Lee Goldberg, National Academy of Social Insurance
Representative Paul Ryan, chairman of the House Budget Committee, yesterday released a plan entitled Path to Prosperity that would fundamentally restructure Medicare, the program that has provided health care and financial security for America’s elderly and disabled population since 1965.
While the Ryan plan lacks the specifics required in the legislative process, the proposal would end Medicare’s basic guarantee of access to care. Ryan would replace the practice of having the federal government reimburse providers for covered services with a system providing limited support for beneficiaries to enable them to purchase coverage from private insurers. The federal government would pay a health plan a set amount toward the cost of the premium; if the federal subsidy is insufficient, it would be up to the Medicare enrollee to cover the difference. Larger subsidies would be provided to lower-income beneficiaries and to those with greater health risks; subsidies would grow over time, but at a lower rate than medical inflation. With the subsidy covering a smaller share of the premium over time, Medicare beneficiaries would either have to pay more or buy a less generous plan. As the Congressional Budget Office (CBO) notes, Ryan’s plan would raise the total cost of health care for Medicare enrollees by 25-45%. The Ryan plan is essentially a cost-shifting approach to long-term deficit reduction.
Given Ryan’s reliance on private insurance, it is also worth noting that the Medicare program was created as a response to a serious problem: in 1963, two years before the creation of Medicare, only 56% of seniors had even limited hospital insurance coverage, as compared to 75% of people under age 65. As a study panel of national experts convened by NASI noted in its 1999 report, Medicare and the American Social Contract, the program was designed as a form of social insurance, funded in part by mandatory contributions from wage earners and employers, with benefits paid from public funds earmarked for that purpose; as a social insurance program, Medicare pays benefits to participants regardless of health or economic circumstances. It is a program specifically designed to protect individuals against the risk of out-living one’s savings or the risks posed by the cost of expensive new medical technology. Ryan’s proposal emphasizes the importance of preserving the social contract, but his proposal fundamentally alters its current terms.
Medicare as presently structured accommodates private health plans, and we would do well to heed past concerns that have been raised about radically altering that relationship. A 2003 NASI report, The Role of Private Health Plans in Medicare, noted that “defining an appropriate role of private health plans for the elderly and disabled does not require that the Medicare program be remade in the image of the private market for employer-based insurance.” The report noted that Medicare beneficiaries have “needs, circumstances and capacities that differ in important ways from those of working age adults.” No one denies that Medicare can and should be strengthened, but policymakers need to find ways to contain costs and improve quality of care without changing the fundamental nature of the program.
Nothing good will happen if
Nothing good will happen if the Democratic Party does not get its head out of the sand and finally at long last show that it knows something about how to properly fund both Social Security and Medicare.
The Republican Party is correct when they criticize the way both systems are funded–Pay-As-You-Go–doesn’t work, it is vastly too expensive because it gets far too little investment returns compounded over time to help pay the benefits, and besides is inherently unstable. but then they do what they have been doing for 30 years now, suggest exactly the wrong way to fix it, the opposite way in fact–privatization, or the use of individual accounts.
The correct technical name for this is, Defined Contribution Savings Plans (DCSPs), of which the most well-known is the nearly ubiquitous, 401(k) plan. Such plans have their uses but have never worked for retirement and never will, because most people are very poor long-term investors, often buying into the nonsense put out by Wall Street, namely that you should get rich quick by trading. Trading makes them rich but you poor.
Making Social Security a Defined Benefit Pension Plan (DBPP) is the right way to fix it and using the same two missing components for Medicare will fix it also.
Both systems need improvement in fraud prevention, Social Security in its disability programs, while Medicare has a minimum of some 15% that is fraudulent. I will talk about these at some later date.
The Democrats, for their part, are correct that these systems must be saved, but then, alas, recommend that a higher payroll tax or increase in retirement age or other cuts in benefits must be done to balance the system. Nonsense! Pay-As-You-Go is what is what is wrong with the system and until this is recognized they are playing right into the hands of the Republican Party.
As the saying goes, with friends like these, who needs enemies?
It is easy to demonstrate that it is impossible, mathematically and actuarially, to ever have decent, affordable defined benefit pensions, retiree medical plans or their counterparts at the federal level, Social Security or Medicare, or for that matter, any type of national health care system, unless monies are set aside long in advance of them being needed, invested, with the key asset class being common stock, and use the resulting compound interest to pay the bulk of the benefits.
The way you do this is to do an annual actuarial valuation using The Entry Age Normal Cost Actuarial Cost Method to determine the annual contribution that will satisfy the equation: The present value of all future benefits, both past and future = the current value of assets + the present value of future contributions.
Unlike Social Security and Medicare, the systems will always be in 100% Actuarial Balance!
