Will lower premium subsidies bend the cost curve? — ctd.

What’s the counter-argument I alluded to at the end of my post? You have to put on your market/choice/competition hat to see it (if you have one). Ask yourself, who is selecting plans in the commercial market? How is that different from the market Rep. Ryan envisions for Medicare?

If you’re thinking that employers play a large role in plan selection (including the fact that half are enrolled in self-insured plans), you’re right! Most people don’t have a lot of choice, unless you think they’re picking employers based on plans (and there is something to that, but it isn’t everything).

In contrast, Rep. Ryan is proposing to allow Medicare beneficiaries to make their own choice among many competing plans. That’s not something we see for most employers. In this respect, Medicare Advantage and Part D seem far more “free” market than the commercial insurance market, though this is just a consequence of the massive employer-sponsored insurance tax subsidy. That’s the “free” market distorted by the tax system. Still “free”! Just incentivized in a particular way.

However, I think one can argue that employers ought to be able to do an even better job of negotiating lower costs. They’ve got a lot at stake and they’ve got more market power than individuals to drive bargains. So, even with plan choice largely in the hands of employers, we should see some effect of lower subsidies on health care costs, right? But we don’t, as I showed.

Now, I agree with the consequence of thinking about employer-sponsorship of plans as problematic. It is, for a number of reasons, including restricted choice. Purchasing insurance on an exchanges, divorced from employment, makes far more sense and would resolve a lot of market distortions. Most economists would agree with this, though there is a risk-pooling issue to consider. A lot depends on the rules of the market (“free” though it may be).

Even though I think moving away from employer-sponsorship would be good, I don’t agree that it is a large barrier to bending the curve. If the curve could be so easily bent, it would have been already. In fact, in some sense it was, in the 1990s, when employers got fed up with escalating health costs and started shunting everyone into managed care. People hated it, but employers forced it. And costs came down.

Then the backlash … which goes quite a way toward illuminating revealed preference. Why are we so sure people want to spend less on health care? If they did, wouldn’t they act differently? (Another good puzzle.)

LATER: I should add for emphasis that there is a difference between reducing the cost (premium) level and bending the curve. It’s the latter — the change in rate of change or the second derivative — that I’ve focused on. I have no doubt that a change in the level — the first derivative — can be achieved in many ways, some of which are sound on other grounds. But any level change will be overcome in some number of years if the rate of growth continues. It only takes a few years of 10% growth to wipe out even the most optimistic estimate of what can be done to the level.

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