Las Vegas Review-Journal's Bad Medicine For Entitlement Reform

››› ››› SALVATORE COLLELUORI

The Las Vegas Review-Journal hyped the need for entitlement reform, calling for an increase in eligibility ages for Social Security and Medicare, means-testing or tying benefits to a beneficiary's income, and competition for Medicare. However, the Review-Journal neglected to mention that health care cost growth has been slowing down and that enacting these policy prescriptions would hurt seniors and low-income Americans.

Las Vegas Review-Journal Pushes For Changes In Entitlement Programs

The Las Vegas Review Journal Called For Medicare, Medicaid, And Social Security To Be "Reformed For Future Beneficiaries." The May 30 editorial claimed that entitlement programs are on track to consume all federal revenues by 2045 and therefore must be reformed by increasing eligibility ages, means-testing benefits, and creating competition for Medicare:

Entitlements already cost roughly $1.6 trillion per year, about 45 percent of the federal budget. The programs are on track to consume all federal revenues by 2045, as tens of millions more baby boomers retire. More than $65 trillion worth of promised Social Security and Medicare benefits aren't funded. Income tax rates could be doubled across the board and they still wouldn't cover the bill.

The programs must be reformed for future beneficiaries. Eligibility ages should be increased to address longer life spans. Benefits will have to be means tested. And Medicare needs to embrace more competition to keep costs down. Republicans have been the driving force behind such proposals -- at their political peril -- but bipartisan efforts have reached similar conclusions. AARP has savaged all of them. [Las Vegas Review-Journal, 5/30/13]

But Growth In Health Care Costs Is Slowing

NY Times: "Sharp And Surprisingly Persistent Slowdown" In Health Care Cost Growth "Is Helping To Narrow The Federal Deficit." The New York Times explained that the rate of growth in health care costs is slowing and has slowed by 15 percent since an estimate three years ago:

A sharp and surprisingly persistent slowdown in the growth of health care costs is helping to narrow the federal deficit, leaving budget experts trying to figure out whether the trend will last and how much the slower growth could help alleviate the country's long-term fiscal problems.

In figures released last week, the Congressional Budget Office said it had erased hundreds of billions of dollars in projected spending on Medicare and Medicaid. The budget office now projects that spending on those two programs in 2020 will be about $200 billion, or 15 percent, less than it projected three years ago. New data also show overall health care spending growth continuing at the lowest rate in decades for a fourth consecutive year.

Health experts say they do not yet fully understand what is driving the lower spending trajectory. But there is a growing consensus that changes in how doctors and hospitals deliver health care -- as opposed to merely a weak economy -- are playing a role. Still, experts sharply disagree on where spending might be in future years, a question with major ramifications for the federal deficit, family budgets and the overall economy. [The New York Times, 2/11/13]

And Medicare Is Already Means-Tested

Medicare News Group: Certain Premiums Are Already Tied To Beneficiaries' Income Levels. According to the Medicare News Group, means-testing is already in effect for those filing taxes individually with an income of $85,000 or less or filing taxes jointly with an income of $170,000 or less, both of which currently pay a $104.90 monthly premium:

While some politicians give the impression that means-testing is a new concept, it's been a policy for almost a decade.

Premiums for Part B and Part D are already tied to beneficiaries' income levels.

Today, seniors who file individual income tax returns (income from Social Security benefits, employment, interest from tax-exempt bonds, etc.) with incomes of $85,000 or less, and couples with incomes of $170,000 or less, pay a monthly premium of $104.90 for Part B. That payment tops out at $335.70 for seniors and couples with an income above $214,000 and $428,000, respectively. Premiums are based on the percentage amount set for beneficiaries. For example, individuals who make $85,000 or less pay 25 percent of Part B costs and Medicare pays the other 75 percent. Those making above $214,000 pay 80 percent of the total Medicare cost. [Medicare News Group, 3/10/13]

Means-Testing Could Hurt Lower-Income Beneficiaries

Recent Proposals To Means-Test Medicare Could Force 25 Percent Of Beneficiaries To Pay Income-Related Monthly Premiums. According to a study by the Kaiser Family Foundation on the impacts of recommendations by both the Obama administration and House Republicans for extending the Social Security payroll tax reduction in 2012, under current law, 8.9 percent of Medicare beneficiaries would have to pay income-related monthly premiums by 2035. However, under these means-testing proposals, 25.8 percent of beneficiaries would be forced to pay income-related monthly premiums by 2035:

With the income-related premium thresholds held constant at their current levels beyond 2019, it is estimated that by 2035, just over one-quarter of all Medicare beneficiaries enrolled in Part B (20.2 million beneficiaries) will be required to pay the income-related Part B premium, because their incomes are projected to exceed $85,000 per individual or $170,000 per couple that year (Exhibit 2).

