The U.S. Debt Binge will end with a 2-tier health care system

Greg Mankiw foresees massive tax increases; I foresee medical care rationing

Greg Mankiw said (a pdf link is there),

I have no doubt that this path of a rising debt-to-GDP ratio will stop at some point. The open questions are how and when it will stop. That is what I would like to discuss with you today. There are only five ways to stop this upward trajectory. They are (1) extraordinary economic growth, (2) government default, (3) large-scale money creation, (4) substantial cuts in government spending, and (5) large tax increases. I would encourage you to try to assign probabilities to these possible outcomes.

Timothy Taylor comments,

My suspicion is that many readers will have two sets of probabilities to assign: one is what you would like to happen, and the other is what you think will actually happen through the US political system.

This may not be what he would prefer to happen, but Mankiw writes that he expects the political equilibrium to eventually settle on tax increases.

To close a fiscal gap of 4 percent of GDP with only increased revenue, the United States would need to raise overall tax revenue by about 14 percent. That is a huge tax hike, but it would bring us only about halfway toward the level of taxation that prevails in the United Kingdom. U.S. taxes would remain below the OECD average and well below the levels in France, Italy, and Sweden.

What I would prefer to happen is an increase in the age of eligibility for Social Security and Medicare. All along, that age should have increased along with longevity, so that we are not giving people on average more than a dozen years to live at taxpayers’ expense.

What I predict will happen is rationing of health care. Government will be willing to pay for a shrinking share of medical procedures. The elderly will have to pay for more of their health care themselves. It won’t be pretty, and there will be some grumbling, but I think it will generate the least political resistance.

As an example of a cut I would like to see, consider the notice that my wife recently received from Medicare reporting that they had paid a large claim to a provider we had never heard of for a service she never obtained. This is the second time this has happened, and both times she has attempted to notify Medicare of the fraud, without getting a response indicating that Medicare sees any urgency about dealing with it or trying to recover the funds. And my guess is that most other recipients do not even know how to report fraud—Medicare does not make it obvious how to do so.

One of the reasons that private health insurers have more overhead than Medicare is that they take fraud prevention more seriously. If it costs $100 to prevent $110 of fraud, that is worth it to a private insurer. For all I know, Medicare might not be willing to spend even $10 to prevent $110 of fraud.

Even if Medicare were more aggressive about fighting fraud, Medicare spending still would be on an unsustainable path. I expect that the solution will be for Medicare to deny coverage for procedures, leading people to pay for more procedures themselves.

This could take the form of “slow-walking” the approval of new, expensive treatments. For example, Medicare paid for my cataract surgery, but it would not pay for the fancier procedure that obviates the need for eyeglasses.

Medicare rationing could take the form of paying providers of some services so little that it becomes difficult or impossible to find a provider willing to take Medicare patients. For example, the doctor who performed my cataract surgery gave me a note certifying my eligibility for a “Medicare discount” on my new eyeglass prescription. I could not find an optometrist who takes Medicare. (Fortunately, Warby Parker or Costco can handle simple eyeglass prescriptions inexpensively, without taking a Medicare discount.)

It is very difficult for someone my age to find a reputable primary care physician who is not in a “concierge” practice, for which you have to pay a sizable annual fee that is not covered by Medicare. This is another form of health care rationing.

In the United States, when you get to be my age, be prepared for a two-tier health care system. You will get basic care through Medicare. But luxury care will come out of your own pocket. And the more the fiscal pressures bite, the more you will find that the medical care you desire is on the wrong side of the line between between basic care and luxury care.