• Will lower premium subsidies bend the cost curve?

    Julie Rovner’s quotes of Michael Cannon about Rep. Ryan’s plan for Medicare got me thinking.

    For example, Michael Cannon of the libertarian Cato Institute says having people spend their own money, rather than the government’s, helps.

    “They’ll be cost-conscious consumers, they’ll choose economical health plans, they’ll put downward pressure on prices, because they will get to see the savings,” he says.

    At the same time, Cannon adds, more competition within the health care industry will also help hold down prices.

    “Because in order to capture the business of those cost-conscious consumers, health plans, providers, will have to find ways cut costs while improving quality,” he says.

    There’s something to this, at least in theory. And yet, as I heard these words I wondered if we had any evidence on hand about the relationship between lower premium subsidies and health care cost inflation. Indeed we do! Premiums in the commercial market are subsidized by the government at a lower rate than those in Medicare.

    Take employer-sponsored plans. They receive the equivalent of nearly a 40% tax subsidy, on average. Contrast that with Medicare, which covers about three-quarters of the premiums for Part’s B and D and the entirety of what would otherwise be a Part A premium. That is, even participants in the most government-subsidized part of the commercial market receive a much lower subsidy than do Medicare beneficiaries. Participants in the non-group market get even lower subsidies.

    With that lower subsidization in the commercial market, we might expect — based on theory alone — more cost consciousness and a lower rate of increase in health care costs. Is that what we find? Not according the figures from the Kaiser Family Foundation:

    That’s 40 years of pretty similar growth for private plans and Medicare. With data like this, I think we need to reexamine some of our theories about what lower premium subsidies can do.

    Addendum: There is a counter-argument to what I just presented. I’m not convinced it is a good one even though I agree that the consequences of it would be beneficial. It’ll probably come up in the comments so I won’t spoil it for those who want to play along.

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    • Medicare benefits from a much higher degree of buying power than private plans, so it’s not really an apples-to-apples comparison.

      The real money is in expensive care for expensive patients and emergency care, which are not situations in which the whole cost conscious consumer idea applies, plus the problems that patients are not good at judging the quality of care and that they skimp on prevention leading to more expensive treatment later, so the whole discussion of shifting responsibility to cost-conscious consumers is somewhat misleading.

      • Plus international comparisons indicate that shifting costs to consumers in the hope of lower healthcare costs doesn’t work in practice.

      • Good point about buying power. Not where I was going with the counter-argument. It is, actually, related to my counter-argument to the counter-argument that I have in mind. :)

    • In the aggregate, Mcare starting from a much higher baseline.

      Avg premium for commercial buyer vs Mcare beneficiary are quite different; even if you grow at 7% annually, health care costs per household in commercial arena lower, ? more disposable income for healthcare, and less incentive to restrain spending. In relative terms, there is notable growth.

      In the >65 set, with significant percentage earning <2x FPL, even with larger subsidization, SUPPLY SIDE dominates, both absolute and relative growth.

      Is that where you were going, sorta?

      Brad