The income thresholds for the higher income Part B and D premiums in 2035 are equivalent to about $47,000 for individuals and $94,000 for couples in today's inflation-adjusted dollars. In other words, if the proposal to have 25 percent of beneficiaries pay the income-related premium was implemented in 2012, rather than reached gradually by holding the income thresholds constant over time, beneficiaries with incomes at or above $47,000 for individuals and $94,000 for couples would be paying higher income-related Medicare premiums this year.

By design, these proposals would gradually increase the number and share of Medicare beneficiaries paying an income-related premium. It is estimated that:

  • In 2020, 10.0 percent of all Medicare beneficiaries (5.8 million) would pay an income-related premium, compared to 6.6 percent (3.8 million) under current law - an increase of 2.0 million beneficiaries who would be paying higher premiums that year.
  • In 2025, 14.2 percent of all Medicare beneficiaries (9.5 million) would pay an income-related premium, compared to 7.3 percent (4.9 million) under current law - an increase of 4.6 million beneficiaries who would be paying higher premiums that year.
  • In 2030, 19.3 percent of all Medicare beneficiaries (14.3 million) would pay an income-related premium, compared to 7.8 percent (5.8 million) under current law - an increase of 8.5 million beneficiaries who would be paying higher premiums that year.
  • In 2035, 25.8 percent of all Medicare beneficiaries (20.2 million) would pay an income-related premium, compared to 8.9 percent (7.0 million) under current law - an increase of 13.2 million beneficiaries who would be paying higher premiums that year. [Kaiser Family Foundation, February 2012]

Economist Dean Baker: To Cut Medicare Costs Significantly "Benefits Would Have To Be Cut" For People Making "As Little As $40,000 Per Year." According to a letter from economist and Center for Economic and Policy Research Co-Director Dean Baker to Rep. Susan Brooks (R-IN), in order to achieve significant savings in the Medicare program by means-testing, benefits would have to be cut for those making as little as $40,000 a year in non-Social Security income:

In a recent talk to Tipton, IN, residents about "entitlement" reform, Rep. Susan Brooks suggested "needs-testing" Medicare to ensure that the wealthy are not receiving benefits. She went on to say "When it was created, they didn't expect people to depend on the program for their medical care... There are not enough young people paying into the program."

Assuming that Rep. Brooks meant means-testing instead of "needs-testing," she might want to clarify whom she means by the wealthy. Fewer than 6 percent of seniors have over $60,000 in non-Social Security income. Removing them from the pool of Medicare beneficiaries would have little effect on the program's long-term cost projections. To significantly curb expenses under needs-testing, benefits would have to be cut for people who have much less income -- in fact, as little as $40,000 per year. 

As it stands, the cost controls put into place by the Affordable Care Act allow the Medicare trust funds to pay full benefits through 2024 and close to full benefits from then on. As well, the latest data from the non-partisan Congressional Budget Office show that the rate of Medicare cost growth has slowed sharply in recent years. If the cost growth continues at the current rate, most of the projected long-term budget deficits disappear. In other words, there is little point in cutting the much-needed benefits of those making less than $60,000 in the name of deficit reduction that is already happening. [Center for Economic and Policy Research, 4/3/13]

Means-Testing Social Security Isn't Cost-Effective And Hurts Seniors

Means-Testing Social Security Would Only Create A 1.6 Percent Savings By 2040. According to a post by Mother Jones political blogger Kevin Drum, political blogger at Mother Jones, means-testing Social Security by lowering the benefits received by higher-income seniors would only create a savings of "$59 billion in 2040, which is a grand total of 1.6% of the savings in the entire Social Security plan." [Mother Jones, 2/15/11]

Means-Testing Could Create Disincentives To Save And Incentives For Consumption. A study on the effects of means-testing Social Security by the American Academy of Actuaries found that workers would have "an incentive against savings toward consumption during their working years," which, resulting in lower national savings, could diminish the improvement to Social Security's finances:

If income from savings during retirement reduced or eliminated Social Security benefits, participants would have an incentive against savings toward consumption during their working years. This would apply not just to workers, but also to their employers, who might forego maintaining or improving private retirement plans if their benefits reduced participants' Social Security benefits. This outcome would be contrary to the goal of raising the low level of national savings and have possible consequences for future improvement in labor productivity. Productivity has a major impact on the nation's economic well-being, as well as the financial health of Social Security, and any factor that negatively affects productivity could deepen both the nation's and Social Security's financial problems. Any direct improvement to Social Security's finances from means testing therefore could be partially offset by the indirect effect of lower national savings. [American Academy of Actuaries, December 2012]

