More Confusion on Medicare

David Brooks has a piece on the Ryan plan and in it he addresses Medicare. I had commented earlier that when he made similar quotes that they were at best irrelevant and at worst fallacious. He states:

Second, we can’t let the oldsters get off scot-free. As my colleague David Leonhardt reported in The Times, two 56-years-olds with average earnings will pay about $140,000 in dedicated Medicare taxes over their lifetimes. They will receive about $430,000 in benefits. This is an immoral imposition on future generations. The Ryan budget wouldn’t touch this generation, but a bipartisan budget deal should ask middle-class and affluent boomers to make a sacrifice for their country. Slow the growth in health care benefits now and dedicate that money to paying down the debt and investing in the young. 

The problem is that Leonhardt is also wrong. For he states:

Mr. Steuerle — along with his Urban Institute colleague Stephanie Rennane — has done some of the most careful work comparing Medicare taxes and benefits. They added up all the taxes people at different points on the income spectrum would pay over their working lives and then translated these amounts into a single sum, expressed in today’s dollars. Mr. Steuerle and Ms. Rennane likewise added up the value of Medicare benefits (net of premiums) that men and women could expect to receive...Their results show that no cohort of Americans, with the possible exception of the very affluent, pays enough Medicare taxes and premiums to cover their costs. The gap is growing over time, too....Two married 66-year-olds with roughly average earnings over their lives will end up paying about $110,000 in dedicated Medicare taxes through the payroll tax, including the portion their employers pay. They can expect to receive about $340,000 in benefits. Two average-earning 56-year-olds will pay about $140,000 and get back about $430,000 in benefits. 

The fact is that if one looks at the Urban Institute Study,  and then compare it to our analysis of a couple of years ago, one can note:

1. We look at the distribution of incomes and not at the lowest level. Their study looks at a 65 year old whose salary equals the average of all workers. In reality the average salary may be at the age of 32 not 65 and when the adult reaches 65 the salary has increased often two fold.

2. One must look at Medicare across all salary levels. Not just one low value.

3. The costs stated in the study are wrong by more than a factor of 2! Look at our study then look at the real data. I have no idea where they got their numbers.

4. They also fail to note that Medicare participants pay a substantial amount, namely $1,200 per year and then 20% or more plus drugs if not in Part D.

The study is flawed to the extreme by not dealing with the full distribution of the population. If one looks at our analysis one sees we have taken into account all of the factors. On average the contributors never get back what they put in!

Now why did Leonhardt and Brooks not catch that flaw, well because the answer plays into their theme. It is a shame that writers who opine on things which they do not understand do so with almost total ignorance of the facts. Pity the Press is so poor.

Vouchers and Health Care

Somehow or the other the current Ryan proposal for eliminating Medicare is akin to one of the structures proposed by the financial whiz kinds in the last decade. In a NEJM article by Aaron the author states:

Under the House Budget Committee plan: (i) Traditional Medicare would end for everyone turning 65 in 2022 or later. (ii) Newly eligible Americans would receive a voucher worth $8,000 on average. As people aged, their vouchers would be increased to reflect increasing use of health care. The value of all vouchers would be indexed to consumer prices. Vouchers for the 8% of enrollees with the highest incomes would be reduced. (iii) Low-income Medicare beneficiaries (“dual eligibles”) would cease to be covered by Medicaid. Instead, they would get a medical savings account equal to $7,800 (also indexed to track consumer prices). (iv) The rest of Medicaid would become a block grant, also indexed to consumer prices.The plan would repeal all major elements of the Affordable Care Act (ACA), including subsidies, Medicaid extensions, insurance exchanges, and requirements that businesses provide insurance and that individuals buy it.

Now this is akin to selling options where the Government hedges itself. Now if we look at people, they fall into the following categories related to health care usage:

1. Young and Unfortunate: This would be the young who come down with some deadly disease like leukemia or who have some severe disability. Unfortunate and costly but not really that many and society has agreed to help them.

