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Saturday, July 19, 2008

"'Means Testing, for Medicare"

Tyler Cowen:

Means Testing, for Medicare, by Tyler Cowen, Economic View, NY Times: Right now, ... pressing problems may lie ahead — and the presidential candidates aren’t addressing them.

No matter who sits in the Oval Office next year, there won’t be many degrees of freedom in the federal budget. That’s because spending on entitlement programs is largely locked into place, and the situation will become much worse as Americans age and health care costs rise. ... The main problem is Medicare, which reimburses the elderly for many of their health care expenses. ...

There’s one important idea lurking in the shadows that neither campaign is keen to talk about: paying out government benefits more efficiently. To put it bluntly, it means paying out full benefits only to those who really need them, and cutting back on payments to everybody else. ...

“Means testing” ... is one way to better allocate benefits. For health care costs, this could be done by expanding Medicaid, which is focused on the needs of the poor, and making it an entirely federal program rather than one partly paid for by the states. ...[T]he elderly are relatively wealthy. With limited resources, it would be better to reallocate health care subsidies toward the poor, whether they are young or old.

Furthermore, inducing the wealthy to pay for their own health coverage would create pressures to lower costs.

An alternative path is to put in place more means testing throughout Medicare. ... This could be taken much further. Of course, the idea of cutting some government transfers provokes protest in some quarters. One major criticism is that programs for the poor alone will not be well financed because poor people don’t have much political power. Thus, this idea goes, we should try to make transfer programs as comprehensive as possible, so that every voter has a stake in the program...

But even if this argument holds true now, it may not be very persuasive when Medicare costs start to push taxation levels above 50 percent. A more modest program, more directly aimed at those who need it, might prove more sustainable in the longer run. ...

Furthermore,... If taking care of the poor is the real value in welfare programs, those programs should be sold as such to the electorate. We shouldn’t give wealthier people benefits just to “trick” them, for selfish reasons, into voting for .. benefits for ... the poor...

Targeted social benefits have been used successfully around the world. ... The biggest problem with such efforts is measuring and enforcing the rules that establish who receives a specified benefit and who doesn’t. Means testing in Medicaid causes many people to hide income and assets or to transfer assets to family members, so they can look poorer and still get benefits. This is a real problem, but the fiscal difficulties of staying on our current spending path may well be far worse.

Advocates of health care reform tend to be long on ideas for expanding care and access, but short on practical solutions for cost control. The argument is often made that single-payer health care systems in Canada or Europe are cheaper than health care in the United States. But Medicare is already a single-payer plan, yet its costs are unsustainable.

The best option is probably to tie the size of Medicare benefits to a person’s lifetime income, which is relatively easily measured and hard to game...

Don’t expect to hear much about targeted benefits anytime before November. Such proposals would acknowledge the painful but probably realistic notion that we don’t have many good ways to control health care costs.

Furthermore, balancing the budget is a popular goal, while cutting benefits is not. But if you’re asking which ideas are most likely to transform economic policy over the next 15 to 20 years, here is one place to start looking.

I believe the political argument that giving everyone a stake in the program helps to preserve it has more validity than Tyler does, market failures (some of which hit all income groups) probably play a larger role in my thinking about government responses to the healthcare problem than in his, and I have more confidence than Tyler that a universal care system has the potential to lower costs.

Update: Responses to Tyler's column from Paul Krugman, Greg Mankiw, and Tyler himself.

    Posted by on Saturday, July 19, 2008 at 02:07 PM in Economics, Health Care, Social Insurance | Permalink  TrackBack (0)  Comments (88)


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