Category: Policy

Lowering Healthcare Costs: Supply and Demand

Most discussions around healthcare these days focus on covering all Americans, and on lowering healthcare costs. President Obama has recently focused on the second issue, noting that ballooning healthcare costs could cripple the federal government’s finances and kill economic growth. But how can healthcare costs be reined in? In the partially private US healthcare system, prices are still somewhat subject to the law of supply and demand. Healthcare prices (and therefore costs) can thus be lowered by either reducing demand or increasing supply. Here’s a quick list of ideas:

Increasing Supply:

1. Increase the number of medical professionals. Unemployment among healthcare professionals remains near 1%, far lower than any other field. Increasing the number of medical, dental, and nursing school seats in the US will increase supply over time, creating more balance in the healthcare work force and driving down wage increases.

2. Shorten the length of medical school. Doctors in the UK and other countries finish their medical education in six years or less before going on to training programs (residency), while US doctors spend eight years between college and medical school. Accelerated six year medical programs exist in the US, and there is no evidence that their doctors’ education suffers as a result. Shortening medical, dental, and pharmaceutical programs to six years will increase the supply of practitioners, and decrease the starting salaries they demand since their schooling and debt burden are lower.

3. Doctors aren’t needed for routine healthcare. Nurse practicioners, midwives, pharmacists, and other medical providers can provide much of the routine care needed. National laws (or at least guidelines) making it easier for these practitioners to do their jobs will further increase the supply of qualified medical professionals, driving down prices.

4. Warranties on Medical Care. While pay for quality has been heavily discussed, it is quite difficult to measure and implement in practice. It’s far easier to require warranties on procedures, so that medical providers must provide care free of charge when issues as a result of mistakes during a procedure. Medicare could put this in place, incentivizing the industry to move towards higher quality.

Decreasing Demand:

1. Measure cost effectiveness of treatments within Medicare. As long as Medicare pays for healthcare by quantity, without any regard for cost-effectiveness, expensive and marginally effective treatments will continue to drive health care inflation. Patients should be given the option to pay for treatments that are not cost-effective, should they desire.

2. End employer health care tax deduction. As I’ve previously discussed, this $250B+ subsidy inflates demand, causing price increases for all, including those without insurance. Removing this subsidy would decrease health care spending by up to 10% [1], and could provide funding for other initiatives including universal health care or deficit reduction.

3. End tax breaks on medical goods and services. Sales taxes are generally not levied on healthcare products like the $285B pharmaceutical industry, providing them with a $20B subsidy relative to other goods [2]. Property taxes and income taxes are not collected on many not-for-profit hospitals, though some generate significant income and serve very few uninsured patients. Ending these subsidies would further reduce demand and prices.

4. Enact consistent end-of-life guidelines for Medicare. 27% of Medicare spending (almost $100B) is incurred for patients in their last year of life. While higher costs towards the end of life are expected, there are wide variations in spending in different regions of the US. Enacting a consistent set of guidelines which emphasizes palliative care would help decrease end-of-life healthcare demand.

Why doesn’t this list mention the approaches typically touted like electronic medical records, administrative efficiencies, and the like? Unfortunately, while efficiency improvements would result in one-time reductions in cost, they would not change the supply-demand fundamentals of the US healthcare delivery system. The solutions mentioned above would address these issues, creating permanent decreases in healthcare costs while potentially expanding availability.

[1] $250B is slightly more than 10% of healthcare spending in the US today, so eliminating this subsidy would reduce spending by that amount at most. In practice, the reduction would be somewhat less, since falling prices would cause some offsetting increase in healthcare consumption.

[2] Assuming a 7% sales tax (most states’ sales tax is higher), 7% of $285B is roughly $20B.

Posted on by praveenghanta 1

Limits on the Health Care Deduction?

The Obama administration is open to the idea of limiting the deduction on employer-based health care coverage. This would be a tremendous step in the right direction in limiting health care cost growth, as I’ve previously discussed (here as well).

While President Obama campaigned against this proposal initially, his advisers now indicate that he will not oppose a reduction in this subsidy if Congress passes it. Let’s hope that this particular initiative survives the Congressional melee and emerges as part of health care reform!

