Medicare Meets Mephistopheles.

• Author: Horwitz, Jill R.
• Position: Book review

MEDICARE MEETS MEPHISTOPHELES. By David A. Hyman. Washington, D.C.: Cato Institute. 2006. Pp. xviii, 138. Cloth, $14.95; paper $9.95.

Most of us look forward to a heaven where people don't get sick. But if they do, health care would be traded among fully informed patients and providers in perfectly competitive and frictionless markets. In that perfect world, sick citizens simply shop for doctors the way they shop for other consumer goods. The better doctors, like the most elegant hotel rooms and fanciest cars, would cost more than inferior doctors. Patients would consult their utility meters and, with appropriate attention to discounting over an infinite lifetime, choose accordingly. After each treatment, the patients would know the quality of their outcome and would accurately tell their friends in heaven whether they got a good deal on their appendectomy, bypass surgery, or what have you.

Unfortunately, that's not the way it works here in the corporeal world. Illness is messy. Medical treatment is complex. Knowledge is limited. Decisions need to be made quickly. And, therefore, health care markets are a muddle. Enter Professor David Hyman. (1) Posing as Underling Demon 666, Hyman has written a book-length letter to Satan about Medicare, the federal health insurance program for people age sixty-five and older. (2) In the letter, Hyman explains that only one thing stands in the way of having heaven's health care system here on earth: big government.

The problem with Hyman's view is that even without big government sticking its meddlesome finger into the pot, health care markets don't work well. Health care markets are all about failures and, unfortunately, the stakes are high. That's what makes health care devilish to provide and vexatious to regulate (and, incidentally, interesting to scholars). That's also why I think that Hyman misses his target. Instead of aiming his considerable wit at Beelzebub's bureaucrats, those policy planners whom he charges with designing a system that was "dysfunctional from the get-go" (p. 10), he'd do better to recognize that his problems rest with the nature of health care and proceed from there. After all, sensible reform must be grounded in reality.

That said, there is a lot to recommend Medicare Meets Mephistopheles. I'll briefly touch on three of its virtues (and one of its vices) before considering Hyman's argument. First, there is a lot of truth in this book. As with any program of this importance and scale, Medicare is riddled with serious troubles. Yes, Medicare spending is huge and it will shock many readers to learn how fast it is growing. Yes, policymakers, analysts, and all but a few scholars have paid inadequate attention to the program's distributional consequences. Yes, the new prescription drug plan is not sustainable. And the list goes on. Despite Hyman's implication that rampant idiocy, greed, and corruption are behind these problems, many smart, honest, and hardworking people are struggling to fix the problems he identifies. I know, I know, the road to hell is paved with good intentions. Still, one need not abandon all hope before entering the realm of Medicare policy.

Second, Hyman is extraordinarily knowledgeable about health care regulation and his exposition is succinct. The book is filled with informative and accurate summaries of Medicare's complicated program design and related laws. The summaries of fraud and abuse law, for example, make my heart sing. I've seldom seen such an accessible and accurate primer.

Third, the book identifies crucial issues raised by all large social programs, not just Medicare. For any large program, we need to know whether the benefits are worth the costs--both on average and at the margin. We also need to know how those costs are distributed--among young and old, healthy and sick, rich and poor.

But that is not all we need to know. Although the book covers a vast terrain, I wanted more. Hyman's arguments only hint at an equally important matter for social policy. What should we do when such a program is, as it inevitably will be, imperfect? How should we balance various injustices? Hyman focuses on Medicare's financing, oversight, and political problems. Yet his preferred design, one more oriented to the market, would generate plenty of its own injustice. Why is that better? (3)

A word of warning: The book's clever approach too often crosses into the facile, making Hyman's argument hard to nail down. But if there is a thesis in this book--beyond that Medicare is big government and big government is bad--it is probably best summed up by Hyman's claim that "the very existence of the Medicare program evoked and encouraged gluttony--and the political consequence of that gluttony was a one-way ratchet that shifted the costs of the Medicare program to the working population and away from Medicare beneficiaries" (p. 41). However, Hyman's refrain about Medicare's irredeemable sins--it spends too much, for the wrong reasons, on second-rate stuff, and all from the pockets of the poor--tells a partial and partisan story.

