12 February 2010 
I like to oversimplify the Medicare debate into three questions:
- Do you think we need to slow the growth of Medicare spending?
- If yes, what should we do with the savings?
- How should we change Medicare to slow the growth of its spending?
I will address the first two questions in this post by creating a 2X2 box:
| We should use Medicare savings to offset new entitlement spending | We should use Medicare savings to reduce future deficits | |
| We must slow the growth of Medicare spending | Obama Democratic Congress |
Rep. Paul Ryan Sen. Judd Gregg Hennessey Some Republicans, especially younger ones |
| We should not slow the growth of Medicare spending | AARP Hospitals, doctors, nursing homes, drug companies, health insurers |
Other (scared) Republicans |
Yes, AARP’s position is nonsensical. I’ll come back to that.
Medicare spending this year will be $516 billion. Seniors will pay about $78 B in premiums, and taxpayers will pay the other $444 B, making it the second largest item in the federal budget after Social Security (at about $700 B). The taxpayer cost of Medicare is projected to grow about 6.6% per year over the next decade, while the economy is projected to grow 4.5% per year over the same time period. If the projections are right, our economy will grow 54% (in nominal dollars) and Medicare will grow 89%. The cost to taxpayers will grow from 3% of GDP to 3.5% of GDP. (All data is from CBO.)
If Medicare spending growth is not slowed, then some combination of three bad things will happen, and sooner than you might think:
- budget deficits will grow to unsustainable levels, forcing a U.S. debt and currency crisis;
- taxes will have to be increased to historically high levels, and then they will have to be raised again, and again, and again;
- other spending priorities within the federal budget will be squeezed. Federal spending for education and defense, cancer research and agriculture, border security and clean energy research will all suffer.
The President and Congressional Democrats
For most of my time in Washington, Congressional Democrats were in the bottom left green box. They opposed any attempts to slow the growth of Medicare spending, and played the politics of the “senior card” to try to scare off Republicans. Before 2009 the defining feature of Beltway Democrats on Medicare was their opposition to “cuts.” This provided them with a potent political weapon.
They were supported by both the seniors lobby (most notably AARP) and all classes of health providers. This alliance is why Medicare is so much harder to reform than Social Security. Elected officials may be willing to challenge AARP if the alternative is raising taxes, but few elected officials are willing to brave the additional onslaught from their local hospitals, doctors, and nursing homes.
President Obama moved Congressional Democrats and even AARP from the bottom left green box to the top left blue box. The President argued that Medicare spending should be slowed and proposed policy changes to do so. He combined these savings proposals with a new federal entitlement program for the uninsured.
This was a radical idea:
- Democrats were now proposing to slow Medicare spending growth.
- When combined with the new entitlement, the politics play out as a transfer from seniors to the uninsured. Seniors vote far more consistently than do uninsured people.
The Administration and its Congressional allies (most notably Senate Finance Committee Chairman Baucus) brokered explicit deals with the health sector to move them to the top left green box. They (legitimately) argued that health providers would benefit from the increased health care usage resulting from millions more Americans having taxpayer-financed prepaid health insurance. This explains the back room deals with the formerly-evil health plans and the formerly-evil drug companies. Baucus’ staff were explicit with health industry lobbyists: “Your industry will make $X B more from increased demand. You therefore need to support nearly $X B in Medicare savings in our bill.”
Unfortunately, our best evidence that these health care bills would not slow national health care spending is that these health sector interest groups made this rational decision. Had these bills actually achieved the President’s stated goal of slowing national health care spending, the industry groups would almost certainly have opposed them.
AARP’s support for the health care bills is harder to understand. Their position is best described as “We oppose ‘cutting’ Medicare spending, but if you do it, then spend it on a new health entitlement for the uninsured.” I will guess that their support for the President’s plan and Democratic bills was a combination of three factors.
- AARP’s leadership leans heavily leftward and Democratic. In this respect they were placing their own ideologies above the interests of their members.
- Some of the uninsured are near retirement. They would benefit from the new entitlement. (AARP accepts members as young as 50.)
- AARP’s leadership probably made a strategic decision to support the new President who can help and/or hurt them on any number of fronts.
Little discussed in the past year of debate on health care reform is that Beltway Democrats are now for slowing the growth of Medicare spending, as long as those savings are “used” to offset a new health care entitlement for the uninsured.
