Arthur Conan Doyle, the creator of the very logical and perceptive Sherlock Holmes, truly believed that garden fairies existed. Richard Dawkins, British author, atheist, and evolutionary biologist put the argument for fairies in a logical bind: “There may be fairies at the bottom of the garden. There is no evidence for it, but you can't prove that there aren't any …” And then over here in America, we have people who believe Medicare in its present conception can be saved. Ah! Fairy fantasy is everywhere!
Medicare is a socialistic product of Lyndon Johnson’s Great Society and exemplifies everything that is wrong with government-designed and government-managed programs. Politicians – mostly Democrats – had tried to get government into the healthcare business since the Roosevelt administration. Failing that, they changed their strategy in the late 1950s and decided to focus on a smaller goal, namely single-payer health insurance for over-65 seniors. Kennedy campaigned on the idea. With his death, Johnson hoped to convert the campaign pledge into law but was stalled by the Democrat House Ways and Means Committee chairman, Wilbur Mills.
Then Mills had a change of heart (perhaps influenced by his own presidential ambitions before being scandalized by an affair with a stripper) and championed not only the original idea of hospital insurance (Medicare Part A) but also insurance for doctor care (Medicare Part B). Mills alone was the architect of the form and structure for Medicare.
Medicare is a program designed for the circumstances of 1965 – not today. It was crafted at a time when the population was young, the number of elderly was relatively small, and the cost of medicine was minimal. Therefore a generous program that was free at the point of care was affordable and politically astute, given the reliable voting patterns of the elderly.
But today, the high-tech, high expense revolution in medical treatments has transformed both care and costs. When Medicare was created, officials projected that hospital insurance, Part A, would cost $9 billion in 1990. In fact, it cost seven times that amount in 1990. And in 2010 Medicare and Medicaid spending was $793 billion – 23% of federal spending – which exceeds defense spending (20%) and Social Security (20%).
Today’s Medicare program is dying under its own weight. After 46 years, with a tsunami of new beneficiaries about to enter the program, Medicare is entering its twilight years because its basic financial assumptions were fatally flawed. The program isn’t just financially flawed; it’s also structurally flawed because it divorces recipients from the financial consequences of their healthcare choices. It is a defined benefit, fee-for-service program with very ugly math.
Consider:
The 24 million Medicare enrollees in 1975 grew to 47 million in 2010 and will grow to 88 million in 2040. The $2,813 cost per enrollee in 1975 grew to $12,090 in 2010 and will grow to $44,416 in 2040. For all except those who believe in garden fairies, the word “unsustainable” has entered the lexicon of entitlement reform. Medicare will be broke in nine years, leaving an unfunded liability of $90 trillion. Such is the nature of government transfer payment schemes. As birth rates slow – which they will always do as a nation gets richer – the recipients of social programs must ultimately exceed contributors.
Medicare is financed through a combination of payroll taxes, premiums and general revenue. The problem is that spending has been growing faster than the economy and is projected to do so indefinitely. Not surprisingly, payroll tax revenue and premiums aren't keeping pace with the program's increasing costs. And that means the draw on federal coffers will grow larger barring any policy changes. In 1975, the program's income from revenue and premiums covered 69% of total Medicare disbursements. In 2010, they covered 40%. By 2040, they'll only cover 30%. Except that Medicare won’t be here in 2040.
Today, over 85% of our healthcare spending is paid for by third parties – either private health insurance or government programs. That is not insurance. Insurance is supposed to protect us against catastrophic, unexpected expense – not routine and elective expense. An annual physical is not a catastrophic, unexpected expense. It is routine and elective. It should be paid for out of pocket. Arguably a normal birth is routine and elective. It should be paid for out of pocket just as the routine and elective purchase of a car, a house, a vacation, a restaurant meal, and repairs of damage that may have been unexpected but certainly aren’t catastrophic. America has one of the world’s highest rates of insulating consumers from their healthcare costs because it abuses the concept of insurance. If people paid more of their non-catastrophic healthcare costs, costs would come down as do all costs paid out of pocket.
Not convinced? Consider Lasik surgery, a procedure that isn’t insured. The inflation-adjusted price of Lasik surgery has dropped by over 50% since its inception and continues to trend down. Providers compete through advertised prices using radio, television, and print media. Full body scans, also not paid by insurance, have fallen under the pressure of competition. The prices for cosmetic surgery have risen less than the general inflation rate because candidates shop, look at photographs, and ask for prices.