This is done quite differently than the way the actuaries for these two systems do it and we can discuss those differences later on if you like.
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The PayGo system of funding them was used by FDR only because he had no choice. He was advised by three consulting actuaries in 1934 to Actuarially Advance Fund Social Security but he said no, once he got from them the very large size of the fund that would in time develop. Why?
Because he had nowhere to invest the money, that’s why. We were deep into The Great Depression, the stock market had collapsed triggering it, and so he clearly could not go there.
He could not go into the corporate bond market either because companies were going out of business or were very weak.
And he couldn’t even out any money into banks because some 50,000 had collapsed, causing him to call a ‘bank holiday’.
So he called for a payroll tax, half paid by corporations and half by workers, put that money into a trust fund and then invested that entire amount back into specially issued non-marketable Treasuries, in effect lending it to the government.
This a real asset–Treasuries have never defaulted–but because the excess amount over the amount to be paid out in the next few years from the Social Security Trust Fund is very small, and because the interest rates on these safe, secure Treasuries is also very small, the fund gets far too little by way of returns to help pay the benefits.
What should have happened long ago is to make the system financially sustainable–to coin a phrase, ‘actuarially sound’, is change the way we finance it as described before and also to pass strong laws with teeth to protect the assets and prevent the past service accrued (earned) benefits from being cut back, but make sure that benefits accrue correctly and do not have their present values extremely backloaded as ERISA—the massive pensions laws passed in September, 1974 did.
The result of not having these laws correct in the private and public defined benefit pension systems, along with equally bad pension and retiree medical plans accounting rules, has resulted in well over a trillion dollar scandal (that is just in the private sector, by the way) and is also a major cause of why so many older employees have been mass terminated, beginning way back in the early 80s, when Michael Milken accidentally discovered he could get ‘pension income’ by terminating employees in the age range of 45–60, which he did. (It is also the major reason why so few Poast Offcie employee ever leave before retirement!)
Milken simultaneously recovered many tens of billions in pension ‘surplus’, which helped finance his nefarious deeds. ‘Surplus’ in this case is not the dictionary definition of, ‘not needed’ but rather a natural outcome of the actuarial funding process and if you take it from these plans during the good times, when the next downturn hits and pension assets go south, the plan would be in extreme danger.
Many corporate pension plan sponsors terminated their DB plans dumping their immense liabilities ultimately onto the plan participants and the taxpayers through the PBGC.
The good news is that these vital systems are still fixable and fixing then correctly will also fix the economy, big time and quickly. These fixes will in the long run also fix capitalism itself, not just making it behave itself, but providing a steady stream of capital going to companies that have excellent long term prospects, who do not despoil the environment or screw the public with flawed products or their own employees, and who do not reward their CEOs like they are Middle Eastern potentates.
And how has all of this failure to fix these systems correctly happened?
Three main reasons:
1. Bad federal Accounting
2. Bad actuaries
3. Bad politicians, most, but not all of them, Republicans.
Far and way the most important of these is 2.
Maybe another time I can talk about these.
I would be happy to answer any questions, but in a week or so (hey, it’s tax time!).
Andy Lang, Fellow, Society of actuaries, FSA, Member, American Academy of Actuaries, MAAA 610-738-9678
andyclang@comcast.net
Lee Goldberg implicitly
Lee Goldberg implicitly criticizes Congressman Ryan’s Medicare proposal for “lack[ing] the specifics required in the legislative process” and for “fundamentally alter[ing] its [Medicare’s] current terms.” He concludes that “policymakers need to find ways to contain costs and improve quality of care without changing the fundamental nature of the program.” But how? Mr. Goldberg offers no suggestion. The existing Medicare program is unsustainable, and reform is essential, but I sense that Mr. Goldberg would reject any serious restructuring of Medicare as a change in its “fundamental nature.”
Apart from administrative rationing and a top-down/central-planning approach, the only way to contain costs is to make consumers of health services more sensitive to the costs of services they receive. Demand curves slope downward, and introducing some measure of consumer price-sensitivity would do far more to contain costs, improve quality, and allocate services to those who need them than the existing bureaucratized and administratively encumbered system.
Mr. Goldberg says the Ryan proposal would shift the cost of Medicare to those who receive health-care services, as if that were a bad thing. But it is precisely what needs to be done to contain costs, improve the efficiency of the system, and salvage it for the long run.
Stephen A. Woodbury
Michigan State University and W.E. Upjohn Institute
Medicare Advantage was pushed
Medicare Advantage was pushed in by the Bush administration and is a device for funneling our taxpayer dollars into the health insurance industry.
Paul Ryan’s plan would do exactly the same thing and would of course destroy the entire system.
For what it is worth, privatization of both Social Security and Medicare began in the early 80’s with Ronald Reagan’s Chief of Staff, the former head of Merrill Lynch. When he ran Social Security privatization up the flagpole, it was immediately shot down. but Medicare privatization was kept secret, and it continues to this day.
