Is Medicare Distorting the Health Care Market?

Health care cost doubled the rate of inflation in 2010, and in some areas it's five times or greater. If you look at the previous decade, health care rose an astonishing 48%, while the overall economy rated at 26% of inflation. Politicians are quick to point a finger at the insurance companies, but neglect the other three pointing back at them. Since the implementation of Medicare – and subsequent price controls – healthcare cost has skyrocketed, and with it a distortion of the market.

One of the biggest factors for this rising cost of health care is a lack of consumer participation. Since Medicare patients are removed from the process of a cost benefit analysis, they’ll often be given superfluous care. Here is report by Avik Roy of The Heartland Institute published in National Affairs:

In theory, Medicare does include some cost-sharing provisions, especially for physician payments under Part B. But over time, private insurance companies began to realize that Medicare's design allowed them to provide seniors with supplemental coverage to pay for the deductible and co-insurance requirements of the program — a good deal for insurers (for whom costs are finite and low), as well as for the seniors who purchase such plans (and are thereby freed from any direct cost for health care). Today, almost 90% of seniors have supplemental coverage plans, which means in effect that they have unlimited health coverage for a low and fixed cost, and thereby every incentive to seek generous, and even unneeded, care.

Combined with the fact that Medicare generally pays health-care providers on a per-service basis rather than on a per-patient or per-outcome basis, this means that Medicare creates an enormous incentive for everyone involved to provide more services to seniors. Volume, more than the cost of individual services, has been Medicare's fiscal downfall. And, as discussed below, reformers trying to fix the program's finances — from the 1970s through the health-care bill enacted last year — have sought to do so through price controls that reduce the amount the program pays for each service provided, which actually creates an even greater incentive for physicians and hospitals to provide a greater number of services to make up the lost revenue.

Proponents for Obamacare believe the federal government is more efficient than insurance companies when it comes to administration cost. That is laughable. Here are some of the outlays:

First, other government agencies help administer the Medicare program. The Internal Revenue Service collects the taxes that fund the program; the Social Security Administration helps collect some of the premiums paid by beneficiaries (which are deducted from Social Security checks); the Department of Health and Human Services helps to manage accounting, auditing, and fraud issues and pays for marketing costs, building costs, and more. Private insurers obviously don't have this kind of outside or off-budget help. Medicare's administration is also tax-exempt, whereas insurers must pay state excise taxes on the premiums they charge; the tax is counted as an administrative cost. In addition, Medicare's massive size leads to economies of scale that private insurers could also achieve, if not exceed, were they equally large.

Speaking of fraud, the federal government is so efficient that an estimated $60 to $100 billion of Medicare spending goes to fraud. Can you imagine what Obamacare is going to be like?

What’s ironic about this whole Medicare debate is the Bill Clinton factor. The savior of the Democratic Party denigrated Rep. Paul Ryan’s market based plan at the DNC. What Bubba failed to mention is that his own commission gave a similar recommendation. Had he been able to keep his pecker in his pants, we might have solved this problem a long time ago.

In 1997, as a result of the Balanced Budget Act, Congress organized the National Bipartisan Commission on the Future of Medicare, under the leadership of Democratic senator John Breaux and Republican representative Bill Thomas. The commission's final recommendation, supported by members of both parties, was that Medicare should be converted to a "market-based Premium Support model" similar to the one used in the Federal Employees Health Benefits Program.

Under the commission's proposed system, retirees would have been able to choose between private health plans and a traditional government-run fee-for-service plan (a consolidation of Medicare Parts A, B, and C). Thus traditional Medicare would have become one option among many, competing for business. Regardless of what option they chose, beneficiaries would have been expected to pay a premium equal to 12% of per capita health costs, but would have paid no premium at all if they bought a plan that was at least 15% cheaper than the average one. In addition, the commission recommended increasing the Medicare eligibility age from 65 to 67, in harmony with Social Security.

After the commission made its proposal, President Clinton made a counter-proposal, shaped in large part by his Treasury secretary, Lawrence Summers. He proposed "managed competition" for Medicare, in which private insurers would have engaged in competitive bidding for health coverage of the elderly. Retirees who chose plans that cost less than the average bid would have retained three-fourths of the savings. Clinton also proposed new subsidies to encourage employers to retain private-sector health coverage for their retirees, taking some of the burden off of Medicare.

These two sets of proposals were, in many ways, quite compatible. Indeed, according to historian Steven Gillon, President Clinton and House Speaker Newt Gingrich, along with several prominent Senate Democrats, were close in 1997 to a historic agreement for reforming Medicare along these lines. But after the Monica Lewinsky scandal erupted in early 1998, Clinton was focused on defending himself from impeachment, and this required currying the favor of ideological Democrats over pragmatic ones. Thus no serious effort was made to bridge the various reform proposals, and Medicare's problems went unresolved.

Will we ever be able to fix Medicare and our health care system as a whole? We could if the politicians would stay the hell out of it. I highly recommend reading Avik Roy’s piece in full, just click the link below. It’s rather long, but well worth it.

Source: http://www.bizjournals.com/cincinnati/blog/2012/05/health-care-costs-double-the-rate-of.html

http://www.nationalaffairs.com/publications/detail/saving-medicare-from-itself