January 29, 2004

What Rush Doesn't Get

On my way to the hospital today, I was tuned in to Rush's program and I caught him complaining about how he couldn't understand how adding a benefit could slow down the growth of government. The analysis is simple if you measure the right things but there's a great deal of double counting in the current medicare debate and I think that's the source of Rush's confusion.

Coronary bypass surgery costs somewhere between $22k and $24k. If a senior has heart disease, the US government is currently on the hook for it and pays for that very expensive operation. On the other hand, a lot of those operations can be eliminated by the use of drugs, which seem to cost an average of $220 a month or $2640 per year. That's a considerably cheaper solution, especially when you consider that in the 8-9 years you're putting off an operation and saving money, some seniors will die of other causes (reducing expenses) while among the surgery crowd others will need a second operation because their arteries clog again. For seniors, there's a fairly high economic value to not front loading your expenses.

What the government does by putting taxpayers on the hook only for the more expensive operations is they encourage the wasteful use of the surgeon's knife rather than the more efficient pharmacist's prescription. This is a cost distorting incentive that has been around since the pharmaceutical revolution started to kick into high gear and pills started to heavily displace operations in normal medicine.

Where fiscal conservatives get tripped up is that while they correctly estimate growth in the government expenditure of pills, they do not believe that any cost savings will be coming down the pike on medicare funded surgical procedures. Cost savings have proven illusory before but the entirely natural reluctance of patients to go under the knife will lead to a pretty big uptick in medical (pill based) management.

Primary care physicians will also have an incentive to limit their surgical referrals. Surgical money does not go into their pockets, but into the pockets of the referred surgical team. There is no incentive for over referral, in fact, there is a negative financial incentive to do so.

Rush isn't alone in mistaking the costs. What I believe is going on is that the Bush people decided that Medicare could better serve its customer at less net cost while simultaneously becoming more compatible with future privatization by adding the drug benefit. Having that plus plan choice plus HSAs makes the bill that was signed into law a long term win for those who want a smaller government.

Posted by TMLutas at January 29, 2004 04:10 PM