Private-Market Tooth Fairy Can’t Cut Medicare Cost: The vast bulk of health-care costs arise from an extremely small share of patients, whose insurance will inevitably bear a substantial share of their expenses. That’s why competition in health care doesn’t work as well as in other sectors, and it’s also why the key to keeping costs to a minimum is to encourage providers to offer better, less costly care in complex cases. Unfortunately, proponents of moving Medicare to a private “consumer-driven” system, including Republican vice presidential hopeful Paul Ryan, seem to instead believe in a health-care competition tooth fairy -- that if we just increase the patient’s share of costs and bolster competition among insurance companies, the expense will come down….
What did the budget office conclude?:
A private health insurance plan covering the standardized benefit would, CBO estimates, be more expensive currently than traditional Medicare.
The reason was that:
both administrative costs (including profits) and payment rates to providers are higher for private plans than for Medicare.
And that effect was larger than any cost savings achieved by people getting less health care. In any Rove-versus-CBO debate that involves economic analysis, I’d put my money on the CBO….
[W]e already have a system similar in some ways to the revised Ryan proposal. Almost 30 percent of Medicare beneficiaries are covered by private insurers through the Medicare Advantage program, which exists alongside traditional Medicare. So what can we learn about the potential impact of the Ryan proposal from our experience to date with Medicare Advantage plans?…
[E]xperience to date does not support claims that private plans in Medicare lower costs…. [I]magine two beneficiaries. One has medical expenses amounting to $150 and the other, $50. The average cost is $100. Now imagine that a private plan bids $90 to cover beneficiaries… [with a] plan… designed to be very attractive to the $50 beneficiary… [but not] to the $150 one, so that person stays in traditional Medicare. The result is that total costs rise from $200 ($150 for the expensive beneficiary plus $50 for the inexpensive one) to $240 ($150 for the expensive beneficiary plus $90 for the inexpensive one). So even though the plan “looks” like it saves money, it doesn’t. It overpays to cover the $50 beneficiary…. [P]lans that can better predict beneficiary costs to game the system by selecting beneficiaries who are expected to cost much less than their risk-adjusted payments….
How big is this selection effect in Medicare Advantage? The evidence suggests it’s huge. The most careful analysis was reported in a 2011 National Bureau of Economic Research paper by Jason Brown of the Treasury Department, Mark Duggan of the University of Pennsylvania, Ilyana Kuziemko of Princeton and William Woolston of Stanford University. In 2006, Medicare Advantage plans were overpaid by more than $3,000 per beneficiary because they were able to select beneficiaries who cost less than their risk-adjusted payments….
We don’t want to put all our chips down on the health-care competition tooth fairy.