Undercharging for Medicare

For a while now I have argued that if people really are attached to Medicare as it is today, then premiums need to triple.

Along comes this analysis from Robert Dittmar via Hit and Run.  He argues almost all the current federal deficit is created almost entirely by the difference between the cost of government medical services and the premiums it charges.

As a thought experiment, let’s suppose that medical expenditures had been self-financed since the inception of government health care in the 1960s. What would our debt and deficit look like today? To answer this question, I simply added the medical care expenditure deficit back into the total government deficit. The result is depicted in [the figure below[ and is astounding (at least to me). Outside of medical expenditures and revenues, the Federal government sometimes ran a surplus and sometimes ran a deficit from 1966 until 1980. Starting in 1980, and lasting until 1994, the government consistently ran a deficit outside of medical spending, but from 1995 until 2010, it consistently ran a surplus. In 1994, the cumulative excess spending would have reached a bit over $1 trillion. But by 1999, debt due to sources other than medical spending would have been completely eliminated by surpluses! The government wouldn’t have needed to borrow again until 2011.

Of course, this is not entirely a Medicare issue.  Almost by definition, Medicaid and VA benefits are always going to be in deficit, since there are no premiums associated with these.

My normal response would be that the government not do this stuff.  But that is clearly a political impossibility.  We libertarians like to ignore realities like that, but it is true.  As such, I think two things will both be necesary

  • Substantial hikes in Medicare premiums
  • Some sort of system-wide cost reduction

To his credit, I suppose, Obama recognizes the need for the latter.  Unfortunately, he goes about it in exactly the wrong way.  His approach is to federalize the entire health care system and impose the same type of government-set rates on the rest of the health care system that obtain in Medicare.   But this does nothing to solve the government's cost problem.  In fact, it is likely to do the opposite.  To the extent that Medicare gets rates today that are subsidized by higher rates on non-Medicare customers, then forcing the entire health care system onto Medicare reimbursement rates will force an increase in Medicare rates, or a vast exit of health care capacity, or both.

If Medicare is going to continue to be a government program, we need to shift to a system that encourages price discovery and price shopping by medical consumers in the market end of the system.  We should be encouraging high-deductible health insurance plans rather than effectively banning them.


  1. MingoV:

    "I think two things will both be necesary:
    Substantial hikes in Medicare premiums
    Some sort of system-wide cost reduction"

    System-wide cost reduction will be impossible. The only ways to achieve it are to ration care or reduce payment rates for services. Rationing care will not pass muster with the public. Reducing payment rates will cause providers to do one of the following: 1. Stop accepting Medicare patients, 2. Provide cheaper and lower-quality care, or 3. Find ways to "beat" the system (such as scheduling more frequent follow-up visits, treating one problem at a time to generate more visits, ordering counseling or nutritionist visits that aren't really necessary, etc.)

    Increasing premiums is not a good option: it encourages Medicare recipients to seek more care because they feel that they have paid for it.

    The best option is to greatly increase co-payments. That provides incentives to not seek care for trivial ailments and to choose lower-priced options (such as an X-ray instead of a CT-scan or medical therapy instead of surgery) when care is needed.

  2. LarryGross:

    what would you say about military retirees health care - not the VA but regular military retiree health care?

    do you know that in a couple of years the military will have more retirees than active duty and they (YOU) will have to continue to pay for their benefits - and they retire after 20 years even if they never served in combat?

    Do you truly think that DOD health care benefits are not a major part of the budget costs?

    Would you be in favor of applying the same cost changes to military retirees also?

  3. LarryGross:

    re: " ration care or reduce payment rates for services." - isn't this the same thing that will happen to non-govt health insurance?

    doesn't private insurance, right now, ration care by capping pay out and requiring co-pays and increasing premiums, etc?

    isn't private health care projected to do the same thing that Medicare and DOD health care will do?

    if we "control" Medicare but don't deal with private health care - is it fixed?

  4. Andrew Hofer:

    Warren, I was under the impression that we were 'effectively banning high deductible health plans', yet was shocked to find my employer (~5000 people) offering one. Furthermore, when our benefits consultant rolled them out to us, he said most employers are going this way. The big HMOs no longer save money for companies large enough to "self insure", so they are all doing these "CDHP" plans. Imagine my shock, after Obamacare, to be incentivized to have an HSA and a high deductible. I do get network bargained prices, though. I also chair a small charity and have been watching their health insurance premiums skyrocket (opening bid +40% each of the last three years). Unintended consequences are all over the place.

  5. LarryGross:

    Americans are job mobile now days. We have portable pensions. We need portable health insurance that is available to everyone regardless of pre-existing conditions and they need to be community rated (same price to all).

    When someone can work part-time for two different employers and then switch jobs and still retain insurance, we'll have a better situation for the country and for our economy.

    We've spent all this time and effort focusing on Medicare and MedicAid while essentially pretending that's it's only an entitlement problem.

    People who can't get insurance - still get care, but they bill the people with insurance for their care - via EMTALA and MedicAid.

    ObamaCare was not the best solution by far but given the myopic intransigence and willful ignorance of those who refuse to see the realities of our system - what's the answer?

    We do not have a Medicare "problem". We have the very same problem with Military health care - TRICARE yet we refuse to deal with it and prefer to play this really dumb blame game.

    How can we say we want solutions and then run away from doing anything? Tell me what REPLACE is after REPEAL.

    I lay the blame directly at the feet of those who oppose ObamaCare but have no real alternatives and instead just want to damage/hurt/kill Medicare - as if that's the problem.

  6. Daublin:

    Larry, here are two prongs of a policy to address the problems you describe. I've encountered this sort of thing being discussed on many occasions, so it is a pity that you have not.

    First, detach medical insurance from employment. This would solve the bulk of the issues you raise: it would make insurance portable, and it would reduce problems due to preexisting conditions. To begin with, eliminate the ObamaCare rules about large employers being forced to provide insurance policies of a certain character.
    Second, provide a direct safety net rather than screwing around with indirect approaches like insurance, price controls, employment contracts, and personal mandates. Some examples of direct support would be: cash assistance for people with genetic conditions, and public funding for second-tier medical care.