Why Obama Should Stand Firm on a Public-Section Insurance Option Part 2

( * Please note parts 1 and 2 of this piece were posted simultaneously. This is part 2-- part 1, which you really should read first-- is right below)

Conservatives often argue that it just isn’t fair to force private health insurers to compete against a government plan because . . .

Well, to be perfectly candid, they know that most for-profit insurers would lose. They don’t put it that way, of course. They argue that the government plan would enjoy “unfair advantages.” It wouldn’t’ have to pay profits to shareholders, for instance, and it wouldn’t have to pay seven-figure salaries to its secretaries. It also wouldn’t have lay out hundreds of millions to advertise –or to lobby Congress.

But have the private insurers’ apologists considered the possibility that private insurers pay their executives too much? Maybe you don’t have to ante up $11 million to attract a good man. (I know you can get a good woman for less.) Perhaps for-profit insurers squander money on needlessly lavish advertising. Maybe these companies shouldn’t be spending quite so much trying to grease the palms of our elected officials.

As for profits for shareholders, certainly those who invest in a business have a right to expect dividends and/or capital gains. But one could argue that it’s up to the private sector company to produce those profits by being more efficient than government. Conservatives themselves often argue this position.

It makes sense to give for-profit insurers a chance to prove that they can add value to the system, if only because many employees who have private insurance today do not want to give it up until they see how health care reform is working out. But, if over time, for-profit insurers fail, and more Americans find that they can get better coverage for less from Medicare-for-all—or from not-for-profits in the private sector--they should have that choice. Taxpayers cannot afford to bail out another industry that can’t figure out how to do its job without short-changing its customers.

This isn’t to say that Medicare-for-all is a sure-fire winner. Today’s Medicare is a deeply flawed system. It needs fixing.

We Must Begin to Make Medicare More Efficient

Ultimately I disagree with the Institute’s report on just one major issue: the assertion that public-sector insurance plans always do a better job of containing costs than private insurers.

Berkeley political scientist Jacob Hacker makes the argument in “The Case For Public Plan Choice In National Health Reform ,” . where he argues that “Although you would not know it from the debate over Medicare’s finances, Medicare has become increasingly effective at restraining the ‘excess growth’ of spending.

Hacker, who wrote the paper for the Institute for America’s Future, uses the chart below to compare the growth in Medicare spending to the growth in private insurers’ reimbursements: “As Figure 2 shows, private plans’ spending per enrollee has grown substantially faster than Medicare spending per enrollee, especially in the last decade or so. Private insurance outlays per enrollee grew an average of 7.6 percent a year between 1983 and 2006, compared with 5.9 percent growth in per enrollee spending under Medicare—a 22 percent difference. (1983 was the year in which Medicare’s prospective payment system for hospitals was implemented; 2006 is the last currently available data year.)

“The gap is even bigger in recent years,” Hacker adds. “Between 1997 (when the Balanced Budget Act of 1997 further constrained Medicare spending) and 2006, private health insurance spending per enrollee grew at an annual rate of 7.3 percent, compared with an annual growth rate of 4.6 percent under Medicare—a full 37 percent difference.”

But, of course, when you make a chart, everything depends on the beginning and ending points that you choose. The chart above appears to have been cut from the chart below ---which offers a more continuous, year-by-year overview of Medicare spending versus spending by private insurers, all the way back to 1970.

Compare the yellow and purple lines, and it becomes evident that while Medicare has done a better job of clamping down on costs in some years—private insurers were more successful in other years.

Hacker is right when he points out that from 1997 to 2006 Medicare has brought health care inflation down significantly. But as the legend reveals, this was largely due to the fact that Medicare reimbursements grew by only 1.2 percent a year for just two years--from 1997 to 1999 .

And this was not, as Hacker suggests, because “Medicare had become increasingly effective at restraining excess” spending. Rather, it was because the Balanced Budget Act (BBA) of 1997 slashed Medicare reimbursements to hospitals, physicians, home health agencies, and skilled nursing facilities, with planned net spending reductions of $116.4 billion from 1998 to 2002 .

Meanwhile, the American Hospital Association complained of "service closures and cutbacks as hospitals and other health care facilities attempt[ed] to wrestle with the BBA's dramatic reductions ." 

