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Medicare Is Doomed

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When Democrats accuse Republicans of wanting to “end Medicare as we know it,” they are right. Of course ending Medicare as we know it is not the same as ending Medicare. What Democrats fail to point out is that “Medicare as we know it” is no longer an option for anyone. They too will end “Medicare as we know it.” If no changes are made in the program, it will simply collapse.

Leaving aside the fatal moral defect of Medicare — that it coerces innocent people through taxation and permits no one to opt out — the program is doomed. (Some time can be bought through changes such as advancing the eligibility age to 67.) It has tens of trillions of dollars in unfunded liabilities, meaning it has made promises to future retirees that Congress has made no provision for keeping. If nothing changes, the working generations will have to be crushed with a far higher tax burden than they have today — which hardly could be seen as fair even by conventional standards, since (for obvious reasons) the elderly tend to be wealthier than younger people. Because of the relative size of the Baby Boom generation, 10,000 members of which are turning 65 each day and going on Medicare, there will be many fewer workers per beneficiary than there were in the past. Two workers will be forced to pay each retiree’s medical bills. Those younger people might have other plans for their money.

So something’s got to give, no matter which party is in power. This should be no mystery. If the government promises to pay for older people’s medical care essentially without limit, wouldn’t one expect the bill to grow very fast? It’s the law of demand in action. As the price of a good drops, other things being equal, demand will increase. If the price drops close to zero (because others are taxed to pay the expenses), demand will skyrocket. The price of a good or service represents an opportunity cost. The prospective buyer must ask whether he prefers the good or service to whatever else he could spend the money on. As the price falls, so does the opportunity cost. If the price approaches zero, opportunity cost follows. (There is still some opportunity cost, for example, in the time spent to obtain the good or service — that time could have been spent doing something else.)

The Medicare program costs more than originally projected because the bureaucrats and politicians underestimated the law of demand. (Beneficiaries do pay premiums and co-payments, so the price of services is not zero to them.) Given the law of demand and assuming that taxes can’t be jacked up or the program abolished, there’s only one thing to do: change the system so the elderly can’t buy all the medical services they wish at a price near zero — that is, “end Medicare as we know it.”

But there’s a problem: Older people, who vote in great numbers, won’t cotton to having free services taken away. That’s why Medicare (like Social Security) has been regarded as a “third rail” of American politics: touch it and you die. So the politicians need to find ways to deceive the elderly into thinking that cuts in the program won’t affect them.

The Obama plan

Look at the current debate over how to fix Medicare. Barack Obama’s health-care plan would cut more than $700 billion from the Medicare bill. (He needs the money to expand Medicaid and other subsidies for younger uninsured people.) But he insists this cut will not reduce benefits for the elderly. How can that be? The money will be taken from providers (and insurers under the popular alternative, Medicare Advantage), not beneficiaries, he says. On its face, that is absurd. If reimbursements to providers are reduced, how could that not translate into reduced services to beneficiaries?

But Obama has an answer: get rid of waste. To date, he says, Medicare has paid for services according to volume. Now it will pay according to value. It sounds nice, but it means that government will second-guess the decision of doctors and patients, which is what the original critics of Medicare predicted would happen.

Obamacare sets up the Independent Payment Advisory Board (IPAB) consisting of 15 presidential appointees (confirmed by the Senate). Attempting to prevent alarm, the law says, “The proposal shall not include any recommendation to ration health care, raise revenues or Medicare beneficiary premiums … increase Medicare beneficiary cost sharing (including deductibles, coinsurance, and co-payments), or otherwise restrict benefits or modify eligibility criteria.” Yet it must, according to Wikipedia, “bring the net growth in Medicare spending back to target levels if the Medicare Actuary determines that net spending is forecast to exceed target levels, beginning in 2015.” Each year IPAB’s proposal will be submitted to Congress, which is tightly restricted in how it can change the proposal.

Sweep away the obfuscation and one is left with the fact that this board must control Medicare spending. That means less money for doctors and hospitals. Now we run into the law of supply: As the price of a service falls, other things being equal, supply will fall with it. We can anticipate that fewer doctors will accept Medicare patients and some on-the-edge hospitals will close. That means patients will face longer waits for services. (The millions of newly insured will also aggravate the already-short supply of doctors.)

Health economist John Goodman and Thomas Saving of the National Center for Policy Analysis noted that this deterioration will only make a bad situation worse.

As the most recent Medicare Trustees’ report points out, compared with private insurance plans, Medicare payments to doctors are going to fall by half from 80% of what private plans pay to only 40% over the next two decades.

Medicare hospital fees are less than 70% of what private insurers pay, and this percentage also will decline over time as well.

The Medicare actuaries predict that one in seven hospitals will not survive these cuts, and that seniors will have increasing difficulty finding doctors who will see them.

Moreover, in the name of paying for value not volume, some services will be curtailed. Despite assurances that only “unnecessary” services will be eliminated, it is hard to have confidence that something as individualized as medical care can be managed by 15 “experts” far removed from the scene. Obamacare did not set up explicit “death panels,” but it has set in motion a procedure that will penalize doctors for doing what bureaucrats think is unnecessary. Medical care “by number” will become the standard in America.

