Trillion Dollar Economists_How Economists and Their Ideas have Transformed Business

by Robert Litan

  The premium-support proposal lay dormant for over a decade, until after President Obama was elected and interest ran high—though in retrospect only briefly—for developing a grand bargain to make a significant dent in the long-term federal deficit projections. This led to a number of bipartisan proposals containing some element of premium support plus an annual cap on the growth in support payments. Some versions of the idea would have eventually replaced the entire fee-for-service Medicare payment system (allowing the smaller managed-care option that mostly healthy seniors choose as a voluntary option), while others would have allowed seniors to choose between a presumably more cost-effective, fee-for-service plan or premium support. One of the most widely publicized of these premium-support proposals was an idea floated and seemingly endorsed by Representative Paul Ryan (also chairman of the House Budget Committee and vice–presidential candidate in 2012) and one of the most experienced budget professionals in Washington, Alice Rivlin, of the Brookings Institution (see following box). The two eventually parted ways, largely over the generosity of the premium support payments, but it is significant that two prominent experts on both sides of the political aisle were able to agree at least on the general architecture of the idea.

  Alice Rivlin: Policy Pioneer

  Before there was Janet Yellen, there was Alice Rivlin (and it should not be a surprise that the two are good friends). Rivlin is the most experienced Washington policy expert of the past five decades, and she is still going strong.

  In a day when few women became economists, Rivlin was a pioneer. She graduated from Bryn Mawr College and then obtained her PhD from Radcliffe (which hadn’t yet been merged into Harvard). She established herself out of the box as one of the clearest thinkers and writers in the profession—her book Systematic Thinking for Social Action remains a must read for anyone wanting a public policy career. She was elected to the highest office in the profession’s association, the presidency of the American Economic Association.

  Rivlin cut her teeth in the policy world at the Brookings Institution and then as an assistant secretary for policy at the old Department of Health and Welfare (since renamed the Department of Health and Human Services). After returning to Brookings and becoming director of the economic program, the public part of her public policy career began to soar.

  Rivlin was the founding director of the Congressional Budget Office, which Congress established in 1974. She later was deputy director and then director of the Office of Management in the Clinton administration, serving thereafter as vice-chair of the Federal Reserve Board. Unlike most high-level federal officials, who either lived in Washington before their appointment or moved there afterward, Rivlin has taken a longtime interest in the public policies of the city. While she was still at the Fed, Rivlin was named chair of the District of Columbia Control Board and was instrumental in helping the city’s finances get back on solid ground after years of disrepair.

  After she left government service, Rivlin continued her public work on the long-term deficit as co-chair (with former senator Pete Domenici) of the Debt Reduction Task Force sponsored by the Bipartisan Policy Center. Simultaneously, President Obama appointed her to the Simpson–Bowles Commission, to seek bipartisan solutions to the rising national debt. In the course of that work, Rivlin worked with Rep. Paul Ryan on a premium-support plan for controlling Medicare costs, a policy stance for which she received some criticism from the left in the Democratic Party. She has stood her ground as one of the leading public intellectuals making the case for a grand bargain to put the federal government on a more sustainable long-run fiscal path.

  Rivlin has received numerous awards for her published work (which is extensive) and public service. She has also taught at numerous universities, including Harvard, George Mason, the New School, and Georgetown.

  On a personal note, Alice has been a long-time mentor and counselor to me throughout my career and a close friend. I also worked with her during a portion of her tenure at OMB. My thanks and admiration for her will live on as long as I do.

  Things took a step backwards in the 2012 presidential campaign. After having endorsed premium support before his pick of Paul Ryan as his running mate, Mitt Romney downplayed the idea during the campaign itself. This didn’t stop President Obama and other Democrats from attacking the idea as turning Medicare into a dreaded voucher program. Since Obama’s reelection in 2012 premium support hasn’t yet recovered from that distancing of both candidates.

  In my view this recent history doesn’t mean the idea is dead. At some point in the future, the inexorable rise in health-care costs, especially those paid by the federal government not just for the traditional entitlements Medicare and Medicaid, but eventually the costs of subsidizing insurance purchases by those in the workforce under the ACA, will compel policy makers to dust off ideas currently on the shelf, like premium support, in an effort to slow rising federal costs for health care.

  Ironically, one of the features of the ACA itself that is most popular—prohibiting insurance companies from discriminating on the basis of a patient’s preexisting medical conditions—should make a future premium-support plan for Medicare and possibly Medicaid easier to implement. The ban on discrimination reduces the need for complicated risk adjustments in the amount of the support required by individuals (risk adjustment may still be necessary for insurers, which have different mixes of insured populations, but this should be easier to accomplish than on a per-person basis). There still would be a need for some geographical variation in the amounts of the supports; otherwise beneficiaries in areas with high medical costs could be put at a serious disadvantage relative to those living in low-cost areas.

