Economics, Entitlements

$62 Trillion in Deficits and Not a Penny More …

Jonathan Chait argues that the Senate healthcare bill’s Medicare advisory commission—now known more obliquely as the Independent Payment Advisory Board—“holds the greatest potential to drive transformation of the system.” Unfortunately, Chait says,

In its official budget estimates, CBO credits these experiments with virtually no budget savings. This is because the budget scorekeeper, understandably, tries to use hard data and relies upon proven success in figuring out how much money a given reform will save. There’s no way to tell which of the transformative experiments will actually take hold or what sort of effect they may have. Probably some, even many, will fail. But the bill’s potential for overhauling American medicine, while impossible to quantify, offers one of its strongest selling points.

800px-20_dollars_art3Maybe so—everything else in the bill does seem worse. But one reason the Congressional Budget Office finds so little oomph in the Medicare commission may be that, even if it performs entirely as intended, it won’t come close to closing the Medicare budget gap.

The new board is empowered to impose cost reductions if Medicare cost growth exceeds the growth of Gross Domestic Product plus 1 percent. Congress must accept these reductions or come up with equivalent cuts of their own.

But here’s the problem: Medicare’s baseline level of growth is right around GDP plus 1 percent.

In the past, the Medicare trustees made their “GDP plus 1” cost growth assumption explicit; currently, they use a more sophisticated model of healthcare cost growth that nevertheless mimics the effects of GDP plus 1.  (See pages 178–180 of the 2009 Trustees Report.) CBO’s projected rate of “excess cost growth” is slightly higher than the trustees’, but this plays out mostly in the longer term, by which time we’re long since broke.

In other words, the Medicare advisory commission—despite all the controversy over “rationing care”—isn’t tasked with much more than limiting Medicare cost growth to a rate baseline which some experts have calculated will generate over $62 trillion in deficits over 75 years. Even if Medicare cost growth were held to GDP plus 1 percent, total costs through the 2030s would cut by only around 5 percent.

This isn’t nothing, but it’s also about the best-case scenario for the Medicare commission—given what we’ve seen in the last year, it’s hard to imagine Congress being more ambitious than the commission. And all of this comes at an enormous price: most of the carrots and sticks Congress could have used to impose real cost savings have been devoted to expanding coverage. We’ve got some serious cost issues to deal with in the future but fewer tools with which to do it.

The Medicare commission is “one of the most potent reforms” in the healthcare bill, according to Office of Management and Budget Director Peter Orszag. He’s probably right, but that’s what’s got me worried.

Image courtesy selbstfotografiert.

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