The Soaring Cost of a Simple Breath
Monday, 14 October 2013 07:24
New York Times
Robin Levi's two daughters both have asthma, but they are able to control it thanks to good insurance coverage. Some students Ms. Levi tutors also suffer from asthma but lack the same insurance and medical care. Sean Patrick Farrell/The New York Times; photo by Max Whittaker for The New York Times
October 12, 2013
— Elisabeth Rosenthal, Reporter
OAKLAND, Calif. — The kitchen counter in the home of the Hayes family is scattered with the inhalers, sprays and bottles of pills that have allowed Hannah, 13, and her sister, Abby, 10, to excel at dance and gymnastics despite a horrific pollen season that has set off asthma
attacks, leaving the girls struggling to breathe.
Asthma — the most common chronic disease that affects Americans of all ages, about 40 million people — can usually be well controlled with drugs. But being able to afford prescription medications in the United States often requires top-notch insurance or plenty of disposable income, and time to hunt for deals and bargains.
The arsenal of medicines in the Hayeses’ kitchen helps explain why. Pulmicort, a steroid inhaler, generally retails for over $175 in the United States, while pharmacists in Britain buy the identical product for about $20 and dispense it free of charge to asthma patients. Albuterol, one of the oldest asthma medicines, typically costs $50 to $100 per inhaler in the United States, but it was less than $15 a decade ago, before it was repatented.
“The one that really blew my mind was the nasal spray,” said Robin Levi, Hannah and Abby’s mother, referring to her $80 co-payment for Rhinocort Aqua, a prescription drug that was selling for more than $250 a month in Oakland pharmacies last year but costs under $7 in Europe, where it is available over the counter.
The Centers for Disease Control and Prevention puts the annual cost of asthma in the United States at more than $56 billion, including millions of potentially avoidable hospital visits and more than 3,300 deaths, many involving patients who skimped on medicines or did without.
“The thing is that asthma is so fixable,” said Dr. Elaine Davenport, who works in Oakland’s Breathmobile, a mobile asthma clinic whose patients often cannot afford high prescription costs. “All people need is medicine and education.”
What $250 of qvar looks like:Replay
Source: IHS. The comparisons are based on the manufacturer’s suggested retail price. Insurance companies may negotiate lower prices.
By Josh Keller and Graham Roberts
With its high prescription prices, the United States spends far more per capita on medicines than other developed countries. Drugs account for 10 percent of the country’s $2.7 trillion annual health bill, even though the average American takes fewer prescription medicines than people in France or Canada, said Gerard Anderson, who studies medical pricing at the Bloomberg School of Public Health at Johns Hopkins University.
Americans also use more generic medications than patients in any other developed country. The growth of generics has led to cheap pharmacy specials — under $7 a month — for some treatments for high cholesterol and high blood pressure, as well as the popular sleeping pill Ambien.
But many generics are still expensive, even if insurers are paying the bulk of the bill. Generic Augmentin, one of the most common antibiotics, retails for $80 to $120 for a 10-day prescription ($400 for the brand-name version). Generic Concerta, a mainstay of treating attention deficit disorder, retails for $75 to $150 per month, even with pharmacy discount coupons. For some conditions, including asthma, there are few generics available.
While the United States is famous for break-the-bank cancer drugs, the high price of many commonly used medications contributes heavily to health care costs and certainly causes more widespread anguish, since many insurance policies offer only partial coverage for medicines.
In 2012, generics increased in price an average of 5.3 percent, and brand-name medicines by more than 25 percent, according to a recent study by the Health Care Cost Institute, reflecting the sky-high prices of some newer drugs for cancer and immune diseases.
While prescription drug spending fell slightly last year, in part because of the recession, it is expected to rise sharply as the economy recovers and as millions of Americans become insured under the Affordable Care Act, said Murray Aitken, the executive director of IMS Health, a leading tracker of pharmaceutical trends.
Unlike other countries, where the government directly or indirectly sets an allowed national wholesale price for each drug, the United States leaves prices to market competition among pharmaceutical companies, including generic drug makers. But competition is often a mirage in today’s health care arena — a surprising number of lifesaving drugs are made by only one manufacturer — and businesses often successfully blunt market forces.