  Admittedly, other ideas for controlling federal spending on health care will be tried before policy makers, or the public, will be ready to embrace premium support. Three of them are embodied in the ACA, and are meant to apply to both the non-senior and senior populations.

  One idea is to encourage more providers to join together in integrated networks, in the hope of achieving the cost savings that one-stop-shop medical organizations like the Mayo Clinic, Intermountain Health Care in Utah, or the Geisinger health system in Pennsylvania appear to have achieved. These new networks, called Accountable Care Organizations, are not totally integrated in that the constituent parts are still nominally independent, but the ACOs attempt to achieve virtually, if not physically, the kind of integration that exists in the fully integrated systems. So far, preliminary results for the cost savings achieved by the ACOs are encouraging, though the jury is still out on the magnitude of those savings that are achievable.7

  A second, much more controversial part of the ACA is its creation of an Independent Payment Advisory Board (IPAB) charged with identifying ways of reducing spending growth in the Medicare program, but only if spending exceeds a target rate. Although at this writing the president hadn’t yet nominated any of the 15 health-care experts who are supposed to serve on the IPAB, the health-care law allows the board to function, and in its place the Secretary of Health and Human Services (HHS) to make the decisions that were vested in the Board. The IPAB’s recommendations (or those of HHS) go into effect unless Congress stops them. Hospitals, however, are exempt from the IPAB recommendations until 2020, so any recommendations the board (or HHS) may make before then will be concentrated among physicians, skilled-nursing facilities, and pharmaceutical companies.

  The IPAB has attracted strong criticism; some even labeled the body a death panel. Without debating the pejorative, the IPAB represents a top-down governmental approach as to which procedures will be reimbursed and what will not. Of course, Medicare already does this; IPAB would only sharpen the focus on cost control. Will it be successful without sacrificing quality of care? No one really knows, and it is far too early to tell.

  Third, Medicare and Medicaid have been experimenting for several years with alternatives to fee-for-service payments systems for health-care providers. Like lawyers who get paid by the hour, doctors or ho
spitals that get paid by the services they provide, or by medical inputs, have incentives to maximize them whether they lead to improved health outcomes for patients or not. As alternatives, the government has experimented with various forms of bundled payments, or lump-sum payments for a single medical episode—say a particular surgical procedure and follow-up monitoring—or even care for a chronic disease over a given period. The payments are directed to a single general contractor-like provider, say a hospital, which then is able to subcontract specialized care, such as physical therapy or counseling, to other providers that may be more cost effective in providing these services. A variation of the bundled payment is payment by medical outcomes, more if the outcomes are successful, less if the opposite is true. In early 2014, Congress was considering writing such outcomes-based bonus systems into law.

  In principle, these alternatives could save money and even lead to better outcomes through improved coordination of patient care. But like all fixed-fee arrangements for professionals, they shift the financial risks to providers, who try to compensate by charging higher upfront fees for assuming the risks. Competition among providers tends to hold down these added costs, but then competition may also lead to some providers delivering suboptimal care, outcomes that may not be known for some time.

  None of this is to say that government payers should not continue to experiment with various alternatives to fee-for-service payments. It is just to raise a red flag of caution that these alternatives are unlikely to be silver-bullet solutions to cost control, especially in single-payer systems, such as Medicare and Medicaid. At the same time, single-payer systems also have no marketing costs, which are built into the cost structures of the competitive health-care insurance industry. The tradeoffs between the different kinds of savings under single payer versus a system of competitive insurers cannot be resolved in theory, but only in the everyday experiences of the real world, which is why health-care economics is one of the most interesting and challenging subfields in the economics profession.

  In the end, my intuition is that the various measures currently aimed at controlling Medicare costs probably will not be sufficient, individually or collectively, to truly bend the cost curve over the long run to prevent either major increases in taxes or the deficit. That is why I believe some form of premium support one day will get its turn in the policy spotlight, but only for younger workers, or those below a certain cutoff age (the rest being grandfathered under the existing, but evolving, system dominated by fee-for-service but with different payment arrangements at the edges).

  Unlike the other methods at cost control, which for the most part are top–down and controlled by government, premium support relies primarily on market forces, mediated primarily by competition among insurers and health-care networks that take on an insurance function (like the Kaiser system). The virtue of a decentralized system is that as long as there is sufficient choice among insurers/networks—a condition the authorities must assure—consumer decisions will ultimately drive the behavior of providers. Consumers will also demand more information about prices and quality of care in a choice-driven system. If and when premium support is adopted, the public and policy makers will then have economists to thank or to blame, probably some of both.

