MB Civic

By James Kwak

Ezra Klein makes an important point about our nation’s health care problem: it’s not just a government deficit problem. The underlying problem is that health care costs are not only growing faster than prices (inflation), but also faster than GDP (economic growth), and as a result the amount of stuff we as a nation will be able to afford, other than health care, will start to go down at some point in the future. (Picture originally from Joseph Newhouse in Health Affairs.)

This means that proposals to solve the long-term budget deficit problem by cutting Medicare benefits are not solutions: they simply shift the problem from the government to individuals–which means they shift the problem from us as taxpayers to us as old people or us as family members of old people.* If, for example, we increase the eligibility age for Medicare from 65 to 67, the government saves money, but only because people who are 65 and 66 lose money–or, alternatively, all of us lose money because their employers now have to pay more for health care.

Paul Ryan’s non-solution is a perfect example. By converting Medicare to a voucher program, he would insulate the federal government from health care cost inflation, saving money for taxpayers; but at the exact same time, this would expose old people even more to health care cost inflation, increasing costs for them and their families. Does Paul Ryan think that somehow “taxpayers” are different from “old people and their families”? Yet his proposal refuses to go away, my effortsnotwithstanding. (And despite the fact that his proposal doesn’t actually reduce the deficit–it makes it worse–as Brad DeLong reminds us.)

* Yes, I know the argument that by shifting costs from the government to households, we reduce the incentives to over-consume health care. But if that’s your argument, then you have to explain how the private sector is better at managing health care costs than the government, and it isn’t. There are a lot of reasons for this, but the simplest is that in either case spending is mediated by an insurer (Medicare on the one hand, private insurers on the other), and Medicare has more market power than any private insurer.