Asthma inhalers, for example, are protected by strings of patents — for pumps, delivery systems and production processes — that are hard to skirt to make generic alternatives, even when the medicines they contain are old, as they almost all are.
The repatenting of older drugs like some birth control pills, insulin and colchicine, the primary treatment for gout, has rendered medicines that once cost pennies many times more expensive.
“The increases are stunning, and it’s very injurious to patients,” said Dr. Robert Morrow, a family practitioner in the Bronx. “Colchicine is a drug you could find in Egyptian mummies.”
Pharmaceutical companies also buttress high prices by choosing to sell a medicine by prescription, rather than over the counter, so that insurers cover a price tag that would be unacceptable to consumers paying full freight. They even pay generic drug makers not to produce cut-rate competitors in a controversial scheme called pay for delay.
Thanks in part to the $250 million last year spent on lobbying for pharmaceutical and health products — more than even the defense industry — the government allows such practices. Lawmakers in Washington have forbidden Medicare, the largest government purchaser of health care, to negotiate drug prices. Unlike its counterparts in other countries, the United States Patient-Centered Outcomes Research Institute, which evaluates treatments for coverage by federal programs, is not allowed to consider cost comparisons or cost-effectiveness in its recommendations. And importation of prescription medicines from abroad is illegal, even personal purchases from mail-order pharmacies.
“Our regulatory and approval system seems constructed to achieve high-priced outcomes,” said Dr. Peter Bach, the director of the Center for Health Policy and Outcomes at Memorial Sloan-Kettering Cancer Center. “We don’t give any reason for drug makers to charge less.”
And taxpayers and patients bear the consequences.
California’s Medicaid program spent $61 million on asthma medicines last year, paying more than $200 — not far from full retail price — for many inhalers. At the Breathmobile clinic in Oakland, the parents of Bella Buyanurt, 7, fretted about how they would buy her medications since the family lost Medicaid coverage. Barbara Wolf, 73, a retired Oakland school administrator covered by Medicare, said she used her inhaler sparingly, adding, “I minimize puffs to minimize cost.”
‘A Frustrating Saga’
Hannah and Abby Hayes were admitted to the hospital on separate occasions in 2005 with severe shortness of breath. Oakland, a city subject to pollution from its freeways and a busy seaport, has four times the hospital admission rate for asthma as elsewhere in California.
The asthma rate nationwide among African-Americans and people of mixed racial backgrounds is about 20 percent higher than the average.
Hannah and Abby Hayes discuss activities they can enjoy because of the drugs they take to manage their asthma.Sean Patrick Farrell/The New York Times; Photo by Max Whittaker for The New York Times
Robin Levi, a Stanford-trained lawyer who works for Students Rising Above, a group that helps low-income students attend college, is black. Her husband, John Hayes, an economist, is white. Their daughters have allergic asthma that is set off by animals, grass and weeds, but they also get wheezy when they have a cold.
“That first year, I had to take a lot of time from my job to deal with the asthma drugs, the prices, arguing with insurers — it was a frustrating saga,” Ms. Levi said.
For decades, the backbone of treatment for asthma has centered on inhaled medicines. The first step is a bronchodilator, which relaxes the muscles surrounding small airways to open them. For people who use this type of rescue inhaler frequently, doctors add an inhaled steroid as a maintenance drug to prevent inflammation and ward off attacks. The two medicines are often mixed in a single combination inhaler for adults, and these products are especially pricey. In addition, many patients, particularly children, take pills as well as nasal sprays that calm allergies that set off the condition.
While on medication, neither Hayes girl has been in the hospital since her initial diagnosis. Their mother tweaks dosing, adding extra medicine if they have a cold or plan to ride horses.
For most patients, asthma medicines are life-changing. In economic terms, that means demand for the medicines is inelastic. Unlike a treatment for acne that a patient might drop if the price became too high, asthma patients will go to great lengths to obtain their drugs.
For pharmaceutical companies, that has made these respiratory medicines blockbusters: the two best-selling combination inhalers, Advair and Symbicort, had global sales of $8 billion and $3 billion last year. Each inhaler, typically lasting a month, retails for $250 to $350 in the United States.