This is the way Medicare should have been designed. But it was always more of a political program than an insurance program. The objective from the outset was to increase voter dependency on government, as was the case with Social Security. (See Happy 75th Birthday, August 21, 2010 blog post.) Unless people pay more than a trivial co-pay for what their healthcare costs – saving and investing for their elderly expenses when they are young income earners – they have no interest when those costs get out of control and have to be paid by others. Likewise, when everyone – and I mean everyone – doesn’t pay enough income tax to keep them interested in reckless government spending, fobbing it off on the minority who pay the country’s bills, democracy is weakened by the decline of interest in the cost of democracy's functioning.
Medicare has now become America’s most popular social program. Its failures are of little concern to its recipients who don’t pay for it. Their only concern is that the benefits will keep coming regardless of cost or consequence. Politicians, whose main concern is reelection, are unwilling to commit suicide to reform the program’s failures, and some cynically hope they will be out of government when the inevitable collapse comes and the politicians of that time will face the wrath of the voters.
So what happens when someone like Paul Ryan has the courage to point out the elephant in the room and put forth a plan – imperfect though it may be – to help transition a failing program to a more substantial footing? Is he encouraged, helped, cheered on for taking leadership in a politically risky undertaking? No! He is castigated for “ending Medicare as we know it.” Advertisements lampoon him for pushing grandma over the cliff. Shamefully uninformed retirees are frightened into voting for candidates who lie to them as happened in the NY-26 special election upset victory of Democrat Kathy Hochul in a heavily Republican district – using tactics that give further credence to Mark Twain’s assertion that prostitution is a higher calling than politics.
Ryan saw that the Medicare problem was rooted in the fact that there is no competition in the Medicare marketplace. When there is no competition, we get crummy schools and crummy healthcare. Medicare providers are paid reimbursement rates that are established by the government and backed with about as much science and thought as throwing darts at a dart board. Medicare reimbursement gives providers an incentive to do more to the patient to compensate for being paid below market prices for their services, and providers have little incentive to be more efficient so they can do more for less and make a good living at it. At the same time, patients lack the incentive to police their bills and shop for healthcare services because they have very little monetary skin in the game. In time government reimbursement will be so far below the market that providers will refuse to accept Medicare patients, and meanwhile the system is running out of money due to patient indifference.
This is how government designs programs because its designers and managers have never held a real job in the private enterprise economy where the goal is to keep expenses below revenue and to C-O-M-P-E-T-E – that ever-absent word in government vernacular – because customers in the world sans fairies are usually limited and suppliers generally aren’t.
The Ryan plan will attempt (the operative word is “attempt”) to head off this impending train wreck with a reform that won’t take effect for ten years and impacts only those who are 55 and younger. It will mimic the design of health plan all Federal employees enjoy, the Federal Employees Health Benefits Program, which makes criticism of the Ryan plan by the Left even more hypocritical. Grandma is pushed over the cliff by the Ryan plan, which offers grandma more or less the benefits of a government employee or retiree? Go figure.
Here are the Ryan plan highlights:
By 2011 private insurance companies that want to compete for Medicare “customers” would be required to offer plans with varying diversity which comply with Medicare specifications (that may be the killer but it’s worked for government employees)
Medicare will pay providers directly (ugh, back to single-payer) for services provided under the patient’s health plan using a premium subsidy (aka voucher.) Any portion of the voucher amount not used would be paid into the patient’s health savings account for future use. Any portion exceeding the voucher amount would be paid by the patient. (Now the patient has two incentives to be a good healthcare shopper – they keep the under-spend, and pay the over-spend.)
Additional subsidies will be made available to low income Medicare patients. High income earners would get less subsidy. (How about no subsidy?)
The voucher subsidy would begin at around $11,000 and be indexed to inflation. Patients could voluntarily receive a risk assessment of their health status, and if a patient is considered high risk for care, the voucher subsidy would be adjusted upward.
The Medicare-eligible age will increment up after 2011 from 65 to 69.5 years, reflecting the increasing longevity and years of good health of Americans since the 1965 law was passed.
That’s it. Pretty radical, huh? Makes you want to run out and push someone’s grandma off a cliff or start looking for fairies in the lawn.
