Magic Dragons, Magic Ponies: Thoughts on Health Care

Pre-Obama: It seemed to me that GW Bush had a Magic Dragon approach to funding the stuff that he, as a rightwards big-government guy, wanted to do. Go ahead, borrow the money -- the Magic Dragon will pay the bill when it comes due. No details needed. So it's fine to cut taxes, it's fine to add a huge Medicare (Part D) entitlement, it's very fine to have a war. The Dragon will pay; just bring him "strings and sealing wax and other fancy stuff" and there's really no problem. Well, I didn't approve (I did and do approve of the war, but not the way he handled -- and funded -- it), but nobody asked me nohow. The Magic Dragon approach is not completely utterly 100% insane, of course: the dragon is growth, and if growth is sufficient then those debts are affordable. Even borrowing (at low interest) to enable a tax cut (which does stimulate growth) can be sort of sane, just as borrowing to invest in the stock market can be sane. I too had a credit line long ago, and closing it (and paying off my mortgage, tax-subsidized by renters, but why?) was less of a solid financial decision than a question of Puritan ancestors whispering at night. But it's risky because the Dragon might not come. In any case borrowing to finance growth in current consumption is not sane, and we've been doing a lot of that.

Early Obama: I was not enthusiastic about Barack Obama, to put it mildly. I could not vote for the guy whose preferred SCOTUS justices were in the majority on Kelo (and the minority on Heller), but I did approve of his economic team and I did think that they represented sanity and I did think that he, as a Great Communicator of Reaganesque stature, might get their sanity to reign. I now think I was wrong; I trusted them and him too much.

Summary-Now: The health care bill we passed last night is not a Magic Dragon bill; it's "paid for"; it's "deficit-neutral" or even "deficit-improving." The CBO says so, and assuming their assumptions I believe their results. Do I assume their assumptions? Not really, and even the assumptions that work for me are sleight-of-hand assumptions, shifting individual costs to where they are not visible to CBO scoring rather than actually reducing cost. Not a Magic Dragon bill, no. It's a Many Magic Ponies bill, instead. I think we're worse off than we were yesterday:

• The US is slightly less financially stable (slightly more liable to a double-dip recession and to prolonged growth reduction), because we have taken specific resources that we needed to pay for the entitlements coming due, and we have allocated these for a new entitlement. It's as if you let your household budget get wildly out of control for years, figuring that you'll find specific money to pay your debts Someday Later. Then you want to give some money to your local school, and you decide you'll fund that by giving up the habit of eating out every night. That's great, but you just reduced your options for paying off the boat and the jetski and the credit cards. Your problems are worse.
• I think that our age-adjusted mortality rates as of, say, 2020, will probably be higher than they would have been without the bill, because part of the bill is being paid with money that I believe would have fueled innovation. I don't think the mortality rates will be as high as they are now -- there will still, I hope and expect, be innovations and even increases in the rates of innovation -- but I think the trend just got less good than it was. (I wish I could make a concrete falsifiable prediction, and be reassured when it turns out wrong, but I can't think of one.)
• And as an extra added bonus, we are very slightly less free than we were.

So anyway, here are some of the things I hope to find that I'm wrong about.

(Some of) The Ponies: Let's start with the "doc fix". The idea is that Congress has been promising for years to cut what doctors are paid by Medicare, so now we say we really really mean it and we'll cut by 21% and then cut a little further each year as time goes on. The money saved because we really really mean it this time is Magic Pony money, we can spend it on whatever we like. And we know that doctors won't increasingly turn away patients even though they already have been:

Dr. Edward Kornel, a neurosurgeon based in White Plains, N.Y., stopped seeing Medicare patients two years ago. Two colleagues in his group practice have joined him in dropping Medicare patients over the past six months.... The American Association of Neurological Surgeons, to which Kornel belongs,...found that 65% of its 3,400 members said they are referring their Medicare patients to other doctors. About 60% said they were reducing the number of Medicare patients in their practice.

This has been going on for a while; in summer 2002 we had NUMBER OF PHYSICIANS TURNING AWAY NEW MEDICARE PATIENTS JUMPS 28 PERCENT. Still we know that the problem will not increase, we know that the reduced payment system will work, because this is a Magic Pony. An assumption, which should not be questioned. Has Walgreens already decided to follow some other drugstores and stop participating in (Washington State) Medicaid because reimbursements are already too low? Never mind, there are still participant drugstores. So far. Hmm...my feeling is that this particular Magic Pony has very low credibility: either Congress will again refuse to reduce the payments, or we will get a substantial increase in Medicare refusals. Neither prong looks good.

