Competition hasn’t worked in health care

at 11:16 AM ET, 12/16/2011

Republicans and Democrats have the same problem with the Congressional Budget Office: it refuses to score competition between health-care plans as a surefire way to lower the cost of health care.

This annoyed Democrats during the health-care reform debate, as it meant the Affordable Care Act didn’t get any credit for the competition it would foster on its exchanges. It’s annoying Republicans now, as it means their Medicare-reform plans need to impose blunt spending caps if the CBO to certify them as deficit reducing.

But the CBO is in the right here: No matter how much sense competition makes in theory, no matter how obvious it is that it will drive down the price of health care, the fact is that it keeps failing when we put it into practice.

When I asked Sen. Ron Wyden to give me examples of programs that made him confident that competition could work, he mentioned the Federal Employee Health Benefits Program (FEHBP) and the California Public Employees Retirement System (CalPERS). Rep. Paul Ryan has also pointed towards the FEHBP as a model for his plans. The only problem? Neither system controls costs — a fact that poses difficulties for both conservative efforts to reform Medicare and Democratic efforts to reform health care:

The Medicare program includes Medicare Advantage -- a menu of competitive managed-care options meant to provide better service at a lower cost. That, too, has been a failure.

In order to keep the private options in Medicare, Congress has had to continuously raise their payment rates above those of the traditional Medicare fee-for-service (FFS) program. In June 2007, the Congressional Budget Office wrote (pdf), “Medicare’s payments for beneficiaries enrolled in Medicare Advantage plans are higher, on average, than what the program would spend if those beneficiaries were in the FFS sector—so shifts in enrollment out of the FFS program and into private plans increase net Medicare spending.”

More recently, conservatives have turned to the Medicare Prescription Drug Benefit (also known as Medicare Part D) as an example of a competitive market program that has cut costs. And there’s something to this argument: Part D has cost less than originally expected and has worked much better than its liberal critics feared.

The question is what accounts for Part D’s performance, and whether it could be exported elsewhere in the health-care system. Medicare’s actuaries say (pdf) that the reason the program is costing less than Congress expected is that pharmaceutical innovation has unexpectedly slowed in recent years. That’s meant the program is paying for fewer new, expensive drugs than anticipated, and more old, generic drugs. This has cut costs substantially, but not through inter-plan competition. For much the same reason, national drug spending -- which includes non-Part D plans -- has been 35 percent lower than we expected in 2006.

Enrollment in Part D has also come in beneath expectations. CBO predicted that 93 percent of seniors would enroll, but only 77 percent ultimately entered the program. This has also contributed to lower overall spending.

Going forward, however, the actuaries expect the good times to end. They predict annual spending growth of 9.7 percent in Part D over the next decade. This is due to “projected further increases in Part D enrollment, changes in the distribution of enrollees by coverage category, and the expected resumption of per capita drug cost growth rates that exceed the rate of increase in other categories of medical spending.”

It goes without saying that 9.7 percent spending growth is not sustainable.

It’s also hard to know the counterfactual for Part D: What if Medicare was running the drug program itself? The Center on Budget and Policy Priorities notes (pdf) that Medicare Part D is paying more for drugs than Medicaid pays. “According to CBO, requiring drug manufacturers to pay Medicaid-level rebates (or discounts) for drugs dispensed to the Medicare beneficiaries who receive Medicare’s ‘low-income subsidy’ to help them afford the premiums for Medicare drug coverage (most of whom are dual eligibles) would reduce Medicare Part D costs by $112 billion over the next ten years. This is strong evidence that reliance on private insurance, has raised, rather than lowered, the government’s costs.”

That leaves us without a clear example of a competition-based program substantially cutting costs. As I wrote yesterday, I hope that’s simply because we haven’t yet cracked the code on competition. Cutting costs through competition comes with far fewer downsides than cutting costs through government price controls. But cutting costs through competition has not yet worked. Cutting costs through price controls, conversely, has worked, as even the most cursory analysis of international health-care systems proves:


(Kaiser Family Foundation)

The reality of our health-care debate right now is that both parties keep trying different versions of a cost control strategy that hasn’t worked because they’re uncomfortable with the cost control strategy that has.

 
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