Asked to explain the high price of inhalers, the two major manufacturers say the calculus is complicated.
“Our pricing is competitive with other asthma treatments currently on the market,” Michele Meixell, the United States spokeswoman for AstraZeneca, which makes Symbicort and other asthma drugs, said in an e-mail. She added that low-income patients without insurance could apply for free drugs from the company.
Juan Carlos Molina, the director of external communication for GlaxoSmithKline, which makes Advair, said in an e-mail that the price of medicines was “closely linked to this country’s model for delivery of care,” which assumes that health insurance will pick up a significant part of the cost. An average co-payment for Advair for commercially insured patients is $30 to $45 a month, he added.
Even with good insurance, the Hayeses expect to spend nearly $1,000 this year on their daughters’ asthma medicines; their insurer spent much more than that. The total would have been more than $4,000 if the insurer had paid retail prices in Oakland, but the final tally is not clear because the insurer contracts with Medco, a prescription benefits company that negotiates with drug makers for undisclosed discounts.
Obamacare's Other Surprise
Saturday, 25 May 2013 16:58
New York Times
LISTENING to the debate about President Obama’s health care plan, some critics argue that Obamacare is going to need Obamacare — because it’s going to be a “train wreck.” Obama officials insist they’re wrong. We’ll just have to wait and see whether the Affordable Care Act, as the health care law is officially known, surprises us on the downside. But there is one area where the law already appears to be surprising on the upside. And that is the number of health care information start-ups it’s spurring. This is a big deal.
Josh Haner/The New York Times
Thomas L. Friedman
The combination of Obamacare regulations, incentives in the recovery act for doctors and hospitals to shift to electronic records and the releasing of mountains of data held by the Department of Health and Human Services is creating a new marketplace and platform for innovation — a health care Silicon Valley — that has the potential to create better outcomes at lower costs by changing how health data are stored, shared and mined. It’s a new industry.
Obamacare is based on the notion that a main reason we pay so much more than any other industrial nation for health care, without better results, is because the incentive structure in our system is wrong. Doctors and hospitals are paid primarily for procedures and tests, not health outcomes. The goal of the health care law is to flip this fee-for-services system (which some insurance companies are emulating) to one where the government pays doctors and hospitals to keep Medicare patients healthy and the services they do render are reimbursed more for their value than volume.
To do this, though, doctors and hospitals need instant access to data about patients — diagnoses, medications, test results, procedures and potential gaps in care that need to be addressed. As long as this information was stuffed into manila folders in doctors’ offices and hospitals, and not turned into electronic records, it was difficult to execute these kinds of analyses. That is changing. According to the Obama administration, thanks to incentives in the recovery act there has been nearly a tripling since 2008 of electronic records installed by office-based physicians, and a quadrupling by hospitals.
The Health and Human Services Department connected me with some start-ups and doctors who’ve benefited from all this, including Dr. Jen Brull, a family medicine specialist in Plainville, Kan., who said that she was certain she had been alerting her relevant patients to have colorectal cancer screening — until she looked at the data in her new electronic health care system and discovered that only 43 percent of those who should be getting the screening had done so. She improved it to 90 percent by installing alerts in her electronic health records, and this led to the early detection of cancer in three patients — and early surgery that saved these patients’ lives and also substantial health care expense.
Todd Park, the White House’s chief technology officer, said many new apps being developed have been further fueled by the decision by Health and Human Services to make available massive amounts data that it had gathered over the years but had largely not been accessible in computer readable forms that could be used to improve health care.
It started in March 2010 when Health and Human Services met with “45 rather skeptical entrepreneurs,” said Park, “and rather meekly put an initial pile of H.H.S. data in front of them — aggregate data on hospital quality, nursing home patient satisfaction and regional health care system performance. We asked the entrepreneurs what, if anything, they might be able to do with this data, if we made it supereasy to find, download and use.” They were told that in 90 days the department would hold a “Health Datapalooza,” — a public event to showcase innovators who harnessed the power of this data to improve health and care.
