Yeah, it’s about money

If single-payer ever comes to America, it’ll be a long, long time from now. Here’s why:

Support grew in 1998-99 for what amounted to a policy turnaround a transformation of Medicare into a version of Clinton’s once-maligned managed competition. […] The AMA, traditionally supportive of increased patient cost-sharing to control Medicare’s expenditures, became convinced by mid-1995 that vouchers were the best way to cut Medicare and protect physician incomes (Castellblanch, 1999). The same account applies to the Federation of American Health systems, a lobby group for 1400 for-profit hospitals whose leaders were also persuaded that the best way to escape the cost controls of Medicare was to change the nature of the program’s entitlement. For these groups and their industry allies, the argument was straightforward. As long as HCFA [now CMS] was willing to use traditional price control tools to rein in hospital and physician expenditure, the industry faced a concentration of payer power they could not hope to overcome. Vouchers, on the other hand, would limit federal outlays, constituting in effect a Medicare global budget. But, unlike Medicare historically, a voucher system would shift the risk of additional spending to beneficiaries and the plans they chose.

That appears on page 148 of  Theodore Marmor’s The Politics of Medicare. Given the power of health-related interest groups, a more likely political equilibrium than single-payer is one that includes both private plans and a public option. That’s most clearly evident for Medicare, for which that has been precisely the state of things for well over a decade. But still, there is a cost problem. So, what’s the logical next step, consistent with the general public-private, hybrid form?

As I and others have written before, it’s in the realm of “premium support” or “competitive bidding.” Check your preconceptions. Those two terms are not synonymous. Competitive bidding is a form of premium support, but a very specific one that includes some important safeguards. Premium support is more general. It can mean a lot of things, including complete privatization of Medicare and transition to fixed-dollar (or slowly growing) vouchers toward the purchase of private coverage. It is natural for “defenders of Medicare as we know it” to have concerns about premium support in general, but there’s less reason to be worried about competitive bidding. I’ll explain.

One reason premium support frightens people is that no such proposal (or none I’ve seen) includes any plausible means to protect voucher levels from being adjusted upwards arbitrarily by Congress, just as they’ve raised Medicare Advantage payments in the past. This type of cost control is no more believable than that included in the ACA. It depends on the commitment of future Congresses.

The second reason some fear a voucher program is that it could leave beneficiaries with far greater cost risk than they have today. They’d be on the hook for every dollar increase in coverage above voucher levels, even for a standardized, constant level of benefits. That’s very different than current Medicare. Since people are averse to change, especially at their expense, they’re not keen on this idea.

An astute reader will recognize that the two reasons to worry about premium support just provided are at odds. On the one hand, one might worry Congress will increase voucher levels too quickly, on the other, one might worry they’ll be too low. This reflects the fact that nobody knows the “right” price for insurance. Any centrally administered price is likely to be too high or too low and attacked as such, perhaps at the same time.

Then there’s competitive bidding, which is different. The version I’ve written about

could save 8% or about $50 billion per year (based on a 2010 Medicare cost estimate) through a competitive pricing system in which all plans, fee-for-service [FFS, the public option] included, offer bids for a standardized set of benefits and the government pays all plans based on the lowest of these cost estimates.

That is, voucher levels are set by the market and at the lowest offered price. They’re large enough so that every beneficiary could enroll in some plan (for standard Medicare benefits) at no additional out-of-pocket cost. If a beneficiary prefers FFS Medicare, that’s an option, though perhaps at a higher premium. If a beneficiary wants additional coverage for enhanced benefits, the market could offer that, but at an additional cost to the beneficiary, not the government. Meanwhile, voucher levels are not set by a political process, but by the market. Thus, both of the concerns about premiums support plans I described above are addressed. Voucher levels are both sufficient to purchase coverage and are not set directly by Congress.* Moreover, taxpayers pay no more than is necessary to provide the basic set of benefits.

Notice that this approach does not eliminate traditional, FFS Medicare, it just requires that it compete in a market. If and where it offers good quality at low cost it may thrive. If and where it is out-competed for enrollees by private plans, it may fail. Either way, taxpayers are paying the lowest price for provision of benefits. Either way beneficiaries are assured vouchers are sufficient to cover the premium of some plan offering at least the standard benefit.**

If such a competitive bidding plan is sensible for Medicare (and perhaps you disagree), then why isn’t it so for other insurance markets, like those for non-disabled, working-age individuals? Why can’t a public option compete with private plans? Why can’t subsidy levels be set according to a bidding process?*** The only reasons are inertia and politics. But they’re plenty sufficient to keep competitive bidding out of Medicare, as well as elsewhere. Perhaps somebody is winning, but it surely isn’t taxpayers.

* Certainly Congress is free to tinker. There’s no way around that. But one can make it harder. For example, the bidding process could be further insulated from politics by placing it under the purview of an IPAB-like entity.

** A benefits standard is necessary for bidding. It is not necessary that all plans provide the standard benefit, though probably sensible that all offer at least the standard.

*** Subsidies are tied to plans’ market prices in exchanges. According to the CBO, “Under the proposal, the subsidy levels in each market would be tied to the premium of the second cheapest plan providing the “silver” level of coverage.” That’s, essentially, competitive bidding. No such thing exists for the rest of the market. For example, the employer-sponsored insurance tax subsidy has nothing to do with market prices.

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