Many thought the across –the- board cuts were crude. It is difficult to assess whether they lowered the quality of hospital care, but according to a 2006 article published in Health Services Research, “hospital financial health deteriorated over the time period, calling into question the sustainability of quality patient care in the face of further reimbursement cuts. As cuts continue, it will be an ongoing challenge for hospitals to continue to provide high-quality care using fewer resources .” 

Congress listened, and “as a result of significant protests from the American Hospital Association, Congress passed the Balanced Budget Refinement Act in 1999 to restore $8.4 billion and subsequently passed the Benefits and Improvement Protection Act in 2000 to restore a further $11.5 billion of the original $116 billion reductions.”

Meanwhile private insurers had been cowed by complaints about “managed care” and they, too were becoming more generous. Thus, Medicare spending resumed its climb, rising by more than 5.5 percent a year from 1999 to 2006.

Private insurers had enjoyed their day in the sun a few years earlier when their spending slowed.. From 1993-1997 their reimbursements creeped up by only 2.8 percent a year. (Hacker does not include these four years in his snapshot of “recent years.”) This was the heyday of “managed care,” when HMOs began saying “no” to many procedures. Then came he backlash, and as HMOs lost market share at the end of the 1990s, they began saying “yes” more often. After they threw in the towel, their reimbursements climbed by well over 8 percent a year.

Over the same period as Hacker notes, Medicare spending grew by “only” about 5.5 percent a year. Medicare managed this feat largely by holding virtually all doctors’ fees flat even while their overhead climbed. (This was another crude solution.) But now the jig is up: physicians are rebelling. Many primary care doctors are no longer taking new Medicare patients. The Medicare Payment Advisory Commission has recommended that Medicare begin raising fees at the bottom of the physicians income ladder while cutting for some services at the top.

In sum, neither Medicare nor private insurers have been successful in putting a lid on costs for more than a few years at a time. And when they have tried, critics insist that they are threatening patients’ health .

Step back, look at the larger chart, and you find that over time (1970 to 2006) Medicare payments soared by an average of 8.7 percent a year, while private insurers have been laying an addition 9.7 percent a year. The one point difference just doesn’t suggest that a public sector plan is intrinsically better suited to holding down costs. (Even in recent years (from 1999 to 2006) Medicare spending has continued to grow at roughly 5.5% a year, hardly a sign of progress.)

In the end, what the chart reveals is that whether Medicare or private insurers are paying, health care costs have been levitating to a point that U.S. healthcare has become unaffordable. We cannot sustain 8.7 annual healthcare inflation or 9.7 percent growth—not unless wages and GDP are spiraling at the same rate. And we know that they won’t.

Before we roll out Medicare- for- all, we need to face the face the facts: Medicare is a spectacularly wasteful system. Research suggests that one out of three Medicare dollars are spent on unnecessary, unproven, redundant and over-priced tests, treatments and products that are no better than the older treatments that they are trying to replace . We can no longer afford to put a match to health care dollars. White House budget director Peter Ortszag has made the numbers crystal clear: Medicare spending is not sustainable. As Archer acknowledged in Tuesday’s conference call: “ Medicare will have to get tougher. I believe it will.”

Medicare needs structural changes, both in term of what it covers, and how it delivers care. This is why Medicare reform will be key to national health reform: we need a far more efficient model for a public-sector plan. It will not be easy—and it can’t be done by simply hacking away at what Medicare covers, or how much it pays healthcare providers, indiscriminately. Cuts need to be made judiciously, with a scalpel, not an axe.

Again, we can learn from Massachusetts: “It’s not like the fat sits out here easily identified and you just slice it off, Jon M. Kingsdale, executive director of the agency that administers Massachusetts Commonwealth Care told the New York Times. “It’s marbled throughout the meat”

Comments

[Maggie Mahar]

Don--

Yes beng "a good stewad" is what it is all about.

I agree that the idea of stewardhip has gone out of fashion, in the public sector as well as among money-mansgers in the private sector.

In the private sector, my favorite sources among money-mangers tend to be people over 60--ofen well over 60, As one of them
explained to me: "We dressed up--wore white shirts and black suits, out of respect for the money--other people's money."
More recently, the phrase "other people's money" has become a joke.

[Don Levit]

Pat:
Thanks for correcting me on your vision of Medicare Part E.
Maggie:
In regards to saving dollars for cost effective treatment, count me in as a supporter.
We need to be just as careful in how we set aside dollars to pay for the benefits, even cost effective benefits.
Right now, we're not being good stewards.
Don Levit

[Pat S]

Don --

I think you don't understand what I mean by Medicare Part E. Part E would be a voluntary buy in program -- a federal insurance option -- under a universal coverage plan, and as such would collect a large amount of its income from private individuals and employers, although some from the government covering low income people. It is designed to fit into Obama's universal coverage plan, under which some people would have their private insurance paid for by the government as well.