Ninety days later, entrepreneurs showed up and demonstrated more than 20 new or upgraded apps they had built that leveraged open data to do everything from helping patients find the best health care providers to enabling health care leaders to better understand patterns of health care system performance across communities, said Park. In 2012, another “Health Datapalooza” was held, and this time, he added, “1,600 entrepreneurs and innovators packed into rooms at the Washington Convention Center, hearing presentations from about 100 companies who were selected from a field of over 230 companies who had applied to present.” Most had been started in the last 24 months.
Among the start-ups I met with are Eviti, which uses technology to help cancer patients get the right combination of drugs or radiation from Day 1, which can lower costs and improve outcomes; Teladoc, which takes unused slices of doctors’ time and makes use of it by connecting them with remote patients, reducing visits to emergency wards; Humedica, which helps health care providers analyze their electronic patient records, tracking what was done to a patient, and did they actually get better; and Lumeris, which does health care analytics that uses real-time data about every aspect of a patient’s care, to improve medical decision-making, collaboration and cost-saving.
Obamacare will be a success only if it can deliver improved health care for more people at affordable prices. That remains to be seen. But at least it is already spurring the innovation necessary to make that happen.
Hospital's rates way over Medicare's pay
Sunday, 12 May 2013 22:43
Publication: The Denver Post; Date: May 9, 2013; Section: Front Page; Page: 1A
By Michael Booth
Colorado hospital retail prices for common surgeries and treatments often vary from one another by 400 or
Data show retail prices for common surgeries at Colorado facilities can be 10 times what’s covered.
500 percent, and the most egregious rates are eightto 10 times what Medicare pays, according to new federal data.
The wild price fluctuations are evident across the country. Rural hospitals frequently charge much less than their urban counterparts, while a facility just miles from another will sometimes charge double what its rival bills. Local and national health experts attacked the dramatic variations as more evidence of a systemic mess that distorts reality for consumers andhinders the quest for cost and quality progress in medicine. Medical Center of Aurora charges $59,000 to treat pneumonia, for example, compared with $49,000 at University of Colorado Hospital and $17,000 at Arkansas Valley Regional Medical Center in La Junta. Medicare, which identified hospitals in its Wednesday release for the first time, pays only $8,000 to $11,000 for such care.
Hospital executives argue almost no one pays the retail or “chargemaster” rates — Medicare, Medicaid,military and private insurance plans negotiate steep discounts. But some of the uninsured or underinsured do see those high bills and end up in collections if they can’t pay.
The new numbers “highlight a troubling trend:Those with the least ability to afford coverage end up paying the most,” said GeorgeLyford, an attorney with theColorado Center on Law and Policy.The center argues for reforms bringing insurance to more citizens. But the charges can affect a broader swath than that, said Phil Kalin, president of the Center for Improving Value in Health Care. Some insurers still agree to pay a set percentageof thechargemaster, so hospitals have an incentive to bump up those prices 5 or 6 percent a year.
Even though only a small number of insurers pay that way, the results can mean a few million dollars more a year in the billion-dollar hospital systems that are growing to dominate theColorado market, Kalin said. Federal officials said in a conference call they hoped the release would help push more transparency onto hospitals that so far have little incentive to compete for consumers.
“We hope consumers will look at this data, and we hope it will shine a muchbrighter light on practices that don’t make sense to us,” saidJonathan Blum of the U.S. Health and Human Services Department’s Medicare office. Medicare officials and many private groups highlighted more examples they say make nosense:
• For major joint replacement, Medicare allows about $13,000 to $20,000, depending on the region and some allowances for patient mix. The retail price at SkyRidge Medical Center in Lone Tree, which is owned by the for-profit chain HCA-HealthONE, is $84,000. Exempla St. Joseph Hospital also charges about $84,000 for that same joint replacement. By comparison, Denver Health charges about $46,000 for the procedure, and Delta County Memorial Hospital charges only $32,000 to full-paying customers. he national average charge for that service is $50,000.
•For general chest pain treatment, Medicare pays $3,000 to $5,000. Littleton Adventist Hospital, part of the Centura system, charges $31,000, and Exempla St. Joseph,$30,000. Denver Health charges about $13,000, and Montrose Memorial Hospital in western Colorado charges only $8,000. Averaging thecharges in the 100 diagnostic categories analyzedby Medicare, Littleton Adventist chargemaster prices are the highest at 682 percent of what Medicare allows. In themiddle range, charges at St. Anthony North Hospital — also part of Centura — were 437 percent of Medicare, and University was at 343 percent.
