09 April 2014

IPAB Unleashed

Many recent reports indicate a slowing of the growth rate of health care spending in the United States (Furman, New Report from the Council of Economic Advisers: The Recent Slowdown in Health Care Cost Growth and the Role of the Affordable Care Act 2013) and (Kaiser Family Foundation 2013). While this is good news, the US still spends far more per capita than any other country in the Organization for Economic Cooperation and Development (OECD) (Organisation for Economic Cooperation and Development 2010).
The causes of health care cost growth include the aging population, greater usage of new technology, and more wasteful spending in the US versus other OECD countries (Kaiser Family Foundation 2012) (Bentley, et al. 2008) (Furman, Reducing Costs and Improving the Quality of Health Care 2013) (Pearson 2009) (Kaiser Family Foundation 2007). Health care spending in the US is particularly inefficient compared with other OECD countries, when measured across many metrics. US life expectancy is significantly lower per dollar spent (Organisation for Economic Cooperation and Development 2010), despite our spending far more than other OECD countries in actual dollars as well as by percentage of GDP (Squires 2011). Nearly all of the difference in health care spending between the US and the rest of the OECD comes from private expenditure, as the US spends about the same in public funds as a fraction of GDP as the rest of the OECD[1] (Kaiser Family Foundation 2011).
There is also a clear connection between high health care prices in the US and poor health outcomes. Fifty percent of respondents in the US to a 2011 Kaiser Family Foundation poll indicated that they had done one or more of the following: “Relied on home remedies or over-the-counter drugs instead of going to see a doctor,” “Skipped dental care or checkups,” “Put off or postponed getting health care needed,” “Not filled a prescription for a medicine,” “Skipped a recommended medical test or treatment,” “Cut pills in half or skipped doses of medicine,” “Had problems getting mental health care” (Kaiser Family Foundation 2012). While some of these behaviors may not be cost-related, it is obvious that lower prices would incentivize many people to modify these choices.
The Independent Payment Advisory Board (IPAB) was created with the passage of the Patient Protection and Affordable Care Act in 2010 (U.S. House. 111th Congress, 2nd Session 2010). The purpose of IPAB is to slow the growth rate of Medicare expenditure and find savings inherent in the current coverage, without compromising the standard of care. Before the creation of IPAB, Congress made decisions about Medicare spending, with non-binding input from the Medicare Payment Advisory Commission. The flaw in this system has been that members of Congress are susceptible to outside pressure from interested stakeholders, such as physicians’ and drug manufacturers’ pressure groups (Aaron 2011) (Hill, et al. 2013).
Many others have proposed alternate plans to curb the growth of health care costs. The American Medical Association (AMA) has called for a reduction of risk factors for preventable disease, the encouragement of patient compliance, waste reduction, and an increase in benefit-cost analysis in decision-making (American Medical Association n.d.). While these are all laudable goals, none constitute a concrete plan. Laurence Seidman advocates a form of universal coverage he calls “Medicare for all.” Under Seidman’s plan, all Americans would automatically qualify for comprehensive health care, much in the way that all seniors now qualify (Seidman 2013). Holly Stockdale outlines many other advisory-board plans that were considered prior to the creation of IPAB. Many of these proposals were structurally similar to IPAB, but varied as to the specifics of authority, and the mechanisms for implementation of board recommendations (Stockdale 2010).
IPAB has been controversial since the planning stage. One of its foremost critics is the AMA, which argues that IPAB removes important decision making authority from Congress (Madara 2012).  The AMA has consistently backed efforts to eliminate, or reduce the scope of IPAB (Lazarus 2013). Henry Aaron writes that removal of health care expenditure decision-making authority from lawmakers susceptible to outside influence is precisely the goal of IPAB. He contends that the objections of interested parties with great political influence, such as the AMA, are a sign of the plan’s effectiveness (Aaron 2011).
The ability of IPAB to cap the growth rate of Medicare expenditures will be tested as the instruments of its mandate come into effect between 2015 and 2020 (Marciarille and DeLong 2012). Since much of the “extra” spending in the US consists of private money, the US should consider using mechanisms from the public sector to help control spending in the private sector. If IPAB proves successful, the implementation of a board like IPAB to regulate all health care spending would significantly reduce total health care costs in the US.
