Achieving Medicare Savings for Durable Medical Equipment

Charles Lane has discovered the problem that Medicare often pays an inflated price for durable medical equipment, prosthetics, orthotics and supplies (DMEPOS). My reaction is two-fold: First, although Lane has identified an area of Medicare spending in which savings could be obtained, he's focusing on a tree. Second, Lane only hints at the resistance that is likely to be encountered should Medicare attempt to minimize DMEPOS expenditures.

Lane tells us that "between 2000 and 2010, Medicare spent $69.4 billion on DMEPOS, almost all of it based on the old, inflated reimbursement rates." So, roughly $7 billion per year. In 2010, the Medicare budget was $560 billion. Even if we assume that there was significant growth in the cost of DMEPOS over that decade, such that by 2010 we were spending $12 billion per year, we would still be talking about just over 2% of spending. If we assume reforms not yet implemented could save 1/3 of that amount, we would be looking at saving $4 billion per year. That type of reform is significant - but only makes a material difference to the cost of Medicare in the aggregate.

One of the arguments often made in response to President Obama's proposed tax increases is that they're too small to make a difference.

The proposed tax increase would fail to address the deficit seriously. According to the Joint Committee on Taxation, the proposed tax increase would raise only $68 billion by shifting the top tax bracket from the Bush era rate of 35 percent up to 39.6 percent (plus a few from the health care law). The government expects to spend $9.9 billion per day, or a projected $3.627 trillion for this year. Based on these numbers, the addition $68 billion from a tax increase would pay for 6.8 days of government operation.

It's a fundamentally dishonest argument, and it's absurd to pretend that we could identify a single tax increase that could bring the budget into balance - at least without tanking the economy. The modest savings that can be achieved by cutting waste in DMEPOS spending should not be overlooked, as small steps are worth taking, but Lane seems to overstate the importance of that one aspect of Medicare spending to its overall budget picture, using ten year figures to exponentially increase the size of an average year's expenditure, and omitting any mention of the size of the Medicare budget.

Lane argues that the "obvious solution" is "competitive bidding". Certainly, one way to avoid excessive cost would be to allow Medicaid to use its market power to negotiate with manufacturers, perhaps leaving Medicare recipients free to choose other equipment but making them responsible for any cost in excess of the negotiated price for equipment on its approved list. Distributors could be paid a percentage of the approved cost as their fee for handling the equipment and training recipients in its use. Manufacturers and distributors, I expect, would go ballistic, and would attempt to scare Medicare recipients by talking about "government bureaucrats deciding what equipment you get", and the like. It would be interesting to see Lane flesh out his "obvious" solution in a future column - and if he has the space, he can also address how we can convince the Republicans in Congress that Medicare should be allowed to use its market muscle to achieve savings not just here, but also (and more importantly) for pharmaceuticals.

It's worth noting that a great deal of DMEPOS, despite its substantial cost, is effectively abandoned when the patient no longer needs the equipment. It would be nice if it were possible to recover, refurbish and reuse some of that equipment. Unfortunately, even before considering patient resistance to being given refurbished, older equipment, the cost of recovering, refurbishing and redistributing medical equipment would likely exceed the potential savings.

The Federal Government is Not a Business

Matt Miller writes,

It’s hard to know which is stupider: the coming sequester cuts or the arguments being made to avoid them.

He later proposes,

Luckily, even though it looks like Democrats and Republicans have tied themselves into a political knot on the sequester, there’s still a way out. They can simultaneously re-enact a payroll tax cut equal to or greater than the sequester and call it a day.

Which makes it difficult to argue with his initial argument. No, in fairness Miller is engaging in a bit of hyperbole, proposing a "solution" that "would be so perfectly cockeyed, herky-jerky and devoid of anything resembling an economic 'strategy' that it would be a perfect fit for this moment." But given that he started out by treating political hyperbole as if it represented serious policy positions, a bit of turnaround seems fair.

Miller makes a significant mistake, though, when he confuses budget cutting in private industry with budget cutting in government. Sure, there's a simplistic "In a large organization, if you have full discretion to identify and eliminate waste, and to identify and fire the least productive workers, you can maintain or even improve efficiency while cutting expenditures." But that's usually not what happens in private industry, even though private industry is normally far less constrained than government when it comes to making cuts and firing workers.