At the lower end, Denver Health’s retail charges averaged 212 percent of the Medicare payments, and Keefe Memorial in Cheyenne Wells, whichhad only one procedure listed, was 68 percent. Many hospital executives dismiss the charge information as nearly meaningless because so few consumers really pay those rates. The uninsured who see a bill with full rates often have their care written off as charity or uncollectible, they said. Most hospitals, meanwhile, lose money on cases where they get onlytheMedicare allowance, said Steven Summer, president of the Colorado Hospital Association. The high retail charges, and in-between charges negotiated with insurance companies, make up the difference Some Colorado consumers are protected from the sky-high bills by a state law passed in 2012 limiting what hospitals can chargethe uninsured.That law requires hospitalstowidely advertise their charity-care policies and to charge the poorest patients onlythe same negotiated discount rates offered to major insurance companies.
Michael Booth: 303-954-1686,
Is Obama's New Index the Right Fix for Social Security?
Wednesday, 08 May 2013 09:01
By Ed Dolan, Wall St. Cheat Sheet – May 5, 2013
One of the most controversial elements of President Obama’s 2014 budget is the proposal to reduce future cost-of-living adjustments to Social Security benefits by changing the inflation index. The U.S. Social Security Administration now bases inflation adjustments on the consumer price index
for urban wage earners and clerical workers (CPI-W), a close cousin of the more widely publicized CPI for all urban consumers (CPI-U). The administration proposal would instead use a relatively new index called the chained CPI, or C-CPI-U, which, in the past, has increased slightly less rapidly.
Predictably, deficit hawks love the idea, while seniors and those who defend their interests hate it. Suppose, though, that we set ideology and interest group politics aside to look at the underlying economics of the issue. On those terms, is the switch to the chained CPI the right fix for Social Security?
What exactly are we trying to fix?
Before we start fixing something, we should be sure we know what is broken. Is a flawed method of inflation adjustment really a major problem? Would fixing it, in isolation, really improve the functioning of the Social Security system as a whole? Or is it just an attempt to disguise an unpalatable cut in benefits as a minor technical correction? If what we really want is an across the board cut, why?
It is sometimes argued that we can afford to slow the growth of Social Security benefits because seniors are no longer as economically disadvantaged as they once were. Consider, for example, the dramatic decrease in poverty rates among the elderly over the past half century. As the following chart shows, in the 1960s, when the government first began to publish official poverty statistics, people 65 and older had the highest poverty rates of any age group. Today they have the lowest rate.
Taken at face value, these trends appear be consistent with the notion that seniors have more than kept up with inflation. However, a closer look at the income status of older Americans raises some doubts about that. One difficulty is that the official approach to measuring poverty probably overstates the standard of living of seniors.
The shortcomings of the official poverty measure are well known. In its original form, it simply multiplies the cost of an economy food plan by three. As a result, it fails to take into account the increasing relative prices of budget elements other than food, the impact of taxes, and the value of in-kind government benefits like SNAP (formerly food stamps), Medicare, and Medicaid. Other problems include inadequate attention to regional differences in living costs and an inadequate view of family structure.
Two years ago, the Census Bureau introduced a new Supplementary Poverty Measure, or SPM, that tries to address these problems.The SPM begins from a minimum budget that includes not just food, but food, shelter, clothing, and utilities — or FCSU. The FCSU budget is then multiplied by 1.2 to allow for other expenditures, and it is further adjusted for family size and regional differences in housing costs.
The SPM then compares the resulting minimum family budget to a measure of resources that adjusts the old cash income concept in three ways. First, it adds the value of in-kind benefits that families can use to meet FCSU needs. Second, it subtracts net taxes. Third, it subtracts other necessary expenses, of which out-of-pocket medical expenses are one of the largest. (For more on the SPM, see this earlier post.)
