Costs and Benefits of Open-ended Health Care
By ELIZABETH C. BOGAN
Senior Lecturer
Department of Economics
Given existing laws, by 2001 the Medicare Part A Trust Fund will be unable to pay its bills. By 2005 it would be over $400 billion in arrears. Part A covers hospital care and some home care and is financed by the Medicare tax of 2.9% on wages and salaries. Under law it must be self-financing. If we believe the money is being well spent, Medicare taxes could be raised to meet these expenses.
Medicare Part B is partly financed by senior citizens, but about 3/4 comes from general revenue. Spending on Medicare Part B, which covers physicians’ fees and some other noninstitutional care such as laboratory work and physical therapy, is growing at more than 10% per year.
General taxes could be increased to cover Part B or seniors could be asked to pay more of its cost. However, I believe that devoting more resources to Medicare is not in the nation’s best interest. The rapid growth in Medicare is partly the result of an aging population which will increase in 15 years as the baby boom generation begins to retire. But it is also the result of the way the U.S. structured socialized health care for the elderly.
Essentially, Medicare was introduced in the late 1960s as an open-ended, unrationed invitation to do anything medically possible to prolong life. In other countries, government-financed health care does not cover invasive surgery with small time horizons for recovery. For example, liver transplants and quadruple bypass surgery aren’t done on 80- or 90-year-olds, as they are in the U.S. Behavior is affected by costs and benefits.
Under Medicare, medical practitioners could recommend painful, risky surgery for the elderly without worrying that the expenses would cause great suffering for the rest of the family. Medical equipment and other advances could be developed without concern for costs. The result of this environment was to spare nothing to prolong life, no matter what the quality of that life.
We ignored the opportunity cost of foregone alternatives as increasing portions of GDP were devoted to medical treatment. One of the standard causes of inefficiency in government spending is the separation of costs from benefits. If the decision maker doesn’t bear any costs s/he will continue to use a service until it offers zero additional benefits.
Cost consciousness needs to be put back into the U.S. system, but in a way that doesn’t reduce the opportunity for beneficial health care to those with low incomes. Working people are being pushed into HMOs by their employers who now charge their employees something for more expensive fee-for-service benefits.
Medicare could reduce some costs by requiring the elderly to move into HMOs or to pay more to stay in fee-for-service plans. However, this does not address the major problem of determining exactly what services should be paid by the government. Having started with an open-ended system, we are reluctant to determine what care should be covered at government expense and what should not.
Some believe that capping Medicare payment levels would force that decision back onto the doctors or that putting the elderly in HMOs would force the administrators to ration care. I would prefer an open political process that would give guidelines to doctors and hospitals for what is covered.
To add cost consciousness, we might require a 50% copayment for some treatments that had lower social priorities. We might require that the first $1,000 of medical expenses per year be paid by the individual. (Medicaid would pay the $1,000 for the poor.) We might create medical saving plans that allow families to keep unused benefits. Even without making people see some of the direct costs of medical treatment, we may get a change in social attitudes from the publicity surrounding end-of-life care.
Maybe society will come to believe that the psychic costs of end stage medical treatments are too high and that in many cases pain relief and hospice are better answers. The benefits and opportunity costs of care for America’s elderly should be a major part of social and political dialogue this year.
Unfortunately, one of the real tragedies of the recent political campaign season was the beating up of Republicans for trying to reduce the rate of growth of Medicare spending. They will not soon pick up the problem to seek solutions.
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