Private Insurance Is More Efficient than Medicare–By Far
Diane Archer has a post at the Health Affairs blog arguing that Medicare is more efficient than private insurance. One can only reach such a conclusion through such sleights of hand as conflating spending with cost, and by ignoring most of Medicare’s administrative costs.
As a pre-buttal, I offer this excerpt from a paper I wrote about a “public option” (emphases generally added and citations omitted):
Is Government More Efficient?
Supporters of a new government program note that private insurers spend resources on a wide range of administrative costs that government programs do not. These include marketing, underwriting, reviewing claims for legitimacy, and profits. The fact that government avoids these expenditures, however, does not necessarily make it more efficient. Many of the administrative activities that private insurers undertake serve to increase the insurers’ efficiency. Avoiding those activities would therefore make a health plan less efficient. Existing government health programs also incur administrative costs that are purely wasteful. In the final analysis, private insurance is more efficient than government insurance.
Why Ryan-Rivlin Beats ObamaCare on Costs — and Spending
Washington Post blogger Ezra Klein asks of Rep. Paul Ryan’s (R-Wisc.) Medicare voucher proposal (co-authored with former Congressional Budget Office director Alice Rivlin):
Why are the cost savings in his bill possible, while the cost savings in the Affordable Care Act aren’t?…when it comes to the ACA, Ryan firmly believes that seniors will quickly and successfully force Congress to reverse any reforms that degrade their Medicare experience. That’s a fair enough concern, of course. What’s confusing is why it isn’t doubly devastating when applied to Ryan-Rivlin.
Set aside that Klein violates Cannon’s First Rule of Economic Literacy: Never say costs when you mean spending. And that he uses the word “affordable” to describe ObamaCare.
There are two reasons why the Medicare spending restraints in the Ryan-Rivlin proposal are more likely to hold than those in ObamaCare.
First, ObamaCare’s restraints amount to nothing more than ratcheting down the price controls that traditional Medicare uses to pay health care providers. Structuring Medicare subsidies in this way — setting the prices that Medicare pays specific providers — makes it very difficult to lower those prices, because the system itself creates huge incentives for providers to organize and lobby to undo those restraints. As I explain more fully in this op-ed from September 2010, Medicare vouchers would change that lobbying game by reducing the incentives for provider groups to expend resources in the pursuit of higher Medicare spending. That gives the Ryan-Rivlin restraints a much better shot at surviving. (Seriously, it’s a pretty cool feature.)
Second, Klein predicts a backlash against Medicare vouchers because he says it amounts to “giving seniors less money to purchase more expensive private insurance.” The notion that Medicare is less costly than private insurance is pure, uninformed nonsense. Medicare and a “public option” are attractive to the Left precisely because such programs hide the full cost of their operations from enrollees and taxpayers. It is a virtue of vouchers that they would reveal to Medicare enrollees the actual prices of the coverage and services they demand, because that information will spur enrollees to be more cost-conscious when selecting a health plan and consuming medical services. That, in turn, will force insurers and providers to compete on the basis of cost to a degree never before seen in this nation, competition that will generate the sort of cost-saving innovations that Jim Capretta discusses here.
Both of these reasons boil down to the truism that nobody spends other people’s money as carefully as they spend their own. We’ll make a lot of progress in this country when the Left realizes how much damage they’ve done by ignoring that truism.
Obama’s Fiscal Commission and Health Care Spending
Following up on what Dan and Chris have said …
If the co-chairs of President Obama’s fiscal commission were serious about reducing federal spending and deficits, they would have proposed eliminating the federal deficit, rather than “reduc[ing] it to 2.2 percent of GDP by 2015.” Yawn. They would have proposed cutting federal spending (currently, 24 percent of GDP and rising) to match federal tax revenue (currently at 15 percent of GDP). But the co-chairs proposed only to “bring spending down to 22 percent and eventually 21 percent of GDP.” Not only does that elicit another yawn, but since the co-chairs only asked for half a loaf, they won’t even get that much.
