By Greg Anrig
Vice President, Programs, at The Century Foundation
The Huffington Post, June 17, 2010

As Obama’s Fiscal Commission prepares for its June 30 hearing, the Roosevelt Institute’s New Deal 2.0 blog invited me to participate in its Social Security’s Fiscal Fitness series, which examines the soundness of the program, its relationship to the federal deficit, and the vital role it plays in America’s economic future.

Advocates of cutting Social Security benefits often argue ruefully that they wish that there was some other way to “save” the program. But, they say sadly, the only realistic choices involve shared sacrifice and pain. So they recommend changes like further delays in the age when full retirement benefits can be collected, reducing cost-of-living adjustments to Social Security payments, and other cuts that would reduce how much future retirees are scheduled to receive.

But in fact, Social Security’s currently strong finances could be sustained beyond a 75-year time horizon entirely through modest tax increases targeted toward high-income workers. Social Security provides vital protections that have been enormously successful in reducing poverty among the elderly and disabled, but its benefits are by no means overly generous. Compared to 30 OECD nations, the U.S. ranks 25th in the share of an average worker’s earnings that is replaced upon retirement by a country’s public pension program. Social Security’s annual benefit of about $13,860 a year for an average retired worker is only slightly above the poverty level of $10,830.

According to the projections of Social Security’s Trustees, the program will be able to continue paying promised benefits in full until 2037. After that point, payroll taxes will be sufficient to finance about three-fourths of promised benefits. Over the 75-year time frame that the Trustees are required to forecast, that gap between promised benefits and revenues amounts to about 0.7 percent of GDP. Closing it would require the equivalent of a 1 percentage point increase in the current Social Security payroll tax rate paid by employees and matched by employers. But the same amount of revenue could be raised in a variety of ways that would confine the extra burden to taxpayers who would be best able to afford it.

One easily defended way to do that would be to raise the cap on annual wages subject to the Social Security payroll tax, which is currently $106,800. Past Congresses have set the cap at a level where it equaled 90 percent of aggregate earnings in Social Security employment. But simply because the incomes of the higher paid have risen much more rapidly than average wages over the past few decades, the cap has declined to nearly the 80 percent level, without any action by Congress whatsoever. Gradually restoring it to the historic 90 percent baseline in and of itself would close about a third of the 75-year shortfall. In the process, only the 6 percent of workers earning above the cap would owe more and their payroll tax deductions would simply continue for a few days longer into the year than they do now. And those workers paying more would receive higher benefits as a result.

One way to close the entire remainder of the shortfall would be to remove the cap entirely just for the employer contributions to an upper income worker’s payroll taxes. That wouldn’t directly affect the paychecks of those employees, though it might somewhat dampen their future raises. Still, considering that the highest earners continue to prosper and enjoy far greater economic security than everyone else, the adjustment is a reasonably fair way to sustain the nation’s most important social insurance program.

An alternative that would more than completely eliminate the 2 percent of payroll shortfall would be to impose a small investment transactions tax (similar to Great Britain’s) of one-fourth of one percent on publicly traded stock, credit swap derivatives, and other financial instruments. Some economists have long supported the idea as a way of deterring economically wasteful “churning” in investment markets, and the cost again would largely be borne by individuals and Wall Street firms that can most afford it.

Other proposals, including earmarking estate revenues to Social Security, also could go a long way to bridging the long-term funding gap without imposing pain on average citizens. But the main reality to recognize is that, notwithstanding the dour “truth-telling” of alarmist politicians, anti-government ideologues, and misinformed journalists, Social Security can be sustained indefinitely without inflicting any pain whatsoever on the vast majority of Americans, and with only modest costs to upper-income taxpayers.

Cross-posted from New Deal 2.0.

http://www.huffingtonpost.com/greg-anrig/how-social-security-can-g_b_615811.html

By Robert G. Evans
Toronto Star, June 1, 2010

“There are stark and unpalatable choices that we face with respect to health care, but there is no magic solution. We absolutely must have an adult debate about how we deal with this.” That’s what David Dodge, former governor of the Bank of Canada and former deputy finance minister, told the Liberal policy conference last March.

