The Corner

Classic Krugman

In his New York Times column (as opposed to his academic work), Paul Krugman is of course notoriously careless with facts. Most of his critics assume he is intentionally deceptive, and I suppose that’s probably true, but there are some columns when his angry flailing gives the distinct impression of someone genuinely misinformed. Either way, and we needn’t assume the worst, today’s column is a great example of his style of hyper-confident error, and it’s especially striking because the point he’s trying to argue is that Paul Ryan wasn’t honest in his convention speech Wednesday night.


Fact checking Krugman is rarely worth the time, but the Medicare debate—which is his main subject today—is terribly important both to the course of this election and, all the more so, to the future of the country. So, with apologies for the very long post (which I’ll put below the fold), let’s see if we can walk through his claims.




First we can treat in passing some points Krugman himself just makes in passing. He starts by restating some of the now disproven charges against Ryan on the Janesville GM plant, by insisting that Obamacare’s cuts in Medicare provider payments would not reduce access to care, by suggesting that pushing 4 million seniors out of Medicare Advantage would not mean reducing their benefits, and by implying that House Republicans would have reduced Medicare spending through price controls and Medicare Advantage cuts just as Obama would.  Jim Capretta did a good job with all those here yesterday, and others have too.


Krugman then blithely asserts that Ryan’s budget proposed tax cuts that would have to be offset with spending cuts, but the budget very plainly calls on the Ways and Means Committee to produce a revenue neutral reform. It’s certainly true that the particulars were not specified, as particulars generally aren’t in a budget resolution, but the requirement for revenue neutrality was specified, and the Ryan budget used the CBO’s current-policy baseline as its revenue line, so Krugman’s claim here just doesn’t make sense.


But Krugman’s chief focus is on what Romney and Ryan have had to say about Medicare, and what they propose to do about it. He describes their proposal this way:

But back to the big lie. The Republican Party is now firmly committed to replacing Medicare with what we might call Vouchercare. The government would no longer pay your major medical bills; instead, it would give you a voucher that could be applied to the purchase of private insurance. And, if the voucher proved insufficient to buy decent coverage, hey, that would be your problem.

Big lie is right. Krugman’s description here is, to put it charitably, entirely incorrect. The Romney-Ryan proposal involves a hybrid of defined-benefit and defined-contribution insurance. The government would establish a basic benefits package, based on what Medicare covers today, and each year private insurers and a government-run fee-for-service insurer would bid to offer that coverage (or more) at the lowest premium they could offer. The amount Medicare would spend on behalf of seniors would be set at the level of the second-lowest bid (or the fee-for-service bid, whichever was lower) in each region. Seniors who chose options that cost more than the premium-support payment (because they offered more benefits, or were less efficient) would have to make up the difference themselves, and those who chose a less expensive option would get the difference back in a tax-free health-savings account. In such a system, seniors would continue to be guaranteed comprehensive coverage with no greater out-of-pocket costs than today’s seniors have, but intense competition among insurers could drive down the cost of providing it. If it worked, Medicare’s costs would decline dramatically, making the program (and the federal government) more fiscally sustainable. If it didn’t work, costs would not go down and another approach would have to be found. Either way, seniors would have a guaranteed, comprehensive benefit. By definition (that is, by program design), the voucher would not prove insufficient to buy decent coverage because its value would be determined by the cost of decent coverage in the very market in which it would be used.


Krugman then writes: “Moreover, the vouchers almost certainly would be inadequate; their value would be set by a formula taking no account of likely increases in health care costs.” That’s false too. The value of the premium-support payment would be determined by an annual bidding process, not by a set formula, and so would precisely take changes in health costs into account.


He then argues that such a system actually wouldn’t reduce costs because “All, and I mean all, the evidence says that public systems like Medicare and Medicaid, which have less bureaucracy than private insurers (if you can’t believe this, you’ve never had to deal with an insurance company) and greater bargaining power, are better than the private sector at controlling costs.”


Again, not true. First of all, the notion that Medicare has “less bureaucracy” than private insurers is deeply confused (and if Krugman doesn’t believe this, he’s never had to deal with CMS, which runs the program). That sort of argument is often based on the claim that Medicare’s ratio of administrative costs (the money it spends on things other than care) to health costs is lower than those of private insurance companies. But this misses some key facts.


To begin with, many of Medicare’s most significant administrative costs are just covered by other federal agencies, and so don’t appear on Medicare’s particular budget, but are still huge costs of the program. The IRS collects the taxes that fund the program; Social Security collects many of the premiums paid by beneficiaries; HHS pays for a great deal of what you would think of as basic overhead, but doesn’t put it on the Medicare program’s budget. Obviously private insurers have to pay for such things themselves. Medicare’s administration is also exempt from taxes, while insurers pay an excise tax on premiums (which is counted as overhead). And private insurers also spend a great deal of money fighting fraud, while Medicare doesn’t. That might reduce the program’s administrative costs, but it greatly increases its overall costs. Some administrative costs save money, after all: The GAO has estimated that a $1 investment in pre-payment review of claims, for instance, would save $21 in improper Medicare payments.