In the effort to hold down costs, Obamacare also fosters the development of Accountable Care Organizations (ACO), reminiscent of, though different from, the despised Health Maintenance Organizations (HMO) of decades ago. One doctor told me that government-promoted ACOs will turn independent doctors into employees, further hastening early retirement and the doctor shortage. “The result [of the ACO provision] is a top-heavy regulatory system in which administrators in government and the ACOs could soak up health care dollars without improving patient outcomes or reducing overall health care costs,” write Roberta Herzberg of the National Center for Policy Analysis and Chris Fawson, a professor of economics and finance at Utah State University.

So the choice appears to be between Medicare bankruptcy and increasing government control over retirees’ health-care spending.

The Romney/Ryan plan

The Republicans would disagree, however. What do they propose? Mitt Romney and Paul Ryan would change Medicare from a “guaranteed benefit” plan to a “guaranteed contribution” plan. In other words, instead of paying whatever bills retirees incur, the government would provide fixed “premium support” to enable them to buy private coverage. They would also have the option of staying in traditional Medicare, but since they predict that their plan will bring down costs through competition, they forecast that Medicare costs will be controlled without limiting people’s choices.

As one might expect, there is less here than meets the eye. For one thing, Goodman and Saving write, “there’s very little difference between the two [Obama and Ryan] plans. There is no important difference in Medicare spending — even when the estimates of the president’s budget are made by his own Office of Management and Budget and the costs of the Ryan plan are projected by Ryan himself.”

Ryan’s so-called voucher plan is not likely to deliver on cost control. As Shikha Dalmia of the Reason Foundation writes, “[Government] programs are always vulnerable to lobbying by groups seeking more…. [Insurance] companies selling coverage to seniors will have a bigger incentive to lobby harder, since the money will go to them.” Ryan’s proposal would set up an insurance exchange in which companies offer government-designed policies. The theory is that competing companies will find ways to lower the price of the mandated coverage.  But, as has happened in the states, providers will lobby the federal government to have their services included in the allowable plans. Dalmia writes,

This will mean two things, both of which will undermine cost containment: One, the greater the gap between what seniors can afford and what is available on the exchange, the more intensely they will lobby for additional funds. Indeed, RyanCare will replace the “patient-provider pincer” with the “patient-insurer pincer.” Two, if seniors’ shopping options are restricted to bureaucratically sanctioned plans with a standard set of benefits, insurance companies won’t have room to fully compete on prices, eviscerating the market mechanism that is key to cost-containment in vouchers.

As a result, there will be more pressure to raise government spending — and we know where that leads. (See above.)

Needless to say, something like this was inevitable. The blank check couldn’t last forever. (These days retirees get far more in services than they paid in taxes.) When a third party pays for your services, you can hardly be shocked when that party gets tired of the never-ending rise in expense and imposes controls. Reassurances that the quality of service will be protected count for nothing when the overriding goal is to “bend the cost curve down.”

There’s no such thing as a free lunch. Money always has strings, and he who pays the piper eventually calls the tune. Opponents of Medicare warned of all this, but they were ignored. The welfare state is a snare and a delusion. It creates dependence at the point of a gun, then once dependency is achieved, it imposes restrictions that create hardship. All the while, the taxpaying generations bear an ever-greater burden.

The only way out is to fully separate medicine and state, which would stimulate reliance on mutual-aid associations and other private for-profit and nonprofit organizations.  It would not only be more efficient; it would also be respectful of individual rights because coercion will be no part of it.

This article was originally published in the November 2012 edition of Future of Freedom.

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    Sheldon Richman is vice president of The Future of Freedom Foundation and editor of FFF's monthly journal, Future of Freedom. For 15 years he was editor of The Freeman, published by the Foundation for Economic Education in Irvington, New York. He is the author of FFF's award-winning book Separating School & State: How to Liberate America's Families; Your Money or Your Life: Why We Must Abolish the Income Tax; and Tethered Citizens: Time to Repeal the Welfare State. Calling for the abolition, not the reform, of public schooling. Separating School & State has become a landmark book in both libertarian and educational circles. In his column in the Financial Times, Michael Prowse wrote: "I recommend a subversive tract, Separating School & State by Sheldon Richman of the Cato Institute, a Washington think tank... . I also think that Mr. Richman is right to fear that state education undermines personal responsibility..." Sheldon's articles on economic policy, education, civil liberties, American history, foreign policy, and the Middle East have appeared in the Washington Post, Wall Street Journal, American Scholar, Chicago Tribune, USA Today, Washington Times, The American Conservative, Insight, Cato Policy Report, Journal of Economic Development, The Freeman, The World & I, Reason, Washington Report on Middle East Affairs, Middle East Policy, Liberty magazine, and other publications. He is a contributor to the The Concise Encyclopedia of Economics. A former newspaper reporter and senior editor at the Cato Institute and the Institute for Humane Studies, Sheldon is a graduate of Temple University in Philadelphia. He blogs at Free Association. Send him e-mail.