One area in which the US outpaces the rest of the OECD is in prescription drug usage. A higher percentage of the US population uses at least one prescription regularly than in every other OECD country. A higher percentage also uses at least four regularly. While the US allots the median percentage of health spending to drugs, it also has the highest per-capita drug spending. In most of the other OECD countries, drug prices are, at least in part, set by the government. This has clearly shown to be a useful technique to keep drug spending under control. Similar spending relationships are observed in medical imaging (Squires 2011).
One of the goals of IPAB, as a part of PPACA, is to reduce health care spending growth by way of “spillovers.” The hope is that reducing prices paid for services to Medicare patients will reduce the overall market price of those services. Whether or not these secondary effects are realized, the Congressional Budget Office projects a significant decrease in the rise of Medicare and Medicaid expenditures as a fraction of GDP over the next ten years (Council of Economic Advisers 2013). The goal of my policy is to harness these savings from reduced inefficiencies across the broad health care financing system.
Much of the recent slowdown in health care cost growth is attributable to savings achieved in Medicare through reduced overpayments (Furman, New Report from the Council of Economic Advisers: The Recent Slowdown in Health Care Cost Growth and the Role of the Affordable Care Act 2013). One reason Medicare is able to keep its administrative costs down is that the Medicare system is not burdened with the administrative duplication of the private sector. Every payment made in the private sector involves two specific administrators. One works for the service provider and is tasked with maximizing the billed amount. The other works for the insurer and is tasked with minimizing the billed amount. The negotiation between these two competing administrators determines, in large part, the final billed amount. Since administrative costs in Medicare are already 70 to 80% lower as a fraction of spending than in private insurance, utilizing these drivers of savings in the private sector is prudent policy (Bentley, et al. 2008).
Ezra Klein referred to IPAB as the “most promising cost control in the Affordable Care Act” (Klein 2010), because, like Henry Aaron, he believes it will virtually eliminate legislative meddling (Aaron 2011). The strong negative reaction of groups like the AMA, which lobby for financially interested parties, is an indication that the IPAB is a promising avenue for meaningful reform (Madara 2012) (Lazarus 2013).
Former Senate Democratic Leader Tom Daschle, President Obama’s first, but unconfirmed, choice to lead the Department of Health and Human Services, has also advocated expanding IPAB to administer cost savings more broadly. It remains to be seen however, if a board like IPAB could realize decreased cost growth in the absence of the single-payer buying power of Medicare. This is the crux of Seidman’s argument for “Medicare for all” (Seidman 2013).
One survey of cost-impact studies of a move to a single-payer system in the US found estimated savings that ranged from 89 to 280 billion dollars per year (Bentley, et al. 2008). It is clear that these savings would not be achieved in their entirety simply by regulating prices paid by private firms, but these figures provide insight as to the potential magnitude of cost savings from simplifying the payment process. It is also important to consider the potential social welfare loss to patients that could result from what some would crudely refer to as “price-fixing.” Social welfare loss, in this context, usually occurs because normal market processes are interrupted by the regulation of price. The market for health care is clearly not efficient, chiefly because buyers and sellers) often lack the necessary information to make rational decisions. The market is therefore already operating at an inefficient equilibrium.
A potential cost of restricting the growth of fees paid to doctors is that, under such a regime, there will be fewer practicing doctors in the US. The US already ranks below the median in the OECD in physicians per capita (Squires 2011). The operative question is whether or not, given the US lead in adopting new medical procedures, technologies, and norms, this is simply part of a trend toward greater utilization of physician’s assistants, nurse practitioners, and other paraprofessionals (Kaiser Family Foundation 2007).
An obvious argument can be made that setting prices through non-market processes can be inefficient. It is clear, however, that the US health care market is both informationally inefficient and more market-oriented than any other in the OECD. Perhaps it is time to expand a plan that has worked well to curb cost growth in public health care finance to all health care finance.