If the co-chairs were serious about reducing federal spending and deficits, they would have proposed a balanced-budget amendment. They would have proposed block-granting Medicaid. They would have proposed implementing Medicare vouchers immediately. (Vouchers are the only way to reduce Medicare spending while protecting seniors from government rationing. They would also change the political dynamics that repeatedly stymie efforts to reduce Medicare spending.) Instead, the co-chairs propose the same ol’ failed strategy of trying to limit Medicare and Medicaid spending using government price-and-exchange controls, which they euphemistically describe as “rebates” and ”payment reforms.” Along the same lines, they propose strengthening IPAB, ObamaCare‘s rationing board. IPAB’s mandate is — you guessed it — to ration care by fiddling with Medicare and Medicaid’s price and exchange controls. It will therefore inevitably fall prey to the same political buzzsaw. To appease Republicans, the co-chairs propose unwise and unconstitutional federal rules that would prevent patients injured by negligent physicians from recovering the full amount they are due (euphemism: medical malpractice liability “reform”). Finally, the co-chairs propose that if federal health spending continues to grow faster than GDP growth plus 1 percent, Congress should consider “a premium support system for Medicare” (which could mean vouchers) and “a robust public option and/or all-payer system” for people under age 65 — a debate that wouldn’t even begin until 2020.
Fiscal Commission members, congresscritters, and citizens who are serious about reducing federal spending and deficits — and who are looking for specific ways to cut government spending — should instead consult Cato’s excellent web site DownsizingGovernment.org.
The ‘Public Option’ Is Back
That didn’t take long at all. Left-wing congresscritters have (re-)introduced legislation to create a “public option” in ObamaCare‘s health insurance exchanges.
The Congressional Budget Office scores the bill as reducing federal deficits by $53 billion by 2019. How? Paying doctors and hospitals less! Put that on a bumper sticker! The public option would use Medicare’s price and exchange controls to pay doctors and other health care providers 5 percent more than Medicare does. Except for prescription drugs: the public option would, ahem, “negotiate” those prices, meaning it would use a separate price-control scheme and pay less than Medicare does. (That means PhRMA probably won’t be bankrolling the public-option campaign the way it bankrolled the pro-ObamaCare campaign and is bankrolling the re-election bids of its congressional benefactors.) Providers, such as community hospitals, would take a huge pay cut if some of their privately-insured patients suddenly only paid Medicare plus 5 percent.
When costs explode under ObamaCare the way they are exploding under RomneyCare, expect the public option to be the Left’s go-to solution. In CongressDaily, co-sponsor Rep. Raul Grijalva (D-Ariz.) says:
By reintroducing it, we make sure that people don’t forget this is a viable option…. I think as the health bill is implemented, more and more people are going to come to the realization that cost containment and competition aren’t as robust as they should be, because of the absence of the public option.
Naturally. Because the first thing that comes to mind when I think cost-containment and competition is government health care programs.
For a refresher on how the Left confuses cost-containment with spending-containment — and on why the public option is a really, really, really bad idea — see my paper, “Fannie Med? Why a ‘Public Option’ Is Hazardous to Your Health.”
Will Kucinich’s Vote Help ObamaCare?
Whether Rep. Dennis Kucinich’s (D-OH) “aye” vote will help pass ObamaCare depends on whether he asked for something in return.
Jane Hamsher of FireDogLake reports, “Kucinich told Obama that he wants a full ERISA waver [sic] and a public option in exchange for his vote.” If he gets either of those things in the reconciliation “fixer” bill, then that will trigger a backlash. His “support” could undermine the whole process.
It really depends on what kind of a negotiator Kucinich is. If he’s a good negotiator, it hurts ObamaCare. If he’s a lousy negotiator, it helps.
Obama’s ‘Best’ Idea? Rationing Care via Clinton-esque Price Controls
Hoping to revive his increasingly unpopular health care overhaul, President Obama has invited Republicans to a bipartisan summit this Thursday and plans to introduce a new reform blueprint in advance of the summit. On Sunday, the White House announced that a key feature of that blueprint will be premium caps, a form of government price control that helped kill the Clinton health plan when even New Democrats rejected it.
The New York Times reports on President Obama’s blueprint:
The president’s bill would grant the federal health and human services secretary new authority to review, and to block, premium increases by private insurers, potentially superseding state insurance regulators.
It bears repeating what Obama’s top economic advisor Larry Summers thinks about price controls:
Price and exchange controls inevitably create harmful economic distortions. Both the distortions and the economic damage get worse with time.
For example, as I have written elsewhere, artificially limiting premium growth allows the government to curtail spending while leaving the dirty work of withholding medical care to private insurers: “Premium caps, which Massachusetts governor Deval Patrick is currently threatening to impose, force private insurers to manage care more tightly — i.e., to deny coverage for more services.” No doubt the Obama administration would lay the blame for coverage denials on private insurers and claim that such denials demonstrate the need for a so-called “public option.”
