Bernanke Prods Reform in Medicare, Social Security

Fed chief Ben Bernanke finally says what I've been saying for years: Medicare and Social Security are going to bankrupt this country if we don't do something soon.

Mr. Bernanke noted that the economy was still fragile, and he made it clear that he did not expect the federal government to raise taxes or cut spending anytime soon. But he spoke about the budget pressures posed by Social Security and Medicare with greater urgency than he has in the past.

“The arithmetic is, unfortunately, quite clear,” Mr. Bernanke said. “To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above. These choices are difficult, and it always seems easier to put them off — until the day they cannot be put off any more.”

Democrats don't want to cut benefits, and Republicans don't want to raise taxes, but something must be done before it is too late.

Bernanke also commented on the Fed's response to the financial crisis, and added his two cents on financial reform.

“To end ‘too big to fail,’ the new regime should permit regulators to close a failing firm and impose losses on shareholders and creditors,” he said. “Indeed, I would argue that no financial instrument counted as regulatory capital should be allowed to receive any protection from losses.”

He's talking a good talk, but thus far it's only talk. We'll see if he practices what he preaches.

The Price We Pay For Medicare

A new public option idea is brewing, wherein people can buy into Medicare.

Representative Alan Grayson last week introduced a bill which would allow any U.S. citizen the option of buying a health insurance policy from medicare at cost.

Some facts about this proposal:

-It would not cost taxpayers anything. Those opting in would be paying for their own coverage, in addition to the taxes they pay currently.
-It is totally optional. People who like their private insurance are under no obligation to participate.
-It would actually decrease the cost of Medicare by expanding the risk pool to younger, generally healthier people.

-It has no government pork, earmarks, or kickbacks whatsoever. It is a simple, four page bill that anyone can read and understand.

While this idea has some merit, as in the government does not subsidize the cost of the health insurance. However, Medicare itself is in desperate need of an overhaul.

The annual price we pay for Medicare doubles every 4 years. Hardly a success story, and hardly a model we want to expand to everyone in America. Medicare's effects also expand far beyond it as well. Many doctors break even or lose money on Medicare patients, and they must make up this difference by overcharging the uninsured and private insurers. Private insurers then pass this extra cost on to employers. Employers then pass this extra cost on to employees.

In America, roughly 60% of people are covered by employer based health insurance. On top of that, Medicare covers another 15%. That leaves 25% of Americans in the "free" market, including the 15% of Americans who are uninsured. That leaves 10% of people who actually buy unsubsidized insurance on the "free" market. This segment of the population is too small to greatly influence the market, and they bear the full costs of their insurance. This also means that 60% of Americans, those covered through their employer, are thrice removed from the costs of their health care: once by insurers, twice by employers, then three times by the tax exemption.

As you can see in my diagram, institutions like Medicare and private insurers deal most directly with doctors and hospitals, setting coverage and prices. However, these institutions do not have to bear the full cost of these prices, as they are subsidized by tax dollars. Private insurers are further insulated from the market in that they mainly deal with employers, not individual policy holders. As such, a bad decision by a private insurer is not felt by their customer, the employer, but rather by the employee. This is a system ripe for abuse and inflation.

Overall, costs are shifted to the people with the least amount of decision making power, i.e. taxpayers, employees, and individual policy holders. Taxpayers and employees have almost no say in their health insurance choices, and because individual policy holders are such a small group, they are at the mercy of the larger market.

So now you see why it is a misnomer to classify our health insurance system as a "free market," since only 10% of Americans participate in anything that could even come close to being called a free market, as they are the only group who even knows how much their insurance really costs. The rest of the market is the result of a series of subsidies that create a system wherein people with money decide how much to pay other people with money, and the rest of us have to cough up the cash to fund these decisions.

Now, obviously Medicare is not the only problem. The other major problem is the tax exemption employers get when they offer insurance. This encourages the arcane practice of employer based health insurance, which through it's separation from supplier and consumer allows more inflation in this most critical of markets. But Medicare is still part of the problem, and should be reformed before any expansion of government health insurance.

