Fairies in the Garden

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."

Ryan’s Plan to Prosperity

Paul Ryan has called himself “the Paul Revere of fiscal problems.” This past Monday he galloped off to Chicago, Obama’s home town, to warn, not that the British were coming, but that a more serious threat was coming – a debt and spending crisis that could change the American way of life permanently.

Selling that message to the American people will not be easy. The political elites on the Left believe the role of government is to direct people’s lives, limit their freedom, increase their dependency, and of course, reelect the elites so they can continue to create an American nomenklatura. Unsurprisingly, Democrats have turned up the volume on their obfuscation message machine to confuse and frighten people about the Ryan debt plan, especially his proposals to make entitlements more responsible.

Polls show, however, that the Democrat demagoguery isn’t working too well, especially their “Mediscare” campaign. According to Gallup polling, Ryan’s plan is more accepted than Obama’s debt reduction plan in every age group except the young. In fact, support for the Ryan plan increases with each older age group to the point that it is supported by almost half the seniors (48%) compared to Obama’s plan (42%) even though Ryan proposes to change Medicare essentially into a voucher system. Obama proposes to do nothing to Medicare – except let it go broke.

A separate Kaiser Family Foundation survey found that a majority of the public (54%) supports Ryan's plan to convert Medicare into a voucher program when it's accurately described as a way to "reduce the deficit and let seniors choose plans based on cost and quality."

Ryan has enlisted the help of House allies in the Republican caucus to fan out into the hustings and help explain the plan. One of Ryan’s warriors is freshman representative Tim Meehan, elected in a swing district not far from Valley Forge. Speaking at a retirement village last week, Meehan concluded his presentation to a group of seniors Democrats love to scare, saying, “You have a congressman from Wisconsin who is showing more leadership and direction than the president of the United States. That is a sad commentary on the moment.”

It came as a shock, then, when none other than Mr. Conservative, Newt Gingrich, sounded off on Sunday’s “Meet the Press” program, calling the Ryan plan “right-wing social engineering” and “radical change from the right." A measure of the support Ryan’s plan enjoys was revealed in the ensuing uproar when conservative pundits and talk show hosts rose in high dudgeon to condemn Gingrich’s remarks. Conservative talk show host, Bill Bennett, obsessed throughout his Monday morning show over the former speaker’s remarks, calling them “an unforgivable mistake” and effectively removing Gingrich from “serious consideration” in 2012. On Tuesday’s show, Bennett was still peeved about Gingrich’s apostasy and invited Gingrich to give an account of himself. Gingrich did himself no favors, denying having said certain things until Bennett played audio clips for him – but that’s another story for another time.

Suffice it to say the House of Representatives passed the Ryan plan a month ago by a vote of 235 to 193 with every Democrat voting "no." The Democrat scare machine went to work, causing some Republicans in tight 2012 House races to get sweaty palms. But current House Speaker John Boehner continues to deny that Republicans are “running away” from the Ryan plan. “That’s just not a fact,” he told Face the Nation recently. “You can ask any one of our members, and they’ll tell you that on average, 80% of the people at these town-hall meetings were supportive of taking big steps to put our fiscal house in order.”

There is no denying that it’s the GOP which is leading the debate on how to get the country’s fiscal future back on track, which the Obama administration derailed with some help from George Bush. Meanwhile, the Democrats have now gone nearly 750 days without passing a budget in the Senate, which they control. Ryan’s spokesman Conor Sweeney told the National Review that “Republicans agree we need to fix our fiscal mess, whereas Democrats can’t even agree that the government needs a budget.”

Ryan continues to present his plan as a sharp contrast to the plan Obama has put forward. And this Monday, Ryan went to great lengths and with great effect to do just that in his speech to the Economic Club of Chicago.

Here are the highlights of his remarks.