As the next chart shows, the SPM increases the estimated poverty rate for the whole population only modestly, from 15.2 percent to 16 percent for 2010. However, the impact varies widely by age group. In particular, the poverty rate for people aged 65 and older jumps from 9 percent to 15.9 percent, which is close to the average for the population as a whole. A large part of that increase comes from the way it takes into account out-of-pocket medical expenses that reduce household income available to meet FCSU needs.
A poverty rate for seniors no lower than that for the population as a whole already undermines the case for less generous cost-of-living adjustments to Social Security, but there is more. We should look not just at the poverty rate among seniors, but at the entire distribution of income for the elderly population. According to CBO data, presented in the next chart, that distribution is far less equal than for the rest of the population, and, as for other age groups, it is becoming even more unequal over time.
The chart shows Gini indexes for various population groups based on market income, a measure that does not include Social Security or other government benefits. A higher value of the Gini index means more inequality. The picture we get is of an elderly population in which a relatively few wealthy households account for most of the market income, while many of the rest are highly dependent on Social Security benefits.
That picture is confirmed by data from the Social Security Administration, presented in the next chart, that show that a third of the elderly population depend on Social Security for 90 percent of their income, and two-thirds for half or more of their income. For the single elderly, the degree of dependence on Social Security is even greater.
Taken together, these data suggest that an across-the-board benefit reduction, whether by way of a switch to the chained CPI or in any other form, would further aggravate the already unequal distribution of income among seniors. To offset that tendency, the administration budget proposal offers “bump-ups” for retirees older than 75, but the bump-ups may not help low-income retirees as much as is sometimes supposed.
The problem is that people with lower incomes are much less likely than those with higher incomes to live long enough to reach the bump-up age. For example, for men reachingretirement age of 67 in 2006, the life expectancy is five and a half years less for those in the lower half of the income distribution than for those in the top half. That means many of the poorest retirees will die before their get their first bump-up. (The same problem also affects proposals to lower Social Security costs by raising the retirement age, as discussed in this earlier post.)
Any way we look at it, then, it appears that a shift to the chained CPI, with or without bump-ups, would make the already unequal distribution of income among seniors more unequal still. Overcoming that problem would require more far-reaching reforms to the Social Security benefit structure, for example, one that combined a guaranteed minimum benefit at least equaling the poverty level with means testing of benefits for wealthier seniors.
How good is the chained CPI?
Let’s look at the matter from a different perspective now. Regardless of what we do about total Social Security benefit levels, caps, and floors, benefits will, like those of other income support programs, need some kind of inflation adjustment. On purely methodological grounds, what reasons do we have to think that the chained CPI is better than the CPI-W?
What we would really like to have as a basis for inflation adjustment is a true cost of living index, or COLI. A COLI would measure the amount of income we need to reach a certain level of consumer satisfaction. If the COLI rose by 3 percent, and your benefits went up from $1,000 a month to $1,030 a month, then we could truly say that you were no better or worse off than before. Unfortunately, though, a true COLI is a purely theoretical construct that we can only approximate in the real world.
The approximations we do have are price indexes-averages of the prices of the various things we consume, weighted by the quantity of each item in our market basket of goods and services. Economists have long argued that price indexes like the CPI in its various forms tend to overstate the rate of increase of the cost of living. Some of the more important sources of upward bias in the CPI are these:
- A substitution bias, which arises from the fact that changing prices cause consumers to shift, over time, from goods whose prices increase faster than average to those that increase more slowly than average, or fall.
- A quality bias, which arises from the fact that new models of a good have better performance (like flat-screen TVs) or last longer (like radial-ply tires), and therefore give additional satisfaction that partly or fully offsets price increases. Closely related factors, like the introduction of completely new goods and new, lower-cost methods of retailing add to the quality bias.
- A small sample bias, which is a purely technical distortion arising from the fact the BLS makes only a few price observations for each good or service each month.