It would be part of Medicare in that it would be administered by Medicare, would run its claims through Medicare, would share the fee schedule and qualifications system of Medicare, etc. However, it would run as a program competing for paying enrollees looking for a better deal than they could get from private insurance, and would collect fees accordingly.

[Don Levit]

Pat:
I agree with you that the government will not default on Social Security or Medicare.
All it has to do is merely issue more Treasury bonds to cover any deficits between income and expenses.
It would seem to me to be a no-brainer to do so, for the government has nothing to lose, at least from an accounting standpoint. The non marketable Treasury securities is an asset to the Trust Fund and a liability to the Treasury, for a net effect of zero!

Regarding Medicare Part E, the payments to the Trust Fund would be in the name of the insured, not by the insured.
The insured pays the taxes into the Treasury, which spends the insured's hard-earned dollars on other governmental expenses.

When one sees that there is no lock box on either the Trust Funds' "surplus" or their contributions from payroll taxes, it puts the current stock market meltdown in a new light.
While the stock market may have been reduced by 45%, the hard dollar assets in the Trust Funds have been leveraged 100% (remember, no assets set aside to fund future benefits).
Even if the government had to make up the difference for the losses in the stock market, it would still be ahead of the game.
Don Levit

[Maggie Mahar]

Don, Barry & Pat

For the U.S. to default on SS would send a signal to the rest of the world that we cannot afford to send.
The dollar would tank. Say good-bye to the U.S. standard of living.

No politician is going to let SS go under. No poitiicans is going to let Medicare go under.

And Pat is right: people age 55 to 65 who lost 40% of the savings in their 401-k are not going to get most of that money back.
Many have already sold, taking large losses. It's unlikely that they will be able to get the timing right and get back into the market at the right time. Many have been so badly burned that they'll never go into the stock market again.
These people are going to need SS and Medicare --just to survive.

SS needs only a minor fix.
Obama's idea of beginning to tax income over $250,000 is a good one.

Medicare costs can be reined in. As I keep saying, it's the inflation that is the problem.

IF we cut much of the obvious waste that I, Dr. Pat, Barry and others have written about on HealthBEAT
we can cover everyone in the country for the money that we are now spending.

Going forward, the trick will be to make sure healthcare inflation does not exceed GDP growth.
Let's say that over the next 15 years, GDP growth averages 2% to 3% a year.
That means trimming healthcare inflation that now runs 7% to 8% a year by about 5%.
Clearly, that's possible if we a)take a close look at overtreatment and b) send a signal to the drug industry, the device industry, the hospital industry that we are not intersted in any more $100,000 drugs that give people a few more months of life (they should spend their resarch dollars elsewhere); that we are not interested in any artificial knees "made especially for women" that are no better than the plain vanilla knee and cost twice as much; that we are not intersted in hospitals that look like luxury resorts, and that we will not authorize any construction of new wings etc. without taking a close look at need and expected cost.
Just as we need to send a signal to the auto industry (we want mid-size and small fuel-efficient cars) we need to send a signal to the healthcare industry (we want affordable care. Don't bother investing in gold-plated care-- we can't afford it. We want the tpe of care people have in countries like Germany, Switzerland and France--where they have better outcomes, fewer frills and much less use of advanced technologies.)

[Maggie Mahar]

Don, Barry & Pat

For the U.S. to default on SS would send a signal to the rest of the world that we cannot afford to send.
The dollar would tank. Say good-bye to the U.S. standard of living.

No politician is going to let SS go under. No poitiicans is going to let Medicare go under.

And Pat is right: people age 55 to 65 who lost 40% of the savings in their 401-k are not going to get most of that money back.
Many have already sold, taking large losses. It's unlikely that they will be able to get the timing right and get back into the market at the right time. Many have been so badly burned that they'll never go into the stock market again.
These people are going to need SS and Medicare --just to survive.

SS needs only a minor fix.
Obama's idea of beginning to tax income over $250,000 is a good one.

Medicare costs can be reined in. As I keep saying, it's the inflation that is the problem.

