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Home Publications Blogs Beat the Press The Post Hides Excessive U.S. Health Care Costs

The Post Hides Excessive U.S. Health Care Costs

Monday, 03 January 2011 05:54

The Post ran a major article telling readers that the value of the benefits they receive under Medicare will vastly exceed the taxes they paid into the program based on a new analysis from the Urban Institute. It then tells readers that many workers think that they paid for their Medicare benefits and:

"...that mistaken impression complicates the job for policymakers trying to build political support in the coming months for dealing with deficits that could drag the economy back down."

The idea that workers have paid for their benefits actually would be close to accurate if the U.S. health care system was anywhere near as efficient as the health care systems in other wealthy countries. The per person cost of care in these countries, all of which enjoy longer life expectancies than the United States, are less than half as much as in the United States.

It is great to see that the Post is worried that "mistaken impressions" by the public might complicate the work of policymakers. There are a whole set of mistaken impressions that it could try to combat rather than foster, starting with the idea that the budget deficit is somehow at the center of the country's economic problems. 

Comments (6)Add Comment
Deficit Due to Government Blocking Choice for More Utility at Margin
written by izzatzo, January 03, 2011 7:27
... the value of the benefits they receive under Medicare will vastly exceed the taxes they paid into the program ...

Any economist knows this represents a breakdown in the law of diminishing returns to marginal utility, caused by an excess of government efficiency combined with interference of free choice.

It's irrational to leave additional utility on the table that exceeds marginal cost. No one in their right mind would forgo the consumption of more Medicare services for which added utility exceeds added taxes at the margin.

For example, if Medicare paid for all heart attacks, in order to capture its full value, one must have multiple heart attacks until the marginal utility value diminishes to the point where it just equals the marginal tax cost.

It's not about 'mistaken impressions', which instead are quite accurate about the excess value of Medicare over tax cost. It's about government, death-panel-like interference with free choice to maximize one's utility, that blocks the consumption of health care far below optimal levels.

The additional excess value of Medicare must be allowed capture by consumers, in order to match additional tax cost at the margin. Only in this way can the excess value of health care over tax cost disappear, since a match is achieved between cost and benefit, and the budget achieves balance with a zero deficit.

Stupid liberals.
Lies, damn lies, and bad economics
written by callejohan, January 03, 2011 10:41
I can’t find the Steuerle/Rennane analysis on the UI homepage but there are some earlier work by Steuerle on Social Security that indicates the methods they’ve used. I don’t think the analysis is worth the electrons it consumes.
First, the UI model on rates of return to taxes in benefits paid only considers half the contributions made by workers. They only include the employee’s payments, and – in spite of basic economic principles and comments made over the years by many, many economists – do not think of the employer’s matching contribution as a wage cost paid in lower salaries to workers. Correcting that, and the cost to workers of SS and Mcare is twice what the UI analysis computes. Bad economic analysis.
Second, Steuerle seems to use a 2% discount rate in computing the present value of future benefits – that’s extraordinarily low. A more appropriate rate would be around 4%, a value typically used in much standard economic analysis. That means that they overvalue the present value of future benefits, making the programs look like a better deal than they are. Again, bad economic analysis – possibly a deliberately biased economic analysis.
Third, for both SS and Mcare, it’s not enough just to look at contributions in dedicated taxes. At least two additional analytical considerations must be added. One is that the cost/benefit analysis of social insurance must be compared to alternative financial arrangement, esp. private savings and insurance. Taking the long term rate of return on index funds as the opportunity cost of workers’ investments and comparing that to their returns under SS and Mcare always shows social insurance as a bad investment. Consider further that under a private insurance scheme the consumption of medical services would be lower, as individuals would bear a higher personal cost of care, and the implication, again pointed out by many economists, is that the future cost growth of Mcare could be lowered under private rather than social insurance. Also, remember that all Mcare costs have to be paid, one way or another, so if current taxes don’t cover the costs the deficit is paid by general revenues – which means higher taxes on workers. Include those taxes in addition to the FICA taxes, and the cost side for workers goes up. As before, bad economic analysis by UI.
Fourth, comparing the cost of health care in the US to the cost of health care in other countries is comparing apples and bananas, but UI is glad to do that. Typically, these comparisons are made with other highly developed countries, the OECD nations, for which decent data exist. But there are so many differences between them and us. Costs are accounted for differently, especially real capital costs, since our system consists of private hospitals and theirs of public hospitals with much lower accounting cost structure – using the correct opportunity cost measures of capital, their costs would be much, much higher. And, perhaps most important, the demographics here are very different. Comparing morbiditiy/mortality data for demographic groups in the US that look like those in OECD countries, and we look as good as they do. What skews the data is the much worse health status and prospects of minorities, muc h of which is beyond social policy. And, finally, in all OECD countries medical care is rationed by waiting lists, so of course they have less cost. It’s not at all clear that the extra cost we pay is a sign of waste – much of it delivers improved quality of health care consumption that makes for happier consumers.
So, on net, the UI analysis is not very good.
written by JBG, January 03, 2011 11:51
It is not only wealthy countries that do better than us. Consider Cuba:
= = = = =
Wherever they are invited, Cubans implement their prevention-focused holistic model, visiting families at home, proactively monitoring maternal and child health... This model has helped Cuba to achieve some of the world's most enviable health improvements, despite spending only $400 (£260) per person last year compared with $3,000 (£1,950) in the UK and $7,500 (£4,900) in the US, according to [OECD] figures.

Infant mortality rates, one of the most reliable measures of a nation's healthcare, are 4.8 per 1,000 live births – comparable with Britain and lower than the US. Only 5 per cent of babies are born with a low birth weight, a crucial factor in long-term health, and maternal mortality is the lowest in Latin America...
= = = = =

The article is mainly about Cuba's humanitarian medical work around the world (extensive and largely unsung), but testifies along the way about the Cuban model's success at home.

The cost comparison isn't fair, because Cuba pays its doctors very little. But even allowing for that, they do way better than we do in getting health value for what is spent. "An ounce of prevention..."
outlaw the SEIU and AMA and health care costs will plummet
written by pete, January 03, 2011 11:56
And don't forget to open the borders...of course, the AMA is fighting foreign trained doctors now...(Like from Cuba?) Thus, excessive U.S. costs, for medical, auto manufacturing, whatever its all the same...artificial monopolies...doomed to be inefficient and create wedges, and sooner or later fail.
written by Mike, January 04, 2011 8:02
Pete, with 10,000 Americans starting to collect Social Sec./day, there was a story about the need for more docs. We'll have to open our borders if we're going to stay healthey.
or increase med school enrolment...
written by pete, January 04, 2011 10:25
This is always an issue with the AMA, keeping the monopoly profits by restricting entry.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.