As the Progressive Policy Institute’s David Kendall explained in a 1994 paper, the Clinton health plan contained similar price controls. Kendall explains why they would be a disaster:
In spite of the late hour in the health care debate, Congress has not yet decided how to restrain runaway health care costs. The essential choices are a top- down strategy of government limits on health care spending enforced by price controls or a bottom-up strategy of consumer choice and market competition. History clarifies that choice: Previous government efforts to regulate prices in peacetime have invariably failed. Moreover, government attempts to control prices in the health care sector would undermine concurrent efforts to restructure the marketplace…
The idea of controlling costs by government fiat is seductively simple. But it rests on a conceit as persistent as it is damaging: that government bureaucracies can allocate resources more wisely and efficiently than millions of consumers and providers pursuing their interests in the marketplace. The alternative — one rooted in America’s progressive tradition of individual responsibility and free enterprise — is to improve the market’s ground rules in order to decentralize decision-making, spur innovation, reward efficiency, and respect personal choice.
As centrally planned economies crumble around the world, many in the United States seem bent on erecting a command and control economy in health care. This policy briefing examines the reasons why government price regulation would fail to constrain health care costs and create many adverse side effects…
Ultimately, government price regulation will always fail because it does not change the underlying economic forces driving up prices. If we are serious about slowing the growth of health care costs, we have to change the ways we consume and provide medical care. Price controls evade the hard but essential work of structural reform in health care markets: They are a quintessentially political response to an economic problem. The alternative is to allow well-functioning markets to set prices and allocate resources, while ensuring that all Americans have access to affordable health care coverage. The market-oriented approach leaves decisions to cost-conscious consumers and health care providers rather than bureaucrats.
Any of that sound familiar? It’s worth reading the whole thing.
This is not hope. This is not change. (Much less a game-changer.) It is, to pinch a phrase, a return to “the failed theories that helped lead us into this crisis.”
Thursday Links
- The populists have it wrong. Why free trade and globalization are great blessings to Americans and poor families around the world.
- How Obama’s plan for health care will affect medical innovation in America: “Imposing price controls on drugs and treatments–or indirectly forcing their prices down by means of a ‘public option’ or expanded public insurance programs–would reduce the incentive for innovators to develop new treatments.”
- Register now for the upcoming Cato forum featuring author Tim Carney and his new book, Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses. Buy the book, here.
- Podcast: “Shoes, Undies and Airplane Security” featuring Jim Harper.
ObamaCare Threatens Innovation
That’s the conclusion of economist Glen Whitman and physician Raymond Raad, who write in Forbes:
Unfortunately, the health care bills moving through Congress could curtail medical innovation. Imposing price controls on drugs and treatments–or indirectly forcing their prices down by means of a “public option” or expanded public insurance programs–would reduce the incentive for innovators to develop new treatments.
Proposed reforms could also retard business model innovation–an area where innovation is weak. Congress has already used its control of Medicare to limit the growth of specialty hospitals. A nationally mandated insurance package would severely curtail innovation in payment methods and insurance products, which have the potential to improve the coordination and delivery of health care services.
The health care debate should address more than just covering the uninsured and controlling costs. When the U.S. generates medical innovations, the whole world benefits. That is a virtue of the American system that is not reflected in comparative life expectancy and mortality statistics.
The op-ed is based on the authors’ Cato Institute policy analysis, “Bending the Productivity Curve: Why America Leads the World in Medical Innovation.”
Reid Won’t Even Tell His Base What He’s Asking Them to Swallow
Here’s my answer to today’s “Big Question” on The Hill‘s Congress Blog:
Now that the “public option” is dead, both the Left and the Right should be able to agree: the Senate bill is nothing but a $450 billion bailout of the private insurance companies.
In fact, the bailout may be several multiples of that figure.
That $450 billion just represents checks that the Treasury would write to private insurance companies. The Reid bill would also force nearly every U.S. citizen to fork over cash to the private insurance companies — no matter how lousy a deal they offer. A recent CBO memo reveals that Reid has been meticulously working behind closed doors to conceal the full cost of his private-insurer bailout.
The Left and the Right should insist that Reid produce a complete CBO score that reveals the full cost of his bill’s private-insurer bailout — in particular, the cost of the individual and employer mandates.
Left-wing Democrats will follow their own consciences when deciding how to vote. But they should force Reid to be honest about what he’s asking them to swallow.