IF we cut much of the obvious waste that I, Dr. Pat, Barry and others have written about on HealthBEAT
we can cover everyone in the country for the money that we are now spending.

Going forward, the trick will be to make sure healthcare inflation does not exceed GDP growth.
Let's say that over the next 15 years, GDP growth averages 2% to 3% a year.
That means trimming healthcare inflation that now runs 7% to 8% a year by about 5%.
Clearly, that's possible if we a)take a close look at overtreatment and b) send a signal to the drug industry, the device industry, the hospital industry that we are not intersted in any more $100,000 drugs that give people a few more months of life (they should spend their resarch dollars elsewhere); that we are not interested in any artificial knees "made especially for women" that are no better than the plain vanilla knee and cost twice as much; that we are not intersted in hospitals that look like luxury resorts, and that we will not authorize any construction of new wings etc. without taking a close look at need and expected cost.
Just as we need to send a signal to the auto industry (we want mid-size and small fuel-efficient cars) we need to send a signal to the healthcare industry (we want affordable care. Don't bother investing in gold-plated care-- we can't afford it. We want the tpe of care people have in countries like Germany, Switzerland and France--where they have better outcomes, fewer frills and much less use of advanced technologies.)

[Pat S]

My observations:

1.) Given the collapse of many personal retirement plans in this recession, social security will be paying generous benefits in the foreseeable future, since any politician opposing that will need new employment soon.

2.) The US cannot default on its obligations, including the obligations to the endowment programs, since to do so would cause havoc in credit markets that would make the last year seem mild.

3.) Given that, the US is going to have to figure out how to pay its obligations under social security. There is some possibility of more cuts in benefits, but that would be hard politicaly. Raising the cap on social security payroll tax to cover more income would be another alternative. Obama has endorsed using that approach, and suggested an interesting wrinkle whereby income between the current cap and about $250,000 would be exempt, with taxes resuming above that to some unspecified level. Then social security could continue to be self financing and the "trust" fund could be left alone for another period of time.

Barry and I have already agreed that the popular talk radio spector of the US defaulting on its social security obligations is unlikely, since the political and economic ramifications would be drastic.

Medicare is another issue. It is less well funded and is due to exceed its ablility to pay its responsibilities much sooner than social security.

One of the potential benefits of Medicare Part E would be to increase the supply of money going to Medicare from payments by or in the name of the insured. Since many of these customers may possibly use much less health care than typical Medicare enrollees do now, there is some possibility that they could generate some surplus in the program. For this to work, of course, we would need a level playing field that stopped private insurance from dumping poor risks on the public plan.

I will say that the idea of a voucher plan, even using VAT to finance it, would help all that to become a reality a lot sooner.

[Don Levit]

Pat:
The money in the mutual fund is a privately owned asset, your asset.
In contrast, the money in the Trust Funds is owned by the federal government.

When Social Security was passed, the adherents had certain worthwhile objectives.
For example, In recommending that Social Security be financed through payroll taxes, the Committee on Economic Security explained "contributory annuities are unquestionably preferable to noncontributory pensions. They come to the workers as a right, whereas the noncontributory pensions must be conditioned upon a means test."
As President Roosevelt explained "We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions."

The Advisory Council believed "The method of financing Social Security by dedicated taxes has given the system considerable protection from having to compete against other programs in the general budget."

These worthwhile goals are in stark contrast with how Social Security and Medicare actually operate.

According to the Fiscal Year 2008 Financial Report of the U.S. Government, On page 33, it states "that the dedicated payroll taxes are merely credited to the trust funds. "THE TRUST FUND BALANCES DO NOT REPRESENT CASH."
Page 96 "The term Trust Fund means only that the law requires that a Particular fund be accounted separately.
THE ACTIVITY OF EARMARKED FUNDS DIFFERS FROM FIDUCIARY ACTIVITIES IN THAT EARMARKED FUND ASSETS ARE GOVERNMENT OEWNED.
THE GOVERNMENT DOES NOT SET ASIDE ASSETS TO PAY FUTURE BENEFITS ASSOCIATED WITH EARMARKED FUNDS. THE CASH RECEIPTS COLLECTED FROM THE PUBLIC FOR AN EARMARKED FUND ARE DEPOSITED IN THE U.S. TREASURY, WHICH USES THE CASH FOR GENERAL GOVERNMENT PURPOSES."