The Lefties hate the Ryan plan because, they claim, it shifts more of the cost of healthcare onto the patient. Well sorta’. But not excessively. Grandma’s subsidy is risk-adjusted and low income beneficiaries get higher subsidies. But, hey, let’s stop the fairy fantasy and admit to the elephant in the room … until Medicare patients have an incentive to manage their healthcare cost, there is no plan that will save the Medicare program. So maybe what we ought to be saying is: Think No Medicare. Now, what’s everyone, including grandma, willing to do to prevent that outcome from happening?
What really chafes the Ryan critics is the suspicion that if a private sector defined contribution plan (versus the current defined benefit plan) really becomes popular with grandma, it will open the door to a privatized Medicare system, and Obamaphiles hate anything with the word “private” in it.
Ryan’s plan is a good start – not a great start. A great start would be a plan that gets the government out of the plan altogether. Giving the government my money to give back to me 45 to 50 years later is like giving myself a blood transfusion with a leaky tube in between arms. A better way is a verifiable mandate that I lay aside a certain amount for my future healthcare in an interest-bearing account during my income-earning years. When I reach 65 or 69.5 years old, I can begin to make withdrawals to buy my annual health insurance. Anything left over when I die goes to my estate.
Now that I think about it, that’s not a bad way to handle Social Security! The returns would be higher and another program would be released from the clutches of government.
The Lefties will of course fight proposals like these because it moves away from the socialism that Obama’s remaking of America envisions.
But in the recent Medicare Trustee’s Report, Richard S. Foster’s Statement of Actuarial Opinion gives this grim assessment:
Without major changes in healthcare delivery systems, the [reimbursement] paid by Medicare for health services are very likely to fall increasingly short of the costs of providing these services. By the end of the long-range projection period, Medicare prices for hospital, skilled nursing facility, home health, hospice, ambulatory surgical center, diagnostic laboratory, and many other services would be less than half of their level under the [pre-ObamaCare] law. Medicare prices would be considerably below the current relative level of Medicaid prices, which have already led to access problems for Medicaid enrollees, and far below the levels paid by private health insurance.
Well before that point, Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result. Overriding the productivity adjustments, as Congress has done repeatedly in the case of physician payment rates, would lead to far higher costs for Medicare in the long range than those projected under [pre-ObamaCare] law.
For these reasons, the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in [reimbursement] updates for most categories of Medicare provider services will not be viable).
Well golly gee, Margaret Thatcher was right after all: "The problem with socialism is that eventually you run out of other people's money."
Medicare is a socialistic product of Lyndon Johnson’s Great Society and exemplifies everything that is wrong with government-designed and government-managed programs. Politicians – mostly Democrats – had tried to get government into the healthcare business since the Roosevelt administration. Failing that, they changed their strategy in the late 1950s and decided to focus on a smaller goal, namely single-payer health insurance for over-65 seniors. Kennedy campaigned on the idea. With his death, Johnson hoped to convert the campaign pledge into law but was stalled by the Democrat House Ways and Means Committee chairman, Wilbur Mills.
Then Mills had a change of heart (perhaps influenced by his own presidential ambitions before being scandalized by an affair with a stripper) and championed not only the original idea of hospital insurance (Medicare Part A) but also insurance for doctor care (Medicare Part B). Mills alone was the architect of the form and structure for Medicare.
Medicare is a program designed for the circumstances of 1965 – not today. It was crafted at a time when the population was young, the number of elderly was relatively small, and the cost of medicine was minimal. Therefore a generous program that was free at the point of care was affordable and politically astute, given the reliable voting patterns of the elderly.
But today, the high-tech, high expense revolution in medical treatments has transformed both care and costs. When Medicare was created, officials projected that hospital insurance, Part A, would cost $9 billion in 1990. In fact, it cost seven times that amount in 1990. And in 2010 Medicare and Medicaid spending was $793 billion – 23% of federal spending – which exceeds defense spending (20%) and Social Security (20%).
Today’s Medicare program is dying under its own weight. After 46 years, with a tsunami of new beneficiaries about to enter the program, Medicare is entering its twilight years because its basic financial assumptions were fatally flawed. The program isn’t just financially flawed; it’s also structurally flawed because it divorces recipients from the financial consequences of their healthcare choices. It is a defined benefit, fee-for-service program with very ugly math.