[1] US public spending on health care is 0.224 standard deviations above the mean in data collected from OECD countries, while US private spending is 2.999 standard deviations above the mean in the same data. (See Figure)


Percentage of GDP
Private Share
Per-capita Spending


Std Dev

US Deviation

Table created by the author from OECD Health Statistics Database data obtained via KFF (2011)

Works Cited

Aaron, Henry J. "The Independent Payment Advisory Board — Congress's “Good Deed”." New England Journal of Medicine, June 23, 2011: 2377-2379.
American Medical Association. "Strategies to address rising health care costs." Getting the most for our health care dollars. http://www.ama-assn.org/resources/doc/health-care-costs/strategies-rising-costs.pdf (accessed February 20, 2014).
Bentley, Tanya G.K., Rachel M. Effros, Kartika Palar, and Emmett B. Keeler. "Waste in the U.S. Health Care System: A Conceptual Framework." The Milbank Quarterly 86, no. 4 (December 2008): 629-659.
Calmes, Jackie. "After Health Care Passage, Obama Pushes to Get It Rolling ." New York Times, April 18, 2010: A16.
Council of Economic Advisers. "Trends in Health Care Cost Growth and the Role of the Affordable Care Act." Council of Economic Advisers. November 2013. http://www.whitehouse.gov/sites/default/files/docs/healthcostreport_final_noembargo_v2.pdf (accessed February 20, 2014).
Furman, Jason. "New Report from the Council of Economic Advisers: The Recent Slowdown in Health Care Cost Growth and the Role of the Affordable Care Act." Council of Economic Advisers. November 20, 2013. http://www.whitehouse.gov/blog/2013/11/20/new-report-from-council-economic-advisers-recent (accessed February 20, 2014).
—. "Reducing Costs and Improving the Quality of Health Care." Economic Report of the President. 2013. http://www.whitehouse.gov/sites/default/files/docs/erp2013/ERP2013_Chapter_5.pdf (accessed February 20, 2014).
Hill, Matthew D., G. Wayne Kelly, G. Brandon Lockhart, and Robert A. Van Ness. "Determinants and Effects of Corporate Lobbying." Financial Management 42, no. 4 (September 2013): 931-957.
Kaiser Family Foundation. "Assessing the Effects of the Economy on the Recent Slowdown in Health Spending." Kaiser Family Foundation. April 22, 2013. http://kff.org/health-costs/issue-brief/assessing-the-effects-of-the-economy-on-the-recent-slowdown-in-health-spending-2/ (accessed February 20, 2014).
—. "Health Care Costs: A Primer." Kaiser Family Foundation. May 2012. http://kff.org/health-costs/report/health-care-costs-a-primer/ (accessed February 20, 2014).
—. "Snapshots: Health Care Spending in the United States & Selected OECD Countries." Kaiser Family Foundation. April 12, 2011. http://kff.org/health-costs/issue-brief/snapshots-health-care-spending-in-the-united-states-selected-oecd-countries/ (accessed February 20, 2014).
—. "Snapshots: How Changes in Medical Technology Affect Health Care Costs." Kaiser Family Foundation. March 2, 2007. http://kff.org/health-costs/issue-brief/snapshots-how-changes-in-medical-technology-affect/ (accessed February 20, 2014).
Klein, Ezra. "Can we control costs without Congress?" Washington Post. March 26, 2010. http://voices.washingtonpost.com/ezra-klein/2010/03/can_we_control_costs_without_c.html (accessed February 20, 2014).
Lazarus, Jeremy A. "AMA Newsroom." American Medical Association. January 23, 2013. http://www.ama-assn.org/ama/pub/news/news/2013-01-23-ama-applauds-bill-to-repeal-ipab.page (accessed February 20, 2014).
Madara, James L. "H.R. 452 Support Letter." American Medical Association. February 27, 2012. http://www.ama-assn.org/resources/doc/washington/hr452-support-letter-27feb2012.pdf (accessed February 20, 2014).
Marciarille, Ann Marie, and J. Bradford DeLong. "Bending the Health Cost Curve: The Promise and Peril of the Independent Payment Advisory Board." Health Matrix: Journal of Law-Medicine 22, no. 74 (2012): 74-120.
Organisation for Economic Cooperation and Development. "Health Care Systems: Getting more Value for Money." OECD Economics Department Policy Notes 2 (2010).
Pearson, Mark. "Written Statement to Senate Special Committee on Aging." Organisation for Economic Cooperation and Development. September 30, 2009. http://www.oecd.org/health/43800977.pdf (accessed February 20, 2014).
Seidman, Laurence. "Medicare for All: A Public Finance Analysis." University of Delaware Department of Economics Working Paper Series, November 2013.
Squires, David A. "The U.S. Health System in Perspective: A Comparison of Twelve Industrialized Nations." The Commonwealth Fund. July 27, 2011. http://www.commonwealthfund.org/Publications/Issue-Briefs/2011/Jul/US-Health-System-in-Perspective.aspx (accessed February 20, 2014).
Stockdale, Holly. "An Overview of Proposals to Establish an Independent Commission or Board in Medicare." Congressional Research Service, January 2010.
U.S. House. 111th Congress, 2nd Session. H.R. 3590, Patient Protection and Affordable Care Act, Sec. 3403. Washington: U.S. Govenment Printing Office, 2010.