(Note: These three sources of bias and all of the discussion that follows concern themeasurement
of inflation. In addition, there are strong biases in people’s subjectiveperceptions
of inflation. Many people are skeptical of the idea that published price indexes overstate inflation because they, personally, perceive a much higher rate of inflation than measured by the CPI. The more paranoid among them believe that the government is purposely manipulating the data in a way that understates the true inflation rate. For a detailed discussion of the upward bias in perceived inflation, see this earlier post
In the 1990s, Congress appointed a panel of economists, known as the Boskin Commission, to study the accuracy of the CPI. The commission estimated the upward bias of the CPI-U to be about 1.1 percentage points per year and made several recommendations for mitigating it. Since that time, the Bureau of Labor Statistics has implemented a number of those recommendations. For example, it has significantly reduced the substitution bias by updating base-year quantity weights more frequently.
Also, it has introduced new methods of correcting for changes in the quality of goods, and it pays more attention to outlet stores and online retailing. As a result, the upward bias of the CPI is almost certainly less than it was in the 1990s, but it may still be as much as one-half to a full percentage point per year. (See here and here for some recent discussions.)
There are strong theoretical reasons for thinking that the chained CPI further reduces the substitution bias. The reason is that it takes into account quantities consumed in the current period, when prices are measured, rather than just quantities consumed in the past. Both theoretical considerations and experience with the C-CPI-U since the BLS began to calculate it in 2000 suggest that the reduction in the substitution bias is in the range of 0.2 to 0.3 percentage points per year. However, that does not automatically make the chained CPI an ideal basis for indexing Social Security benefits. It has problems of its own.
One problem as that the data on current consumption patterns needed to calculate the chained CPI are available only with a lag. The first version of the C-CPI-U released each month is only an estimate based on extrapolations from past data. Social Security benefits would have to be adjusted using a preliminary calculation of the chained CPI rather than the final revision.
A more serious problem is that the quantity weights used for both the CPI-U and the C-CPI-U do not necessarily reflect the consumption patterns of Social Security beneficiaries. Beneficiaries are much older, on average, than the population as a whole; they are likely to drive less, use more medical care, and perhaps differ in other ways as well from the general population.
Conceptually, it would be better to adjust Social Security benefits using a price index specially tailored to the consumption patterns of the people receiving them. With this in mind, the BLS has experimented with a separate consumer price index for the elderly population, known as the CPI-E. Although there are several methodological issues to be resolved before the CPI-E is ready for the big time, preliminary results suggest that it has been rising at a rate about 0.2 percentage points faster than the CPI-W, in large part because of the greater weight it puts on healthcare goods and services.
Arguably, a chained version of the CPI-E would be an even better basis for inflation adjustment of Social Security. The BLS has not yet tried to calculate such an index, but if the substitution bias for the CPI-E is about the same as it is for the CPI-U, a chained CPI-E would probably rise about 0.2 to 0.3 percentage points more slowly than the unchained version. That means that when we take into account the offsetting effects of the substitution bias and the differences in consumption patterns between elderly and younger consumers, it could well turn out that the CPI-W, as now implemented, is a better approximation to a COLI for senior citizens than the C-CPI-U.
The bottom line
When all is said and done, the economic arguments for switching from the CPI-W to the chained CPI for inflation adjustment of Social Security benefits is a good deal weaker than it is often represented to be. We cannot really be confident that the chained CPI is a better approximation to changes in the cost of living of the elderly population than the CPI-W. In addition, switching to the C-CPI-U without adjusting benefit floors and caps could very well increase the inequality of income distribution among the elderly, which is already greater than for the population as a whole.
The fact is, the proposal to switch Social Security to the chained CPI has much more to do with politics than with economics. In the current phase of the budget debate, the White House appears eager to assume the role of the reasonable party by offering to cut entitlements, in order to set up a contrast with a conservative opposition that is unwilling to consider even small increases in revenue. The administration apparently hopes that it can minimize the backlash from its core supporters by passing off the C-CPI-U a purely technical adjustment.It is not likely to work. My advice would be to forget about changing inflation adjustments for Social Security until the political climate allows consideration of a more comprehensive set of entitlement reforms. Use of the C-CPI-U or some similar chained price index might eventually make sense as part of broader reform package, but as a stand-alone measure, it offers little to love.
Ed Dolan is Wall St. Cheat Sheet’s in-house economics professor. He is the author of an acclaimed series of textbooks Introduction to Economics and Ed Dolan’s Econ Blog.