When I worked as a management consultant as a younger man I was involved in a few cost-cutting efforts at large, admired companies. I knew of many more from colleagues. These were never happy exercises. Some people lost their jobs. But it was a truism that even well-run firms could cut 10 percent (and often far more) of their expenses with scant impact on the quality of their products or services, or on their “seed corn” for the future.

That’s just the way large organizations are. Over time, various accretions of people and activity take place during periods of growth. And that’s in the private sector, where competition and the profit motive act as continuous prods to efficiency (just think of how many firms went through much larger cuts during the Great Recession only to come back stronger). In government, the organizational tendency toward endless expansion is much greater.

Let's note first of all that a lot of the "management consulting" Miller describes is not acutally about identifying inefficiency, reporting it to the company that hired you as a consultant, and letting them act on your report. A substantial amount of that work involves being retained to provide cover for management decisions that have already been made. "Here's what we are going to do. Now go out, analyze our business, and 'objectively' report back to us that we need to make those changes." It's not unlike the rating agencies who rate garbage bonds as AAA because they don't want to lose the work - you do what you're paid to do.

But let's assume that Miller's employer was different from the norm, and all of its clients retained it to provide arm's length reports. "We don't care what you find - just find our inefficiencies and report back to us so that we can make our company more efficient." In such a scenario, Miller's team would spend a great many hours, billing substantial fees, to perform their investigation and analysis, and would provide detailed reports to support their recommendations to management. Does Miller believe that such an effort is being made in every single government agency that is going to be hit by the sequester? Agencies will have, for the most part, made an effort to prepare for the sequester, but under the circumstances we can expect that their preparations are going to be ad hoc, and colored by the hope that the sequester is avoided.

Note also that Miller speaks of "well-run firms" - as if that's the typical client of a management consulting firm brought in to legitimize budget cuts. Let's think for a moment about how various "well-run firms" have managed to save that 10% over the past few decades. Hewlett Packard cut its R&D budget and went from being a well-run firm that led in product design and quality to... pretty average for the industry. Seriously, though, a well-run company might identify factories that could be closed or consolidated, jobs that could be outsourced, product lines that could be eliminated - or marketed more effectively. How much of that does Miller believes applies to the federal government?

If you read on, the answer appears to be "All that, and more!" Yes, let's think about those firms that were "strengthened" by the Great Recession - like G.M. and Chrysler. Heck, AIG isn't doing too badly these days, either. So maybe the solution is a government bailout of the government? Or a managed bankruptcy that allows the government to shut down the least productive states, just as G.M. shed product lines and dealerships. "Sorry, New Mexico, West Virginia, Mississippi, Alabama - we've been subsidizing you too long. And Hawaii, Alabama, Alaska, Montana, South Carolina and Maine - you had better shape up fast!" Maybe we could deport the least productive 10% of the population? We'll be smaller, but stronger, right?

It's important to recall, also, that the sequester is all about numbers, not about efficiencies, and does nothing to create efficiencies between agencies or to overcome politics. A management consultant might say to the government, "You know, you could create a lot of efficiency, reduce staff and cost, and ease the regulatory burden for business if you merged the SEC and the CFTC." I would respond, "I can't disagree, but that is not likely to happen before they start having snowball fights in Hades." The sequester is apt to put pressure on a lot of the wrong places. Miller complains that the government will somehow find a way to maintain all vital functions, such that it's wrong for the President to suggest that any vital functions are threatened, but that's an article of faith. Miller is looking at the government in toto, but not every government agency is presently well-staffed or well-funded relative to its mission.

Miller complains "When independent or Democratic business people in high-tax states such as New York or California hear the president say the feds can’t possibly endure a 5 percent cut but instead need to hike effective top marginal tax rates beyond the mid-50s level to which Washington’s last fiscal deal just raised them, it turns what should be a winning economic showdown for the president into one that leaves influential constituencies wondering if Obama 'gets it.'" Surely Miller does not believe that Obama's tax reforms raised Mitt Romney's effective tax rate to @55%. Or that of California billionaire Warren Buffett. Or that of New York billionaire Michael Bloomberg. I suspect that if you were to show Miller's example to one of those "independent or Democratic business people" they would "get it" - they would tell you that Miller is looking for the most exceptional cases, pointing to them due to their high state and local taxes, to try to confuse his readers about the magnitude of the federal tax increases and into believing that their situation is representative of the nation as a whole. (Assuming they don't chuckle and explain that their "tax guy" is better than Miller thinks.)