Does this sound like the government takes its responsibilities seriously, in order to give the citizens a moral right to collect their benefits?
Are the payroll taxes really dedicated so that the citizens have considerable protection from having to compete againt other programs in the general budget?
Don Levit

[Pat S]

The way I read it the trust funds' relationship with the treasury is that it is similar to my relationship with the mutual fund that held the money I saved to pay for my kids education:
the money was invested in the fund, interest/profits were reinvested in the fund for greater yields, and money was taken out only as it was needed to cover costs of education.

It worked perfectly.

I have some problems with VAT since it collects a larger percentage of income from lower income people than higher income, although it certainly collects more actual money from higher income folks. Also, although all taxes produce less revenue in down economic cycles, VAT tends to fluctuate even more severely because to some extent there is a voluntary aspect to the tax, especially for higher income people. Since high income people's spending has a much higher elective component, they tend to pull back during poor economic times.

I agree with the idea of a dedicated health tax. I just would like to see it as a seperate part of income tax, similar to the NYC income tax added on top of the NY state tax.

[Barry Carol]

“So, the full extent of the loans is minimized and not fully reflected until many years after the loan is originated. How's that for clarity and transparency?”

Don,

The trust funds are also credited each year with an appropriate interest rate on their special purpose bonds. So, when we reach the point where current year benefits exceed revenue from current year dedicated taxes, the Treasury needs to redeem enough special purpose bonds to close the gap between revenue and benefit expense for that year. Generally, it will need to sell bonds, notes, or bills to public investors to do that except, in rare instances, when surplus revenues in the consolidated budget can make up the shortfall.

On the issue of transparency, I think dedicated taxes are a good way to finance programs like Medicare and Social Security because it allows people to see the costs in their payroll withholding of FICA taxes each week, month or whatever pay cycle they are on. Similarly, charging for such services as drivers licenses, car registration, hunting licenses in order to fund those services improves the efficiency of resource allocation. The gas tax to fund transportation projects and highway tolls to cover the cost of bonds to build and then maintain highways are another example of dedicated revenues.

With respect to healthcare, I think Dr. Ezikiel Emanuel is on the right track when he proposed a dedicated Value Added Tax to fund healthcare vouchers. While I would prefer a payroll tax approach myself, a highly visible and dedicated tax will help the average person to better understand how much healthcare costs and how much he or she is personally paying for it. By contrast, funding via general revenues keeps the cost hidden which helps to fuel demand because too many people either think someone else is paying on their behalf or they don’t understand how much they are paying personally. The bottom line is that while trust fund finance may be a bit hard to understand for the average person, the dedicated tax that underlies it is actually a good idea for these particular programs. By contrast, general revenues (personal and corporate income taxes at the federal level) are, in my view, a more appropriate way to fund defense, law enforcement, and means tested programs that serve the poor.

[Don Levit]

Pat:
I agree with you that we need more transparency and clarity between the self-funding taxes and the general revenue portion for funding Medicare.
I read today the 2008 Annual report of the Boards of Trustees for Medicare.
On page 195, is written "The trust fund perspective reflects both categories of revenues for each trust fund. For the Hospital Insurance, revenues from the public plus transfers/credits from other government accounts exceeded total expenditures by $16.4 billion in 2007.
The footnote explains that "Surpluses of revenues from the public over expenditures to the public are invested in special Treasury securities and thereby represent a loan from the trust funds to the general fund of the Federal Government. These loans reduce the amount that the general fund has to borrow from the public to finance a deficit."
So, the report seems to be saying that the surplus in the Trust Funds which is represented by the special Treasury securities are loans from the Trust Funds to the Federal Government.
Instead of borrowing money from the public, the Trust Funds are borrowing money from the Federal Government.
These are very special loans, however - very different from the loans you and I understand. As Barry Carol explained,
these loans are not paid back until the surplus is eliminated.
And, they are paid back only to the extent the Treasury securities need to be redeemed to pay current benefits.
So, the full extent of the loans is minimized and not fully reflected until many years after the loan is originated.
How's that for clarity and transparency?
Don Levit

[Maggie Mahar]

Barry, Don, Pat.S

Thanks for continuing the comments t onhis very interesting thread.

Don & Pat S.: I agree with Pat S. when he writes that "Medicare as a buyer of treasury bonds is no more engaging in US government deficit spending than other buyers of treasury bonds, be they you, me, or the government of China."

