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The Big Gamble in Health Care: Would Competition Outdo Government in Controlling Costs?

Scott Bittle and Jean Johnson

Reprinted from The Huffington Post - March 28, 2013

The Obama administration recently opened talks with officials in Arkansas and Ohio on plans to allow the states to use federal Medicaid money to buy private health insurance for their low-income residents. Several other states seem ready to follow suit. If this all goes through, it will be an unexpected pairing of progressive and conservative ideas -- one pragmatists may find encouraging.

As a rule, there's a cavernous divide between those who see traditional Medicare and Medicaid as the best way to provide health care coverage to people without it and those arguing for a private market, consumer-driven approach. This gulf reflects differing political visions, but also fundamental issues of trust.

Progressives often view proposals to involve private insurers in Medicare and Medicaid as sneak attacks designed to disembowel programs that work well and enjoy broad public support. Witness the response to Representative Paul Ryan's proposals to "voucherize" Medicare.

Conservatives frequently have an immediate, almost visceral rejection of government, seeing it as inherently more wasteful and less efficient that the private sector. For some, government involvement in health care means "socialized medicine " is just around the corner.

But for those like to consider ideas from both sides, the debate over injecting more market competition into health care raises issues that deserve more than a knee-jerk response.

A first step may be to disentangle two questions that are generally intertwined in debates over "competition" in health care.

Which approach is better at containing costs and serving patients -- traditional government programs or the private insurance market? Wonks and politicians are currently battling over which strategy has been more successful holding the line on costs, and given that Medicare serves an older, sicker, and growing segment of the population, making the comparisons isn't as easy as you might think. An Urban Institute study showed that between 2006 and 2010, per "enrollee" spending in Medicare grew by 4.2 percent compared to 4.5 percent among private insurers. During that period, Medicare enrollment rose while private enrollment declined slightly. Medicaid was most successful, with per enrollee spending increasing by only 2.7 percent, but with worrisome downsides. Since Medicaid pays doctors much less than they would earn from private insurance, fewer accept it, which means patients often have to hunt and wait for care.

Would patients help hold the line on costs if they had more skin in the game? The question here is whether patients will choose more affordable insurance if they have financial incentives to do so. Companies like Sears and Darden Restaurants (The Olive Garden and Red Lobster) are trying this approach, setting up exchanges offering differently-priced plans. The companies pick up the tab for the least costly, while workers themselves pay the difference if they choose more expensive ones. Not surprisingly perhaps, workers are veering toward toward less costly plans, with about 4 in 10 choosing high deductible coverage.

Some worry that people with high deductibles will postpone care to save money. And it's not clear that having people shop for insurance really slows the growth in overall health care costs. Peter Orszag, the former White House budget director, points out that "the vast bulk of health care costs arise from an extremely small share of patients." These are patients with serious, chronic illnesses that would be covered by insurance under nearly any arrangement, so even if many more Americans are shopping carefully for insurance, the overall impact on national health care spending may not be that much. Orszag says the way to reduce costs is to find less expensive ways to care for these seriously-ill patients.

Ironically, both sides sometimes use Switzerland as their case in point. In Switzerland, consumers purchase their health care plans directly, rather than having insurance provided by government or their employer. As Avik Roy describes it in Forbes, the system is universal, purchasing insurance is mandatory, insurance plans are heavily regulated, the Swiss are as healthy as we are, and their doctors are well-paid. His assessment? "In contrast with the United States, whose health care expenditures are the highest percentage of gross domestic product in the world and where more than 40 million citizens are uninsured, the consumer-driven Swiss health care system achieves 30 percent lower per capita health care costs and universal coverage while providing reasonable quality of care."

Paul Krugman sees some positives as well. He believes something like Medicare for everyone -- a single-payer approach -- or a system where a public option is available alongside private insurance plans would deliver better cost containment and patient care. But when Krugman was writing in favor of Obamacare in 2009, he described the President's plan as one that would "Swissify" American health care. This, he said, would be a "vast improvement" on the old system that left millions of Americans without coverage.

The problem with all these interpretations is that there aren't really any good "apples to apples" comparisons in the U.S. health care market -- examples where government health programs and private ones compete head to head. True, the government already accounts for nearly half of all health care spending, but government the private sector are rarely competing for the same people in the same markets. The overall incentives in the health marketplace are also skewed. As many experts have pointed out, we pay providers based on what tasks they perform, not whether their patients get better. And patients often have difficulty figuring out who is paying for what.

The bottom line for us is that there's no reason to believe that private market competition is a magic potion that will cure our health care problems, nor is it necessarily "the Swiss menace," to quote Krugman's wonderful tongue-in-cheek phrasing. Any move toward more competition in health care is an extrapolation from limited results. You can view that as an experiment, or a gamble, depending on your point of view. But you can hardly call the results a certainty -- on either side of the debate.


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