In addition to obscuring his insights, Hyman's breezy style too often crosses into insult, mainly against mommy-party Democrats. Although acknowledging that all politicians pander to voters, Hyman gratuitously asserts that "Democrats disproportionately emphasize Medicare in their appeals to the electorate, which is consistent with their basic position that the 'highest purpose of government is to send people checks in the mail.'" (4) Typical is the unfounded claim that "many of Medicare's defenders react to even the slightest criticism of their favorite program with a ferocity that demonstrates that their enthusiasm has more to do with ideology than the actuarially sound/goo-goo [that is, good-government] approach they would insist on if we were talking about anything other than Medicare" (p. 103). Beleaguered Republicans are mainly guilty of the sin of anger, a reasonable response to their turncoat members who acted like Democrats in lustfully voting "to expand an out-of-control entitlement" (p. 65). In politics all sides engage in shallow and inconsistent argument. Yet it is principally Democrats and Medicare supporters that Hyman charges with substituting slogan for reason. Despite these distractions, readers should press on.

1. WHAT'S A FEW BILLION AMONG FRIENDS?

   Hyman starts with a sketch of Medicare's vastness: "Covering approximately 42 million (primarily elderly) Americans, it funnels almost $340 billion per year into the pockets of physicians, hospitals, clinical laboratories, home health agencies, physical therapists, social workers, [and] pharmaceutical companies. ..." (p. xvii). (I've heard about the billions lining the pockets of big-pharma execs, but social workers?) Of course, this money is not sent by the federal government to these professionals in the form of birthday gifts, but rather through reimbursement for providing services to sick people.

   Predictions and polemics aside, Hyman is right that by any measure the United States spends a lot of money on health care. But Medicare is only part of the picture. Don't forget that Medicaid spending is almost as high, and on top of that there is private insurance and out-of-pocket payments. Hyman is also fight that Medicare massively exceeded its initial cost projections. As Richard Epstein reports in his introduction, "By 1990, Satan had secured his pound of flesh: total hospital expenditures were more than six times those originally estimated in 1965" (p. xiv). Pretty soon even these dollars might come to look like pocket change. By 2050, Medicare spending alone is projected to increase to 9.2% of GDP from 2.9% today, both be cause of medical cost growth and the graying of America. (5) Not everyone, however, is convinced that Medicare's spending will continue to grow at current rates. (6)

   But Hyman didn't even give the Devil his due. Medicare can be blamed for much of total U.S. health care spending. People spend more on medical care when they have insurance than when they don't. But the spending growth is much greater when it comes in the form of a public insurance program than through individual insurance coverage. In fact, Amy Finkelstein has estimated that Medicare's effect on hospital spending is over six times larger than what the evidence from individual-level changes in health insurance would have predicted. How can this be? Finkelstein explains that insuring a large percentage of the population leads to market-wide changes that go beyond those that would result from the mere aggregation of a bunch of individual decisions to buy insurance. (7) The idea is that if you insure the elderly in one fell swoop, hospitals will respond to the promise of increased demand by entering new markets and adopting new practices, despite the high fixed costs of these activities. The more Medicare spends, the more we all spend.

   Why should we care how much money is spent on health care in the United States? Per capita health spending varies considerably (more than 100 to 1) across nations. (8) Ironically, spending on medical care is lower in countries with public systems than in countries with private systems. (9) But people (and countries) have to spend their money on something. We spend a larger share of our money on the military (4.06% of GDP in 2005) than do France (2.60%) (10) and Tuvalu (which doesn't have a military to spend money on). (11) Both Sweden (7.7% of GDP in 2004) and Swaziland (6.2%) spend more of their money on education than we do (5.7%). (12) Accordingly, how much of GDP goes to health care can be understood as a matter of national choice, not whether the country can afford the bill. (13)

   Some economists have argued that our spending hasn't been profligate, but rather shows good investment sense. David Cutler, for example, argues that we have gotten more than our money's worth. Analyzing treatments as varied as neonatal care and...