December 5, 2023

Economic Scene: Medicare Needs Fixing, but Not Right Now

It might not be a good idea to try to resolve these questions quite so urgently. Partisan bickering under the threat of automatic budget cuts is unlikely to produce a calm, thoughtful deal.

“We don’t have to solve this tomorrow; not even next year,” said Jonathan Gruber, an economist at the Massachusetts Institute of Technology who worked on the design of President Obama’s health care reform.

More significantly perhaps, some economists point out that the problem may already be on the way toward largely fixing itself. The budget-busting rise in health care costs, it seems, is finally losing speed. While it would be foolhardy to assume that this alone will stabilize government’s finances, the slowdown offers hope that the challenge may not be as daunting as the frenzied declarations from Washington make it seem.

The growth of the nation’s spending slowed sharply over the last four years. This year, it is expected to increase only 3.8 percent, according to the Centers for Medicare and Medicaid Services, the slowest pace in four decades and slower than the rate of nominal economic growth.

Medicare spending is growing faster — stretched by baby boomers stepping out of the work force and into retirement. But its pace has slowed markedly, too. Earlier this month, the Congressional Budget Office said that by 2020 Medicare spending would be $126 billion less than it predicted three years ago. Spending over the coming decade, it added, would be $143 billion less than it forecast just last August.

While economists acknowledge that the recession accounts for part of the decline, depressing incomes and consumption, something else also seems to be going on: insurers, doctors, hospitals and other providers are experimenting with new, cheaper and more efficient ways to deliver care.

Prodded by President Obama’s Affordable Care Act, which offers providers a share of savings reaped by Medicare from any efficiency gains, many doctors are dropping the costly practice of charging a fee for each service regardless of its contribution to patients’ health. Doctors are joining hundreds of so-called Accountable Care Organizations, which are paid to maintain patients in good health and are thus encouraged to seek the most effective treatments at the lowest possible cost.

This has kindled hope among some scholars that Medicare could achieve the needed savings just by cleaning out the health care system’s waste.

Elliott Fisher, who directs Dartmouth’s Atlas of Health Care, which tracks disparities in medical practices and outcomes across the country, pointed out that Medicare spending per person varies widely regardless of quality — from $7,734 a year in Minneapolis to $11,646 in Chicago — even after correcting for the different age, sex and race profiles of their populations.

He noted that if hospital stays by Medicare enrollees across the country fell to the length prevailing in Oregon and Washington, hospital use — one of the biggest drivers of costs — would fall by almost a third.

“Twenty to 30 percent of Medicare spending is pure waste,” Dr. Fisher argues. “The challenge of getting those savings is nontrivial. But those kinds of savings are not out of the question.”

We could be disappointed, of course. Similar breakthroughs before have quickly fizzled. Just think back to that brief spell in the mid-1990s when health maintenance organizations seemed to beat health care inflation — until patients rebelled against being denied services and doctors dropped out of their networks rather than accept lower fees.

The Centers for Medicare and Medicaid Services already expects spending to rebound in coming years. Without tougher cost control devices, be it vouchers to limit government spending or direct government rationing, counting on savings of the scale needed to overcome the expected increase in Medicare rolls may be hoping for pie in the sky.

“It makes no sense,” said Eugene Steuerle, an economist at the Urban Institute, to expect the government will reap vast Medicare savings without having an impact on the quality of care.

The Affordable Care Act already contemplates fairly big cuts to Medicare. In its latest long-term projections published last year, the Congressional Budget Office estimated that under current law, growth in spending per beneficiary over the coming decade would be about half a percentage point slower than the rate of economic growth per person.

To understand how ambitious this is, consider that Medicare spending per beneficiary since 1985 has exceeded the growth of gross domestic product per person by about 1.5 percentage points per year. Slowing down that spending would require deep cuts in doctor reimbursements that, though written into law, Congress has never allowed to happen — repeatedly voting to cancel or postpone them.

Under a more realistic situation, the Budget Office projected that the growth of Medicare spending per capita over the next 10 years would be in fact 0.6 percentage points higher than under current law and accelerate further after that.

Yet despite the ambition of these targets, they would not be enough to stabilize future Medicare spending as a share of the economy. A report by three health care policy experts, Michael Chernew and Richard Frank of Harvard Medical School, together with Stephen Parente of the University of Minnesota, concluded that to do that would require limiting the growth of spending per beneficiary at 1.25 percentage points less than the growth of our gross domestic product per person.

“The Affordable Care Act places Medicare spending on a trajectory that is historically low,” Mr. Chernew said, noting his opinion was not an official statement as vice chairman of Medicare’s Payment Advisory Commission, which advises Congress on Medicare. “Could we do better? Of course. Will we? That requires a little more skepticism.”