If Miller believes that we can easily and harmlessly cut 5% of government spending, without affecting the core missions of the federal government, I think a much better article would be one in which he outlines those achievable budget cuts. Put that "management consulting" experience to good use....

The Affordability of High Speed Rail

As you probably know, Robert Samuelson comes from the "If I favor something, we can safely assume that its cost will be 'pocket change'" school of economics. And although he has since admitted that he grossly underestimated the cost of the Iraq war, he has not backed away from his definition of what constitutes "pocket change" - the type of expenditure our nation is rich enough to make without any serious reflection about costs. In terms of discretionary spending:

People inevitably ask that question, forgetting that the United States has become so wealthy it can wage war almost with pocket change. A war with Iraq would probably cost less than 1 percent of national income (gross domestic product).

So we can spend amounts of up to, say, $140 billion per year and dismiss the expenditure as "It's only pocket change". In terms of recurring spending:

[The defense budget] now runs about $350 billion annually. That's a lot of money but, in an economy producing more than $10 trillion annually, isn't much of a burden. It's slightly more than 3 percent of GDP.

So we're now talking "$500 billion per year isn't much of a burden". Except, of course, if we're talking about Medicare or Social Security in which case a comparable sum magically becomes an unsustainable burden.

I'm not thrilled with Samuelson's formulation as it seems to be too easy a dodge - you break down the spending you support into small chunks, with self-interested projections about future costs, while aggregating the costs you oppose, such that your agenda can be paid for with "pocket change" and everything else is "unaffordable." If you have $1, a penny may be "pocket change" but that doesn't mean you have more than 100 pennies to spend - you still have to do the math and set priorities.

If we give Samuelson the benefit of the doubt, we can acknowledge that when he made his "pocket change" argument he argued that, as affordability was not a valid issue, the next step should be to examine whether we should "afford" something. But when Samuelson doesn't support an expenditure he consistently rejects his own "pocket change" formulation in favor of the lament, "It costs too much". The latest case in point, high speed rail.

Vice President Biden, an avowed friend of good government, is giving it a bad name. With great fanfare, he went to Philadelphia last week to announce that the Obama administration proposes spending $53 billion over six years to construct a "national high-speed rail system." Translation: The administration would pay states $53 billion to build rail networks that would then lose money - lots - thereby aggravating the budget squeezes of the states or federal government, depending on which covered the deficits.

Strangely, I'm having a difficult time understanding why Samuelson sees $140 billion (<1% of GDP) as "pocket change" that trumps the "can we afford it" argument, but $9 billion is an astronomical, unaffordable sum.

High-speed rail would definitely be big. Transportation Secretary Ray LaHood has estimated the administration's ultimate goal - bringing high-speed rail to 80 percent of the population - could cost $500 billion over 25 years.

So in Samuelson's "worst case scenario" with 80% of the population ultimately served by high speed rail lines, an initial infrastructure investment of $20 billion per year is a "stupendous sum". The point is, thanks to his "we can afford it" argument in relation to the Iraq War and all things military, Samuelson's "we can't afford it" argument about high speed rail is... a train wreck. In his present argument he rails about costs because he opposes the program and his policy arguments are weak; in the former argument he spoke of our nation's wealth and of much larger expenditures as "pocket change" because he supported the program and similarly could not compose a compelling policy argument.

Samuelson's policy argument rests upon a broad range of assumptions: First, he presents an anecdote about an opponent of rail transportation from the Cato institute who found that bus travel from DC to New York City was considerably cheaper than rail. Never mind if that's the fair comparison at present - is the train cheaper, for example, than air travel?

Second, he assumes that high speed rail is going to be the equivalent of low speed rail, such that people choosing between rail and other forms of travel won't consider the speed and convenience of high speed service. I suggest that he travel from London to Paris by three methods, car (and ferry or hovercraft), air and high speed rail, then get back to us on which was the most convenient. Samuelson argues that air travel is presently "quicker" than trains; perhaps he has forgotten that we're talking about "high speed rail"?

Third, he assumes that oil prices will remain low. I'm not sure what date Samuelson would accept as the date for "peak oil", but it's more than safe to assume that the cost of bus travel and air travel will rise. Samuelson may not be aware of this fact, but once you build a railroad and buy the trains and cars it's a relatively cheap way to get people or freight across long distances. You don't see trucks hauling coal from mines to the nation's coal-burning power plants - it's sent by train.

