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Obamacare Doesn't Cut Medicare

8/17/2012 03:00:00 PM
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The Romney campaign recently has gone all out to convince voters that Obama's signature healthcare law cuts $716 billion from medicare funding. It is a lie, and a strange one for Romney-Ryan to be making.

First of all, it is false. The claim comes from the fact that the CBO projects that as a result of reforms in medicare reimbursements and other measures designed to lower healthcare costs, the law will result in $716 billion in savings versus what we would otherwise have spent under previous policy. So there are two things to note: (1) nothing in the law mandates that these funds be cut, so if healthcare prices don't fall, then spending won't be reduced by the new policies, and (2) No one will experience a reduction in their Medicare coverage as a result of the policy, whether or not spending actually falls by $716 billion. So there is simply no sense in which it is accurate to say that Obama has cut, or wants to cut, Medicare.

But there is a more important point here, which is that Romney and Ryan are attacking Obama when it is actually their own plan that cuts medicare by $700 billion, even while it increases costs to seniors. How so? Well first of all, Ryan's proposed legislation, which Romney has explicitly said he supports, would turn Medicare as we know it into a voucher-and-mandate program that, instead of paying a flexible amount for senior's healthcare directly, would instead offer only a fixed, lump-sum voucher restricted by a mandate that the voucher be spend on private insurance, and not healthcare. Oh, and by the way, the Romney-Ryan plan to replace Medicare would cut benefits to seniors by $700 billion, even while the Ryan-mandate raises costs on seniors substantially. According to the CBO, the percentage of their healthcare that would be government-funded would fall from the current 80% to just 35% under the Ryan plan.

So both candidates this fall will reduce Medicare spending by $700 billion. The President's plan, already current law, will do this without reducing anyone's benefits by cutting costs. The Ryan plan will do this by cutting benefits while driving up costs.
James 8/23/2012 04:21:00 PM
It all depends on your definition of a reduction of benefits and costs are. Romney side-- betting that the costs will be controlled by the free market (as health care costs rose when the government became involved link: http://mises.org/daily/5320) and that the benefits were simply too good to begin with (consult a population demographic chart to see how it would be unsustainable with baby boomers retiring). Meanwhile the Obama camp lives in the world of ice cream and blowjobs. Costs- we'll just print more money. Benefits--We only have to say we'll do it so we get re-elected.
Matthew Martin 8/23/2012 05:10:00 PM
There's no doubt that healthcare costs rose after the government became involved, but this is just an example of what econometricians call spurious correlation. Healthcare costs has been rising over time due to a variety of factors that have nothing to do with government policy, and so you can't really claim any kind of causality here.

A good example on the "free market approach" is Medicare Advantage, in which we gave seniors the option of enrolling in private insurance. It still has some fingerprints of government involvement since it is funded through taxes and allows the private insurers to benefit from Medicare's ability to bargain for lower prices. However, the CBO finds that Medicare Advantage costs 115% of what traditional medicare costs, even though it did succeed in reducing the prices charged by healthcare providers, because private insurers face much higher overhead costs than the government. I have written on how this increased overhead acts a lot like a sales tax on healthcare: http://hyperplanes.blogspot.com/2012/08/medicare-advantage-and-medicare-vouchers.html

As for sustainability, this is just a matter of matching revenues with benefits. It is possible that we've been under-taxing the baby-boomers from the beginning relative to the benefits we promised them, but I think it would be pretty absurd to say that there is no tax rate at which the current level of benefits would be sustainable.