Medicare Increases Could Ding Some in Middle Class
Wednesday, 17 April 2013 18:08
By RICARDO ALONSO-ZALDIVAR
WASHINGTON (AP) -- Retired city worker Sheila Pugach lives in a modest home on a quiet street in Albuquerque, N.M., and drives an 18-year-old Subaru.
Pugach doesn't see herself as upper-income by any stretch, but President Barack Obama's budget would raise her Medicare premiums and those of other comfortably retired seniors, adding to a surcharge that already costs some 2 million beneficiaries hundreds of dollars a year each.
Due to the creeping effects of inflation, 20 million Medicare beneficiaries also would end up paying higher "income related" premiums for their outpatient and prescription coverage over time.
Obama administration officials say Obama's proposal will help improve the financial stability of Medicare by reducing taxpayer subsidies for retirees who can afford to pay a bigger share of costs. Congressional Republicans agree with the president on this one, making it highly likely the idea will become law if there's a budget deal this year.
But the way Pugach sees it, she's being penalized for prudence, dinged for saving diligently.
It was the government, she says, that pushed her into a higher income bracket where she'd have to pay additional Medicare premiums.
IRS rules require people age 70-and-a-half and older to make regular minimum withdrawals from tax-deferred retirement nest eggs like 401(k)s. That was enough to nudge her over Medicare's line.
"We were good soldiers when we were young," said Pugach, who worked as a computer systems analyst. "I was afraid of not having money for retirement and I put in as much as I could. The consequence is now I have to pay about $500 a year more in Medicare premiums."
Currently only about 1 in 20 Medicare beneficiaries pays the higher income-based premiums, which start at incomes over $85,000 for individuals and $170,000 for couples. As a reference point, the median or midpoint U.S. household income is about $53,000.
Obama's budget would change Medicare's upper-income premiums in several ways. First, it would raise the monthly amounts for those currently paying.
If the proposal already were law, Pugach would be paying about $168 a month for outpatient coverage under Medicare's Part B, instead of $146.90.
Then, the plan would create five new income brackets to squeeze more revenue from the top tiers of retirees.
But its biggest impact would come through inflation.
The administration is proposing to extend a freeze on the income brackets at which seniors are liable for the higher premiums untl 1 in 4 retirees has to pay. It wouldn't be the top 5 percent anymore, but the top 25 percent.
"Over time, the higher premiums will affect people who by today's standards are considered middle-income," explained Tricia Neuman, vice president for Medicare policy at the nonpartisan Kaiser Family Foundation. "At some point, it raises questions about whether (Medicare) premiums will continue to be affordable."
Required withdrawals from retirement accounts would be the trigger for some of these retirees. For others it could be taking a part-time job.
One consequence could be political problems for Medicare. A growing group of beneficiaries might come together around a shared a sense of grievance.
"That's part of the problem with the premiums - they simply act like a higher tax based on income," said David Certner, federal policy director for AARP, the seniors lobby.
"Means testing" of Medicare benefits was introduced in 2007 under President George W. Bush in the form of higher outpatient premiums for the top-earning retirees. Obama's health care law expanded the policy and also added a surcharge for prescription coverage.
The latest proposal ramps up the reach of means testing and sets up a political confrontation between AARP and liberal groups on one side and fiscal conservatives on the other. The liberals long have argued that support for Medicare will be undermined if the program starts charging more for the well-to-do. Not only are higher-income people more likely to be politically active, but they also tend to be in better health.
Fiscal conservatives say it makes no sense for government to provide the same generous subsidies to people who can afford to pay at least some of the cost themselves. As a rule, taxpayers pay for 75 percent of Medicare's outpatient and prescription benefits. Even millionaires would still get a 10 percent subsidy on their premiums under Obama's plan. Technically, both programs are voluntary.
"The government has to understand the difference between universal opportunity and universal subsidy," said David Walker, the former head of the congressional Government Accountability Office. "This is a very modest step toward changing the government subsidy associated with Medicare's two voluntary programs."
It still doesn't sit well with Pugach. She says she's been postponing remodeling work on her 58-year-old house because she's concerned about the cost. Having a convenient utility room so she doesn't have to go out to the garage to do laundry would help with her back problems.
"They think all old people are living the life of Riley," she said.