Fourth, Samuelson appears to believe that the nation's interstate highway system is free. That it doesn't require massive, annual investment. That we don't need to invest hundreds of billions of dollars in roads and bridges just to maintain the status quo. That a growing population will find a cross-country drive as pleasant as he did, back in the dawn of the era of the interstate highway, rather than as a congested drive across potholed roads and crumbling bridges.

When I was planning my last cross-country trip, I looked at rail travel. I quickly dismissed it as a possibility. Why? Because unless your goal is to spend a good chunk of your vacation admiring the landscape (or cityscape) through a train window, it eats too much time to travel by train. There are issues even in a short-term trip, such as from Ann Arbor to Chicago, due to the number of stops the train must make at small town stations, the many stretches of urban track for which the speed limit is low, and the periodic stops to allow freight trains to pass - freight carriers own the tracks and they get priority. I would hope that a high speed rail system didn't follow a similar "stop in every town" model, as frequent stops would significantly reduce the benefit of "high speed".

It's also not much fun to be on a train full of people who constantly chatter on cell phones or leave their cell phones on while sleeping through phone calls and voice mail alerts that come through every five or so minutes. The comfort level of the cars and seating was suboptimal - not that air travel is great, but the incremental cost for offering more space and better seats is much lower for rail travel. But I didn't even consider bus travel. I suspect that, while he might not admit it, were Sameulson to travel across the country by Greyhound he would recognize why most people who can afford an alternative eschew long-distance bus trips despite the price point. Perhaps he could simply stop by a few bus stations and absorb the ambiance. Seriously, are you left with the same impression as me - that the extent of Samuelson's experience with mass transit bus and rail travel is reading the anecdote of the guy from Cato - that for Samuelson, a limo to the airport then flying coach would be "slumming it"?

I'll admit having some skepticism of high speed rail, not so much in theory but in practice. I am skeptical that the planners will avoid having the train stop every fifteen minutes, doubling or tripling the duration of a "high speed" trip between more significant population centers. I'm skeptical that the companies that run high speed trains will invest in the level of moderate to high comfort you can enjoy in many other nations. I'm skeptical that governments will provide for the construction of relatively direct rail lines between population centers. I would like to see a solid plan in place before spending is authorized.

But with rising fuel prices, by the end of the next quarter century (assuming he's still alive) even Samuelson might be troubled by the cost of air travel. So rather that presenting "we can't afford it" arguments that he would probably reject out-of-hand if we were talking about, say, invading Iran, perhaps Samuelson can do us the favor of looking at the facts.

How About Insuring Student Loans Instead of Guaranteeing Them

The net effect would be similar - if a student defaulted the lender would be able to make a claim for indemnification from the insurer. But the mechanism would be different - rather than having the taxpayer write a blank check, educational institutions would contribute part or all of the cost of insuring student loans based upon their default rate. No educational institution would have to participate, but the price of not participating would be ineligibility for participating in the insured student loan or federal tuition grants programs.

Modern Bank Robbery

I agree with Simon Johnson that this line of thinking is atrocious and unacceptable:

One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook. However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base. As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives. We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.

If the goal is to wrap up the crisis as quickly as possible, then let's stop talking about buying junk assets from banks and start talking nationalization. If the key to recovery is to avoid "prolonged deterioration", we can end the role of those junk assets in this mess just as quickly by estimating the lowest price we can pay for "the various toxic assets residing on financial institution balance sheets".

Attention Pennypinchers

If you're like me, you are frequently appalled by misplaced priorities and waste associated with a lot of government projects. (Not that the corporate world is necessarily better, but that's a post for another day.)

Over at Crime and Federalism, Mike has an interesting post on how easy it is to spend OPM¹, even when those spending it wouldn't contribute a penny of their own funds to the "worthy cause" they claim to support. I take issue with his partisan stance that this is something "liberals" do, as it's a common trait among just about anybody with access to OPM (and seems to worsen as accountability is removed).
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1. OPM = "Other People's Money"

What We Care About... And What We Don't Care About

I will guarantee you that the new supermax prison in Guantanamo Bay has none of these problems.

Hey - I know what will fix it! A new coat of paint!