Consider:
The 24 million Medicare enrollees in 1975 grew to 47 million in 2010 and will grow to 88 million in 2040. The $2,813 cost per enrollee in 1975 grew to $12,090 in 2010 and will grow to $44,416 in 2040. For all except those who believe in garden fairies, the word “unsustainable” has entered the lexicon of entitlement reform. Medicare will be broke in nine years, leaving an unfunded liability of $90 trillion. Such is the nature of government transfer payment schemes. As birth rates slow – which they will always do as a nation gets richer – the recipients of social programs must ultimately exceed contributors.
Medicare is financed through a combination of payroll taxes, premiums and general revenue. The problem is that spending has been growing faster than the economy and is projected to do so indefinitely. Not surprisingly, payroll tax revenue and premiums aren't keeping pace with the program's increasing costs. And that means the draw on federal coffers will grow larger barring any policy changes. In 1975, the program's income from revenue and premiums covered 69% of total Medicare disbursements. In 2010, they covered 40%. By 2040, they'll only cover 30%. Except that Medicare won’t be here in 2040.
Today, over 85% of our healthcare spending is paid for by third parties – either private health insurance or government programs. That is not insurance. Insurance is supposed to protect us against catastrophic, unexpected expense – not routine and elective expense. An annual physical is not a catastrophic, unexpected expense. It is routine and elective. It should be paid for out of pocket. Arguably a normal birth is routine and elective. It should be paid for out of pocket just as the routine and elective purchase of a car, a house, a vacation, a restaurant meal, and repairs of damage that may have been unexpected but certainly aren’t catastrophic. America has one of the world’s highest rates of insulating consumers from their healthcare costs because it abuses the concept of insurance. If people paid more of their non-catastrophic healthcare costs, costs would come down as do all costs paid out of pocket.
Not convinced? Consider Lasik surgery, a procedure that isn’t insured. The inflation-adjusted price of Lasik surgery has dropped by over 50% since its inception and continues to trend down. Providers compete through advertised prices using radio, television, and print media. Full body scans, also not paid by insurance, have fallen under the pressure of competition. The prices for cosmetic surgery have risen less than the general inflation rate because candidates shop, look at photographs, and ask for prices.
This is the way Medicare should have been designed. But it was always more of a political program than an insurance program. The objective from the outset was to increase voter dependency on government, as was the case with Social Security. (See Happy 75th Birthday, August 21, 2010 blog post.) Unless people pay more than a trivial co-pay for what their healthcare costs – saving and investing for their elderly expenses when they are young income earners – they have no interest when those costs get out of control and have to be paid by others. Likewise, when everyone – and I mean everyone – doesn’t pay enough income tax to keep them interested in reckless government spending, fobbing it off on the minority who pay the country’s bills, democracy is weakened by the decline of interest in the cost of democracy's functioning.
Medicare has now become America’s most popular social program. Its failures are of little concern to its recipients who don’t pay for it. Their only concern is that the benefits will keep coming regardless of cost or consequence. Politicians, whose main concern is reelection, are unwilling to commit suicide to reform the program’s failures, and some cynically hope they will be out of government when the inevitable collapse comes and the politicians of that time will face the wrath of the voters.
So what happens when someone like Paul Ryan has the courage to point out the elephant in the room and put forth a plan – imperfect though it may be – to help transition a failing program to a more substantial footing? Is he encouraged, helped, cheered on for taking leadership in a politically risky undertaking? No! He is castigated for “ending Medicare as we know it.” Advertisements lampoon him for pushing grandma over the cliff. Shamefully uninformed retirees are frightened into voting for candidates who lie to them as happened in the NY-26 special election upset victory of Democrat Kathy Hochul in a heavily Republican district – using tactics that give further credence to Mark Twain’s assertion that prostitution is a higher calling than politics.
Ryan saw that the Medicare problem was rooted in the fact that there is no competition in the Medicare marketplace. When there is no competition, we get crummy schools and crummy healthcare. Medicare providers are paid reimbursement rates that are established by the government and backed with about as much science and thought as throwing darts at a dart board. Medicare reimbursement gives providers an incentive to do more to the patient to compensate for being paid below market prices for their services, and providers have little incentive to be more efficient so they can do more for less and make a good living at it. At the same time, patients lack the incentive to police their bills and shop for healthcare services because they have very little monetary skin in the game. In time government reimbursement will be so far below the market that providers will refuse to accept Medicare patients, and meanwhile the system is running out of money due to patient indifference.
