Arnold Kling  

The Health Cost Narrative is Incomplete

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The Case for Brain Drains... Raise the Age...

Stare at the following table, which gives population projections for the elderly in the United States, in millions.

Age Group200720202030
65-7419.332.338.8
75 +18.622.533.3

Source: Census Bureau International Population Data Base.

Over the next twenty years, we are going to double the number of people aged 65-74, who get their health care paid for by Medicare. And we are going to nearly double the number of people aged 75 and up, where medical expenses get really high. The Medical Expenditure Panel Survey, for which the most recent data available are from 2007, shows average spending in the 75+ age group of $10,500 per person.

If you double the number of beneficiaries, you have to cut the amount of money that you spend on each beneficiary. Now the Republicans are wrong to attack cuts in Medicare benefits. But the Democrats are even more wrong to suggest that cuts in Medicare benefits can be used to fund new subsidies. Cuts in benefits are needed to enable Medicare to survive a doubling of the population of beneficiaries.

Moreover, the cuts in Medicare benefits need to be very large. To a first approximation, if you hold the budget constant and double the number of beneficiaries, then you need to cut benefits by 50 percent. The cuts in benefits need to be genuine, not phony. The health care bill contemplates cutting reimbursement rates to doctors and other health care providers. That mechanism has a track record of being phony, with Congress voting to override such cuts.

The most important facts in health care policy are not the number of uninsured, the international comparisons of health care, or the measures of "excess cost growth." The most important facts are the numbers in the table above.

Stare at the table.


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COMMENTS (10 to date)
david writes:

A 65 year old in 2020 will be much healthier than a 65 year old back when Medicare was rolled out. Raising the age categories upward to retain the same worker-recipient ratio is probably the legislative path of least resistance (the people most aggravated will be those nearly 65, presumably).

JPIrving writes:

I wonder what the savings would be from a nation wide propaganda campaign extolling the virtues of the paleodiet...

Some big fraction of age related illness and frailty are easily avoided by simply learning a bit about nutrition and fitness.

B.B. writes:

With all due respect, Mr. Kling, I think you are wrong.

I invite you to look at the CBO long-term budget projections, or the GAO's projections.

Medicare spending as a share of GDP will surge for three reasons:
(1) relative increase in size of elderly population;
(2) rising volume of medical care per elderly person for each age-cohort;
(3) rising relative price of every item of medical care.

According to you, (1) is the most important factor.

According to CBO and GAO, (2) and (3) are the most important factors.

The reason we can fix Social Security with a moderate tax hike but can fix Medicare with only a huge tax hike is that Social Security spending is driven by (1) alone, but Medicare is driven by all three.

Arnold Kling writes:

B.B.,
The outlook for 2080 may be dominated by excess spending. But I am talking about the outlook for 2020 adn 2030. There it is dominated by demographics. See Keith Hennessey.

ben writes:

@david
Why will a 65 year old be healthier in 2020? Our obesity levels have gotten dramatically worse than in the past, and with that comes a lot of expensive chronic diseases.

Also the ability of people to work at ~65 is very bimodal, a lot of office workers can continue without too much burden, a lot of more manual workers, especially those who smoke, have can't so easily.

Thirdly, and admittedly I haven't run the numbers, can we really keep the worker-recipient ratio from a significant change with any sort of reasonable change to the retirement age?

Douglass Holmes writes:

We have raised the age for full Social Security but the age for Medicare is the same as it was when Medicare was first passed. This is not sustainable. There will be many people who live to be 100 and beyond. These people will spend nearly as much time on Medicare as they did on private health care, if private healtcare survives.

Keith Beacham writes:

Mr. Kling,

Is it unreasonable to imagine a future where gains in productivity, liberalization of licensure policies and a reduction in the costs associated with clinician training conspire to dramatically reduce the cost of medical care? We are discussing a problem 30 years out.

Chris Koresko writes:

@Keith Beacham,

You beat me to it!

Of course tmeasures with the potential to significantly improve productivity in the medical sector tend to run into entrenched interests. I suspect that is why the Obama/Reid/Pelosi approach contains little or nothing in that direction.

If memory serves, one prominent politician explicitly admitted in print a few months back that the absence of tort reform was due to fear of lawyers.

It seems to me that the rapid increase in medical costs must stem from the combination of restrictions on supply (AMA rules, FDA regulations, etc) coupled with enormous government-fueled demand, lawsuits and measures taken in fear of lawsuits, and a generous helping of outright fraud.

Has anyone published a careful study comparing the inflation rates for medical procedures covered vs not covered by Medicare? By any insurance? My expectation would be that where the consumer is insulated from the cost the inflation rate would be higher than for medicine paid for out-of-pocket, and a tiny bit of anecdotal evidence (the price and quality of laser refractive eye surgury are both improving over time) seems to support this.

Jeremy, Alabama writes:

Keith B.

I recall Arnold had an article, I think from his TCS days, that described medicare/caid growth in terms of a race against productivity growth.

I believe at the time he was optimistic. I gather he is less optimistic now. I agree. Productivity growth is easily damaged by tax policy, and we appear to have crossed a permanent threshold of high taxes, deficits and stagnation.

The prospect of growing our way out of this problem was a pleasant chimera while it lasted, but I fear we have killed the golden goose. All the remaining options are hard.

Keith Beacham writes:

Chris Koresko.,


If by;

“It seems to me that the rapid increase in medical costs must stem from the combination of restrictions on supply (AMA rules, FDA regulations, etc) coupled with enormous government-fueled demand, lawsuits and measures taken in fear of lawsuits, and a generous helping of outright fraud.”

you mean that human actors impose costs and friction on the smooth operation of markets, I agree. It is my belief that this condition is a constant and though improvements can be made at the margin, human evolution moves far too slowly for anyone to expect dramatic change.

It is ruthlessness and efficiency with which technology dispenses with witch doctors, vinyl records and gas lights that interests me.

Example: Software packages are quickly rendering pharmacists little more than over paid store clerks. Sure, they are at present protected by both state and federal regulation but this may be the only leg with which they have to stand. Consider this; Walgreens pays personnel 120K to enter prescriptions into a system that cross checks for interactions and contraindications. This software has gotten so sophisticated that it even displays a color picture of both sides of a pill or capsule in order to reduce errors. At what point does some management consultant instruct Walgreens to petition government to liberalize the regulation that requires pharmacists? How far will Rite aid and CVS be behind them?

My point is that technology and productivity gains do not negotiate with entrenched interests they destroys them. These gains don’t follow a linear progression, they leap.

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