The budget debate, Ryan said, has become a “game of green eyeshade arithmetic” in which the government elites – including Obama – insist that temporary spending restraints must be traded for permanent tax increases. This sets up the debate to be little more than an argument over who to hurt and how to manage the decline of our nation. So, higher taxes and rationed healthcare become givens when certain entitlements and spending are declared off-limits for reform. Ryan calls this a “shared scarcity” mentality. It is Obama’s vision of America’s future. To quote Ryan:

In a recent speech he gave in response to our [the Ryan] budget, President Obama outlined a deficit-reduction approach that, in my view, defines shared scarcity. The President’s plan begins with trillions of dollars in higher taxes, and it relies on a plan to control costs in Medicare that would give a board of 15 unelected bureaucrats in Washington the power to deeply ration care. This would disrupt the lives of those currently in retirement and lead to waiting lists for today’s seniors.

Shared scarcity represents a deeply pessimistic vision for the future of this country – one in which we all pay more and we all get less. I believe it would leave us with a nation that is less prosperous and less free.

The missing ingredient in a “shared scarcity” mindset is economic growth. Shared scarcity fails to consider all of the strategies which ought to be deployed to provide incentives for economic growth. It chases ever-increasing spending with ever-increasing taxes, which, in Ryan’s view, reduces the number of “makers” in American society and expands the number of “takers.” The incentives for hard work and risk taking are therefore eliminated, creating a society of discouraged, complacent, and dependent citizens.

Those committed to the mindset of shared scarcity, Ryan said, are telling future generations, “Sorry, you’re just going to have to make do with less. Your taxes will go up, because Washington can’t get government spending down.” They are telling future generations, “You know, there’s just not much we can do about healthcare costs. Government spending on healthcare is going to keep going up and up and up… and when we can’t borrow or tax another dollar, we’ll have to give a board of unelected bureaucrats the power to tell you what kind of treatments you can and can’t receive.”

In contrast to Obama’s pessimistic proposal for spreading the pain around, Ryan proposes four commonsense pillars to restore economic growth in this country and to step back from the spending abyss which the Bush and Obama administrations pushed the country toward.

Ryan’s first pillar for economic growth is for government to stop spending money it doesn’t have which is forcing it to borrow at unprecedented levels. He noted that the rating agency S&P recently downgraded the outlook on US debt from “stable” to “negative.” That sends a bad signal to growth creators. If S&P is telling business that America is a bad investment, they’re not going to expand and create jobs in America – not at the rate we need them to. More debt means more uncertainty, and more uncertainty means fewer jobs.

Averting a debt crisis ultimately means getting healthcare costs under control. The House-passed Ryan budget gets healthcare spending under control by empowering Americans to fight back against skyrocketing costs. The Ryan budget makes no changes for those in or near retirement, and offers future generations a stronger voucher-based Medicare program that they can depend on to guarantee coverage – a plan that provides less help for the wealthy and more help for the poor and the sick.

There is widespread bipartisan agreement, Ryan noted, that the open-ended, fee-for-service structure of Medicare is a key driver of healthcare cost inflation. His disagreement with Obama isn’t about the problem; it’s about the solution for controlling costs in Medicare:

If I could sum up that disagreement in a couple of sentences, I would say this: Our plan is to give seniors the power to deny business to inefficient providers. Their plan [Obama’s] is to give government the power to deny care to seniors.

Ryan reaffirmed the Republicans’ commitment to repeal ObamaCare and its burdensome maze of new regulations. Not only does ObamaCare impose an unconstitutional mandate on every American; it also imposes new regulations on businesses which are stifling job creation.

Let me share with you a figure that serves as a devastating indictment of the new healthcare law: So far, over 1,000 businesses and organizations have been granted waivers from the law’s onerous mandates. These waivers may prevent job losses now, but they do not guarantee relief in the future, nor do they help those firms that lack the connections to lobby for waivers.

What Ryan failed to mention is that 20% of the most recent batch of 204 waivers were given to businesses in Nancy Pelosi’s district.

