outlook through medicare, a large government program. decreasing health care costs would lower the per patient costs of medicare; right now, those costs are assumed to increase, making the fiscal otulook look bleak.

presumably, legislation to create universal health care would have a funding mechanism, like a tax, attached to it, like nearly every other large-scale social program we've instituted. if universal health care lowers per patient medical costs, this new tax could be lower than current premiums, but higher than the cost of the system. this would improve the fiscal outlook.

another point these folks like to make is that the uninsured seek emergency room care, which falls on the federal government to pay. they usually say this cost falls on taxpayers, but we can think of it as "worsening the fiscal outlook" as well. if people don't go to the emergency room, which is more costly than seeking preventative or routine care, from my understanding, then this extra cost also disappears.

i think you are assuming thoma implied that a president obama would mandate a universal health care system with no funding mechanism, so the statement didn't make sense. i doubt this is what he was implying, and it's not what any advocate of universal health care is implying, either.

Arnold Kling writes:

Ryan,
I think you really believe what you are saying.

First of all, the odds of tax finance being cheaper than premium finance are not good. The dead-weight loss of taxation is at least 20 cents on the dollar.

But more importantly, there is no place for the taxes to come from. Look at the projected Medicare spending. It will absorb more than 100 percent of tax revenues in another generation or two at the rate it's growing.

I want the Krugmans and DeLongs of the world to make explicit their mechanism for keeping government health care spending under control. Right now, I'm seeing a lot of hand-waving.

Lord writes:

Assuming linearity and superimposability between the two is a very bad assumption. P can and does affect G and G can and does affect P. P is already paid for; transferring how it is collected and distributed does nothing to G in first approximation. It only changes if it becomes more or less efficient with more or less control.

Jonathan W writes:

My favorite question to ask anyone who favors a universal governmental run health care system is to query them to name a single government program or agency that can handle complex interaction of persons and technology as exists in modern health care (i.e.; doctor-patient, development-treatment, etc;)

Most persons almost immediately point to social security but then on quick reflection, say that the post office is a good indicator of how well a health care system could work, and even that does not settle well with the self-same proponents.
If I'm not mistaken with your previous posts Mr. Kling, you assert that P should grow to the extent of an individuals ability to pay without going bankrupt (simplification) and that G could exist as a form of backup, or catastraphic care plan which would form a rational rationing of P (if you will..) - fewer visits to the emergency room for a tummy ache etc.. In such a world both P and G would shrink and healthcare would, ostensibly become more streamlined.

If P ceases to exist and G assumes all liabilities, then consumption of health care will increase dramatically. Not does Thoma ignore the simple demand-side economics but fails to see that this will create budget excess in greater numbers every single year, until which time health care is rationed and not by the individual by choice but by the government to slow the growth of a system that will be nearly impossible (in truth not possible) to reverse.

Lord writes:

All one would have to do is adopt the healthcare system of any other country on the face of the earth since none spends anywhere near what we do. Especially considering ours isn't that great to begin with, more satisfaction and more efficiency are very possible. Actually creating a real market in healthcare could be extremely healthy.

Gary Rogers writes:

What if G disappeared altogether? I suspect we would find a way to survive. On the other hand, if we let G drive us into bankruptcy, the future is pretty bleak for everyone. Even aproaching retirement age, I am much more worried about the latter.

As an example of how things work without insurance, I found the hospital bill for when I was born. It was saved along with my birth certificate among my parents papers. It included 5 days in the hospital for my mother and me, anesthesia, infant care plus some other miscellaneous items. In 1948 the total was $69.74. I can guarantee that the services did not include all of the extras that are included in the maternaty package today, but when money is not readily available there are ways to save.

Dave Schuler writes:

Arnold, I think that Mark and other likeminded folks believe that the reason for the increases in G+P is adverse selection, which as best as I can tell is a mystical belief about the way that insurance companies do business which anyone who knows anything about insurance companies has reason to be pretty skeptical about. However, if they're right G after universal coverage might be less than G with universal coverage. As I say, it sounds like a mystical belief to me.

My own view is that since health care is a cartel neither eliminating adverse selection nor making health care consumers more sensitive to pricing signals will have much effect on the rising costs of health care. The supply of health care has stayed practically fixed despite obvious increases in demand.

Maniakes writes:

There seems to be a widespread belief among Obama supporters that transferring health care spending from P to G will slow down the long-term rate of growth of G+P to a managable level without harming quality of care. How this is supposed to happen has not been adequately explained to me.

Supposing this did happen, then it would be an improvement to the long term fiscal output, since the problem is less the current size of G than the expected long-term rate of growth of G.

Ajay writes:

I am actually fairly sanguine about future Medicare/government spending on current medical procedures, as I think the current medical system will be completely destroyed over the coming decades and replaced with something much more efficient. That means many current medical procedures will cost a fraction of what they do now. The fundamental problem with Medicare however is that it is a blank check for all future medical procedures. Suppose someone invents an expensive way to screen for back problems on a yearly basis starting in 2015, Medicare will no doubt cover that also. The reason to dismantle Medicare is not because of future extrapolations of current spending. The reasons are because it significantly distorts the private medical market and because it is a blank check for spending on future medical procedures.

