HispanicBusiness

President Obama a year and a half ago seemed willing to lower the inflation measure used to adjust Social Security benefits each year. Should we do that?

I think we do need to do that. I wouldn't do it in isolation from a lot of other changes. It needs to be part of a bigger political package.

For a lot of very technical reasons, inflation is overestimated. When inflation goes up, people say, I'm going to buy Schnucks brand instead of the name brand. They buy cheaper products to hold their actual spending down. We know people do that, but the main inflation measure doesn't include that. (The lower "chain-weighted" measure under consideration takes such substitutions into account).

The one caveat is that I don't think inflation has been studied enough in the aging population. Inflation measures for old folks should have less housing, because their mortgages are paid off, but more health care. It probably should have less food, less entertainment, less transportation. But health care is the big one, and prices are rising high for that.

How big a problem is Medicare? Do we need to fix it in the next couple of years?

Not right away. Federal tax revenues are at a historical low. Typically, they have been 18 to 20 percent of GDP for decades. In recent years revenues have dropped below that level (to about 16 percent of GDP, the lowest rate since the 1950s) for two reasons: the recession and the tax cuts passed in the Bush years. If we leave taxes at 16 percent of GDP, Medicare, Medicaid and Social Security will eat up all the government's revenue by 2030, and there'll be nothing left for anything else.

Do we have to cut Medicare benefits?

I have a hard time seeing how we can get away without making at least some cuts to benefits. It's a loaded word politically, but there are a lot of ways we can get there. You could raise premiums, or raise deductibles and co-pays.

There are three things we have to do: cut benefits, raise revenue (meaning higher taxes) and control medical costs.

Some Republicans, and the Bowles-Simpson Commission, argued that Medigap insurance programs shouldn't be allowed to pay the first dollar. They say Medicare recipients should have to pay more of the bill out of pocket so they would be careful not to use the system too much.

I agree with the point made by the commission. However, can consumers make rational decisions in medical markets? I'm a health economist, and I can't do that. I don't have a medical degree. There's an imbalance of information; if the doctor tells me I need something, I trust him.

The word in economics is elasticity, and medical demand isn't very elastic. Raising the price doesn't have a big effect on demand. Forty years of research tells us that, even if we make the change suggested, it is not going to make much difference.

Republicans believe the problem is consumers. Democrats believe the problem is a market failure, so they have to hit the providers.

Can Medicare squeeze more out of the providers?

We have been doing this for many years. Medicare has price controls for everything. (Medicare sets the prices it will pay for medical services.) The problem is the number of people going into Medicare as the boomers retire.

But there are things that can be done. Accountable Care Organizations will have incentives to integrate services and increase efficiency, for example, linking hospitals with outpatient services, physicians and long-term care and so on. (The organizations will manage the care of Medicare patients. The idea is to reward good patient outcomes, rather than pay for each medical procedure.)

Medicare is beginning a value-based purchasing program that rates hospitals on measures of medical quality as well as quantity. The idea is to pay hospitals based on how well they serve patients.

We were not sure this would work, but experiments show that it does. The change in payment is small (about 1 percent), but hospitals responded. One percent is still a lot of money to the hospitals when their overall margins sometimes are in the 3-5 percent range.

(Medicare plans to expand the program and include doctors' practices by 2017.)

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