2. Middle Aged Bad Luck: These are the group who are mid life and are struck with say breast cancer. Bad genes, bad luck, whatever, but they did nothing that got them there and they are hit in the middle of their lives. Again we agree to help.

3. Life Style Choosers: These are the drinkers, smokers, eaters, and other life style based diseases. Type 2 Diabetes and Obesity account for almost 15% of this total. The problem here is that their costs remain. Unlike the first two who often die or are healed, this group takes a long time to die and their costs grow greater each year as do their numbers. Somehow this should be an issue but is not.

4. Older and Unlucky: This is the group with Parkinson's, and other debilitating diseases of old age as well as cancers hitting before 75. They may have breast, colon, pancreatic, kidney, and other cancers. Some may be mitigated against others not so. Alzheimer's disease is in this batch as well. This is the target for Medicare. It is catastrophic.

5. The Real Old Folks: It is often the case that when one gets to say 75 with no disease then there is a good chance you will hit 90 and drop of a plain old heart attack or the like. But if somehow we keep them away from heart attacks then perhaps they die of a cancer, more costly. Also more painful. This group may very well be kept off of the armory of blood thinners and pacemakers, and just let nature take its course. This of course is a personal choice but it should be an informed personal choice.

Thus Medicare is really targeted at those who get old and are unlucky. It has been expanded to the Life Style Choosers because we often can keep them alive. The drinker, the smoker, the obese individual, we can pump them up and treat their symptoms and it adds to the costs. In addition we have a group who want every little discomfort remedied. Yet at what cost?

Aaron presents the argument in a superb manner. Medicare serves a purpose. It has gotten out of control, but so has all health care. Vouchers are rant with problems. The solution in my opinion is not a voucher.

Great Cartoon

From xkcd we have the following:

Perhaps this also typifies the glut of economic verbiage! In a sense this tells a great story. We should all take it to heart.

Predatory Pricing: It Exists

Prof Boudreaux has a post regarding predatory pricing, and a prior post apparently rejecting its existence, if I read it correctly. He states:

A key to understanding the economics of predatory pricing is to realize that the predator must lose more money than do any of its prey. The reason is that the predator can force the preys’ prices down only by taking away their customers. And to take away the preys’ customers requires that the predator expand its sales during the price war. In contrast, the prey are free to reduce their sales to levels that minimize (if not eliminate) their losses.

How, then, can predation be a lucrative strategy? The answer must be that the predator is better able than the prey to absorb price-war losses. Fortunately for consumers, predators are not better able to absorb such losses. In fact, any prey that is as efficient as the predator has just as much access to funding for the price war as does the predator....

But suppose that the observed low prices really aren’t predatory; suppose, instead, that these prices reflect the price-cutter’s superior efficiency. In this case, a mistaken belief by private investors that these low prices are predatory does no social harm. Investors lend money to a firm that doesn’t deserve the funds, while the genuinely more efficient firm keeps its prices low. Consumers never suffer. And eventually the mistake is revealed because the less-efficient firm cannot compete over the long haul with the more-efficient price cutter.

Now I see this as a rejection of predatory pricing as a social evil. Let me give a real counter example. In 2001 I was selling, amongst other services, VOIP into Poland. Unbeknown to me a second international carrier, a state carrier, was also selling into Poland. Week by week the prices dropped and week by week we matched it, until we saw that we could no longer do so. We actually had the lowest cost structure and we even went further than we should have to retain our market, but the Board said stop. Good thing, for our competitor just kept going, and against himself!

Two years later I meet the head of the same company and over lunch he recounts the tale. Allegedly he got the job because his predecessor lost $100 million on this predatory pricing scheme.

Yet what of the consumer? Both carriers were out of the market replaced by the over bloated incumbent. Prices rose, the public had no alternative, and predatory pricing had a negative effect.

Just a thought from the real world. Oh, and telecom is filled with this stuff.

The Ryan Plan, Health Care. and Which Way to Go

Rep Ryan has detailed at a high level his plan. He states:

In 2010, health-care costs rose by over 7 percent, compared to around 1 percent for all other goods and services.