And everyone, again, please stop with this P and G crap. This habit is merely one of the sciences being envious of the mathematicians and blindly emulating their methods, similar to a cargo cult. The use of single-letter variables in discussion only obscures thought and makes you look like an insecure academician, please don't do it.

a student of economics writes:

The evidence from other countries, as well as evidence within the US (e.g. the VA system, Medicare, etc) strongly suggest that G provides healthcare significantly more efficiently and effectively than P. Outcomes are better; costs are lower.

In that case, moving healthcare spending and revenues from P to G will "reduce health care cost growth".

QED

a student of economics writes:

Please cite a source for this claim:

"Look at the projected Medicare spending. It will absorb more than 100 percent of tax revenues in another generation or two at the rate it's growing."

According to the non-partisan CBO, as cited by the Federal Reserve Bank of San Francisco, the total Federal Budget, including Medicare, Medicaid, SS and everything else is projected to be less than 30% of GDP "under the assumption that current policies continue."

Here's my source:

http://www.frbsf.org/publications/economics/letter/2003/el2003-27.html


30% of GDP is about 9 percentage points more than today's share, but hardly infeasible.

ryan writes:

i'm still trying to figure all of this out. i agree that i'd like more specifics on the mechanism through which costs go down under a government health scheme, but i'm still struggling with this argument. here's my reasoning:

Let's say that today, P = $80 zillion and G = $20 zillion. P = Pr (insurance premiums, cash transactions, etc.) and G = .8*T (to use the 20 percent dwl figure you cite).

Let's also assume that government health care is more efficient, because if it isn't, then the whole argument is ridiculous:
OVERALL US HEALTH = .5*P + .75*G

This means the US is spending $100 zillion for $55 zillion worth of health.

Now, let's make G = $100 zillion and P = $0. This means the US is spending $125 zillion for $75 zillion worth of health. (Or, to keep health constant at $55 zillion, the total health bill would be around $90 zillion). Either way, we're getting more health per dollar spent. We're just spending more in the second one, so that we can cover more people (which, as you say, is a different argument).

Now, the fiscal picture doesn't look all that rosy. If we put all the inefficiency in the model on to the bad side of the government balance sheet (inefficiency in the private health care market showing up there in the form of emergency room bills, etc.), then we go from a deficit of $49 zillion ($104 zillion - $55 zillion) in the first scenario to a deficit of $50 zillion ($125 zillion - $75 zillion) in the second. Not a big increase, but certainly not a decrease. If, as Thoma suggests, though, the coefficient on G is an increasing function of G, then the fiscal picture actually could look better.


Obviously, these results depend on the coefficients i picked for deadweight loss of taxes and government-provided health care's relative efficiency (and the form of the function i described). Nonetheless, the argument we should be having is trying to determine the correct magnitudes of those figures, and embracing the complexity of the issue, rather than the accounting exercise you posted here. let's hold their feet to the fire to describe the mechanisms, and not pretend such mechanisms don't, and can't, exist.

Lord writes:

The best thing I have ever read on the subject was a comment on DeLong on Waldmann, http://delong.typepad.com/sdj/2008/07/robert-waldmann.html, http://delong.typepad.com/sdj/2008/07/robert-waldmann.html

To quote the last point:

5.) THE MOST IMPORTANT POINT: I am always amazed at the discussions by American economists, political scientists, health care providers, health care theorists, and politicians about health care and the question of what will work. This discussion is similar to someone debating how to manage infectious diseases but pretending that they have never heard of antibiotics or that antibiotics are a strange and questionable development. The answers to how to make health care work are on the shelf. They have been discovered by everyone else in the developed world. They have been shown to work well in general and specifically to work much better than our system both economically and medically. We are at the bottom or near the bottom in terms of health care performance in the developed world and at the top in terms of health care costs by a wide margin. To deliberately pretend that there is a question as to what would work better than our system is to literally bury our heads in the sand. Conservative politicians of all stripes, and the insurance companies, pharmaceutical companies, HMO’s, medical equipment providers and others who realize huge profits from our current mess of a system (at the expense of both patients and the economy) are only too glad to encourage this behavior, but it is disappointing when people who should know better play along.

Glen writes:

student,

Do you mean that P is more efficient and effective? If not, could you please provide what information your talking about.

Jim Glass writes:
Please cite a source for this claim:

"Look at the projected Medicare spending. It will absorb more than 100 percent of tax revenues in another generation or two at the rate it's growing."

The CBO says to keep even with current promised spending will require a 50% across-the-board income tax increase (or equivalent) by 2030, a 91% increase by 2050 and a 150+% tax increase (17.1 points of GDP) by 2082. A 100% tax increase may be considered equal to "100 percent of tax revenues", I believe.

In 2030 this cost is basically two-thirds Medicare and one-third Social Security, then SS stabilizes and all the rest of the rise is basically Medicare.