Broad Support For Social Security Could Be Damaged If Program Was Means-Tested. According to a report by the Center for Economic and Policy Research (CEPR), means-testing benefits could be harmful to lower-income retirees in the long term:

However, supporters of increased benefits for low-income retirees should be wary of means-testing as a mechanism to increase the long-term financial solvency of Social Security or to increase benefits at the lower end. Social Security currently enjoys broad and strong political support because it pays benefits to nearly all retirees, regardless of income. If benefits were substantially cut for middle income retirees, this support could be undermined in ways that are harmful for lower-income retirees in the long run. [Center for Economic and Policy Research, November 2011]

Raising The Age Of Eligibility For Social Security And Medicare Disproportionately Hurts Low-Income Seniors

U.S. News & World Report: Life Expectancy For Americans With Low Levels Of Education And Income Has Been Decreasing. According to an article in U.S. News & World Report, life expectancy is increasing for those who are more educated and higher earning, and decreasing for those less educated and lower earning:

Social scientists have assembled an increasingly powerful record that shows longevity gains have not been doled out equally. Well-educated and higher-income people of all races are, indeed, living longer. But despite major gains in treating and even preventing life-shortening diseases, lifespans among Americans with low levels of education and income have been moving in the opposite direction.

"In 2008, U.S. adult men and women with fewer than twelve years of education had life expectancies not much better than those of all adults in the 1950s and 1960s," researchers concluded in a recent study published in the journal Health Affairs. "When race and education are combined, the disparity is even more striking."

"White U.S. men and women with 16 years or more of schooling had life expectancies far greater than black Americans with fewer than 12 years of education--14.2 years more for white men than black men, and 10.3 years more for white women than black women," researchers said. "These gaps have widened over time and have led to at least two 'Americas,' if not multiple others, in terms of life expectancy, demarcated by level of education and racial-group membership." [U.S. News & World Report, 12/14/12]

Washington Post: Raising Eligibility Ages Would Mean Fewer Benefits For Lower-Income Workers. Looking at the life expectancy of higher- and lower-income retirees, The Washington Post found that lower-income workers receive fewer benefits because they don't live as long:

The tightening economic connection to longevity has profound implications for the simmering debate about trimming the nation's entitlement programs. Citing rising life expectancy, influential voices including the Simpson-Bowles deficit reduction commission, the Business Roundtable and lawmakers on both sides of the aisle have argued that it makes sense to raise the eligibility age for Social Security and Medicare.

But raising the eligibility ages -- currently 65 for Medicare and moving toward 67 for full Social Security benefits -- would mean fewer benefits for lower-income workers, who typically die younger than those who make more.

"People who are shorter-lived tend to make less, which means that if you raise the retirement age, low-income populations would be subsidizing the lives of higher-income people," said Maya Rockeymoore, president and chief executive of Global Policy Solutions, a public policy consultancy. "Whenever I hear a policymaker say people are living longer as a justification for raising the retirement age, I immediately think they don't understand the research or, worse, they are willfully ignoring what the data say." [Washington Post, 3/10/13]

CEPR: Raising The Retirement Age Could Reduce Benefits For All Workers Between The Ages Of 40 And 60. According to a report by the Center for Economic and Policy Research, a proposal to increase the retirement age to 70 for workers reaching age 62 after 2035 could result in a 10 percent reduction in benefits for workers currently in their 40s:

As noted above, Social Security's normal retirement age is already increasing for all workers born in 1938 or later. For all workers born after 1960, the normal retirement is set to increase to age 67. One proposal would increase the normal retirement age by two months each year beginning in 2013 and continuing until it reaches 70 for workers reaching age 62 after 2035. The Center for Economic and Policy Research has estimated the effect of increasing the retirement age in this manner for current workers between the ages of 40 and 60. Increasing the retirement age would result in reduced Social Security benefits for all of these workers, with the largest losses for those workers currently in their 40s. For example, workers between the ages of 40-44 in 2007 would experience a 10-percent reduction in benefits.

