The Agenda

On Medicare and the Distributional Impact of the U.S. Tax System

My colleagues at Economics 21 have written two posts that I enthusiastically recommend (no bias here, folks). The first summarizes a new study on Medicare cuts, and its findings are sobering:

A new study by Vivian Wu and Yu-Chu Shen examines the 1997 Balanced Budget Act (BBA), which cut payments to various health services. Their results suggest that every 1% reduction in Medicare payments resulted in a 0.4% increase in mortality rates in hospital over the long-run, due to reductions in staffing and higher operating costs.

The lessons of this study counter Administration rhetoric that spiraling Medicare costs can be blamed on overtreatment and easily be cut through centralized government control. Given the experience of the 1997 cuts, it is very unlikely that the IPAB, which relies exclusively on one-size-fits-all rate reduction, will produce solutions that do not sacrifice health care outcomes. While the Administration has emphasized delivery care reform; recent research suggests that even areas that have exemplary delivery systems – like Rochester, Minnesota, home to the Mayo Clinic – do not experience significantly lower health care inflation.

Additionally, research by one of the authors of the study has found that every dollar of Medicare cuts through the BBA resulted a hike in private insurance costs of 21 cents, as hospitals cost-shifted their financing burden. Similar Medicare cuts in the future may result in comparable cost-shifting and higher private insurance costs, contrary to Administration claims that nothing will change for individuals with employer-provided care.

Without the ability to painlessly cut only “waste and abuse”; the federal government may be faced with just the unappealing choice of higher mortality rates for seniors or steadily rising deficits. Indeed, the original 1997 BBA cuts were themselves steadily rescinded through a series of yearly “doc fix” spending delays that were only continued as the PPACA was signed into law. [Emphasis added]

This is why many of us are invested in the idea of a defined contribution model designed to facilitate bottom-up health system reform driven by decentralized business-model innovation. I will say, however, that the question of cost-shifting has been hotly debated, and I don’t think that Wu and Shen will be the last word on the subject.

And then the Economics 21 team compared the Tax Foundation’s findings regarded the progressivity of the U.S. tax burden vs. that of the CBO. Definitely worth a look. 


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