• Premium support proposal and critique: Objection 2, political reality

    This post is part of a series. If you haven’t read the prior posts in the series, you really should. The introduction explains what I’m doing and links to all posts to date. I’m assuming you read them.

    Consideration of the likely political dynamics is another powerful critique of the style of premium support I outlined. Though in principle, one could orchestrate a program that provides a level playing field between private and public plans, in practice that may be hard to achieve or maintain due to political factors. Those factors are more likely to tilt things in favor of private plans.

    It’s not terribly hard to see why. Like it or not, US politics runs on money. Traditional Medicare (TM) doesn’t have any to lend in service of political campaigns or campaign issues. Insurance companies and those who work for and profit from them do. Sure, beneficiary groups like AARP could be a powerful force in support of TM, but I don’t think they’re any match for health insurers.

    Additionally, provider groups are more likely to support private plans since there is a perception they pay higher rates than TM. Not all of them actually do so in all markets, but relative to how Medicare rates are expected to trend under current law, private plans may ultimately be more generous than TM. So, all in all, there will be considerable pressure for Congress to tilt the playing field in favor of private plans.

    To some, this is obviously a problem because it would further erode enrollment in TM. That it is a problem requires one to believe that TM offers unique features that we must maintain (like these or these) even though competitive bidding would still ensure efficient provision of the Medicare benefit without TM in the mix. To others, political favoritism toward private plans is not a problem at all. It’s what they want. Is it any surprise the two sides don’t trust each other’s policy motives?

    Having said all that, there’s something a bit inconsistent about a claim that Congress won’t be able to resist political pressure from insurers and providers. If that is true (and, I believe it is), then the game is already over. In time those groups will eventually win. Look what’s happening in Medicare today. Private plans are as popular as they’ve ever been. That’s likely to change as payments to Medicare Advantage plans decline. However, they’ll probably be ratcheted up again by another administration (unless we go to competitive bidding). Even the current administration hasn’t held the line as tightly as they could have.

    Finally, a way to help with this problem of political meddling is to protect the whole arrangement by handing it over to an IPAB-like board. That won’t afford it perfect protection, but it should be some cushion from political forces since board members won’t be running for reelection and don’t need massive campaign war chests.

    Still, it will require future Congresses to support the IPAB-like board for all this to work. Why should they do that? Given all this, it isn’t hard to see why proponents of TM don’t want to endorse anything that increases the risk of its demise. It’s why a competitive bidding-type premium support concept is not appealing to them even if, on paper, it establishes a level playing field. Given politics, the field is not likely to stay level.

    AF

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    • The comment

      “That it is a problem requires one to believe that TM offers unique features that we must maintain (like these or these) even though competitive bidding would still ensure efficient provision of the Medicare benefit without TM in the mix. ”

      is correct with respect to TM, but does not explain what the unique feature of TM is. That feature is that TM has the largest and most diverse possible risk pool. This, along with the non-profit aspect of TM is why premium support cannot and will not work.

      Once this risk pool is broken up, TM will be left with the high risk enrollees, and their costs will rise. Unless they are highly regulated private plans will not offer insurance to an 85 year old person with chronic health problems.

      Everyone needs to focus on the risk management aspects of Medicare, but no one seems to want to do so. Is it that they just don’t understand the concept?

      • As the post stated, I presumed you’ve read the entire series thus far (go to the intro, to which I linked for links to all posts). Risk adjustment was covered in a prior post. Actually, I linked right to it.

        The posts I linked to in the bit you quoted discusses other important features of TM.

    • I had read the earlier post on risk management, but I think it did not address the fundamental basis of insurance. This is that a large pool of statistically independent subjects where the probability of a loss is low but the cost of a loss is high is what is necessary for insurance to succeed.

      My point was that the large, universal risk pool is the unique thing that Medicare brings to the health care policy debate for seniors. The issue of what is and what is not covered is secondary, What is important is that catastrophic costs are covered to prevent impoverishment among senior, or the shifting of the burden of costs onto health care providers.. The idea that the higher risk class should pay more is contrary to reallity, the higher risk class in Medicare being largely without the means to pay thousands of dollars more.

      Because the concept of Premium Subsidy for private plans competing with TM violates the basic principle of health insurance one simply cannot construct a system where that would work. Occam’s Razor is at work here, the reason private plans with or without premium support have not been done is because they cannot be done.

      Or to put it another way, if it could be done it would have been done.

      What you are tryinig to do is admirable, but in the end when you have to put together a specific program rather than state general principles you will find that you end up with either a program that on economic terms removes care from the most vulnerable, or results in a massive government regulatory program on private insurance that essentially produces what Medicare currently is, but in a much less efficient manner.

      Really, go ahead and try to develop the specifics. It won’t be fun.

      • Never am I trying to lay out the best possible program. Such a thing does not exist because we won’t all agree on the criteria to measure goodness. As always, I am trying to explain the features of a particular program, what the benefits might be and what the limitations are.

      • David, how do you feel about Medicare Advantage? Would you like to see it expanded, contracted, regulated differently?

    • “It’s not terribly hard to see why. Like it or not, US politics runs on money. Traditional Medicare (TM) doesn’t have any to lend in service of political campaigns or campaign issues. Insurance companies and those who work for and profit from them do. Sure, beneficiary groups like AARP could be a powerful force in support of TM, but I don’t think they’re any match for health insurers.”

      The notion that the trillions of dollars of money funnelled through traditional medicare isn’t distorted in ways that are calculated to advance the political fortunes and ideological committments of the people who control the purse strings is hard to square with the empirical record and pretty much all of public choice theory. To those who object to this claim I say, let’s start with John Murtha International airport, take a tour through the corn ethanol program, and then move onto the defense appropriations process.

      The reality is that it’s just as likely that people who want everything from an expanded role for government in the health sector to a full-on Canadian style single payer regime for ideological or political reasons would do everything in their power to rig the game against private particpants – and they have an inexhaustible warchest worth hundreds of billions of dollars per year *and* the capacity to engage in intimidation through regulation on their side.

    • @George

      I think Medicare Advantage is an evolutionary step on the way to an integration of insurance and health care providers. The current fee for service model does not work because the incentives of providers are to increase, not decrease costs. The system’s increased costs are increased income to providers, and to expect them to voluntarily reduce their income is just not a feasible assumption.

      There is belief, based entirely on faith, that competition among traditional insurance companies in a fee for service type provider system will control costs. It won’t. This is the model for non-senior health care. If competition with private insurers could control costs, it would have controlled costs.

      I would refer everyone to the excellent article in the WSJ on this subject

      http://online.wsj.com/article/SB10001424052970204319004577084553869990554.html

      which describes in detail what is happening with insurers combining with health care providers and health care providers starting to offer insurance directly and eliminating the tranditional insurance middleman.

      If this sufficiently evolves, then Medicare and other health care plans could be totally private, with the government providing a fixed payment to an insurer/provider who would then have the incentive to reduce costs so they could keep more of the fixed payment.

      If there was sufficient competition in an area, service and quality would improve and costs would be stabilized. Once Humana and United Health and others start acquiring practices and facilities in a specific area the whole model will change for the better.

      In fact, it is hard to see how it will evolve any other way. As the housing industry learned the hard way, costs cannot keep rising faster than nominal income. If something cannot continue, it will not continue.

      [Apologies to TIE for hijacking the Blog, just wanted to answer the question]