Ryan’s second pillar for economic growth was the restoration of common sense to the regulatory environment. Regulations should be fair, unintrusive, and should not cause uncertainty as to their impact on America’s employers. Ryan would dismantle the growing scourge of crony capitalism, in which Washington bureaucrats abuse the regulatory process to pick winners and losers in the private economy. The NLRB and the FCC come to mind.

Congressional Republicans continue to advance reforms that stop regulatory bureaucrats from strangling job growth and innovation with red tape. We’ve advanced legislation to stop the EPA from imposing job-destroying energy caps on American businesses. We’ve advanced legislation to revisit the flawed Dodd-Frank law, which actually intensifies the problem of too-big-to-fail by giving large, interconnected financial institutions advantages that small firms do not enjoy.

Ryan’s third pillar recognizes that the economy can’t get back on track if Obama gets his way in trying to tax the country back into prosperity. Prosperity requires low tax rates and a tax policy that doesn’t change year by year, thereby creating so much uncertainty that businesses have no incentive to invest capital to create jobs. Even non-economists understand that high marginal tax rates are a drag on the economy and growth.

As the University of Chicago’s John Cochrane recently wrote, “No country ever solved a debt problem by raising tax rates. Countries that solved debt problems grew, so that reasonable tax rates times much higher income produced lots of tax revenue. Countries that did not grow inflated or defaulted.”

Ryan acknowledged that his plan is in fundamental disagreement with Obama and the Democrats regarding tax reform. A simpler, fairer tax code is needed because individuals, families, and employers now spend over six billion hours and over $160 billion per year figuring out how to pay their taxes. The tangle of special interest credits and deductions that currently exist must be eliminated in order to lower tax rates and promote growth. The Ryan budget that passed in the House does that by making the tax code “simpler… flatter… fairer… more globally competitive… and less burdensome for working families and small businesses.”

In contrast Obama says he also wants to eliminate deductions, but at the same time he wants to raise tax rates. That includes raising the top rate to a whopping 44.8%., which would amount to a $1.5 trillion tax increase on families and job creators. As always, Obama says that only the richest people in America would be affected by his plan. “Class warfare may be clever politics,” Ryan said, “but it is terrible economics. Redistributing wealth never creates more of it.”

The fourth and final pillar of the Ryan plan calls for rules-based monetary policy to protect working families and seniors from the threat of high inflation. It would restrict the current Janus-headed Federal Reserve to a focus on price stability only and get it out of its full employment role. The Fed, like most government agencies has extended its tentacles like kudzu, intruding ever more into the private sector, and most recently used monetary stimulus to bail out the failures of Washington politicians.

Families and businesses rely on a sound money policy, and the Fed will have its hands full if it sticks to that one goal alone. However, the Fed’s recent waywardness from rules-based monetary policy has increased economic uncertainty and caused its critics to call for eliminating the Fed. The Federal Reserve was intended to be an independent agency, not a political arm of the White House. It should explicitly publish and follow a monetary rule as its means to achieve its sound money goal.

We can’t achieve this goal by simply rubber-stamping increases in the national debt limit without reducing spending in Washington. Ryan noted:

Speaker Boehner made this clear in a recent speech at the Economic Club of New York: If the debt ceiling has to be raised, then we’ve got to cut spending. The House-passed budget contained $6.2 trillion in spending cuts. For every dollar the President wants to raise the debt ceiling, we can show him plenty of ways to cut far more than a dollar of spending. Given the magnitude of our debt burden, the size of the spending cuts should exceed the size of the President’s debt limit increase.

In concluding, Ryan told his Chicago audience that the country faces a choice between two futures. It can continue to go down the path toward shared scarcity – the path that the Obama administration has put the country on – or it can choose the Path to Prosperity – the name for the Ryan plan.

Ryan closed by recalling a statement by his mentor, the late Jack Kemp, who in 1979 gave this rationale for the only real choice America has:

We can’t progress as a society by using government to diminish one another. The only way we can all have more is by producing more, not by bickering over how to share less. Economic growth must come first… for when it does many social problems tend to take care of themselves, and the problems that remain become manageable.

Amen, Jack Kemp.