I call him the Typhoid Mary of The Big Four, corporate defined benefit pensions, retiree medical plans, Social Security and Medicare. He went after them all and has nearly succeeded.
Who recalls his name? Hint: Mrs. Reagan hated his guts and the feeling was mutual.
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Gee, Stephen, you work for a drug company—waddya know, you want the system privatized, do you?
Hey–you can also get tons of money from health insurance companies too, and if you want to push privatization of Social Security you can get a lot more from life insurance and stock brokerage firms.
Guess what?
The two worst financial products ever foisted on the American people (and the world) are individual level premium cash value whole life insurance policies, which take about 50% of every premium dollar on a present value basis (most of that to the agent), all the while extolling the virtues of this wonderful investment, while individual health insurance policies take from 35-40% of those premium dollars* assuming you can get insurance in the first place and if you do, can keep it if something goes wrong with your health.
There are more scams perpetrated by these two products than there are stars in the skies.
Privatize these two systems, and you will soon see for yourself, just how big they are.
* I once knew of one major mail order company near where I live now that took a whopping 70%, the founder, a fundamentalist Christian, absconding with well over a billion dollars!
His mail order firm often targeted seniors, sometimes selling those whose mental faculties were failing dozens of such policies!
His son now uses that stash to support the GOP. He worked with Jerry Falwell to produce the infamous ‘Clinton Chronicles—the biggest pack of lies ever created.
A free cheese steak and Tasteecake (and Scrapple if you want it) to anyone who knows the name of the company, the founder, and his son.
Stephen, thank you for the
Stephen, thank you for the comments. As an active member of NASI, we are pleased that you are engaging in this dialogue. There is no doubt we need fiscal policy change if Medicare is to remain solvent over the long term. But Rep. Ryan’s plan would scrap the existing reimbursement program and replace it with a subsidy that is intentionally set to increase less than the nominal cost of health care. This plan would shift more of the cost of health care to beneficiaries who already pay significant out-of-pocket costs. According to the Kaiser Family Foundation, median out-of-pocket spending among Medicare beneficiaries as a share of income has been rising steadily over time, from 11.9 percent in 1997 to 16.2 percent in 2006. One in four Medicare beneficiaries spent 30% or more of their income on health expenses in 2006; the CBO has estimated that by 2030, Rep. Ryan’s budget proposal would increase out-of-pocket costs for typical Medicare beneficiaries from the projected 25-30% to 68%.
The Ryan proposal rests on the misperception belief that the problem with our current health care system is one of moral hazard where the artificially low price leads to overconsumption of health care services. While it is not clear that consumers are price-sensitive for health care services in the same way they are in the purchase of consumer goods, it is clear that beneficiaries already have a great deal of “skin in the game.” The view that we must continue to shift the cost of care to seniors since our only option is either that or engage in top-down price controls is interesting, since many other countries have chosen the latter by imposing a national budget on health care spending. Of course, there are other alternatives: reducing provider payments and increased revenues.
It would be interesting to analyze the secondary effects of Rep. Ryan’s strategy for cost containment. Making seniors pay more for their health care will reduce their overall savings. This may reduce transfer payments to other family members and it may reduce other expenditures. On the margin, many will not be able to make the marginal expense of additional health care needs. They will defer care until their condition worsens – a strategy that usually involves more expensive care and less favorable outcomes – or become eligible for Medicaid. It is not clear how large a group would be affected in this way but because nearly half of all Medicare beneficiaries have incomes below 200% of the federal poverty level ($21,780 for an individual), many experts believe that this could shift a significant set of costs to state Medicaid programs (which Rep. Ryan proposes to turn into a block grant).
There is no doubt that we need to change Medicare to improve the quality of care provided. Some of this started with the Affordable Care Act with the creation of Accountable Care Organizations and demonstration programs aimed at increasing the integration and coordination of care for the dually eligible. The jury is out on these efforts but the ACA contains a number of serious efforts to contain costs by improving care.
You noted that I have not suggested alternative solutions to this proposal, and you are partially right. NASI’s 2000 report, Financing Medicare, continues to provide a useful analysis of the revenue that may be needed under various reform options (including premium support) and the pros and cons of various revenue options. We have also begun to re-examine our work in this area and plan to convene study panels of people from a variety of disciplines and different perspectives who have thought long and hard about how to reform Medicare. We suspect that there are fiscal and health policy approaches to reform that keep the fundamental structure of the Medicare program intact and contain cost at the same time. These likely include a combination of increased revenues (perhaps through comprehensive reform of the tax code or through a repeal of the 2001 tax cuts) as program changes designed to produce more efficient care. Thanks again for your comments.