Posted on by praveenghanta 0

US Defense Spending Is Out Of Control

In the federal budget, there are three untouchable categories of spending: Medicare, Social Security, and Defense. Which of these expenditures has grown fastest over the past decade? While the media is constantly pointing to runaway healthcare spending, defense spending has grown at 10% per year in the past decade, faster than any part of the budget. The Korean and Vietnam Wars were fought on 2/3 the current defense budget, and those were much larger conflicts than Iraq and Afghanistan! In his proposed budget, President Obama has indicated that he will attempt to make defense spending more efficient. Nonetheless, the budget shows defense spending rising from $600 Billion this year to nearly $700 Billion by 2019.

US defense spending during the Cold War (1946-1991) averaged $400 Billion per year in 2008 dollars, including both the Korean and Vietnam wars. By comparison, the 2008 defense budget including the Iraq War and troop surge was $676 Billion. It’s absurd enough that we defeated the Soviets with a much smaller military budget, but proposed budgets increase spending further, when the winding down of the Iraq war should enable a $100 Billion dollar decrease.

Winslow Wheeler at the Center for Defense Information notes that the military budget has doubled while the quantity of weaponry and quality of military readiness has actually declined. Department of Defense accounting is so poor (perhaps intentionally?) that the DoD has no idea how much money is really spent on its weapons programs. Rather than increasing the defense budget, President Obama should consider freezing it at the 2007 level for the balance of his presidency. This would eliminate almost $1 trillion in deficit spending, and would finally force the DoD to focus on accountability and efficiency. A $600 Billion defense budget is still triple that of our potential adversaries’ defense budgets combined, and would ensure our safety while forcing fiscal discipline on an untamed federal department.

Sources:

[1] $258 Billion in 1998, $676 Billion in 2008 = 10% growth per year. Health care spending and social security also rise rapidly over the same period, but neither grew at this rate. See the following links for data:

http://www.defenselink.mil/comptroller/afr/fy2008/Fiscal_Year_2008_Department_of_Defense_Agency_Wide_Financial_Statements_and_Notes.pdf – Figure 1-5 and 1-6 show actual expenditures for 2008

Click to access tables.pdf

Click to access budget.pdf

[2] $676 Billion in 2008 vs. $400 Billion per year in 2008 dollars during the Cold War including Vietnam and Korea

http://www.cdi.org/Issues/milspend.html

Posted on by praveenghanta 3

US Debt to exceed GDP by 2015

Here’s a more recent post – the US Debt is now likely to exceed GDP by 2010, next year!

The United States federal debt stands at 10.7 trillion today, or 75% of US GDP. The CBO projects that the US debt will reach 14.6 trillion by 2015, without accounting for the effects of the stimulus package and ongoing bank rescues. These efforts could easily add 1-2 trillion to the total debt, sending the debt over 16 trillion by 2015.

GDP growth may be negative for 2009, and will probably average 2% through 2015 according to CBO projections. Real GDP at the end of 2008 was 14.2 trillion, and is project to rise to 15.8 trillion by 2015, less than the federal debt at that time! Rising inflation may prevent this from happening, but will bring its own set of problems.

Where does a debt load of 100% of GDP put the United States relative to other nations? That would put the US among the top 10 most indebted nations in the world, with peers like Zimbabwe and Italy.

Source Links:

Current US GDP at Bureau of Economic Analysis

US Total Debt at treasurydirect.gov

CBO Budget and Deficit Projections – Click Budget Projections. This xls also includes economic growth estimates.

CIA World Factbook Ranking of Nations by Public Debt

Posted on by praveenghanta 2

Healthcare Bubble

Dot com bubble. Real estate bubble. Commodities bubble. Healthcare bubble? How can the US healthcare system be a bubble when tens of millions are uninsured and more people fall through the cracks daily? The media, public, and politicians alike have been more concerned with the inadequacies of the system than with its rapid growth. US healthcare spending has grown enormously, exceeding the rate of inflation for decades to become the largest sector of the US economy. The United States now spends over 16% of its GDP on healthcare, almost double the average for developed nations.