Dodge joined a list of economists and other pundits who predict that public health care will be financially unsustainable in coming years as Canada faces an aging population and escalating costs for scientific advances in care and treatment. But an “adult debate” on the sustainability of public health care must start from who and what drives health-care spending.

It’s true that total health-care spending in Canada has risen in recent years, taking larger shares of both government revenues and budget allocations. This has led to accusations of “crowding out” other public programs by those favouring further privatization of health care.

The data tell a much more nuanced story. The central fact is that, recession years apart, medicare spending — hospitals and physicians’ services — has fluctuated between 4 per cent and 5 per cent of gross domestic product since 1975. After the introduction of medicare in the late 1960s these costs stabilized because universal, comprehensive coverage consolidated expenditures in the hands of a single payer. The cost of health services not covered by medicare has risen from 3 per cent of GDP in 1975 to 7 per cent in 2009.

Today, Canada’s expenditures on health care match those by other OECD countries. The public share of overall health costs in Canada is relatively low for high-income OECD countries, around 70 per cent. Private insurance, primarily for prescription drugs and dentistry, now accounts for 12.7 per cent of Canadian health spending, 14th highest in the world. The OECD outlier is the United States, where extensive private finance supports uncontrollable cost escalation (now over 16 per cent of GDP). Getting these costs under control will be the major task facing Obama’s health-care reform.

Provincial governments’ spending on health care over the past 15 years has taken increasingly larger bites out of their expenditure budgets. But this is a simple consequence of large cuts in non-health programs, not of out-of-control medicare spending. These cuts in non-health spending are traceable to substantial cuts in personal and corporate income taxes by the federal and most provincial governments, particularly since 1997. Between 1997 and 2004, these tax cuts removed an estimated $170.8 billion from public sector revenues. Total provincial revenues are by now roughly $35 billion per year less, or about half provincial spending on medicare. Cumulative federal cuts are at least as large.

The provinces’ revenue shortfalls were not all self-inflicted. The federal government’s large cuts in financial transfers since the mid-1990s also left big holes in provincial budgets. Subsequent increases have not fully made up the loss.

What are the real motives behind the claims of financial unsustainability? Two, I think. First, under Canada’s universal tax-financed medicare, higher-income people contribute proportionately more to supporting the health-care system, without receiving preferred access or a higher standard of care. Any shift to more private financing would reduce the relative burden on those with higher incomes and offer (real or perceived) better or more timely care for those willing and able to pay.

Second, every dollar of health-care expenditures is also a dollar of someone’s income. The Ontario government’s recent change in reimbursement for generic drugs made this clear: the shares of Shoppers’ Drug Mart fell 10 per cent overnight. Privatization is a way to avoid cost containment, reopening greater income opportunities for providers of care (and private insurers) outside public control. Expenditures would accordingly rise, as in the United States, but public budgets might (in the short term) be contained. “Unsustainable” public spending magically becomes sustainable when shifted from taxpayers to patients.

It is time, long past time, for an “adult conversation” about these motivations, and for a clear identification of the winners and losers from eroding or dismantling medicare. (Economists who evade this issue should be shamed.)

But it is also time for an adult conversation about the real drivers of cost escalation. Researchers have known for decades that population aging is a real but a minor factor. Its impact will certainly increase, but it will remain secondary to increases in intensity and costliness of care. This is the real issue. Where is the money going, both public and private, and are we getting value? Again the Ontario generic drug initiative makes the point. Rising expenditures are not a law of nature; several hundred millions will be cut at a stroke. The real issue is political; those millions are also cut from pharmacy’s incomes.

Are there other opportunities? Yes. Medical imaging and laboratory testing are currently the major sources of cost escalation. What are the benefits? No one knows. Ultrasound for low-risk pregnancies is up 50 per cent in 10 years. Why? Patterns of medical practice and hospital use vary widely across the country, for no apparent reason. Toronto’s Institute for Clinical Evaluative Science, among others, has tracked some of these large unexplained variations, but they are largely ignored. These are what we need to discuss, not “stark choices” about relieving the burdens on and improving the benefits for high-income taxpayers — and, incidentally, opening new markets for private insurers. Panic-mongering about a “grey tsunami” is simply a distraction.