For more information, I highly recommend This American Life's show on how our health care system came to be.

Fix Medicare First

As the health care battle rages on, we take time to look back at the last major federal health care plan, the $600 billion-a-year elephant in the room: Medicare. Why should we look at Medicare you ask? Because Medicare, you may be intersted to know, was broken before it even started, as is clear in this interview with Joe Califano, the major decision maker of LBJ's 1965 Medicare initiative:

Mr. CALIFANO: By late '67, the budget data was just stunning. I mean 1968, we knew that system should be changed. We asked Congress for authority to change it.

JOFFE-WALT: But you just created it.

Mr. CALIFANO: I know it. But we saw what was happening with costs so fast. So fast.

KESTENBAUM: But they couldn't change it. Doctors now like the system. They were getting paid for work they'd previously done for free. And that was that. This system, with all its problems, stayed in place for almost 30 years. Meanwhile, medicine got more expensive.

The fee-for-service model that Medicare cemented into practice drove costs up so fast that within 2 years even President Johnson exclaimed that they needed to rework the payment system. They never did.

There have been some band-aid solutions proposed here and there, but despite its fundamental flaws, most of the original Medicare model is still in place. It is still causing medical costs to skyrocket, and the cost of Medicare itself doubles every four years.

So to all you would-be health care reformers, before you go mucking with the rest of the system, how about you fix Medicare first.

Health Bill's Medicare Cuts are Wishful Thinking

The Democrat Health Plan now working its way to the Senate is being marketed as deficit reducing, despite its $1.2 trillion price tag. The plan will be paid for by increased taxes and reduced Medicare payments.

Specifically, the plan calls for $426 billion in spending cuts and $572 billion in taxes, and is projected to net a $104 billion deficit reduction over 10 years.

The proposed cuts are likely to be short lived, as Congress has a history of proposing Medicare spending cuts, then abandoning them as medical interest groups turn up the heat.

Under both Democrats and Republicans, Congress repeatedly has waived curbs it has tried to place on spending. It has given back other savings from the 1997 law to hospitals, skilled nursing facilities and other providers, most notably in 1999. More recently, Congress has twice switched off a cost-saving trigger that was contained in a 2003 bill establishing a Medicare prescription-drug benefit. Congress also frequently has waived budget resolution limits, as well as pay-as-you-go rules requiring offsets for tax cuts and entitlement spending.

Since 1997, Congress has passed five Medicare spending cuts, only to repeal all five shortly after they went into effect.

A plan that cuts Medicare spending by half a trillion dollars is wishful thinking. Do not be fooled.

Facts About Health Spending

America spends more than any other country on health care, and this spending rises every year. So here's a breakdown of our National Health Expenditure (NHE).

• NHE grew 6.1% to $2.2 trillion in 2007, or $7,421 per person, and accounted for 16.2% of Gross Domestic Product.
• Medicare spending grew 7.2% to $431 billion in 2007, or 19 percent of total NHE.
• Medicaid spending grew 6.4% to $329 billion in 2007, or 15 percent of total NHE.
• Private spending grew 5.8% to $1.2 trillion in 2007, or 54 percent of total NHE.
• Hospital expenditures grew 7.3% in 2007, up from 6.9% in 2006.
• Physician and clinical services expenditures increased 6.5% in 2007, the same rate of growth as in 2006.
• Prescription drug spending increased 4.9% in 2007, a deceleration from the 8.6% growth in 2006.
• At the aggregate level in 2007, businesses (25 percent), households (31 percent), other private sponsors (4 percent), and governments (40 percent) paid for about the same share of health services and supplies as they did in 2006.

Many people claim we need a larger government presence in health care to control costs, but the government programs of Medicare and Medicaid already account for 34% of all health spending, and costs continue to spiral out of control. In fact, spending by the government increases significantly faster than private spending.

We already have a third of our health care industry supported by the government, how much more do we need before we accept that more government is not the answer?