Barry-- you write that you expect entitlement programs to change in many ways, and note that "The Social Security program was changed following the Greenspan Commission in 1982. FICA taxes were raised in several steps while the retirement age for full benefits was increased from 65 to, ultimately, 67 by 2027."

I would note that 1982 was the beginning of one revolution, 2009 is the beginning of another, going in the opposite direction.

i also expect changss in our attitude toward entitlement programs, but I suspect --specially in the context of this very deep recessio-- ghg ,many Americans are going to be more and more interested in weaving a tight social safety net.

While the Japanese eoonomy has suffered a long and deep recession, its people have not suffered greatly.

Similarly, today Europans are not nearly as vulnerable as Americans. Their governments have made sure that they have healthcare, education, housing--whatever the state of the eocnomy.

[Barry Carol]

Dr. Pat,

I don’t think we need to worry about defaults on the special purpose bonds. I do think it is probable, however, that, over time, entitlement programs will be changed in myriad ways to reduce their long term costs and make them more sustainable. The Social Security program was changed following the Greenspan Commission in 1982. FICA taxes were raised in several steps while the retirement age for full benefits was increased from 65 to, ultimately, 67 by 2027. Higher income Medicare beneficiaries started to pay more in Part B premiums starting in 2007 and fully phased in this year. There is consideration of doing the same thing for Part D. Healthcare reform, including (hopefully) substantive changes in payment policy led by CMS could materially reduce Medicare’s long term cost (from what it would have otherwise been) while the Medicare portion of FICA taxes could also be raised to some extent if necessary and if we want to continue to finance Part A solely with a dedicated tax.

[Pat S]

Don and Barry --

We can discuss whether the "full faith and credit" of the US government has a "sometimes" clause in it or not for a long time. I tend to think that any defaults on t-bonds, even to other government agencies, would create a new world of pain that would make what we are going through now look mild.

Meanwhile, I would favor a better accounting of spending that did not mix the money from the self-funding taxes with general revenue. It would make clear to everyone where the lion's share of the income tax goes, as well as where the lion's share of the debt has come from. A world in which people were clearly told "your income tax dollars are going mostly to military spending, military related spending, and interest on debt accumulated due to military spending, not on paying for fictitious welfare cadillacs" would be a more honest world in which people might make better decisions.

[Don Levit]

Pat:
You bring up two distinct issues: Deficit spending and debt spending.
The reason that Medicare contributes to debt spending (increasing the total debt) is that the payroll taxes provide only its equivalent to the Trust Fund.
The actual taxes stay in the Treasury, and are used for other general expenses, such as defense. The Treasury bonds (debt) are issued in lieu of the taxes.
In other words, the government leverages the payroll taxes 100%, by issuing debt.
There are 2 distinct forms of debt: debt owed to the public (investors, etc.), and the debt government owes itself (intragovernmental borrowing, such as in the Trust Funds).
The interest on the public debt is an expense in the budget.
The interest for intragovernmental debt is not relevant, for accounting purposes, for with intragovernmental debt, an asset is created with the corresponding liability.
The asset can be nothing other than intangible goodwill, the full faith and credit of the U.S. government.
That is why the interest on intragovernmental debt, although almost as high as public debt, is not considered a current budget expense.
Of course, we haven't even discussed paying back the principal, but are principles even relevant?
Don Levit

[Barry Carol]

The issue of the bonds held by federal trust funds such as Social Security and Medicare is a confusing one for many people. If you or I or the Government of China own Treasuries and wants to sell them, the aggregate amount of federal debt held by the public does not change. When one of the federal trust funds needs to sell bonds to meet obligations like Social Security or Medicare payments that exceed current year dedicated taxes that finance them, which hasn’t happened yet, it will need to sell Treasury bonds, notes or bills to public investors in order to get the cash it needs to redeem the bonds held by the trust funds and pay its bills. When that happens, the total debt held by the public and the annual cost of servicing it (paying interest and redeeming or refinancing securities as they mature) rises. By contrast, when the Treasury adds special purpose bonds to a trust fund and adds annual interest to the trust fund balance, no taxes need to be raised and no securities need to be sold in the public capital markets. This is why critics don’t consider the special purpose bonds to be “financial assets” in the same sense that Treasury securities held by the public are.

As Pat S notes, President Johnson started this accounting approach to conceal the cost of the Viet Nam War and every president since continued the practice because it makes the annual deficit look smaller and reduces the amount that needs to be raised from income taxes and other non-dedicated taxes.