Perhaps Americans just demand the best and priciest healthcare, with the most modern technology and treatments. Other insurance prices are on a steep rise, including home, accidental and auto insurance. If Americans paid for healthcare themselves, this would simply represent a rational spending choice. But the federal government now incurs 60% of all healthcare spending, meaning that taxpayers, and not individuals, pay for most of our healthcare. Medicare, Medicaid, and other direct government healthcare accounts for 46% of healthcare spending, while tax breaks on healthcare subsidize another 10-15% of healthcare spending [1].

At current growth rates, government healthcare spending will exceed the entire Federal budget by 2050 [2]. Total spending on healthcare will near one-third of GDP by 2030. It’s unlikely that the US can devote 1/3rd of all productive capacity to healthcare without crippling other sectors of the economy and reducing overall economic growth. The healthcare bubble thus dwarfs all previous bubbles in size, since the technology, real estate, and energy sectors are all so much smaller.

How will the bubble pop, and what will its effects be? Since most healthcare spending is federal, the bubble will pop when the government can no longer afford its healthcare outlays. The US has been able to borrow freely by issuing debt for many decades, but this will eventually end once our debt exceeds GDP. With the current downturn, government debt may actually exceed GDP by 2015 [3]. Thus the reckoning may come sooner than many expect.

Will healthcare reform contain costs and deflate the bubble gradually? Most reform plans focus more on increased coverage than on cost control, so they may exacerbate the problem. Eventually the hard choices will have to be made, and they will include some combination of reducing Medicare benefits, cutting provider reimbursements, openly rationing government health care, and limiting the tax break on health insurance. I just hope that some of the hard choices are made before we are collectively up against a fiscal wall.

[1] $200 Billion in taxes are foregone as a result of the employer-based healthcare tax deduction, equivalent to 10% of all healthcare spending. When this subsidy is included the government’s share of healthcare spending rises to 56%. This analysis does not include the exemptions on property taxes and sales taxes that healthcare providers receive; adding these subsidies in would likely drive the government’s share of health care spending over 60%.

[2] The CBO predicts that Medicare and Medicaid will account for 14% of GDP by 2050. This figure doesn’t include healthcare spending through the VA system, SCHIP program, and other federal healthcare programs, which total $100 Billion in spending today. If these programs also grow commensurately, total government spending may near 18% of GDP in 2050, roughly equivalent to total government revenue.

[3] This projection of public debt growth shows that US government debt will exceed gdp by 2050. This only takes into account debt held by the public, however. Gross government debt is already above 65% of GDP, and may grow to 75% by the end of 2010 as a result of the recession and stimulus spending. With deficits of $500B+ per year possible for several year, US total government debt could exceed gdp in less than 10 years.

Posted on by praveenghanta 13

Stimulus Plan Ideas

I’ve been thinking about President-elect Obama’s proposed stimulus plan lately, as it represents one of the larger policy decisions of the coming year. Most economists agree government stimulus that some form of is necessary to prevent a deflationary economic environment, and to improve economic sentiment. But what criteria should we use to judge fiscal stimulus spending, and are there any good ideas out there that haven’t been considered?

Stimulus Plan Criteria:

1. Speed: Any stimulus spending needs to occur quickly in order to boost the economy. Projects which don’t hit the ground til 2010 don’t meet this criteria.

2. Spent, Not Saved: Ideally, 100% of any stimulus funds should be spent on consumption of goods and services to kick-start the economy. Tax rebate checks, particularly to the wealthy, perform poorly in this regard because a larger percentage of the funds will be saved.

3. Return on Investment: Projects with a measurable return on investment, whether in economic growth or otherwise, are preferable to spending that has no longer term benefit.

With these criteria in mind, here are some fresh ideas that I think deserve consideration:

1. Convert school buses and bus fleets to CNG. This would decrease diesel emissions near children, and also reduce US dependence on foreign oil, while providing an immediate boost to the auto manufacturing sector. Particulate pollution kills tens of thousands of people annually – why not spend to improve public health and reduce oil dependence at the same time? $25 Billion would enable the conversion of half the nation’s school bus fleet.

