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Monday, July 21, 2008

Means Testing, for Medicare

Writing for the New York Times, Tyler Cowen suggests that cutting back payments to the relatively wealthy is a more efficient way to allocate government benefits.  For health care costs, this could be done by expanding Medicaid and making it an entirely federal program, and also by limiting Medicare.  Cowen writes,

Means_testing_medicareRight now, the United States is in the midst of a financial crisis, but even more 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. Even if the government is conservative in its spending, just paying out promised benefits implies that tax rates will rise to a crushing level — a range of 60 to 80 percent of income — well before the end of this century.

The main problem is Medicare, which reimburses the elderly for many of their health care expenses. As Mark V. Pauly, professor of health care systems at the University of Pennsylvania, has said, “Medicare as we know it today cannot be sustained over the next 50 years and probably will run into financial difficulties within the next 15.”

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. Most recently, this notion has been proposed by Peter H. Schuck, a Yale law professor, and Richard J. Zeckhauser, a Harvard political economy professor, in their book, “Targeting in Social Programs: Avoiding Bad Bets, Removing Bad Apples.”

“Means testing” — cutting back on payments to the relatively wealthy — 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. At the same time, the government would need to limit the growth of Medicare, which is universally applied to all elderly people; as a segment of American society, the 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. For instance, higher-income older Americans have already been paying larger Medicare premiums and receiving a lower prescription drug benefit; that’s part of what made it possible to expand the prescription benefit within budgetary constraints.

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 and will support more spending.

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.

Americans have supported the growth of many programs aimed mainly at the poor. Both Medicaid and the Earned Income Tax Credit have grown rapidly in size since their inception. The idea of helping the poor — and not having the government take over entire economic sectors — was the original motive behind welfare programs, in any case.

Furthermore, the argument for comprehensive and universal transfer programs does not meet the ideal of democratic transparency. 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 greater benefits for everyone, the poor included.

Targeted social benefits have been used successfully around the world. Mostly for fiscal reasons, Finland, Sweden, Britain and Australia all have moved toward a greater use of targeted benefits for those who need them. Typically in these countries, higher earners receive lower pension benefits — and that helps to maintain strong and robust welfare states.

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, rather than to one’s income or assets in any current year. In essence, higher earners would receive lower benefits instead of facing the prospect of higher taxes, as current trends predict. This policy reflects an ethic of individual responsibility — namely, that people who have earned well throughout their lives should be expected to take care of themselves, precisely so that the truly unfortunate can be helped.

Coverage gaps will remain. What if you lose or squander all your savings, for example, just before you retire? But the real question concerns the opportunity cost of the money we are using to subsidize the health care of high lifetime earners. Given the number of problems in the United States today, it’s hard to believe that this is the best use for the money.

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.

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