December 15, 2013
How to Control Entitlements, Especially Medicare
How to Control Entitlements, Especially Medicare-Becker
Everyone agrees that government spending on medical care and social security has been on a trajectory so that it could well become a major drag on the United States' economy. The Affordable Care Act (Obama Care) was supposed to slow down entitlement growth, but it is far from clear at this point how it will accomplish this since spending on Medicaid will expand significantly. I concentrate my discussion of entitlements on spending on the elderly, and propose ways to reduce this spending without any significant additional rationing of care.
Estimates of future spending on Medicare, the main government program for medical spending on persons over 65, indicate that it will rise by 2035 from its present level of about 3% of GDP to almost 6%. This is a ballpark estimate, and it makes assumptions about the growth over time in the number of persons of different ages who will be over 65, medical spending at different ages for those over 65, and the rate of growth of GDP over this time period. The growth in the number of persons over age 65 is the only one of these quantities that can be forecast reasonably accurately.
Despite this uncertainty about what actual spending will be, I have a couple of suggestions to slowdown the growth of Medicare spending. The first one is the easiest in principle to implement; namely to raise the age of eligibility for Medicare (and for social security as well) to age 70. Social security was introduced in the 1930s when life expectancy at age 65 was more than seven years below what it is now. Moreover, the quality of life after age 65 was also much lower at that time since men and women were generally already "old" at age 65. Although Medicare was not introduced until the late 1960s, both the quality and quantity of life have also increased rapidly since then- for example, life expectancy at age 65 has risen by five years.
The more numerous and healthier men and women currently who reach age 65 should be encouraged to continue working for at least several more years- probably to age 70- instead of being encouraged to retire to collect social security benefits and Medicare payments. Those between ages 65-70 would remain in employer's health insurance plans or buy individual insurance. In either case, they would have greater incentive to economize on their health spending.
Exceptions to the 70 eligibility age would be made for men and women who are not healthy enough to continue working after 65. At present, individuals can stop working and collect disability insurance if they can "prove" they have work-related disabilities. Workers between 65 and 70 could be folded into this disability program, and a corresponding one for Medicare eligibility, with suitable modifications to speed up the disability litigation process, and to reduce the complexity of the decisions on whether someone qualifies for disability payments.
The other main reform to Medicare is to put a larger share of medical payments onto individuals who have sufficient resources. A simple approach would be to introduce vouchers for Medicare spending, whereby lower income and wealth individuals would receive full vouchers to cover their Medicare expenses. Families with higher incomes and wealth would receive partial vouchers, with the voucher rate falling as incomes and wealth became higher. Families with partial vouchers presumably would generally purchase private health insurance to fill in gaps in their Medicare coverage.
Many of those purchasing this private "supplementary" health insurance would take sizable deductions and significant co-pays to reduce the size of their insurance premiums. These deductions and co-pays would increase the incentives of the elderly to economize on medical spending since marginal health spending will come partially or wholly out of their own pockets.
What should be done about the federal entitlements spending that is threatening the long-term solvency of the federal government?—Posner
The future is clouded, but it is hard to find a convincing reason to believe that entitlements spending by the federal government will not continue to increase unless there are significant changes in such programs.
An "entitlements" program is simply a program not financed by annual appropriations by Congress, with the result that its beneficiaries are entitled to their benefits rather than being at the mercy of legislative whim. Of course Congress can alter, or even if it wants abolish, an entitlements program (alter social security for example by raising the eligibility age), but that requires passing legislation, whereas a program financed by annual appropriations requires annual legislation to continue the program. The beneficiaries of entitlements are thus protected by legislative inertia, which makes it difficult to abolish or even alter programs legislatively; whereas programs can easily by starved when they depend on an affirmative annual grant of money by Congress.