01 April 2014

Happy April, part two

A Case for Lower Top Marginal Tax Rates

            There has been much discussion in the popular press in the last few years about economic growth and income inequality. Some economists and commentators have suggested that inequality is a barrier to economic growth (Plumer, 2013). In Kuznets’ canonical formulation, inequality rises as per-capita income rises from low levels, but begins to fall as per-capita income rises yet further (Figure 1) (Kuznets, 1955). The argument of those who believe inequality and growth are incompatible is both that the United States economy is on the “right-hand side” of the Kuznets Curve, and that there is a causal relationship that runs from inequality to growth. Evidence, however, suggests that reducing the marginal tax rates for the top three brackets (currently 33, 35, and 39.6 percent) would increase gross domestic product (GDP). The primary channel for this increase is the labor supply. Numerous studies indicate that reducing top rates would incentivize workers to work more and for non-participants to enter the labor force. For these reasons, I recommend a reduction in the top three marginal income tax rates.
            Barro and Redlick find that marginal tax rate increases negatively impact GDP significantly. They found a tax multiplier of approximately 1.1. While this value is unlikely to be robust for marginal rates significantly different from current rates, the 1.1 value is likely to hold for a decrease in rates as well. Barro and Redlick also argue that a decrease in aggregate taxes has a higher multiplier, and therefore a greater stimulative effect, than increases in government purchases, for which the multiplier is less than one (Barro & Redlick, 2011).
            The 1986 Tax Reform Act (TRA), which greatly reduced the top rates, provides a natural experiment that has been studied by many researchers. Evans and Kenward estimate that labor supply would increase by 3 percent, leading to a rise in output of 2 percent (Evans & Kenward, 1988). Though they attribute some of the increase in labor supply to the entrance of women into the labor force, a similar effect could be observed today in the reversal of the downward trend in labor-force participation, which has been falling since the mid 1990s, and falling precipitously since 2008 (Figure 2).
            Feldstein’s panel study of the TRA finds that individuals’ response to this reduction included increasing labor supply (Feldstein, 1995). This response to altered incentives will lead to an increase in GDP if aggregate supply can be approximated with a Cobb-Douglas production function (Bao Hong, 2008). Feldstein also points out that lower marginal rates encourage workers to take less of their compensation in the form of untaxed perquisites (Feldstein, 1995). This shift toward pecuniary compensation likely reduces deadweight loss, as workers can more directly satisfy their needs and desires with money wages than with non-wage benefits.
            Heim’s panel study of the 2001 and 2003 tax law changes, which also reduced marginal rates on higher earners, mirrors Feldstein’s findings. Heim found positive labor-supply effects, especially among those with incomes above $500,000 per year. Like Feldstein’s, Heim’s results imply that reversing the reductions would not likely increase revenue, because workers whose taxes return to higher levels are more likely to work less than to continue working the same amount (Heim, 2009). It is important to note that the period covered by Heim’s study, 1999-2005, included a recession and subsequent recovery. It is therefore possible that his findings are specifically relevant to current conditions. Further supporting the results of Feldstein and Heim, McDaniel finds, in a study of fifteen OECD countries over the period 1960-2004, that 80 percent of changes in hours worked is attributable to changes in tax rates, with the relationship between hours worked and tax rates always negative (McDaniel, 2011).
            Arnold, et al. find that replacing income tax revenue with revenue from consumption taxes is beneficial to economic growth. These consumption taxes could take the form of value-added taxes and targeted taxes aimed at reducing environmentally damaging consumption. They specifically cite sales tax reductions as growth-inhibiting. They find that reductions in the top rates would spur productivity growth and entrepreneurship. They specifically cite the progressivity of personal income taxes as a barrier to growth (Arnold, et al., 2011).
            At a time when labor-force participation is falling, it is sound policy to incentivize workers to remain in or enter the labor force. Many studies have shown the efficacy of lower marginal income tax rates in achieving this goal. Further, the effect is most prominent on the highest earners. For this reason, I advocate a reduction of the top three marginal income tax brackets.