The CBO numbers are digested here with links to the original CBO report and other relevant primary sources.

"about 9 percentage points more than today's share, but hardly infeasible."

It's 17 points of GDP by 2082 -- but let's forget that impossible number and just look at 2030, only 22 years away.

By 2030 a 6.1 point of GDP tax increase is necessary. Feasible? Infeasible? Let's compare to past tax increases. It's ...

[] 25 times the size of the 1983 tax increase enacted to save SS the first time it went broke -- which paralyzed Washington politics until the last moment, and was matched with exactly equal dollar sized benefit cuts as part of the compromise to get the tax passed.

[] Seven times larger than the Clinton tax increase that passed the Democratic House by one vote and Democratic Senate only on a VP tie-breaker vote.

[] 20% larger than all the taxes enacted after Pearl Harbor to fight World War II.

You know, 2030 isn't so far away. And that's just the start of the hikes, with more and more coming forever after....

Anybody who thinks we're going down the road of tax increases on this scale that are simply going to get themselves enacted without offsetting major future program cuts and means-testing -- exactly as happened with SS in 1983, for the same political reasons -- is delusional from smoking too much weed.

I hope from smoking too much weed -- otherwise that person is just plain delusional.

I don't know if Krugman and DeLong smoke weed. ;-)

Jim Glass writes:
First of all, the odds of tax finance being cheaper than premium finance are not good. The dead-weight loss of taxation is at least 20 cents on the dollar.

I have never heard anyone in the DeLong -Krugman "throw our small (sic) government overboard" (from DeLong's recent post on Medicare) camp mention "dead-weight loss of taxation" even once.

Gee, doesn't that loss also increase not just with the tax rate but by the *square* of the increase in the tax rate? Aw, don't mention it.

I did see Krugman tell the Asia Times that he thinks the US govt should be collecting 28% of GDP in revenue today, right now. That's equivalent to a 90% across-the-board income tax increase.

Minimum, assuming no loss to anything like "deadweight cost of taxes", which he didn't mention.

He also didn't mention how he was going to "save", oh, 7 or 8 points of GDP annually for future use. Maybe in the Social Security trust fund? ;-) (Nor, proud Keynesian that he is, did he mention "fiscal drag" ...)

Curiously, he says we need a 90% income tax increase today to the Asia Times, but he's never said it right here in his own column. Isn't that odd?

In this election year, while setting future national policy, shouldn't he be saying from his influential post at the Times...

"We Democrats should be openly embracing in this election the 90% tax increase right now that our policies call for, for starters, to pay for the Medicare and Social Security we all so value, so we won't have to pay even more for them later -- and once we settle that issue we can move on to enacting national health care and finding the additional taxes to pay for it..."

That would be a winner, right? Endearing him to Obama and Harry and Nancy.

It sounds like I'm being sarcastic -- but on the course we're taking, it IS coming, sooner or later. Not so much later, in fact, starting no later than the 2020s.

muirgeo writes:

When you move P to G some of the high paid paper pushers in P now have to look for jobs actually providing health care rather then spending all their time trying to figure out how to deny it. With P in G paper pushers will be transformed into orderlies pushing patients, or maybe they'll be pharmacist pushing pills, or nurses pushing meds...but no more pushing paper for profit ....much more efficient.

Jody writes:

high paid paper pushers in P

What? There's not high paid paper pushers in G?!?

macquechoux writes:

Mark answered your criticisms today over at Economist's View. As one who reads both your and Mark's blog on a daily basis I would greatly appreciate your opinion of his latest post. As someone who spent the last nine years of my semi-retirement providing software & support for municipalities and other government agencies I tend to share your fear of government administered programs.

muirgeo writes:

"The problem with G is that it is busting the budget." AK

If this were true then your post would have some merit. But the claim requires ignoring all the other aspects of the budget that may be "busting it".

As far as budgets go I know of many family budgets that have been busted by P. I know of no family budgets or governmental budgets that have been busted by G.

If the concern is busting budgets increasing G while deleting P will save many budgets and bust none.

But also I believe the main point of Mr. Thoma post was not specifically about budgets and was more on overall efficiency and delivery of health care which 30 other developed nations experience suggest will be improved by a national health care policy. And curiously none have busted budgets.

Snark writes:
The evidence from other countries, as well as evidence within the US (e.g. the VA system, Medicare, etc) strongly suggest that G provides healthcare significantly more efficiently and effectively than P.

I'd like to see sources cited for this claim (particularly with regard to VHA), because most of the investigative studies I'm familiar with don't even come close to describing a "more efficient and effective" model of healhcare provision.

Chris writes:

My mother works for a cardiology office that does a fair bit of Medicare work. They can do procedure X for $400, the hospital can do it for $850.

Medicare is reducing the payment to her outpatient service to $375 this year and raising the hospitals to $900. This is the exact same service and the clinic has a better success rate.

All that expanding government healthcare is going to do is increase the special interests involvement in the process - it isn't going to be about reducing costs, but deciding who is going to become wealthy at taxpayer expense.

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