Personally, I view spending the annual trust fund surpluses on other government programs and issuing special purpose bonds in their place as similar to an individual putting an IOU in his child’s college savings account each month instead of depositing actual cash into a money market fund or stock mutual fund. When the child reaches college age, the parent is going to have to find actual cash or assets (like equity in a home) that can be borrowed against to pay college expenses. If actual cash were deposited to the college account each month as it was supposed to, borrowing to redeem the IOU’s would not be necessary. The downside is that if the cash were deposited each month, the family could not have spent as much or lived as well because it would not have as much cash available to fund its lifestyle. Similarly, if the federal government saved the annual trust fund surpluses as it was supposed to, it would have had to either raise other taxes or spend less on other government programs.

[Pat S]

Don Leavit --

I am very confused by your discussion of treasury bonds and social security and Medicare.

Social security and Medicare are BUYERS of treasury bonds, not ISSUERS of treasury bonds. The treasury bonds do indeed represent federal debt and are part of deficit spending, but Medicare as a buyer of treasury bonds is no more engaging in US government deficit spending than other buyers of treasury bonds, be they you, me, or the government of China.

I will grant that the decision to blend spending and revenue for self financed programs into the general budget (made by LBJ to conceal costs of the Viet Nam war but followed by every president since) creates a misleading accounting of government spending. It makes deficits look smaller, sometimes creates apparent surpluses when there are none, and makes military spending seem a much smaller part of the activity of the government financed by income taxes and deficits than it really is.

I am not an accountant and do not understand some accounting rules, but it seems to me that placing money in a savings account, even a savings account whose assets are treasury bonds, does not count as deficit spending.

I agree with Barry's contention that the spending in Medicare Parts B, C, and D is partly supported by deficit spending, since it is not covered by the payroll tax. But suggesting that Part A's treasury bond assets are deficits is confusing me. The fact that the money is freed up to finance the war in Iraq does not seem to make Medicare a deficit spender, but rather the US military.

[Don Levit]

Maggie:
I came across some information today which seems to confirm similar material I have from the Treasury Department.
This is from the Social Security web site, and can be found at:
http://www.socialsecurity.gov/policy/docs/statcomps/supplement/2008/glossary.pdf.
Under "trust fund (OASDI and Medicare). Four separate accounts in the U.S. Treasury in which are deposited THE EQUIVALENT of taxes received under FICA, SECA, contributions dealing with coverage of state and local government employees, etc., and transfers of federal general revenues."

The key question, imo, is "What is the substantive difference between general fund transfers and the equivalent of FICA, SECA,taxes etc.?"
I say very little, for both transactions are financed by Treasury bonds (debt).
Don Levit

[Maggie Mahar]

Barry & Don--
To say that part of Medicare is financed by "deficit spending" is true insfar as all government spending that dips into general revenues is financed by deficit spending.
But that's simply to say that our federal government runs a deficit.
And up to a point, that's not a bad thing. (We've gone well beyond that point--thanks to the open-handed and wasteful spending of the last administration.)

Pat S.--
Thanks for the very clear description of how all govt spending that comes from general revenues is part of "deficit spending."
To me, this is very different from saying "Medicare is running a deficit"--which is isn't. Though if we wait 10 years, Medicare Part A will get there.
And yes, Medicare is no more wasteful than private insurres. The insurers did a significantly better job of containing costs for four years (1993-1997) when HMOs were managing care. But, often they didn't manage care wisely.
Rather than asking: is it effective? then only looked at cost.
Over all, from 1970 to 2003 Medicare has done just slightly better in controlling costs, with spending rising an avearge of about 8% a year vs. 9% a year for private insuers.
But the slight difference realy doesn't matter. Whether it's 8% a year or 9% a year, it's runaway inflation and simply unaffordable.
And finally, all of the parties you name are responsible for the current mess. That's what my book is about. Though you have left one one group: patients.
On the whole, patients do not drive healthcare spending--certainly not the big-ticket items. They simply follow their doctors' orders when he tells them that they need to be in the hospital, undergo a certain procedure, etc.
But many U.S. patients have become accustomed to being overtreated. They do not understand that more care and more expenisve care is not necessarily better care. And they beocme quite indignant if you talk about cutting back on unnecessary care.
They also don't like hearing that their doctor may be wrong.
True healh care reform will require a huge amount of education--another reason why it will take time.

[Pat S]

Don, Jenny, Maggie --

Medicare financing is very complicated indeed, as Barry noted in another spot.