Figure 1: Theoretical Kuznets Curve (as described in (Kuznets, 1955))

Figure 2: Labor Force Participation 1993-2014 (Federal Reserve Bank of St. Louis, 2014)

Works Cited

Arnold, J. M., Brys, B., Heady, C., Johansson, A., Schwellnus, C., & Vartia, L. (2011). Tax Policy for Economic Recovery and Growth. The Economic Journal, F59-F80.
Bao Hong, T. (2008, November 20). Cobb-Douglas Production Function. Retrieved February 2, 2014, from João Luís Morais Amador: http://docentes.fe.unl.pt/~jamador/Macro/cobb-douglas.pdf
Barro, R. J., & Redlick, C. J. (2011). Macroeconomic Effects From Government Purchases and Taxes. The Quarterly Journal of Economics, 51-102.
Evans, O., & Kenward, L. (1988). Macroeconomic Effects of Tax Reform in the United States. Staff Papers - International Monetary Fund, 141-165.
Federal Reserve Bank of St. Louis. (2014, February 2). Civilian Labor Force Participation Rate (CIVPART). Retrieved February 2, 2014, from Federal Reserve Economic Data: http://research.stlouisfed.org/fred2/series/CIVPART
Feldstein, M. (1995). The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act. Journal of Political Economy, 551-572.
Heim, B. T. (2009). The Effect of Recent Tax Changes on Taxable Income: Evidence from a New Panel of Tax Returns. Journal of Policy Analysis and Management, 147-163.
Kuznets, S. (1955). Economic Growth and Income Inequality. The American Economic Review, 1-30.
McDaniel, C. (2011). Forces Shaping Hours Worked in the OECD, 1960-2004. American Economic Journal: Macroeconomics, 27-52.
Plumer, B. (2013, December 5). Is inequality bad for economic growth? Retrieved from Wonkblog: http://www.washingtonpost.com/blogs/wonkblog/wp/2013/12/05/is-inequality-bad-for-economic-growth/