You Can’t Take That Away From Me

Is this “the end of progressive government?” asks E.J. Dionne in The Washington Post. Do Republicans intend to break “America’s promise to seniors and to the poor?” asks Jon Cohn in The New Republic. Will the Republicans leave “the old and the poor without health care,” as Ezra Klein suggests? There’s no question in Paul Krugman’s mind. The “savings will come entirely from…denying medical care to those who can’t afford to top up their premiums,” he says. It’s “radical,” “irresponsible,” and “extreme,” adds Dionne.

They’re writing about the Medicare reform in Paul Ryan’s Republican budget plan. That’s the reform he devised with former Clinton-era budget director Alice Rivlin, which mainly reflects a bipartisan proposal made by a Clinton-era Medicare reform commission. Perhaps this is as good a time as any to introduce:

Goodman’s Rule                   Everyone is entitled to become hysterical;
For Civil Discourse:              but only on topics you actually know something about.

before reminding everyone that all these critics were unapologetic supporters of ObamaCare. Now take a look at the graph below. I’ll explain it below the fold.

No, No.
They Can’t Take That Away From Me

The top (dark blue) line in the graph shows projected Medicare spending based on the trend for the past four decades. Basically, the growth rate of real per capita spending on medical care in the United States (4%) has been about twice the rate of growth of real per capita income (2%). Medicare has roughly kept pace with spending by everyone else.

You don’t need to be an economist or mathematician to know that this relationship is unsustainable. If you are consuming something whose price is growing faster than your income, eventually it will crowd out every other thing you are consuming. If we somehow managed to stay on the path we are on, today’s teenagers in their retirement years would have nothing to eat, nothing to wear, no place to live — but they would have really great health care.

Obviously, the path we are on leads to an impossible place. So the only question is whether we are going to get off the current path in a planned, orderly way or whether we are going to let unplanned chaos do the trick.

The bottom (yellow) line in the graph shows the path of Medicare spending under the health reform bill Congress passed last year. Whereas the path we are on is the rate of growth of GDP + 2%, under ObamaCare the growth rate will be close to the rate of growth of GDP + 0%. This means that under the new health reform law, Medicare will grow no faster than national income.

What will keep Medicare spending at such a low growth rate? The Obama administration has a long list of ideas for making the health care system more efficient — electronic medical records, pay-for-performance, evidence-based medicine, coordinated care, integrated care, managed care, etc., etc. But since there is no evidence that any of this will work, it also has a fall-back strategy: price controls. Under the legislation, Medicare payments to doctors and hospitals will fall further and further behind what all other health plans are paying. According to the Medicare Actuaries Office, Medicare payment rates will be below Medicaid’s before this decade is over.

There will be a price to pay for all of this in terms of access to care. From a revenue perspective, seniors will become less desirable as patients than welfare mothers. Medicaid patients in many places today have difficulty finding doctors who will see them; and they turn to community health centers and the emergency rooms of safety-net hospitals as the next best alternative. In just a few years, the elderly and the disabled will join them. Meanwhile, the supply of services will contract, with an estimated one in seven hospitals leaving Medicare by the end of this decade.

The middle (red) line shows Medicare spending growing at GDP + 1%. Although this line is not an estimate of the Ryan budget proposal, it reflects the stated goal of a number of reform proposals, including President Obama’s deficit commission (Bowles/Simpson), the Domenici/Rivlin proposal and the Rivlin/Ryan proposal, which is basically the Medicare component of Ryan’s budget proposal and which we have previously described here.

Before going further, note that whatever you think about the Ryan proposal, if it’s “draconian” then ObamaCare is twice as draconian. If Ryan’s idea breaks Lyndon Johnson’s compact with the elderly (Jon Cohn’s description), then ObamaCare breaks it twice over.

Other than the magnitude of the spending cuts, the two approaches are different in this respect:

  • ObamaCare keeps paper benefit promises in place, but steadily reduces the price it will pay for them. This is how the administration can claim that the elderly have not lost any benefits. They haven’t lost any “promised benefits.” But if the fees Medicare will pay become so low that no doctor will provide services for those amounts, this is a distinction not worth making. If seniors cannot get care at these artificially low prices, they will have to pay out-of-pocket for concierge doctors and other services.
  • The Ryan approach promises not a fixed package of benefits, but a fixed sum of money for each retiree (adjusted for expected health care costs). If other Ryan reforms fail to slow the overall rate of growth of health care spending, retirees will have to add money from their own resources to be able to have the full insurance package Medicare would have provided under current law.