Are there more Magic Ponies? Of course. There's a Magic Pony list by Douglas Holtz-Eakin and a vituperative partial rebuttal by Brad DeLong; I believe part of the partial rebuttal, but as DeLong says most of the gimmicks are minor, and that

What does deserve attention is:

[T]the legislation proposes to trim $463 billion from Medicare spending and use it to finance insurance subsidies. But Medicare is already bleeding red ink, and the health care bill has no reforms that would enable the program to operate more cheaply in the future. Instead, Congress is likely to continue to regularly override scheduled cuts in payments to Medicare doctors and other providers...

As somebody-or-other said, this is budget nihilism: if we assume that congress will reverse all actions it takes to reduce the deficit and yet require that congress only pass bills that reduce the deficit nevertheless, we are asking that congress pass nothing at all. But if that is his argument, he should make it--and back it up.

But DeLong is generalizing in a way that Holtz-Eakin is not: Holtz-Eakin is saying that Congress has a specific credibility problem generated by repeated specific behavior, and that he sees no reason to expect Lucy to stop pulling the football away as she's done seven times before. DeLong presumably either believes that Lucy will stop this specific repeated behavior (for some reason not stated), or that this specific bill should be passed even in the expectation that the Magic Pony won't show up. It is not clear to me which he believes. My own concern is that the outcome looks bad to me, either way.

There's the initial-decade trick, of balancing six years' expenses against ten years' income. Hmm. We accept that taxes on "Cadillac" insurance plans are too unpopular to pass now, but we promise to do it later, in 2018 after the current administration is definitely out of office. We really mean it, too. Hmm. And we are going to apply Social Security taxes to upper incomes, which will then be at least partially paid back because the people who've paid them are then eligible for higher benefits, but the full amount will have been included on a Magic Pony. And spent. (Holtz-Eakin seems to assume that this is 100% fake, DeLong points out that it's only partially fake. Bystanders like me wonder -- but doesn't the repayment depend on how long these contributors live? If they live long enough, with benefits growing faster than inflation, isn't it more than 100% fake? Well, with a Magic Pony perhaps it doesn't matter. And DeLong is right that this isn't one of the big ones.

Some of the sleight-of-hoof comes by sliding the bills over to the states, as Medicaid sharing (after 2016). Hmmm...Arizona just cut 310,000 people off Medicaid, and More than half the states are reducing Medicaid services and payments to health care providers this year as the recession propelled enrollments to record levels and sapped money from treasuries. Sure, things ought to be better by 2016, but then again a lot of state budgets from NY to California with quite a few in between are having increasing budget problems, e.g. with their own pension funds. But this Magic Pony will increase their deficits, not the federal deficit, so it's not CBO-scored, and if states have to raise their taxes then it will not be a federal problem, and if the federal government winds up bailing out states that will be a completely separate transaction. And of course we slide costs to private industry: Caterpillar: Health care bill would cost it $100M. Caterpillar (like all those other companies) is in the business of using money to pay employees and suppliers and stockholders, making money grow. Whatever prediction you would have made yesterday about how much money is available to pay employees and suppliers and them what reinvests -- you should make it a teensy bit smaller, today. (Except that this is not a surprise.)

Am I arguing that the government should stay out of healthcare? Absotively posilutely not. Our government is good at raising money, and should traditionally step in in case of disasters whether regional or individual, and I would support a quite expensive plan like the one I proposed here. Especially if we shifted to growth-oriented taxation, mainly a consumption tax (whether VAT or just let everyone take income into a list of accounts and investments such that it doesn't get taxed until it leaves). To this I would add Pigovian taxes, employed cautiously, and progressive estate/gift taxes on, say, the top 1% of wealth and up, making it flatly impossible to inherit (or receive as gift) your way into the top 0.01% of wealth. I'm not exactly a libertarian when it comes to that sort of thing, but there's an envelope on the kitchen counter with a small check for Radley Balko because I really feel like we need more libertarian thinking around here. I'm not at the point of contributing to the Tea Party; the one Tea Party organizer I've talked with is a nice guy and very sincere but I am skeptical of his economic understanding, even compared with mine.