Curtain Call for the ‘Public Option’ Sideshow
Senate Democrats now appear to be jettisoning the idea of creating a new government program to snuff out compete with private insurance companies. It was an audacious proposal from the start, as it made their health care plan even more left-wing than the Clinton plan, which voters soundly rejected for being too statist.
Yet it was always a sideshow that helpfully distracted the Left, the Right, and the mainstream from what shrewd Democrats and their allies at AHIP have really wanted all along: an individual mandate forcing all Americans to purchase health insurance under penalty of law.
As I argue in this Cato study, an individual mandate gives government more (and more immediate) control over Americans’ health care than even the so-called “public option” would. As it has in Massachusetts, an individual mandate will allow government to control what kind of insurance you buy, how much you pay, how insurers pay doctors, where doctors report to work, how doctors practice medicine, and what kind of medical care you get.
The question now is whether the Left, the Right, and the mainstream will recognize the Senate health care bill for what it is: a massive $450 billion bailout for private insurance companies that will drive health insurance premiums and taxes higher while reducing quality, all for the benefit of a small cadre of Democrats with a preternatural need to control other people’s health care.
(Cross-posted at Politico‘s Health Care Arena.)
Thursday Links
- You call this a “moderate compromise?”: The public option’s rotten replacement.
- Why Copenhagen is all pain and no gain. Meanwhile, Brookings finds that “meeting the Waxman-Markey emissions targets would result in a loss of personal consumption from $1 trillion to $2 trillion; GDP would be lower by 2.5 percent by 2050; and there would be 1.7 million fewer jobs.”
- Dear U.S. government: This is how you create a job.
- Podcast: “Recounting the cost of ObamaCare.“
FEHBP Plan Is No ‘Moderate Compromise’
Senate Majority Leader Harry Reid (D-NV) has announced that he has reached a super secret compromise on how to deal with the so-called public option for health reform. While Reid said the agreement was too important to actually tell anyone what is in it, most of the details have been leaked to the press.
Rather than set-up a completely government-run insurance plan to compete with private insurance, Congress would establish a program similar to the Federal Employees Health Benefit Program (FEHBP), which currently covers government workers, including Members of Congress. The FEHBP offers a variety of private insurance plans under a program managed by the US Office of Personnel Management (OPM). Each year OPM uses the Federal procurement process to solicit bids from insurance companies to be one of the plans offered. Premiums can vary, but participating plans operate under stringent rules. As a model, the FEHBP is apparently acceptable to moderate Democrats because the insurance plans are private rather than government entities, while liberals like it because it is government regulated and managed.
In addition, the compromise plan would expand Medicare, allowing workers ages 55 to 65 to “buy in” to the program, and may also expand Medicaid.
A few reasons to believe this is yet another truly bad idea:
- In choosing the FEHBP for a model, Democrats have actually chosen an insurance plan whose costs are rising faster than average. FEHBP premiums are expected to rise 7.9 percent this year and 8.8 percent in 2010. By comparison, the Congressional Budget Office predicts that on average, premiums will increase by 5.5 to 6.2 percent annually over the next few years. In fact, FEHBP premiums are rising so fast that nearly 100,000 federal employees have opted out of the program.
- FEHBP members are also finding their choices cut back. Next year, 32 insurance plans will either drop out of the program or reduce their participation. Some 61,000 workers will lose their current coverage.
- But former OPM director Linda Springer doubts that the agency has the “capacity, the staff, or the mission,” to be able to manage the new program. Taking on management of the new program could overburden OPM. “Ultimate, it would break the system.”
- Medicare is currently $50-100 trillion in debt, depending on which accounting measure you use. Allowing younger workers to join the program is the equivalent of crowding a few more passengers onto the Titanic.
- At the same time, Medicare under reimburses physicians, especially in rural areas. Expanding Medicare enrollment will both threaten the continued viability of rural hospitals and other providers, and also result in increased cost-shifting, driving up premiums for private insurance.
- Medicaid is equally a budget-buster. The program now costs more than $330 billion per year, a cost that grew at a rate of roughly 10.7 percent annually. The program spends money by the bushel, yet under-reimburses providers even worse than Medicare.
- Ultimately this so-called compromise would expand government health care programs and further squeeze private insurance, resulting in increased costs and higher insurance premiums, and provide a lower-quality of care.
No wonder Senator Reid wants to keep it a secret.
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