Congressional Republicans
In 1995 the Republicans proposed to slow the growth of Medicare spending as part of the Balanced Budget Act. That bill was paired with a separate tax cut bill. Congressional Republicans argued they were slowing the unsustainable growth of Medicare spending as part of a shared sacrifice to balance the budget. President Clinton and Congressional Democrats argued Republicans were cutting Medicare to pay for tax cuts. Republicans argued they were in the top right red box above. Democrats would have argued that Republicans were in a different box labeled “Use the Medicare savings for tax cuts.” President Clinton vetoed both 1995 bills. (At the time I worked on Medicare for Senate Budget Committee Chairman Pete Domenici.)
In 1997 President Clinton negotiated a balanced budget (and tax cutting) deal with Congressional Republicans which significantly slowed the growth of Medicare and Medicaid spending. The structure of the 1997 law was parallel to that in 1995, but the magnitudes were smaller and President Clinton got some of his spending priorities addressed as well. That deal could have been attacked in the same way as the 1995 deal, but instead everyone agreed to frame the Medicare savings as contributing to deficit reduction and a balanced budget, putting Congressional Republicans, Democrats, and President Clinton squarely in the top right red box above. (At the time I worked on budget and health issues for Senate Majority Leader Trent Lott.)
Today Congressional Republicans make two arguments:
- We need to slow the growth of Medicare spending as part of a solution to long-term entitlement spending and deficit problems.
- We should not use Medicare savings to finance a new entitlement.
The key to understanding Congressional Republicans’ behavior over the past year is that all of them have made argument #2, while only a few of them bravely make argument #1 as well.
I have argued for both. I wrote a few months ago that I believe our long-term deficit and entitlement spending problems are more important than the lack of health insurance today. While I support slowing the growth of Medicare spending, I oppose doing so if we’re just going to turn around and create a new entitlement program. We would then lose a key opportunity to address what I believe is America’s most important economic policy problem.
Last year Congressional Republicans discovered that policy weaknesses in ObamaCare created political vulnerabilities. One of their criticisms was #2 above, that the pending legislation would slow the growth of Medicare spending but also create a new entitlement program.
Most Congressional Republicans were careful in their language. They said they opposed “cutting Medicare to pay for a new entitlement.” Even in being responsible, they were using the intentionally inflammatory word “cut.” They were turning the seniors card back against Democrats. This was savvy politics but damaging to efforts to slow the growth of Medicare spending for deficit reduction. As a policy matter it helped kill a bill that was both fiscally irresponsible and terrible health policy, but at the cost of validating the word “cut” and the senior scare tactic.
Other Congressional Republicans short-handed their criticism to “I oppose this bill, which cuts Medicare by $500 billion.” This is much harder to justify, unless you go with an ends-justify-the-means argument.
It’s easy for me to sit on the outside, after a terrible health care bill has died, and say “I wish they hadn’t used attack X to kill the bill because of its long-term damage to other policy goals.” We cannot know if that attack was dispositive, and those in office have the responsibility for making those judgment calls. At the same time, it’s amazing that it was effective in contributing to the bill’s death, given that AARP and the entire health sector were essentially paid for their silence.
To see the Medicare battle playing out today, continue reading with Medicare: Krugman v. Gingrich, and Krugman v. Ryan.
(photo credit: WILL I GET A REFUND FROM MEDICARE? by roberthuffstutter)
Keith
Do you know how much real evidence there is that seniors scare so easily?
I turned 65 last summer and am on Medicare. I also have other insurance, however and would gladly embrace a reduction in Medicare if it truly resulted in reduced health spending across the board. I have often said that I would give up Medicare altogether if the Feds just gave me back what I paid in. They could even keep the interest. Using that money to set up a health savings account would make me much more sanguin about my medical future than having the government involved in it to the extent I expect they will be.
So, my initial question. Have there been any pols of the ancient americans that reflect a need or desire for all of this government largess?
Your daily distortion from Keith Hennessey. Health Care Reform is about reform, not entitlement. It is a recognition of the fact that our health care system is the most expensive by far, though our health care outcomes are below those of many countries that spend a fraction of what we do, for example France. It is a recognition of insurance industry decades long honing of an expertise at purging the sick from their insurance rolls, both by pricing them out, and recission of coverage on frivolous grounds, which we have perversely incentivized for years, exacerbating social costs and screwing American families to the wall. So your claim that Medicare cuts are made so Dems can get their hands on some money and spend it is a distortion worthy of a political hack. If the shoe fits.
