The Corner

Medicare/MediScare Spending

Thomas Saving and John Goodman have a good piece in the Wall Street Journal explaining very clearly where the projected savings in the president’s health-care law are coming from. If the law is implemented as written, spending per enrollee will be slashed dramatically:

Consider people reaching the age of 65 this year. Under the new law, the average amount spent on these enrollees over the remainder of their lives will fall by about $36,000 at today’s prices. That sum of money is equivalent to about three years of benefits. For 55-year-olds, the spending decrease is about $62,000—or the equivalent of six years of benefits. For 45-year-olds, the loss is more than $105,000, or nine years of benefits.

A big share of the long-term reduction in spending is coming from a 29.4 percent cut in fees for doctors who treat Medicare patients on Jan. 1, 2012. Of course, I have mentioned before that no one believes this reduction will take place, not even Medicare’s chief actuary, who writes that “the financial projections shown in this report for Medicare do not represent a reasonable expectation for actual program operations in either the short range (as a result of the unsustainable reductions in physician payment rates) or the long range (because of the strong likelihood that the statutory reductions in price updates for most categories of Medicare provider services will not be viable).”

Besides, why should we believe that these fees will be cut? The implementation of that part of the law has already been postponed several times since it was passed. We shouldn’t believe it, argues economist Bruce Bartlett, unless this cut is part of a deal on the debt ceiling. He writes:

But what if President Obama and House Speaker John Boehner agreed, as part of negotiations on raising the debt limit, to let the this cut in Medicare fees take effect as current law requires? That would cut Medicare’s costs very substantially over current policy — something Mr. Boehner has demanded as a price to prevent the Treasury from defaulting on the debt.

The virtue of this approach is that no one has to do anything — the sustainable growth rate is already in law. All our leaders have to do is promise not to change the law and instead allow it to take effect on schedule.

The doctors will scream bloody murder and threaten to stop treating Medicare patients. It will be ugly.

But everyone knows that Medicare needs to be cut, and as the biggest contributor to long-run deficits, doing something meaningful to reduce spending on this program will demonstrate resolve and commitment to deal with entitlement spending.

Leaving the politics of this solution aside, even if we could implement the cuts, it doesn’t seem like a desirable solution. I assume that, under the current system, doctors are charging higher fees for services than they would if their patients were paying with their own money. Bartlett is right to say that allowing these cuts in doctors’ fees to be implemented would reduce Medicare spending, and he is correct to say that doctors will be very upset. But I don’t think he’s correct to conclude that once doctors understand that reimbursements for their fees aren’t going back up — no matter how much they lobby and scream about the unfairness of it all — they will accept the deal and try to look for ways to deliver these services for a significantly reduced price.

That’s because, as Tyler Cowen often reminds us, unless you can repeal the laws of economics, the supply curve slopes upward. This means that when you keep the price of things artificially low, you get shortages. In this case, doctors will likely stop serving Medicare patients or at least reduce the number of Medicare patients they see; if they are forced to see Medicare patients, these seniors will receive lower quality care. Call it immoral or what you will, this is the way it works. Think about it: If your boss comes and tells you that from now on your salary will be cut by 30 percent, would you keep on working as much as you did before? I doubt it.

Now, ultimately, if we implement these cuts, spending will be reduced but at the expense of lower-income seniors who don’t have many options other than to put up with the system. Is that really the plan?

And remember, even if the law is implemented as planned, Medicare spending is still exploding in the near future and the program still isn’t solvent.

For more evidence of the long-term unsustainability of the program due to goofy budget assumptions in the Affordable Care Act, read Peter Suderman’s piece this morning about the the CLASS (Community Living Assistance Service and Supports) Act.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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