  I do not have the space here or the expertise to flesh out all of the details of even a streamlined premium-support plan. One especially knotty issue is whether and to what extent to means test the amount of the premium-support payments. Critics of the idea express the legitimate worry that if the system does not succeed in constraining the growth of medical costs, then low- and even middle-income seniors will get shortchanged over time, and find that their government-assisted insurance covers less and less of their medical expenses. My inclination is to build in an income-based adjustment for the support payments, though I realize that also would introduce more complexity into the administration of the program.

  What impact on health-care providers and insurers would a premium-support system have? Put another way, what is likely to be the business impact of such a major change in the Medicare and possibly Medicaid programs?

  The short answer is that a premium-support system would accelerate the changes in health-care markets that are already underway. There would be greater pressure on health-care providers to become more efficient, and thus more pressure among small physician practices to sell out to larger providers or affiliate with ACOs. This is analogous to what has been happening to grocery stores, retailers, and banks for decades. Insurers, like the government, will continue to experiment with alternatives to fee-for-service, but most economists would probably say that the market would do a better job deciding the best outcomes than a potentially politicized government agency.

  At the same time, because insurers and health-care networks will be looking to cut costs, there will be room for innovative new companies to offer solutions: more wireless medicine (wearable monitors and the technology to support them); more Minute Clinics staffed by nurse practitioners (as states face growing consumer pressure to allow them to widen the scope of their practices); and new organizational forms of health-care delivery. In principle, in their search for lower costs and better care, health-care providers will have stronger incentives to prescribe new pharmaceuticals, but as discussed in the previous chapter, new financing techniques will be necessary to encourage truly innovative drug discoveries.

  Taxing Consumption

  All governments must raise taxes to fund their spending. Economists generally support borrowing to fill any gap between revenues and expenses when the economy is not generating sufficient revenue to balance the budget, and ideally running surpluses when times are good. The ideal is sometimes met by local and state governments that must meet a balance requirement constitutionally, or because they can’t print money to cover any deficits. National governments, or more precisely their monetary authorities, can print money to finance deficits, but there are limits to this: Too much money eventually means excessive inflation, which undermines people’s trust in one of the things they count on their governments to manage well, the purchasing power of their currency. The rise of Nazism after Germany’s experience with post-World War I hyperinflation is history’s starkest proof that losing that trust can lead to revolutionary and sometimes horrible consequences.

  But back to taxes: If you ask most economists, they’ll tell you the best tax system is one that most efficiently raises revenue, least distorts private sector behavior, doesn’t dampen economic growth, and is widely perceived as fair. Since 1913, the federal government has relied overwhelmingly on income taxes—on individuals and on corporations—to achieve these goals, with mixed results. Today, it is widely conceded that the income tax code is a mess, horribly long and complex, inefficient, and depending on your political party preference (as a declining share of Americans seem to have), unfair and punishing.

  With the current state of affairs in mind, many tax experts and ordinary citizens old enough to remember look back fondly to the landmark 1986 tax reform legislation that significantly cut personal income tax rates while scaling back some tax preferences. History credits the several leading elected officials who brokered the deal: President Ronald Reagan, Senator Bill Bradley, Senator Robert Packwood, and then Representatives Dan Rostenkowski and Jack Kemp, who despite their many differences on other issues, were able to come together and push through the Congress perhaps the most important and constructive tax reform package of all time.

  What many do not know, however, is the identity of the individual who did more than perhaps anyone to build the intellectual foundation for this broader base–lower rate reform. This idea continues to have strong appeal today, despite the fact that the 1986 reform was gradually undone in the decades that followed by a series of special tax breaks aimed at inducing changes in private behavior that could not otherwise be accomplished politically by direct federal spending. That individual is Joseph Pechman, the longtime director of economic studies at the Brookings Institu
tion, and for decades one of the leading tax economists in the United States (see following box).

  Joseph Pechman: An Original Tax Reformer8

  Like a number of famous economists, Joseph (Joe) Pechman grew up in New York City and attended City College there, before going to Wisconsin for his PhD. Pechman got that degree shortly after the United States entered World War II, and was lucky enough to be able to use his quantitative skills as a meteorologist for the Army during the war. After the war, he began his professional career as an economist at the Treasury department, and later served on the staff of the Council of Economic Advisers and the Committee for Economic Development.

  It wasn’t until Pechman came to Brookings, however, that his professional economics career really began to blossom. Through numerous articles, he analyzed the economic impact of the income tax code, with special emphasis on its distributional impact. He eventually became one of the nation’s leading economic authorities on taxation. His landmark book, Federal Tax Policy, went through five editions.

  Joe was more than a scholar. He was one of Brookings’ great administrators, serving as director of the Institution’s economic studies program for 21 years (1962 to 1983). He had a remarkable ability to focus his energies: He followed a routine from which he rarely departed, of working on his scholarly papers in the morning, typically at home, and then coming to the Institution for lunch—as lunch was and is perhaps the most important component of the glue that holds Brookings scholars (or those at many organizations for that matter) together—after which he handled his administrative chores.