Both these approaches could involve substantial shifting of costs to seniors. The difference: (1) ObamaCare shifts twice as much as Ryan and (2) Ryan leaves the marketplace with incentives to meet seniors’ needs and the flexibility to do so, while Obama incents the market to abandon seniors and seek more lucrative patients elsewhere.

We have previously described ObamaCare’s expected impact on seniors, based on the analysis of Rick Foster, Medicare’s Chief Actuary, former Medicare Trustee Tom Saving and Harvard health economist Joe Newhouse. The results are grim.

We have also previously described the Ryan plan and suggested ways to make it better. In fact, with additional reforms a Ryan-type plan could take us to midcentury with seniors having the same type of benefits Medicare now promises (but delivered more efficiently) and with a payroll tax rate no higher than the one we have today.

Let me conclude by announcing that we are accepting nominations for the worst violator of Goodman’s Rule for Civil Discourse. This passage has no close rival at the moment:

Oh, and for all those older Americans who voted GOP last year because those nasty Democrats were going to cut Medicare, I have just one word: suckers!

— Paul Krugman

Comments (18)

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  1. Vicki says:

    Great post. Nice musical accompaniment.

  2. Bret says:

    Have you thought about a warning sign to be posted at the beginning of these editorials, signaling that the writer is about to become hysterical about a subject he knows nothing about? That would be helpful to everybody.

  3. Mike Ainslie says:

    Ryan has hit a Home Run. Every discourse from now on will have to address how their proposal will enhance or hurt his ideas. It is a watershed moment in the discourse for the government in America. This changes everything.

  4. Nancy says:

    Great song pairing.

  5. Larry says:

    It is always better to communicate to people what is several/many years infront of them rather than changing the rules of the road immediately or worse yet not explicitly telling them clearly and unambiguously. For this I give Ryan much credit.

    It is also better to provide what you can in terms of financial support and allow people to fund more from their own resources — they are less likely to waste resources if they have skin in the game.

    Finally it is important to cover the catastrophic costs for society’s members since not one of us can afford the costs of a long devasting illness.

    Health care is our destiny.

  6. Ken says:

    Glad to see Ryan stepping up to the plate. I guess it was predictable that the left wing would immediately begin attacking his plan.

  7. I would add that more expensive health care is not necessarily better health care. In fact in many cases it is worse. With all the non-beneficial inappropriate care being delivered in the U.S. today with all their complications, our health outcomes are no better than other countries that spend much less and in many instances worse.
    We can do our seniors a favor by having our physicians organized to work together providing evidence based beneficial care, using judgment so that it is tailored to each individual’s needs. Our medical care costs would be much less and it would then be easier to come up with a plan as to how to pay for it. That plan should include health savings accounts.

  8. Patrick Skinner says:

    John, I haven’t read much of Ryan’s proposal yet, but my biggest question is ‘Will this shift from Gov’t payor to providers to Insurance company payments to providers reduce or eliminate the cost shifting of the gov’t underpayment to overcharges to private and insurance company payments? 1st blush is that insurance companies would pay network rates for in network providers – right? That would bring down insurance premiums somewhat.

  9. steve says:

    1) Rivlin said she did not support Ryan’s plan, the one released yesterday.

    2)CBO anticipates that individual plans for seniors will cost more for seniors with this plan as they will be buying private insurance. By 2030, seniors will be paying for 68% of their costs, which will be higher in total since you are buying private insurance.

    3) This is unclear to me. Could you put a line on the graph representing what will happen under the Ryan budget? Bowles-Simpson was just an aspirational goal with few specifics.

    “Before going further, note that whatever you think about the Ryan proposal, if it’s “draconian” then ObamaCare is twice as draconian.”

    Or an attempt to address costs. Private insurance in the US has shown no ability to control costs. We are now going to put millions of elderly into private insurance. It seems quite likely that the result will be a majority of seniors unable to afford insurance other than a mini-med type plan, which is really just a medical discount plan.


  10. steve says:

    Oops. Number three was in reference to this.

    “Although this line is not an estimate of the Ryan budget proposal, it reflects the stated goal of a number of reform proposals,”

    (Sorry, was up all night on call taking care of elderly patients who could not remember their medical histories, allergy lists or medications.)