This is putting enormous pressure on Medicare and Medicaid. But these programs aren’t just affected  by rapidly rising health-care costs – they are actually a key driver of inflation in the  health-care sector. Nearly 50 cents of every dollar spent on health care in this country is spent  by federal, state or local government. Because of the design and structure of these programs, much  of the government’s money gets wasted – and shows up as inflation in the cost of care.

Everyone who is on Medicare or knows someone on Medicare has stories about waste in the system – unnecessary tests, redundant treatments, and the cost in both time and money of mistaken billings  and misplaced records.This kind of waste is inevitable in a top-down, government-run system, and it’s a big  reason that costs have spiraled out of control.

Yes, these costs are rising as we had examined two years ago. The reasons are several fold. First  people take poor care of themselves and when the reach Medicare age they have already placed themselves at risk. Second we can do a great deal more. Third people are living longer, albeit with increased costly care. He continues:


Real reform – especially with respect to Medicare – must eliminate this unsustainable waste and reduce inefficiencies and costs by giving beneficiaries themselves more control over their own  health-care benefits and decisions.

Waste has always been a factor focused upon as a cost reduction. However that can and should be done in the system as it stands. It does not require a another new law.

He does make a useful point regarding the new health care bill:

Nevertheless, even if these efforts worked, the tradeoff in terms of lost freedom would be completely unacceptable. This approach would transform the relationship between citizen and state, leaving individuals helplessly dependent on their government. On a more practical level, it would substantially diminish quality of and access to care. There is no way for “experts” in Washington to know more  about the health care needs of individual Americans than those individuals and their doctors know.

Namely having some GS9 decide on your health care will not work. Yet the counter side is that you as an individual have a duty to refrain from personal choices which put you at risk and cost society. How to do that is the key.

His proposal in brief is:

• Save Medicare for current and future generations while making no changes for those in and near retirement. For younger workers, when they reach eligibility, Medicare will provide a Medicare payment and a list of guaranteed coverage options from which recipients can choose a plan that best suits their needs. These future Medicare beneficiaries will be able to choose a plan the same way members of Congress do. Medicare will provide additional assistance for lower-income beneficiaries and those with greater health risks.

• Ensure that the cost of frivolous litigation is not passed on to consumers in the form of higher health-care premiums by capping non-economic damages in medical liability lawsuits.

• Stop the raid on the Medicare trust fund that was going to be used to pay for the new health care law. Any current-law Medicare savings must go to saving Medicare, not financing the creation of new open-ended health-care entitlements.

• Fix the Medicare physician payment formula for the next ten years so that Medicare beneficiaries continue to have access to health care.

The first is in essence the elimination of Medicare. What he suggests has great risks in that it will throw a mass of society onto the health care system at their most vulnerable time in life. No company offers retirement health insurance, almost none, except Government and union workers. That means the people creating the wealth will be subsidizing those consuming the wealth. Second, as we have written, it is not clear that tort relief saves a great deal. As to the Medicare Trust fund, it has been robbed! As we have shown time and again if one has a reasonable job in life one contributes more to Medicare than one receives! But Congress took the money. Finally the fixing the reimbursement formula is essential.

Should those on Medicare be in fear? Not for the short run, but now that the shot has been sent across the bow they must be wary.

A Very Strange Shutdown

The impending shut down, if it happens, has set NIH a twitter. In Science they states:

Although government shutdowns are not uncommon, most recently in late 1995 and early 1996, the culture seems different this time around. While in the past many people, especially postdocs, came into work and were eventually paid, this time, "the impression I have is that you will have to show you're on some list" to enter a building, one lab chief said. Another investigator was told there will be fines for violators. This time, NIH staff members aren't even supposed to log into e-mail from home, a source said.  

This means that some where from the top down, they plan on a hard ball tactic. Professionals are not even allowed email! Typically good scientists are really thinking all the time. This is not the FCC or the Department of the Interior. This is NIH.

One should ask what is going on?