Part A is financed by the Medicare tax. It currently runs a surplus. That surplus is stored in the form of US T-bonds. It could be stored in any form, but, as almost everyone has learned in the last few months, if you want to be sure you will see your money again, T-bonds are the way to go.

The money taken in by the treasury in exchange for the T-bonds is indeed used to fund deficit spending. This idea has been popular with every administration since Johnson, but was especially popular with Reagan and Bush II, who used social security and Medicare surpluses to help finance massive deficits.

However, to suggest that Medicare Part A is financed by deficit spending is currently incorrect. It may become correct if the money in the fund is exceeded in the future, but not now.

However, Part B and Part C (Medicare Advantage) are another story. They are funded by a combination of subscriber payments and funding from general revenues. In the sense that any spending from general revenues is part of deficit spending, Medicare B and C are funded partly by deficit spending. So are all federal programs, including military spending, that are not funded by dedicated taxes or fees.

It is also true that almost any form of univeral coverage, including a theoretical universal coverage program based entirely on private insurance, would be partly funded by general revenues and as such would involve "deficit spending."

However, it is very important to note that Medicare is not the only part of the health care system that is "broken." Private insurance, in that it fails in being able to provide for coverage for everyone, often fails to provide workable coverage for an even larger group, costs the earth for the combination of employers and individuals who pay for it, and since a period in the late 80's and early 90's when it followed the lead of HMO's has failed to do any kind of job in control of costs and the growth of costs, is certainly broken as well.

When blame for the "broken" state of US health care is being assigned, every player -- Medicare, Medicaid, the federal and state governments, private insurers, doctors, hospitals, other providers, the drug industry, the medical equipment and supply industry, and agencies charged with the attempt to supervise the whole mess -- is guilty.

When we are talking about "fixing" the health system, we need to keep that in mind, and be willing to use any tools at hand to fix it.

[Don Levit]

Barry:
Excellent point about the deficit financing.
I read today that the average benefit for a Medicare beneficiary is $10,460, of which is paid for by $4,346 of payroll taxes, $1,212 of premiums paid by beneficiaries, and $849 from other sources.
The balance of $4,053 is financed from general revenues.
I understand that none of the payroll taxes actually go into the Trust fund.
If that is the case, the liability is even higher, save for the accounting device which produces a "wash" when one government agency borrows from another.
Don Levit

[Pat S]

Lisa --

I see what you are saying, but I think we are saying much the same thing.

When I say "outcomes" I mean comparative outcomes. The winners of comparitive outcome studies are the management patterns that reach the goal -- a successful outcome -- in the safest, shortest, most direct, and least expensive way.

Doctors in the US tend to get absorbed in the idea of the elegance, beauty, and theoretical sophistication of their processes -- making complicated high tech approaches seem the best way to approach a problem. Who would not think that "fixing" diseased arteries with surgery or interventional techniques wasn't better than "just" treating the patients with medicine while leaving the underlying problem untouched?

Health care systems in other countries, which are often subject to the advice and regulation of standards boards, tend to focus on what the outcomes are: is the outcome equal to or better than other approaches? For example, the greatly reduced use of coronary artery bypass and coronary artery dilation and stenting in most other countries is a direct result of data that shows that more conservative medical treatment results in the same or better results.

[Lisa Lindell]

Pat S
"In measuring the quality of health care programs I would tend to argue that the proof of the quality is in the outcomes"
Please email me march5publishing@gmail.com,with your address so I can send you a book.

[Lisa Lindell]

"In order to fix US health care we need to focus on results, not process
Pat S I couldn't disagree with you more. The result of our healthcare experience was successful, couldn't have had a better outcome. The process to get there was as backwards and useless as a football bat.

[Barry Carol]

“Medicare spending has to be reined in so that taxes and the trust fund can cover it.”

Maggie and Don,

I think we’ve discussed this before, but the 2.90% Medicare portion of FICA taxes, split evenly between the employer and employee and applied to all wages, finances only Medicare Part A (hospitalization) which accounts for roughly half of Medicare’s program costs. Part B (non-hospital costs except prescription drugs) and Part D (prescription drugs) are both financed 75% by general federal revenues and 25% by beneficiary premiums. All programs financed in whole or in part by general (non-dedicated) federal revenues are partly deficit financed by definition as long as federal expenditures exceed tax revenues as they do now by a large margin.