Yet even if it is unrealistic to expect that newfound efficiencies will stabilize Medicare’s finances, the slowdown in health care spending suggests that politicians in Washington calm down. It offers, at the very least, more breathing room to carefully consider reforms to the system to raise revenue or trim benefits in the least damaging way.

There are many ideas out there — from changing Medicare’s premiums, deductibles and coinsurance to introducing a tax on carbon emissions to raise revenue. Some of them are not as good as others. Until recently, President Obama favored increasing the eligibility age for Medicare. Then research by the Kaiser Family Foundation concluded that raising the age would increase insurance premiums and cost businesses, beneficiaries and states more than the federal government would save. The nation would lose money in the deal.

“As we do this, there are smarter and dumber ways to do it,” Mr. Gruber said. “It would be a problem if we were to do things in a panic mode that set us backward.”

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Today’s Economist: Casey B. Mulligan: Social Insurance and Layoffs


Casey B. Mulligan is an economics professor at the University of Chicago.

Unemployment insurance and other types of social insurance subsidize job separations and thereby result in too many layoffs and too few people employed.

Today’s Economist

Perspectives from expert contributors.

A variety of programs help workers after they leave a job and do not start a new one, depending on the circumstances of the job separation.

Unemployment insurance is often available when the worker was laid off and continues to look for work. Disability insurance is available when a worker’s health makes it too difficult to remain on the job. Social Security’s old-age insurance program provides income for elderly people after they leave their jobs.

Layoffs, disability events and retirements have some differences, of course, which is why each type of job separation has a separate insurance program. But in each case, a working relationship between an employer and an employee has been terminated, and the worker has not started a new one with, say, different working conditions or a different rate of pay.

In their analyses of disability and old-age insurance, economists have found that insurance reduces the cost of job separations and thereby increases their numbers, because the insurance helps replace the income and production that is lost when the worker stops working.

The prospect of the insurance payments gives employers less reason to change the nature of a job to encourage a disabled or elderly employee to remain at work and gives employees less reason to accept changes in working conditions or pay that would make it easier for employers to retain them.

David Autor of the Massachusetts Institute of Technology has studied the United States federal disability-insurance program and finds that it “provides no incentive to employers to implement cost-effective accommodations that would enable disabled employees to remain on the job.”

The Congressional Budget Office explains further about disability insurance that “because the D.I. program is funded through a flat-rate payroll tax on employers and employees, employers do not bear the costs associated with a disabled worker who stops working and becomes a beneficiary in the D.I. program.”

Note that disability benefits are paid to employees, not employers. Nevertheless Professor Autor and other economists conclude that the benefits affect employer behavior because the employment relationship is exactly that: a relationship between employer and employee.

If an employee has better, or less bad, options outside the relationship, then the employer will find the employee more expensive to keep. Disability and other forms of social insurance increase the income employees can receive outside the job and thereby make employees more expensive from an employer’s point of view.

The economists Jonathan Gruber and David Wise have found that Social Security provisions “provide enormous incentive to leave the labor force early.” Just like disability insurance, Social Security provisions can shift some of the burden of job separations from the private sector to the public insurance programs and thereby give the private sector too little incentive to prevent or delay the separations.

Employers sometimes experience reductions in demand from their customers, as auto manufacturers and home builders did early in the recent recession. One way they react is to lay off part of their work forces. But they could also adapt to less demand by work-sharing, reducing prices charged their customers (or increasing those prices less than the general rate of inflation) or reducing wages.

Smart employers recognize that one of these adjustments — layoffs — brings forth help from the government through its safety-net programs (on behalf of employees); the other adjustments do not. If the safety net were less generous, there would be fewer layoffs during a recession, because employers would adjust less with layoffs and more in other ways.

(State unemployment insurance programs are, and have been, “experience rated” in the sense that employers sometimes find their payroll taxes increased for each employee they dismiss. However, the experience rating is imperfect; some employers are already at the maximum tax rate and further layoffs would not increase it. More important, the effect of experience rating on employer costs of layoffs was present even before the recession. What’s new since 2008 are the federal extended and emergency unemployment programs that are not experience-rated, thereby adding to the benefits an unemployed person can expect to receive without adding to the taxes levied on his former employer).

Thus, even if it were true that the unemployed completely ignored the safety net’s generosity in their decisions to seek and accept jobs, the safety net would still increase unemployment during a recession by increasing layoffs.

Yet economists have recently forgotten this important connection between unemployment insurance and the number of people employed. The C.B.O. has looked at the economic effects of unemployment insurance and noted that extending unemployment benefits would “reduce the intensity of some workers’ efforts to search for a new job because the higher benefits would lessen the hardship of being unemployed.” But the C.B.O. concluded that “the net impact on the unemployment rate from some workers’ reduced efforts to find a job would be slight.”