An increase in the current normal retirement age would be particularly harmful for workers in jobs that are physically demanding or involve difficult working conditions. These workers have less ability to continue working in their 60s than workers in office jobs and other less demanding conditions. Older workers in poorly compensated jobs are much more likely to have physically demanding jobs than better compensated workers. For example, about 63 percent of older workers in the bottom wage quintile have difficult working conditions compared to only about 25 percent in the top quintile. [Center for Economic and Policy Research, November 2011]

Competition For Medicare Doesn't Bring Down The Cost Of The Program

Creating Competition For Medicare Won't Be Prime Driver Of Health Care Cost Reductions. According to a report by the Center for American Progress, the plan proposed by former Gov. Mitt Romney and Rep. Paul Ryan (R-WI) to create competition for Medicare would achieve savings from other factors such as increases in the premiums paid by beneficiaries:

Gov. Romney and Rep. Ryan claim that privatizing Medicare will increase competition among health plans, allowing market forces to lower costs. But the Romney-Ryan plan does not address underlying health care costs or consider that the health care market functions differently than other consumer markets. Ample evidence exists that premium support would not foster the type of competition that reduces prices. The Congressional Budget Office concludes that premium-support plans would achieve much of their federal savings from "increases in the premiums paid by beneficiaries, not from increases in the efficiency of health care delivery."

There also is evidence that "Medicare beneficiaries are less responsive to differences in premiums when choosing a health plan than the privately insured population is, so plans may have less incentive to compete on the basis of premiums in the Medicare market than in the privately insured market." These concerns have played out in the part D market, where most savings achieved by the program are a result of factors other than competition, including lower enrollment and greater generic utilization. [Center for American Progress, 8/24/12]

Peter Orszag: Creating Competition Doesn't Bring Down Cost For Beneficiaries Of Medicare. According a piece by Peter R. Orszag, former director of the Congressional Budget Office and director of the Office of Management and Budget, creating competition would be more costly for seniors than traditional Medicare:

The vast bulk of health-care costs arise from an extremely small share of patients, whose insurance will inevitably bear a substantial share of their expenses.

That's why competition in health care doesn't work as well as in other sectors, and it's also why the key to keeping costs to a minimum is to encourage providers to offer better, less costly care in complex cases.

Unfortunately, proponents of moving Medicare to a private "consumer-driven" system, including Republican vice presidential hopeful Paul Ryan, seem to instead believe in a health-care competition tooth fairy -- that if we just increase the patient's share of costs and bolster competition among insurance companies, the expense will come down. As Karl Rove recently argued, "Competition will lower costs by using market forces to spur innovation and improvement."

Someone might want to tell that to the Congressional Budget Office, which evaluated Ryan's original 2011 proposal to gradually move all of Medicare to private insurance companies. (In all these comparisons, we must remember that the goal is to reduce total cost -- to the government and the beneficiary combined -- compared with current projections. Merely shifting costs across the two categories is not a particularly impressive accomplishment.)

What did the budget office conclude? "A private health insurance plan covering the standardized benefit would, CBO estimates, be more expensive currently than traditional Medicare." The reason was that "both administrative costs (including profits) and payment rates to providers are higher for private plans than for Medicare." And that effect was larger than any cost savings achieved by people getting less health care. In any Rove-versus-CBO debate that involves economic analysis, I'd put my money on the CBO. [Bloomberg News, 8/20/12]

Erza Klein: No Matter How Much Sense Competition Makes In Theory, It Fails In Practice. According to the Washington Post's Ezra Klein, competition in health care has not brought down the price of health care:

Republicans and Democrats have the same problem with the Congressional Budget Office: it refuses to score competition between health-care plans as a surefire way to lower the cost of health care.

This annoyed Democrats during the health-care reform debate, as it meant the Affordable Care Act didn't get any credit for the competition it would foster on its exchanges. It's annoying Republicans now, as it means their Medicare-reform plans need to impose blunt spending caps if the CBO to certify them as deficit reducing.

But the CBO is in the right here: No matter how much sense competition makes in theory, no matter how obvious it is that it will drive down the price of health care, the fact is that it keeps failing when we put it into practice.

[...]

The Medicare program includes Medicare Advantage -- a menu of competitive managed-care options meant to provide better service at a lower cost. That, too, has been a failure.

In order to keep the private options in Medicare, Congress has had to continuously raise their payment rates above those of the traditional Medicare fee-for-service (FFS) program. In June 2007, the Congressional Budget Office wrote (pdf), "Medicare's payments for beneficiaries enrolled in Medicare Advantage plans are higher, on average, than what the program would spend if those beneficiaries were in the FFS sector--so shifts in enrollment out of the FFS program and into private plans increase net Medicare spending." [The Washington Post, 12/16/11]  

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