Canadians consistently show that they support public health care. In May, a national poll by Nanos Research confirmed that 90 per cent of Canadians feel that health care is the most important national issue, and almost 90 per cent support public solutions to problems in the health-care system. They are right. Canada’s health-care system is as sustainable as we want it to be.

Robert G. Evans is University Killam Professor in the Department of Economics at the University of British Columbia. He is a member of UBC’s university’s Centre for Health Services and Policy Research. He is an officer of the Order of Canada, and a fellow of the Royal Society of Canada and the Canadian Academy of Health Sciences.

http://www.thestar.com/opinion/editorialopinion/article/817249–public-health-care-as-sustainable-as-we-want-it-to-be

Bruce C. Vladeck, Ph.D.
New England Journal of Medicine
May 5th, 2010

Now that Congress has completed the epochal, exhausting, and contentious task of enacting comprehensive health care reform, it must confront another health care issue that is perhaps even more politically difficult: reform of Medicare’s physician payment system. On April 15, Congress voted to postpone a 21% reduction in Medicare fees that was to have gone into effect April 1, but a longer-term solution is not yet in sight.

The problems with the Medicare physician payment system are twofold, and each dimension poses complex political difficulties. First, Medicare is captive to an arbitrary, if elegantly conceived, formula for total payments to physicians — the sustainable growth rate (SGR). In the alternate reality of the Congressional budget process, the SGR will reduce Medicare’s physician payments, which already trail those from private insurers, as far into the future as the eye can see. Second, there is widespread consensus that the relative fees in the current system are a significant cause of the growing imbalance in supply and utilization between primary care and specialty services in the U.S. health care system. That imbalance, in turn, is widely perceived as a major cause of both excessive costs and inadequate quality of care. This is not just a Medicare problem: the Medicare Resource-Based Relative Value Scale is used by most private insurers to set relative prices for physicians.

In 1997, when Congress refined the formula by which the annual change in Medicare physician fees was determined, it decided that total physician payments per beneficiary should grow no faster than the economy as a whole, as measured by the gross domestic product (GDP). Policymakers were concerned about increases in the volume of services that beneficiaries received; since total spending equals price times volume, under an aggregate cap, if volume grew more quickly, fees would grow more slowly or be reduced.¹ The expectation that total physician spending could be kept to such a level was probably unrealistic, since few countries have ever attained that target, and an increasing proportion of health care services were migrating from inpatient hospitals to the lower-cost settings of outpatient facilities and physicians’ offices, which many thought would improve outcomes and save money. But the economy was growing robustly, and the SGR’s framers were pursuing a broader agenda of trying to drive the entire Medicare system away from fee for service toward private, capitated plans.

Moreover, the excessively ambitious growth target is only the beginning of the problem. The SGR is a cumulative, prospective formula; if actual spending in a given year exceeds that year’s target, the following year’s spending is supposed to be reduced proportionately, but if that reduction is insufficient, then additional reductions must come in the future. Every time Congress postpones a formula-determined fee reduction, it compounds the difference between actual and expected fees, making the (theoretical) eventual adjustment that much more severe. Thus, since the SGR was implemented in 1998, total Medicare physician expenditures have exceeded the allowed amounts by only $20 billion (on a total of almost $1 trillion), but to recoup that all in 1 year would require a 21% reduction in 1 year’s fees. And those reduced fees would then become the base for payment levels in all subsequent years.²

In a rational world, Congress would write off the $20 billion as a relatively small policy error and establish a more realistic prospective formula. But under Congressional budget rules, the cost of doing so is not $20 billion, but $20 billion per year, compounded by inflation, times 10 years. The Congressional Budget Office and the Office of Management and Budget are required to assume that someday Medicare’s physician fees will be permanently lowered to SGR levels and that anything above that amount is “extra spending.”