Moreover, because Medicare covers older (and therefore sicker) patients than most private insurers (who are locked out of that market), the ratio of its spending on coverage to its spending on overhead is very different from the one most private insurers have — if administrative costs for managing two patients are both $100 but one patient has $200 of health expenses in a year and the other has $2,000 of health expenses, the insurer that covers the first patient will have a far higher administrative-cost ratio, even though both have the same administrative costs. On a per-patient basis, Medicare’s administrative costs most years are actually higher than those of private insurers, even though the program has all the enormous advantages just described in averting such costs and keeping them off the books. Robert Book has done great work on this subject, for instance here.


Finally, what Krugman calls negotiating power is just the power of price controls — Medicare doesn’t negotiate, it dictates prices, and when those are below the providers’ costs then providers have to either increase the volume of services they provide (which increases Medicare’s overall costs) or shift costs to other payers (which increases other people’s costs). They generally do both.


But Krugman’s more important error is the notion that Medicare has been better at controlling costs than private providers. He even purports to offer some evidence for this, writing:

You can see this fact in the history of Medicare Advantage, which is run through private insurers and has consistently had higher costs than traditional Medicare. You can see it from comparisons between Medicaid and private insurance: Medicaid costs much less. And you can see it in international comparisons: The United States has the most privatized health system in the advanced world and, by far, the highest health costs.

But no. Let’s look at Medicare Advantage first. That program, created in 2003, involves a mix of administrative and competitive pricing. It allows seniors to choose to have their Medicare benefit provided through private insurers. Each year, CMS determines what it will pay Medicare Advantage plans for covering a Medicare patient in each county in the United States, and, in a separate process, plans offer bids for how cheaply they can provide that coverage. If the CMS benchmark is above the bid level, which it almost always is, the federal government keeps 25 percent of the difference and the insurer providing the plan keeps the other 75 percent — which it is required to use for additional benefits, for reducing co-payments, or both. That means there are two kinds of costs to look at in the program: what it costs insurers to provide the same benefit as traditional Medicare, and what it costs Medicare to pay those insurers a pre-set benchmark payment. The first of those is the one that can tell us if private insurers can be more efficient than Medicare, and the evidence it provides gives great cause for hope. For instance, in a study published in the Journal of the American Medical Association on August 1, a team of Harvard researchers examined evidence from Medicare Advantage (looking at the bids plans make, rather than just the payments they receive from Medicare) to consider how Ryan proposal would have worked had it been in effect in 2009. They found that it would have provided coverage equal to that of traditional Medicare at premiums that would have been, on average, 9 percent lower. That’s no small savings in a half-trillion dollar program, and that would have been in a single year. The effect on the growth of costs could well be far more significant over time. 


As for Medicaid, that program tries to contain costs through price controls, by basically underpaying providers of care. The result is a serious and growing lack of access to care, even as the program’s costs continue to balloon. This is basically how liberals want to “reform” Medicare too — as the program’s actuary points out, under Obamacare, Medicare’s payment rates would actually be lower than Medicaid’s within about a decade (because of those $716 billion in cuts, among other things), with disastrous effects on access. And one effect of this is of course to shift those costs to the private-insurance system — since the providers have to try to survive somehow. To point out that this leads to higher costs for the privately insured is hardly to justify such crude and ineffective command economics.


And comparisons with foreign systems? That’s pretty much like comparing Medicare and Medicaid to private insurance. If health-care prices are set administratively rather than in something resembling a market (as happens to an enormous extent in America but an even greater extent in essentially all other developed countries), then assessing costs by considering spending alone doesn’t really tell you very much. It’s hard to get around this problem, but you can learn more by looking first at how spending grows or contracts over time (to get a sense of the efficiency of the system) and second at how much of a society’s overall resources (including not only money but labor and material resources) are spent on health care. On both counts, the United States does not fare worse than other countries. In terms of spending growth, the U.S. is basically in the middle of the pack of the developed world. We need to do far better than that to avoid fiscal collapse (because we’re growing a much larger base at the rate at which they’re growing smaller ones), but the systems used by other countries don’t really show us how. (Noah Millman and Reihan Salam have both written very intelligently about this.)  And in terms of the use of resources for health care, the U.S. is actually a good bit more efficient than other developed countries (the great John Goodman reviews a lot of this evidence here and here).


Krugman then concludes by arguing that the Romney-Ryan plan’s promise to leave current seniors untouched by its premium-support reform wouldn’t hold because you couldn’t sustain a situation in which different groups of seniors are in different forms of the Medicare program. But this claim is based on his earlier error about the nature of the proposal itself (he writes: “Think about the political dynamics that would arise once someone born in 1956 still received full Medicare while someone born in 1959 couldn’t afford decent coverage”; but of course that is not what Romney and Ryan propose).


This leaves basically nothing in Krugman’s column that is as he says it is. It’s worth taking the trouble to go through his claims point by point not because this column is unusual but because it is perfectly characteristic of the way he and others have approached the debate about Medicare reform. Unable to process what Obamacare on the one hand and the Romney-Ryan proposal on the other have done to the old political dynamics of the debate, they just pretend none of it exists, and then they call their opponents liars.


It won’t be easy to have a serious policy conversation with voters in this environment, but as the politics of Medicare over the past month or so suggest, it could well still be possible — and it’s worth the effort.

Yuval Levin is the director of social, cultural, and constitutional studies at the American Enterprise Institute and the editor of National Affairs.


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