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.

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