This is how government designs programs because its designers and managers have never held a real job in the private enterprise economy where the goal is to keep expenses below revenue and to C-O-M-P-E-T-E – that ever-absent word in government vernacular – because customers in the world sans fairies are usually limited and suppliers generally aren’t.
The Ryan plan will attempt (the operative word is “attempt”) to head off this impending train wreck with a reform that won’t take effect for ten years and impacts only those who are 55 and younger. It will mimic the design of health plan all Federal employees enjoy, the Federal Employees Health Benefits Program, which makes criticism of the Ryan plan by the Left even more hypocritical. Grandma is pushed over the cliff by the Ryan plan, which offers grandma more or less the benefits of a government employee or retiree? Go figure.
Here are the Ryan plan highlights:
By 2011 private insurance companies that want to compete for Medicare “customers” would be required to offer plans with varying diversity which comply with Medicare specifications (that may be the killer but it’s worked for government employees)
Medicare will pay providers directly (ugh, back to single-payer) for services provided under the patient’s health plan using a premium subsidy (aka voucher.) Any portion of the voucher amount not used would be paid into the patient’s health savings account for future use. Any portion exceeding the voucher amount would be paid by the patient. (Now the patient has two incentives to be a good healthcare shopper – they keep the under-spend, and pay the over-spend.)
Additional subsidies will be made available to low income Medicare patients. High income earners would get less subsidy. (How about no subsidy?)
The voucher subsidy would begin at around $11,000 and be indexed to inflation. Patients could voluntarily receive a risk assessment of their health status, and if a patient is considered high risk for care, the voucher subsidy would be adjusted upward.
The Medicare-eligible age will increment up after 2011 from 65 to 69.5 years, reflecting the increasing longevity and years of good health of Americans since the 1965 law was passed.
That’s it. Pretty radical, huh? Makes you want to run out and push someone’s grandma off a cliff or start looking for fairies in the lawn.
The Lefties hate the Ryan plan because, they claim, it shifts more of the cost of healthcare onto the patient. Well sorta’. But not excessively. Grandma’s subsidy is risk-adjusted and low income beneficiaries get higher subsidies. But, hey, let’s stop the fairy fantasy and admit to the elephant in the room … until Medicare patients have an incentive to manage their healthcare cost, there is no plan that will save the Medicare program. So maybe what we ought to be saying is: Think No Medicare. Now, what’s everyone, including grandma, willing to do to prevent that outcome from happening?
What really chafes the Ryan critics is the suspicion that if a private sector defined contribution plan (versus the current defined benefit plan) really becomes popular with grandma, it will open the door to a privatized Medicare system, and Obamaphiles hate anything with the word “private” in it.
Ryan’s plan is a good start – not a great start. A great start would be a plan that gets the government out of the plan altogether. Giving the government my money to give back to me 45 to 50 years later is like giving myself a blood transfusion with a leaky tube in between arms. A better way is a verifiable mandate that I lay aside a certain amount for my future healthcare in an interest-bearing account during my income-earning years. When I reach 65 or 69.5 years old, I can begin to make withdrawals to buy my annual health insurance. Anything left over when I die goes to my estate.
Now that I think about it, that’s not a bad way to handle Social Security! The returns would be higher and another program would be released from the clutches of government.
The Lefties will of course fight proposals like these because it moves away from the socialism that Obama’s remaking of America envisions.
But in the recent Medicare Trustee’s Report, Richard S. Foster’s Statement of Actuarial Opinion gives this grim assessment:
Without major changes in healthcare delivery systems, the [reimbursement] paid by Medicare for health services are very likely to fall increasingly short of the costs of providing these services. By the end of the long-range projection period, Medicare prices for hospital, skilled nursing facility, home health, hospice, ambulatory surgical center, diagnostic laboratory, and many other services would be less than half of their level under the [pre-ObamaCare] law. Medicare prices would be considerably below the current relative level of Medicaid prices, which have already led to access problems for Medicaid enrollees, and far below the levels paid by private health insurance.
Well before that point, Congress would have to intervene to prevent the withdrawal of providers from the Medicare market and the severe problems with beneficiary access to care that would result. Overriding the productivity adjustments, as Congress has done repeatedly in the case of physician payment rates, would lead to far higher costs for Medicare in the long range than those projected under [pre-ObamaCare] law.
For these reasons, the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in [reimbursement] updates for most categories of Medicare provider services will not be viable).
Well golly gee, Margaret Thatcher was right after all: "The problem with socialism is that eventually you run out of other people's money."
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