  11. Devon Herrick says:

    I find it rather odd that people throw up in arms if they might have to pay out of their own pockets. Yet, they see nothing wrong (or unsustainable) with the notion that providers can have their fees cut and (supposedly) nothing bad will happen to access and quality of care.

  12. steve says:

    I find it odd that people believe you can control medical spending and pretend that fees will not be affected.


  13. wanda j. jones says:

    It’s a little odd that no one speaking about healthcare costs lists the effects of over-ordering. Some specialists become expert at various procedures that bring in more money than a typical office visit. The result is higher annual income than if the doctor did only what the patient actually needs. It’s the “Slack in the system” that enables specialists to actually be available when patients do need them. Demand is highly variable and doctors have only a few ways of making their target incomes. Pricing is one, diversification is another, and over-treatment is a third. I’ve been given MRI’s when a clinical assessment would have been enough, offered a second MRI after a simple surgery “The Radiologists want to see again the lesion on your liver, and no, it will not lead to another surgery.” I was offered back surgery for a food drop created from carrying heavy loads; would have been at least a $100,000 expense. I see 7 specialists because each is so narrow that they won’t tackle more than one disease at a time. I watch this as I participate as a patient because I am a health professional and know what I am really seeing. I have fired 3 specialists for what I perceived as ethical lapses, such as “If I write it this way, your insurance company will cover it, but if you are paying for it yourself, I’ll make the price only half of that.”

    Ryan is brave, on the right track and deserves to be respected for his forethought.

    Wanda J.

  14. Frank Timmins says:

    Steve says, “Private insurance in the US has shown no ability to control costs.”

    That’s right Steve. It is not in the nature of economics for any “third party”, be it government or private industry, to “control costs”.

    Costs and only be ultimately controlled by the direct interaction between the buyer and seller of services (doctor and patient).

  15. Lawrence A. Hunter, Ph.D. says:


    Your blog is absolutely the best piece I have seen on Medicare reform, ObamaCare and the budget, bar none. Wow! It’s a tour de force, a grand slam.

    I do have serious problems with some of Paul’s approach in his Path to Prosperity, which I fear is premature, especially given the long-term nature of the package — it is out of sync with the current budget struggle this year and the next given the balance of power in Congress. In my opinion, the little leverage we have in Washington right now should be devoted to tactical, short-run budget reductions and preparing the budget process, over which Ryan does have considerable control — — but he doesn’t seem to be focused on these strategic leverage points. (I understand the symbolic/promises-kept motivation behind Paul’s plan but given his real position of power and responsibility, he may get trapped in a whirlpool of expectations and demands he can’t control and maintain at the symbolic level without our having political control of the Senate and White House.) Moreover, by not focusing more on economic growth and REAL tax reform, rather than the ersatz rate reduction traded against “loophole closings” (, and by avoiding cuts to the military-industrial complex, he may cause a backlash (austerity w/o growth is toxic) and actually entrench the welfare state. But, I will detail all of this in a forthcoming column.

    In terms of the political hysteria and demagoguery surrounding his proposed Medicare changes, however, you have hit the knuckleheads right smack in the nose. Congrats.

    Best regards,

  16. Mr. Timmins (3:37 p.m. comment): What you wrote made me reframe this issue. Who expects insurers to drive down costs? Does anyone expect auto insurers to drive down the cost of owning and operating automobiles? Does anyone expect property & casualty insurers to drive down the cost of owning and operating residential or commercial real estate?

    Of course, not. That is not the function of insurance. You’ve given us another way to frame the issue. Thank you for that.

    Also, a nominee for the violator of civil discourse: Kyle Curtis of the blog Bue Oregon, who hurled the accusation of “Gestapo-like tactics” against that neo-Nazi organization – the Wisconsin State Republican Party! (See:

  17. Wanda Jones says:

    Dear Mr Goodman:

    I’m a fond reader, so this is not a complaint.

    You might take a harder look at the chart on this blog; the lower line makes it seem as though Obamacare is a good deal. This is their propaganda about it, when others have shown a much more worrisome picture. Using this chart makes it look like you support Obamacare.

    Wanda J. Jones, MPH
    New Century Healthcare Institute

  18. Mary Kohler says:

    A very good piece