Meanwhile, the Rep. Ryan budget that cowardly Republicans are busily fleeing has something else in mind for the money saved by eviscerating Social Security and Medicare: tax cuts. Surprise surprise! Lurking in that manuscript, but exempted from the CBO cost estimate of it, are tax cuts on the order of many trillions over the next decade, plunging the fiscal situation ever deeper into catastrophe.
Majorajam, I have heard the claims about the healthcare outcomes, but I am not finding good links to the studies. Can you provide links?
All of which is to say an honest matrix would have Medicare cuts as a component of a package of other policy proposals with its aggregated budget impact, (including tax cuts), and Medicare cuts on a standalone basis and its impact on the budget. As of now, no Republican, Democrat nor mendacious blogger has signed their name to the latter.
This article indicates that taxpayers will pay $444 billion for medicare spending; however; this should not be mistaken for general revenues. It should be noted that of the $444 billion "paid by taxpayers" for all Medicare programs approximately half is paid via payroll tax contributions and the rest from general revenues. Broken down within programs, most of Medicare A (85%) is paid for by payroll deductions , whereas most of Medicare B (73%) and D (77%) are paid for by general revenues.
Keith,
Re: "“cutting Medicare to pay for a new entitlement", as you indicate, throughout the healthcare "reform" debate proponents have presented the misleading argument that the incremental spending on the new entitlement would be fully "offset" and thus "deficit-neutral", "not adding a dime to the deficit". Leaving aside important, appropriate skepticism that even what they claim will happen will actually happen (that Congresses and presidents in the future will stick to the tough parts of the plan, that supposedly expected healthcare savings will materialize, etc.), the whole concept is terribly misleading in the context of our enormous, unsustainable long-term fiscal imbalance and thus in the context of the need to make large, painful, politically unpopular and politically difficult budgetary sacrifices (on both revenue and spending sides), because any budgetary sacrifice used up as an "offset" for incremental spending (or for a tax cut) is no longer available to contribute to reduction of deficits, thus requiring us to add even more painful and politically difficult sacrifices to solve the problem, and thus adding to the adverse consequences until we solve the problem and the adverse consequences if we don't solve the problem and a crisis hits.
To illustrate, it’s like I have a friend, Joe, who is obese and, per his current habits and gap between calories consumed and calories burned, will continue to get increasingly obese and eventually die a premature death. Joe clearly must cut down from 4 meals a day to 3, and start working out 4 days per week. Both of these changes will be extremely difficult for Joe, but if he is to avert disaster, he must make these changes, and the longer he waits, the greater the risk of disaster and the greater the ultimate sacrifice he’ll have to make (having to cut back even more on consumption and work out even more, along with more physical pain, which will also make the working out more difficult). So Joe realizes that he must make this sacrifice of less consumption and more exercise.
But then Joe calls me, and the following dialogue transpires.
Joe: I’m going to add a late night snack to to my daily consumption. But don’t worry, I’m going to “offset” it — every Saturday I’m going to work out and cut down from 4 meals to 3. So adding the late night snack every evening is “weight-neutral”.
Me: But Joe, even leaving aside my doubts that you’ll actually get to the gym once a week, you have to do that meal reduction (and much more) and that exercise (and much more) ANYWAY, to address the problem you already have! In other words, that exercise and meal-reduction is a given. The main thing you’re doing now is introducing the element of the late night snack every evening. The best that can be said about these changes you’re labeling “offsets” is that, IF you actually implement them right away and maintain them, it might mean doing them a bit sooner rather than later, but you really shouldn’t pretend that making sacrifices that you have to make anyway (and which sooner or later you’ll be forced to make) and labeling them “offsets” really means that they offset the calories of your late night snacks every night and makes the whole set of changes “weight-neutral” in a meaningful sense. Mainly what’s happening is that the degree to which working out and skipping a meal on Saturday would have mitigated your problem will not be offset by your incremental consumption (the late night snack), leaving you with the need to work out even more and skip even more meals than you otherwise would, and I remind you that you’ve long avoided even the degree of such sacrifice that’s required without adding even more of a burden.
Joe: Well, um, it’s, er, fully offset. Ya’ know, weight-neutral. Just look at the numbers that show it. Doesn't add an ounce to my weight.