The Obama administration has asked the deficit-reduction “super committee” to consider several major health care reforms. These reforms need to be designed so that they improve — not compromise — health and innovation in the United States.
There are only two ways of cutting future Medicaid and Medicare spending: reducing the number of eligible citizens or reducing the spending per beneficiary.
The government has little comparative advantage relative to the private sector in managing the latter. Yet, that is where most of the White House’s policy recommendations are focused.
Instead, greater attention should be paid to better aligning eligibility with societal goals of helping those in need. Officials should get out of the business of micro-managing per-capita spending.
They should focus their efforts in two directions. First, reduce the number of upper-income individuals eligible for public programs. Currently, since the rich pay the most taxes, they are essentially paying themselves to get public, rather than private, coverage. Second, for those in need of the program, support their premiums rather than regulating their health care providers.
Such means-testing opens up health care to more market-based pricing and innovation. Market-based valuation of products is central to efficiently guiding innovation, benefiting both poor and rich.
In contrast, the White House proposals are filled with various attempts to centrally micro-manage per-capita spending.
The biggest component of the administration’s proposed health care savings is greater price controls in the Medicare drug program, which will generate an estimated $135 billion in savings over 10 years, about 40 percent of the total health care savings proposed.
This is a misguided move.
Currently, Medicaid and Medicare pay for drugs in very different ways. Medicaid, which provides health care to the poor, mandates a rebate of 23.1 percent (for most brand-name drugs) or 13 percent (for generics) of the drug’s market price.
By contrast, Medicare’s drug benefit — otherwise known as Part D — encourages competition: seniors are given a subsidy and allowed to choose their own private plans.
Essentially, the White House wants to apply Medicaid-style price controls to Part D. But by harnessing the power of competition, the Medicare drug program has kept its costs 41 percent below initial projections. Seniors overwhelmingly report they are satisfied with the service they receive.
To be fair, some of the White House’s recommendations are in the right direction, notably combating Medicare fraud.
But these moves are not nearly enough to address the problem of runaway entitlement spending. Instead of stripping Part D of the elements that make it work, the super committee should emulate its success by introducing market competition throughout the public insurance system.
There are some people who take issue with the Part D model — that is, the act of government providing premium supports while allowing individual patients to choose their own private plans and cultivating market competition under public financing.
Some say that the government is actually more efficient at providing insurance. And their chief piece of evidence is that Medicare spends about a third as much as the private sector, 4 percent versus 12 percent of revenues on average, on administrative costs.
For one thing, private administrative expenditures can serve a valuable purpose, particularly in weeding out fraud. Medicare, meanwhile, is estimated to lose up to 15 percent of spending annually to fraud. In addition, evidence suggests that on a per-capita basis, the two sectors spend the same — the difference is due to spending being higher in Medicare, not administrative costs being lower.
Another concern with premium supports is that they allow plans to rake in excessive profits. But private insurance profits are actually not anomalous, as also suggested by a lack of new entrants. A 2008 PricewaterhouseCoopers study estimated insurers’ profits at just 3 percent. Moreover, private plans pay for about half of U.S. health care, so the share of total spending due to profits would be only 1.5 percent.
The belief that Washington, D.C. can manage per-capita spending is misguided. It perhaps stems from a consensus in the policy community that there is great “waste” in health care, as much as a third of health spending, or $900 billion, which amounts to 6 percent of GDP. But if these analysts know how to cut plans’ costs by a third without sacrificing quality, why aren’t private insurers hiring them? One answer would be that the claims they make are not taken seriously by those with skin in the game; no one knows of a better alternative than the current one.
Congressional committees will forward their savings recommendations to the super committee later this month. The super-delegates themselves have to officially submit their cost-cutting to Congress by December 2. And Congress has to pass a final bill by mid-January. Now is the time for clear thinking.
The United States needs to make drastic changes to Medicare and Medicaid in order to maintain its fiscal health. But the right spending cuts can improve, rather than sacrifice, health and medical innovation.
Tomas Philipson is a professor of public policy at the University of Chicago. He is also a partner at Precision Health Economics, which consults private and public payers, as well as manufacturers.