• About Enthoven’s WSJ op-ed

    Alain Enthoven published an op-ed today in the Wall Street Journal. It’s titled “What Paul Ryan’s Critics Don’t Know About Health Economics” and subtitled “A premium-support system would create the right incentives for cost cutting without putting undue burdens on seniors.” With that you can probably guess what’s in it.

    If I had time and, frankly, energy, I could go through it point by point. There’s a lot I don’t agree with. There’s a lot that the research evidence doesn’t agree with. There’s a lot that CBO doesn’t agree with.

    But, I’ll just focus on one thing. Enthoven wrote,

    The problem with just cutting hospital payments now is that hospitals will continue to shift costs onto private payers.

    About that, Uwe Reinhardt emailed me,

    If hospitals simply shift costs to private payers whenever Medicare pays them less, does that not indicate that private payers have insufficient countervailing market power in the market for hospital care? And if that is so what supports the faith that private payers can control hospital prices and health spending per capita “through competition”?

    I can’t speak for the faith that some may have for the private market. For myself, I think that competition can play a constructive role in Medicare, if it is structured properly, i.e., it includes a public option that competes on a level playing field with private plans — competitive bidding — within an all-payer rate setting regime. This is not what Rep. Ryan, the GOP, or Alain Enthoven are endorsing.

    As to Reinhardt’s first question, yes, if private payers cannot resist cost shifting then they clearly have no ability to drive prices lower. Cost shifting requires market power on the part of providers, market power that overcomes that of insurers. You cannot simultaneously insist that providers can cost shift and that insurers can drive down prices through competition. The two are mutually exclusive.

    More on cost shifting in many posts.

    • Uwe’s response is devastating to the Ryan proposal. Thanks for posting that.

    • Austin may not have the time to go point by point through the Enthoven article, and that is probably not a good use of his time, but this blog did to some degree


      and came up with some pretty good points. In particular I like the two questions at the end, if the Ryan Plan is so great, why wait and if Private Insurance can control costs, why hasn’t it done it. Have they ever been answered?

    • I agree with the view that either there is no appreciable cost-shifting, or if there is, it undermines the belief that private health insurance is able to control costs, since it would have to be weaker than Medicare to have the costs shifted to it.

      That aside, I do think the Ryan plan would make a real impact on cost control. It would do so at a huge price for American seniors, since the medical cost trend would not suddenly shift to be in line with the premium support. There would be an ugly transition period and seniors would bear the brunt of the pain until it happens. So, I don’t want Ryan’s plan, but I cannot see how an economist would argue that it would fail to help control costs.

      Because it was gated, I couldn’t read the full article, but I would guess that Enthoven feels compelled to defend Ryan’s plan because it resembles the premium support (defined contribution) program he helped enact for The Netherlands: http://www.washingtonpost.com/opinions/a-dutch-model-for-medicare/2011/04/29/AFQPNICG_story.html

    • Jonathan

      “I cannot see how an economist would argue that it would fail to help control costs.”

      I understand your analysis is that since the Ryan plan would shift costs onto Seniors who would then reduce their consumption of health care services, this would lower overall health care costs.

      The reasons I disagree with your analysis and conclusions are

      (1) health care is largely a fixed cost industry, and reductions in usage do not result in substantial reductions in costs, similar the way that a reduction of say, 10% of enrollment in a school in no way reduces the cost of operating the school by 10%. The lack of understanding about the fixed cost nature of the health care industry and the economic dynamic of fixed costs and fee for service is one of the major reasons why people like Ryan are so wrong.

      (2) The drivers of the upward movement in health care costs are the fee for service structure, which would continue under the Ryan plan, the high cost of implementing new technology, the highly inelastic demand for health care services, the inability of consumers to comparison shop and the inability of insurance companies to control costs (If the could have they would have)

      So as an Economist that is how I would answer your post.