Would Privatizing Medicare Lead to Better Cost Controls?

By Uwe E. Reinhardt
The New York Times, May 13, 2011

The annual Milliman Medical Index, released earlier this week by Milliman Inc., the Seattle-based employee-benefit consulting and actuarial company, is illuminating, and I highly recommend it. The index is particularly timely as the nation considers proposals to reduce sharply the role of the federal government in financing health care, along the lines proposed by Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee.

The index measures the total cost of health care for a typical American family of four covered by a preferred provider plan, widely known as a P.P.O. The index’s great virtue is that it includes not only the employer’s and employee’s contributions to the premium for P.P.O. coverage but also the out-of-pocket expenses the family has under the plan.

Employers can control the growth of health insurance premiums by shifting more and more of the cost from the insurance policy to the family’s budget, through higher deductibles and coinsurance or by excluding benefits from coverage that had previously been covered.

Thus, the index provides a more accurate picture of the actual burden of health spending for a typical American family than does just the premium for P.P.O. coverage.

The estimated average cost of health spending from all sources for a typical privately insured American family more than doubled in the last decade, to $19,393 in 2011 from $8,414 in 2001. Over the decade, the index exhibited an average compound annual growth rate — widely known in the trade as C.A.G.R. — of 8.8 percent, although, in recent years, that rate has ranged between 7 and 8 percent.

Despite that recent abatement, the growth rate is still more than twice the rate at which total average employee compensation has grown, for all but the top executives among private employers. In recent years, the growth in employee compensation has hovered beneath 3 percent.

In other words, health care is chewing up employees’ paychecks like Pac-Man in the famous arcade game. And there is considerable empirical evidence that the employer’s ostensible contribution to the employee’s health-insurance premiums actually comes out of the employee’s take-home pay.

As noted above, it is not a stretch to argue that the Milliman Medical Index bears directly on the hypothesis that private health insurers are able to control the growth in per-capita health spending better than Medicare can.

At the theoretical level, one might be persuaded to subscribe to that theory, because private nonprofit and commercial health-insurance plans have at their disposal cost-control mechanisms that traditional Medicare has been denied by statute — for example, selective contracting with preferred providers that offer the insurer lower prices, or various direct interventions to control the volume of health services.

In addition, private nonprofit or commercial health insurers can offer other advantages that traditional Medicare has not, like disease management, wellness programs and better coordinated care — advantages that, in principle, are empirically demonstrable if they exist.

But the Milliman data do not suggest that superior control over total health spending — as opposed to controlling premium growth through cost-shifting to private household budgets — is among the industry’s strengths. To argue that the industry can do so is, at this point, faith-based analysis.

It is widely assumed, among both health insurers and the hospital industry, that the more rapidly rising prices paid by private insurers reflect a cost shift from government to the private sector. The theory is that private insurers must compensate with higher prices for the shortfall from actual cost imposed on providers of care by unduly low Medicaid and Medicare payment rates.

With a few exceptions, economists remain skeptical on the validity of the cost-shift theory, although it may operate in some market environments.

But suppose one accepted the cost-shift theory at face value. It implies that in many markets with highly consolidated hospital systems and large physicians’ groups, private insurers simply lack the market power to resist price increases from the more powerful providers of health care for whatever reason — cost shift or otherwise.

For the full article:
http://economix.blogs.nytimes.com/2011/05/13/would-privatizing-medicare-lead-to-better-cost-controls/

Milliman Medical Index:
http://publications.milliman.com/periodicals/mmi/pdfs/milliman-medical-index-2011.pdf

Each year we look at the Milliman Medical Index and realize that our current system is still not working. The Affordable Care Act (ACA) provides no realistic hope of slowing costs in the privately insured sector. ACA’s only effective mechanism is the establishment of the Independent Payment Advisory Board, but that would leave private plans alone while risking converting Medicare into an underfunded welfare program.

Looking at the Milliman numbers, it seems so obvious. Instead of privatizing Medicare, we should improve it and then provide it as a public program that covers everyone. Cost escalation would be slowed to sustainable levels while preserving free choice of physicians and hospitals (which would be lost in a privatized Medicare program).

Single payer legislation has already been introduced that would allow us to take a serious look at this concept. In the House, Rep. John Conyers has introduced The Expanded and Improved Medicare for All Act (H.R.676), and Rep. Jim McDermott has introduced the American Health Security Act of 2011 (H.R.1200), which also has been introduced in the Senate by Sen. Bernie Sanders as S.915.

It is no wonder that conservatives often say that if we don’t adopt their less regulated privatization schemes we are going to end up with single payer. They understand the numbers, and they realize that single payer would actually work. It’s time that we look at single payer not as a threat, but as a hope – a hope that we could finally provide affordable health care for everyone.

Comment originally published on The New York Times website.