2. 100% tax credits for energy efficiency in homes and small businesses. Instead of handing out tax rebate checks, which aren’t spent in full, why not pay homeowners and businesses to improve energy efficiency? President-elect Obama has made a similar proposal regarding federal buildings, but tax credits would lead to faster spending since consumer and small businesses can move more quickly. $50 Billion would retrofit 50 million of America’s single family homes with energy saving modifications.

3. Increase funding for basic science research. The great economic booms of the 80’s and 90’s were driven by technological advances like the personal computer, the internet, and pharmaceutical technology, and these technologies had their early beginnings in basic research. Increasing basic research and grant expenditure at the NSF, NIH, DARPA, and other agencies would employ thousands of new college graduates and researchers while accelerating the path to future technological breakthroughs. Doubling the NSF and DARPA budgets would cost $10 Billion, while another $5 Billion would add to NIH’s budget.

Funding these ideas in total would cost $90 Billion. While federal spending at this level would crowd at private investment in normal circumstances, today’s circumstances have drastically reduced private investment across the board. If the Federal government is planning to spend close to a trillion dollars on stimulus, shouldn’t we fund high return projects like these?

Posted on by praveenghanta 0

What’s the Real Federal Deficit?

The federal deficit for the past ten weeks alone is now 650 Billion dollars, in addition to a fiscal 2008 deficit of $1 Trillion.

Since the US government fiscal year ended on 9/30/08, the federal debt has increased from $10,024 Billion to $10,656 Billion (as of 12/9/08).* The federal debt increased by $1 Trillion over the 12 months ending 9/30/08.

As I’ve previously noted, measuring the Federal deficit by looking at growth in the Federal debt provides a clearer picture of budget shortfalls than the officially announced numbers, which hide significant expenditures, and paint too rosy a picture.

A large part of the recent increase in the debt can be tied to the Treasury Department’s various stabilization and bailout initiatives, including the TARP and other programs. President-elect Obama plans to add a significant dose of fiscal stimulus to the Treasury and Federal Reserve efforts, driving the deficit up by another 500 Billion to one trillion in the next year. While current circumstances do call for aggressive action, the government should take care not to exacerbate our economic problems by trying to roll the clock back to 2006. Lowering mortgage rates for new home purchases, for instance, provides an incentive to create and buy more of a product that is already in a state of massive over-supply.

When the bad times end, we’ll have to start paying these debts back. Let’s hope President-elect Obama and his team spend their stimulus money on projects with tangible return on investment, and not just on make-work programs.

 

* A significant portion of the increase in deficit spending is being used to buy financial institution shares and various commercial debt instruments, which might be thought of as investments. Nonetheless, the federal debt grows when we borrow, even if we use the money to buy investments. This holds true for personal balance sheets, corporate balance sheets, and for the federal government as well. The federal government has a particularly poor record of decreasing the size of its debt, so I believe it’s fair to regard any excess borrowing as a deficit.

Posted on by praveenghanta 4

Level the Playing Field for Mass Transit

President-elect Barack Obama announced a massive public works program this weekend to rebuild America’s infrastructure, with investments in transportation, energy efficiency, and schools planned.

Obama could further his fiscal stimulus and infrastructure program by leveling the playing field between road and mass transit investments. When the Interstate highway system was created, the federal government provided 90% of the financing, requiring states to pitch in the remaining 10%. In contrast, most transit projects in the US received little or no federal funding until the 70’s, and currently receive 60-80% in federal financing. In addition, transit projects have to meet steep qualification requirements before being funded, while states are provided lump sum funding for road projects which can be used with much greater discretion.

Why not level the playing field by allowing states to use federal transportation funding as they see fit, without explicitly allocating it for roads or mass transit? States with large urban areas could then focus on large-scale transit projects, while rural states could focus on traditional road construction. This blog has consistently advocated against subsidies of all kinds, but since most major transportation projects are funded via the DOT, it makes sense to enable states to spend the money according to their needs.

In the current economic environment, fiscal stimulus is advisable, and fully funding mass transit projects will help advance the new administration’s energy policy as well. Providing equal funding for both mass transit and roads should be an easy win for the Obama administration, and I hope that the new President takes this step.