Of course, even $250 billion over 10 years is a rounding error relative to an annual deficit of $7 trillion, but elected officials, while steering every nickel they can to their constituents or contributors, like to pose as sworn opponents of deficit spending. Out of context, $250 billion certainly seems like a lot of money, and in today’s U.S. Senate, it takes only a handful of politicians to bring the legislative gears to a halt. In fact, early last year, the House of Representatives passed legislation that would have changed the budget rules to permit a more sensible fix for the SGR, but the proposal died in committee in the Senate.

The country’s long-term budgetary status is a serious problem, and budget discipline has to begin somewhere. But everyone seems to agree that reducing Medicare’s physician fees by 21%, in perpetuity, while private fees continue to increase might create access problems for at least some beneficiaries and might harm providers whose high volume of service to Medicare beneficiaries leaves them especially dependent on Medicare revenues.

As if that weren’t problematic enough, the basic mechanics of the Medicare Physician Fee Schedule, which was supposed to change physician payment to increase rewards for primary care services at the expense of procedural and interventional services, appears to have gone totally off track. For various reasons, the fee schedule, which originally did increase the prices of evaluation and management services relative to those of surgery or invasive procedures, turned in the other direction through the process of annual updating of relative value units.³ Surgeons, radiologists, and some medical specialists are now paid two to three times as much per hour as providers of cognitive services, which is about where we began 20 years ago; this was the situation that the fee schedule was supposed to fix.

The question of the relative virtues of primary versus specialty care can be debated ad nauseam, but in other wealthy countries that serve their populations at least as well as we do, the ratio of primary care physicians to specialists is much higher than in the United States, and the gap in compensation is much smaller or the poles even reversed.⁴ Young physicians, burdened by increasing educational debts, may well choose a career path on the basis of a major difference in compensation, especially when the better-compensated positions require less ongoing responsibility for patients and offer better working hours.

Under a budget constraint, however, changes to the relative fees paid to various categories of physicians give rise to zero-sum “distributional politics”; there may be a theoretically correct way to determine relative fees, but that is larg
ely irrelevant to a legislative process in which various groups are free to pursue their self-interests. The only general solution to such a political free-for-all is to increase the total pot available for distribution — as is customarily done, for instance, in the realm of agricultural policy. Last year’s House-passed health care reform bill took this approach, and the final reform law does add a modest amount of money to primary care fees.

But here the two dimensions of the problem intersect. The way to redress the imbalance between primary care and specialty compensation while shrinking the disparity between Medicare and private insurance is to add more money to primary care while leaving specialists’ fees unchanged, on average. But doing so worsens the federal deficit, providing fodder for those who pose, at least, as opponents of deficit spending. And then the pundits argue that fixing the current system isn’t really worth the bother — that fee-for-service payments are so intrinsically counterproductive that we should just scrap them in favor of something better.⁵ Except that no one knows what that something is.

The enactment of health care reform after many considered it irreversibly derailed by the Senate election in Massachusetts has suggested to some that perhaps the U.S. political system is not so hopelessly gridlocked after all. Health care reform, some believe, might be a harbinger of a more sensible and productive approach to solving serious policy problems. Untying the political knots enmeshing Medicare physician payment will test that optimism.

Disclosure forms provided by the author are available with the full text of this article at NEJM.org.

Source Information

From Nexera (a health care consulting business), New York.

This article (10.1056/NEJMp1004709) was published on May 5, 2010, at NEJM.org.

References

1. The sustainable growth rate system. In: Report to the Congress: assessing alternatives to the sustainable growth rate system. Washington, DC: Medicare Payment Advisory Commission, March 2007:11-27.
2. Centers for Medicare & Medicaid Services. Estimated sustainable growth rate and conversion factor for Medicare payments to physicians in 2010. November 2009. (Accessed April 26, 2010, at http://www.cms.gov/SustainableGRatesConFact/Downloads/sgr2010f.pdf.)
3. Ginsburg PB, Berenson RA. Revising Medicare’s physician fee schedule — much activity, little change. N Engl J Med 2007;356:1201-1203. [Free Full Text]
4. Lee TH. The need for reinvention. N Engl J Med 2008;359:2085-2086. [Free Full Text]
5. Wilensky GR. Reforming Medicare’s physician payment sys