Department of "Huh?!"
Hey! Obama! Recess-Appoint Somebody to Kevin Warsh's and to Peter Diamond's Seats on the Federal Reserve Board Already!

Why the Ryan Plan for the Abolition of Medicare Would Be a Bad Idea

As John Ellwood said to me outside Berkeley's Goldman School earlier this week (after I had said: "Gee, Paul Ryan really snookered Alice Rivlin, didn't he?"), the more a North Atlantic country's health-care financing system relies on markets--on patient choice and private provision--the more expensive it is without any apparent gain in outcome measures.

Mark Thoma explains why:

Health Care Vouchers vs. Program Cuts by Experts: As part of his plan to reduce the budget deficit, Republican Congressman Paul Ryan of Wisconsin proposes replacing Medicare as we know it with a voucher system... seniors would receive a credit from the government that can be used to purchase health insurance from private sector providers. The Ryan plan would... leave many without the means to obtain the care they need. But even if the vouchers were adequate, I would still not be in favor of a voucher system for health insurance. I am not opposed to vouchers in general. They are offered as an alternative whenever government wants to broaden the availability of private sector services, e.g. vouchers for housing and education, and sometimes vouchers are the best available solution. But not always. So how can we tell if a voucher program is likely to work? And what does this tell us about the Ryan proposal?

Health insurance vouchers are, in essence, the same as giving people cash to purchase health insurance. Using a voucher instead of cash ensures that the money is used to purchase insurance. Since using a voucher is just like spending earmarked cash, the principles that tell us when ordinary markets are likely to fail can also tell us when a market involving cash-equivalent vouchers is likely to run into trouble. Those principles state that markets work best when there are a large number of buyers and sellers, consumers have full information about the product, the good or service is nearly identical across producers, and there are no barriers to entry or exit. There are other conditions as well, most of which can be summarized by the requirement that prices provide the correct signal to consumers and producers in order to encourage optimal behavior. There are concerns about some of these conditions in health insurance markets, e.g. while purchasers of health insurance are numerous, providers are much fewer in number. And in some case, e.g. pharmaceuticals, there may be only one or a very few suppliers of a particular drug. In addition, though regulation attempts to ensure that the alternative plans are transparent, easy to understand, and easy to compare, many consumers have trouble comparison shopping for insurance due to incomplete information about insurance plans.

Another big problem, one that isn’t always present in voucher systems, is that insurance companies pay the bills but have difficulty getting doctors and consumers to make cost effective choices. One reason for this is that consumers are charged very little over and above their insurance premiums for health care, and hence have little regard for the cost involved as they make their health care decisions. Prices do not regulate behavior as they should, and this leaves cost control in the hands of insurance companies. In addition, profit incentives that cause excessive tests and other types of health service overprovision make costs even harder to control.

Our experience with HMOs in the 1990s shows that insurance companies are not very good at controlling health care costs within this type of a system.... [I]t’s not the vouchers per se that are the problem; it’s the implicit reliance upon insurance companies to enforce cost control that comes with them. But is there a better answer? Consumers themselves are in no position to make informed decisions about health care.... The solution – and it's in the Affordable Care Act – is for people with the necessary knowledge about medical services and a commitment to the public interest to... decide which procedures should and should not be covered by Medicare. This does not rule out a particular procedure: it only defines whether taxpayers or the individual should pay for it....

We know what works for health care cost control. Other countries deliver universal care at lower costs and similar quality, and I believe that once we’ve tried other avenues that fail, this is where we will end  There will be lots of false starts, delays and dead-ends along the way—and a voucher program, if pursued, is one of those dead ends. But the day will come when we realize that using successful systems in other countries as models for reform is the best way to provide universal access to health care at the lowest possible price.