Lower spending is the wrong rationale for private health insurance

The proposal to raise the Medicare eligibility age from 65 to 67 has legs. Earlier in the week, the Health Leadership Council, a consortium of health industry leaders, endorsed the idea. About that Matt Yglesias wrote,

[S]hifting marginal people out of Medicare is lucrative for the health care industry. By the exact same token, if you’re interested in reducing health care costs, what you want to do is listen to executives of health care companies and then do the reverse. Rather than raising the Medicare eligibility age, we ought to be lowering it. […] Both domestically and internationally, it’s clearly the case that the way to reduce health care costs is to adopt more statist payment systems. UK health care is cheaper than Canadian health care is cheaper than American health care. In America, Medicare is cheaper than private insurance.

Interestingly, this used to be well-understood. From the end of World War II up through the Hillarycare episode, the main conservative argument against increased government provision of health care was precisely that by reducing costs it would reduce profits and thereby reduce innovation.

More recently, conservatives have tried to take up the reverse banner and claim that health care prices are high because of government subsidies and that therefore free market solutions will reduce health care prices. This is, however, contradicted by all the available evidence along with the voluminous history of conservative whining that government-funded health care would be too stingy.

I’ve got a lot to say about the issues Yglesias raises, so this will be a long post. Before I get to the issues, though, I want to make one thing perfectly clear. You should not care what my opinion is about the virtues of public vs. private spending on health care. What I might find preferable should not be important to you. In fact, I will not state my preferences in this post, and you should not infer what they are from what I write here (because it doesn’t matter). What I think you should care about is what I care about: facts, evidence, and truth, to the extent it is knowable.

Now, about facts: here are some, with links that back them up.

All of that is consistent with the hypothesis that public health financing programs can control costs at least as well, if not better, than private ones. In addition to that and as Yglesias wrote, there are the decades of statements by health industry leaders and proponents of private health care that suggest they all know this to be true. You can’t argue low public payments stifle innovation if public payments aren’t below those of the private sector. You can’t argue that low public payments lead to cost shifting if public payments aren’t lower than private ones.

By the way, I have asked, more than once and publicly, for those who claim public health spending outpaces private health spending to provide anything like a body of evidence I’ve given above. (Aside: I didn’t even work that hard to come up with the list above. There may be a lot more out there I’m not thinking of.*) So far, I’ve seen nothing other than ideas that badly miss the mark. What I tend to see is a lot of creative arguments about why the evidence I’ve cited above is not illustrative of lower levels or growth in public spending, about how they leave out this factor or that consideration or don’t adjust for thus and such. All of this may be true. But a theoretical argument about a hypothetical omitted factor is nothing compared to cold, hard facts. As for those that show private beats public on cost control, I’m still waiting.

However, even if I take as proven that public health insurance programs control costs better than private ones, that alone does not not mean that public programs are to be preferred. There is value in choice. Having more insurance options increases people’s ability to find a product that suits them best. Leemore Dafny and colleagues estimated the value of the ability to choose plans in an exchange-like setting to be worth over $2,000 more for a family of four relative to typical, constrained choice of employer-based options.

There is also value in innovation. Prescription drug coverage options were available from private plans decades before Medicare implemented a drug program. Medicare still has no long-term care benefit, though one can buy private long-term care insurance. So, it is eminently plausible that the private markets adjust to consumer demand more quickly than public programs.

Thus, the right argument for private options is not that they reduce health care spending. The evidence I’ve seen and the statements by the health care industry itself illustrate otherwise. The right argument is that private options offer more choice, greater flexibility, and rapid innovation. Those things are good, but they cost something. A well-functioning, competitive private market can drive that cost to a minimum, but that cost may still be above what we’d pay for a government health plan (albeit one with less or no choice and relatively slow to adjust to the changing needs and demands of Americans).

Private health plan advocates are right. Choice, innovation, and flexibility are all valuable. They’re so valuable, people may be willing to pay more for them. There’s nothing wrong with that. But paying more means, well, paying more. If you think you can get all that for less, show me the evidence. Until then, I don’t see any reason to, on faith, waive the fundamental law of economics: there’s no such thing as a free lunch.

* See the Health Affairs post by Diane Archer for more evidence.

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