And freedom? I did mention at the beginning that I think that we're "very slightly less free than we were." Why? Well, this morning I did 50 pushups (pulse 117) and five minutes later managed only 36 (pulse 111) and five minutes later only 25 (pulse still 111; rest pulse is 58). Definitely not an athlete, just a reasonably healthy aging geek who has lost two pounds (183.8 to 181.6) in the last six weeks, which projects forward to, umm, weight zero in ten years? About that. And of course you shouldn't care, just as I shouldn't care if you do or don't exercise or eat your vegetables or smoke (as long as it's not upwind) or drink (as long as you don't drive drunk while my 13-year-old is crossing the street). And so on. We shouldn't have to care. But as I was saying recently, our biggest "health care" problems seem to include issues of obesity and of smoking history. Smoking's getting better (less) in this country, and congratulations to all you ex-smokers! Obesity's getting worse: I do sympathize. But if I'm paying the resulting health care bills...hmmm. Bloomberg-style nannyism becomes an issue of national solvency. Put down that doughnut, sir, and step away with your hands up. Exaggeration? Sure...but the issue is very real, and Bloomberg actually exists. Your right to make your own choices is already limited when others pay the cost, and that has just gotten very slightly worse. You cannot even choose to depend on alternative medicine anymore, unless you can pay your mandated payments for politically approved care and pay for whatever alternative you actually prefer. Liberty is slightly less. The rewards for those who decide what is politically approved are slightly greater. The FDA is slightly more of a political football than it was. Regulatory capture increases, crony capitalism strengthens.

Personally, I think it's a Bad Thing. But then again, maybe not. And this is one time that I really hope I'm really wrong.

[footnote: this post is an extended rumination around a walk-around-the-golf-course-between-our-back-yards with Sasha, who would of course much rather hear that I'd spent the time on code. Oh, well.]

update 3/23: I should have noted the CBO "direct spending and revenue" estimates at (CBO) March 20, 2010 Preliminary estimate of the direct spending and revenues effects estimate for proposed reconciliation legislation combined with H.R. 3590 as...; note that after it gets going, we seem to be headed towards $200 billion per year in addition to the money that isn't actually collected and spent by the Federal government, which is naturally not scored by the CBO...ulp. Whatever. Anyway, I would concur with most of Megan McArdle's remarks at 8 Predictions for Health Care:

The people wondering why I was so upset should contemplate that first, I think you people just screwed up both our health care system, and our fiscal system (even further), and that if I'm right, that's not really funny.... So now, onto predictions!

And I'd also point to her follow-up post, More on Health Care Predictions. But mainly, I would currently expect that

• the net number of lives saved as we transition from current trends, while plausibly not zero, will not rise above statistical noise (and might be zero)
• the number of lives lost long-run, mainly due to a decrease in the rate of increase of innovation but also because of misaligned incentives causing misdirected resources, will be very substantial
• curve-bending won't work as described.
• Many people will be happier, with lowered stress
• Many people will be less happy, with fewer choices -- and less money, and longer waits, and so on.

But I still have Hope for Change of the mainly technological kind; I just think we bent the curve the wrong way.

and more...So many good things said; I liked Zakaria's remarks that

There's more in here about cost controls than in any previous expansion of health care since the creation of Medicare. But objectively you'd have to say there isn't a lot. What there is takes one of two forms. ... the theory that Congress then would have the political courage to do what it now doesn't have political courage to do, which is an interesting theory. The second is ...the the kind of rationing board that I was describing -- nobody will call it such because it will be politically unpopular -- but in fact that's what it will do. . But if you then read some of the language instituting the commission, it says oh, it won't deny services to anyone, basically language to the effect it won't in any way curtail any kind of services or ration care. But of course, if you're not rationing care, how would you bring costs down?

And Sumner, my favorite commenter on at least monetary policy,weighs in on a Krugman commentary on the Holtz-Eakin item referenced above:

To summarize, all 7 of DHE assertions are correct. Krugman tries to change the subject by looking at different issues, like whether the front-loaded revenue is, by itself, enough to turn a deficit into a surplus. It’s not, but DHE never claimed it was. Then Krugman switches the subject from the 10 year to the 20 year forecast, and relies on incredibly rose-tinted assumptions. And after all this, he doesn’t lay a glove on DHE.

Well, maybe it won't do too much harm. Maybe. It does improve labor mobility. Not as much as my sort of plan, I think, but it is an improvement.