Yet it would be a mistake to convert the entitlements programs to annual-appropriations programs. That would create uncertainty that would make it very difficult for people to plan for retirement or make decisions regarding savings and health insurance. But the result of the entitlements nature of programs like social security and Medicare is that spending on them grows fromyear to year if the number of beneficiaries grows, or if, as in Medicare and Medicaid, the entitlement is not a fixed sum of money but a service, and in the case of health care a service likely to grow in cost from year to year. The increase in beneficiaries is the primary driver of cost of the two major entitlements programs—Medicare and social security. The beneficiaries are denominated by age, and the old-age population is growing, seemingly inexorably. The 65-and-older population was 4 percent of the total U.S. population in 1900, 12 percent in 2000, and it is almost 14 percent now—which means that it has grown by 15 percent in the last 13 years. There is no sign, or reason to expect, that it will not continue growing at a fast clip, though the rate of future growth cannot be accurately estimated.
Medicare, Medicaid, and social security now account for more than 40 percent of total federal government expenditures; when other entitlement or quasi-entitlement programs, like food stamps and the Earned Income Tax Credit, are included, the total rises above 60 percent. This means that significant annual increases in entitlement expenditures will have a significant effect on overall federal expenditures. Unless tax revenues grow as fast, which is at best uncertain, the government's huge debt will grow relative to the economy as a whole, requiring either substantial cuts in other federal expenditures or higher taxes, or some combination of cuts and higher taxes. (Growth in the national debt per se is harmless; obviously the national debt is going to be greater in 2014 than it was in 1790. It is the ratio of debt to GDP that counts.)
Apart from political resistance, and the resistance put up by legislative inertia to reducing entitlements benefits (for remember that reducing them requires the enactment of new legislation), it is difficult to think of ways of reducing entitlements that are likely to be effective. It is frequently argued that increased longevity justifies raising the age of eligibility for full social security benefits from 67 to 70. The problem is that many people in that age range have serious health problems, and for that or other reasons a very strong need or desire to retire, and this means that if applications for social security disability benefits (that is, for commencement of social security benefits before the normal eligibility age, upon proof of physical or mental inability to obtain full-time gainful employment) will soar—and the cost to the government of processing disability applications (which requires determination of disability) greatly exceeds that of processing an application for normal social security benefits, which basically requires only proof of age and some information about employment history.
The controversial Affordable Care Act ("Obamacare") aims at reducing medical expenses, but at the same time envisages a vast increase in the number of Medicaid recipients. That vast increase might not increase aggregate medical costs, if it resulted in a healthier population and relieved pressure on hospital emergency rooms, which are very costly to operate. If aggregate medical costs fell and the population became healthier and as a result economically more productive, then so long as the aggregate benefits exceeded the increase in federal outlays, that increase wouldn't matter—the federal debt would not be growing relative to the economy as a whole. And that as I said is what matters.
But a healthier population means more old people. And more old people means greater outlays for social security and Medicare. Increases in longevity are correlated with increases in dependence, not only on medical services but on home care and related custodial services.
Which leads me to the first of the only two practical ideas that occur to me for slowing the increase in entitlement expenditures relative to the size of the economy: a shift in emphasis in medical research from length of life to ability to live independently. Independent living means living without home care (whether by relatives, thus taking time from them that they could use more productively in other activities, including paid employment, or by paid care—paid by the government in many cases) and being able—and wanting—to work. Independent living can be fostered by focusing medical research on problems of vision, musculoskeletal problems (which impair mobility), obesity, and dementia, in preference to research on curing and preventing cancer, heart disease, and stroke.
My second proposal is to means-test social security and Medicare. About 7 percent of American households have incomes above $150,000. Most of these people are not wealthy (even people with incomes of $250,000, which places them in the top 1.5 percent of the household income distribution, are not wealthy by modern standards), but they are comfortable. They can afford to finance their retirement through savings, and to buy decent health insurance. In my opinion they should not be eligible to receive either social security or Medicare benefits. Taking them off the social security and Medicare rolls would produce an immediate substantial savings in federal entitlements expenditures.