Although it looks at incentives to avoid job separations in its consideration of disability insurance, the C.B.O. makes no mention of the same incentives in its analysis of unemployment insurance and consequently is premature in its rejection of the basic economic proposition that paying people for not working will reduce the number of people who work.

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Unboxed: When There’s No Such Thing as Too Much Information

Yet the data explosion is also an enormous opportunity. In a modern economy, information should be the prime asset — the raw material of new products and services, smarter decisions, competitive advantage for companies, and greater growth and productivity.

Is there any real evidence of a “data payoff” across the corporate world? It has taken a while, but new research led by Erik Brynjolfsson, an economist at the Sloan School of Management at the Massachusetts Institute of Technology, suggests that the beginnings are now visible.

Mr. Brynjolfsson and his colleagues, Lorin Hitt, a professor at the Wharton School of the University of Pennsylvania, and Heekyung Kim, a graduate student at M.I.T., studied 179 large companies. Those that adopted “data-driven decision making” achieved productivity that was 5 to 6 percent higher than could be explained by other factors, including how much the companies invested in technology, the researchers said.

In the study, based on a survey and follow-up interviews, data-driven decision making was defined not only by collecting data, but also by how it is used — or not — in making crucial decisions, like whether to create a new product or service. The central distinction, according to Mr. Brynjolfsson, is between decisions based mainly on “data and analysis” and on the traditional management arts of “experience and intuition.”

A 5 percent increase in output and productivity, he says, is significant enough to separate winners from losers in most industries.

The companies that are guided by data analysis, Mr. Brynjolfsson says, are “harbingers of a trend in how managers make decisions.”

“And it has huge implications for competitiveness and growth,” he adds.

The research is not yet published, but it was presented at an academic conference this month. The conclusion that companies that rely heavily on data analysis are likely to outperform others is not new. Notably, Thomas H. Davenport, a professor of information technology and management at Babson College, has made that point, and his most recent book, with Jeanne G. Harris and Robert Morison, is “Analytics at Work: Smarter Decisions, Better Results” (Harvard Business Press, 2010).

And companies like Google, whose search and advertising business is based on exploiting and organizing online information, are testimony to the power of intelligent data sifting.

But the new research appears to be broader and to apply economic measurement to the impact of data-led decision making in a way not done before.

“To the best of our knowledge,” Mr. Brynjolfsson says, “this is the first quantitative evidence of the anecdotes we’re been hearing about.”

Mr. Brynjolfsson emphasizes that the spread of such decision making is just getting started, even though the data surge began at least a decade ago. That pattern is familiar in history. The productivity payoff from a new technology comes only when people adopt new management skills and new ways of working.

The electric motor, for example, was introduced in the early 1880s. But that technology did not generate discernible productivity gains until the 1920s. It took that long for the use of motors to spread, and for businesses to reorganize work around the mass-production assembly line, the efficiency breakthrough of its day.

The story was much the same with computers. By 1987, the personal computer revolution was more than a decade old, when Robert M. Solow, an economist and Nobel laureate, dryly observed, “You can see the computer age everywhere but in the productivity statistics.”

It was not until 1995 that productivity in the American economy really started to pick up. The Internet married computing to low-cost communications, opening the door to automating all kinds of commercial transactions. The gains continued through 2004, well after the dot-com bubble burst and investment in technology plummeted.

The technology absorption lag accounts for the delayed productivity benefits, observes Robert J. Gordon, an economist at Northwestern University.

“It’s never pure technology that makes the difference,” Mr. Gordon says. “It’s reorganizing things — how work is done. And technology does allow new forms of organization.”

Since 2004, productivity has slowed again. Historically, Mr. Gordon notes, productivity wanes when innovation based on fundamental new technologies runs out. The steam engine and railroads fueled the first industrial revolution, he says; the second was powered by electricity and the internal combustion engine. The Internet, according to Mr. Gordon, qualifies as the third industrial revolution — but one that will prove far more short-lived than the previous two.

“I think we’re seeing hints that we’re running through inventions of the Internet revolution,” he says.

STILL, the software industry is making a big bet that the data-driven decision making described in Mr. Brynjolfsson’s research is the wave of the future. The drive to help companies find meaningful patterns in the data that engulfs them has created a fast-growing industry in what is known as “business intelligence” or “analytics” software and services. Major technology companies — I.B.M., Oracle, SAP and Microsoft — have collectively spent more than $25 billion buying up specialist companies in the field.

I.B.M. alone says it has spent $14 billion on 25 companies that focus on data analytics. That business now employs 8,000 consultants and 200 mathematicians. I.B.M. said last week that it expected its analytics business to grow to $16 billion by 2015.

“The biggest change facing corporations is the explosion of data,” says David Grossman, a technology analyst at Stifel Nicolaus. “The best business is in helping customers analyze and manage all that data.”  

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