Posted on by praveenghanta 0

US Healthcare Reform: Possible Choices

The United States’ health care system is a patchwork of private care, Medicare for seniors, Medicaid for some of the poor, and emergency-only care for the 47M uninsured. Both presidential candidates insist that change is needed, with increased coverage and decreased costs as primary goals. Neither candidate mentions how public dollars will be rationed, though government resources are limited.

Here’s a list of a range of health care systems in place around the world, with the most market-oriented systems listed first, and the most government controlled systems listed last. The future of American health care will mostly take the form of one of the middle options, as both extremes appear politically unpalatable.

US Health Care System Choices:

Health Care System Description Found Where
Traditional Free Market Little government intervention, patients pay health care providers directly. Those without financial means rely on charity hospitals or receive no care. India, many developing countries
Public Senior Care + Semi-Free Market The government provides health care for seniors, while others rely on a regulated private health insurance market (whether purchased individually or through an employer). United States
Public Care for Children and Seniors The government provides health care for seniors and children, while others rely primarily on the private health insurance market (whether purchased individually or through an employer). Barack Obama’s health care plan approximates this
Mandatory Health Insurance The government requires that all individuals purchase health insurance, and provides subsidies to assist the poor and unhealthy in purchasing coverage. Massachusetts, Hillary Clinton’s Plan
Dual Public-Private System The government provides health care for all residents not enrolled in private care, and provides incentives for employers to provide health care and for individuals to purchase care. Individuals may also pay extra to supplement their basic government plan. Australia
Single Payer, Private Premium Care The government provides health care for all residents, and individuals can choose to pay extra for premium health care services (like private rooms, experimental treatments, etc). France, other European countries
Single Payer Only The government pays for all health care, and does not allow private market health care transactions. Canada
Posted on by praveenghanta 2

Why does America encourage debt?

America (and the world!) is now being punished for its relentless accumulation of debt during the housing bubble and before. Commentators of all stripes have laid blame for the credit bubble, whether upon Alan Greenspan, lack of regulation, greedy Wall Street, or otherwise.

But it’s interesting to note that US credit bubble has in fact been building for decades, as shown here:

US Household Debt to GDP Ratio
US Household Debt to GDP Ratio

I have a basic question: Why does America encourage debt? Both individual and corporate debt are encouraged through federal and state law, through mortgage interest deductions for individuals, and through similar deductions on interest payments by corporations.

The home mortgage deduction is a relatively recent invention, while business interest has been deductible since the advent of the income tax. Both deductions encourage us to borrow and increase leverage – and as we know now, leverage cuts both ways. The home mortgage deduction raises home prices and encourages Americans to take on excess debt. But what about the business interest deduction?

Businesses can typically raise money by either borrowing it or by selling equity in their business. Since borrowing is subsidized through a tax deduction, this encourages businesses to borrow money rather than selling shares to raise money. The downside is apparent in hard times: creditors demand repayment, whereas equity investors share in both gains AND losses*.

The home mortgage and business interest deductions formed the foundation of the credit bubble by creating a tax benefit for borrowing rather than saving.

These deductions also collectively cost taxpayers $250 Billion** per year, more than the Iraq war and almost as much as Medicare. Perhaps the next Administration should consider restoring the balance of incentives between saving and borrowing as part of its tax reform initiatives. While an immediate end to these preferences is impractical, a phased reduction coupled with broad-based tax relief might help transform America back into a nation of savers.

*From a business perspective, interest has always been treated as just another business expense, and is thus deductible just like the electric bill. But debt and equity are often competing forms of ownership in a business, and so making interest deductible makes debt more appealing than issuing shares. For example, a a pizza shop could borrow $10,000 for a renovation and deduct the interest as a business expense, or it could bring in a partner to buy 10% of the business in order to raise capital. If the owner of the pizza shop brings in a partner, he doesn’t get a deduction, and now he has to share any additional income with his partner. Thus debt is favored over equity – this principal is even taught in business schools.

** The home mortgage deduction costs totals $100 Billion per year, while the business interest tax deduction can be estimated at $150 Billion per year with total corporate debt of $10 Trillion, an average interest rate of 5% (conservative estimate), and a corporate tax rate of 33%.

Posted on by praveenghanta 4