Why isn’t Medicare cheaper?

at 02:42 PM ET, 06/13/2011

The basic attitude that most pundits/politicians have towards Medicare is “of course it’s wildly expensive. It’s a government-run health-care program!” That actually gets matters backwards, though. For one thing, it’s quite a bit less expensive than private insurance, as Paul Krugman argues in his column today, and as you can see in the chart above. What’s odd about Medicare, however, is that it’s also a lot more expensive than other forms of government-run insurance. It’s more expensive than the Veterans Administration or Medicaid, and much more expensive than Canada’s health-care system (also called “Medicare,” incidentally), or than Britain’s or Germany’s or France’s. Your intuition may tell you that Medicare’s costs are completely predictable, but on this, your intuition is wrong: There’s overwhelming evidence that government-run health care is typically cheap, and Medicare is an outlier in being so expensive. So what gives?

I’ve never seen a really convincing study looking into this question. The best data we have compare various countries to one another, and the basic story that emerges is that America pays much more per unit of health care (here are some graphs). The reason, it seems, is that in other systems, you either pay the price the government is willing to accept or you’re locked out of most of the market. So why doesn’t Medicare do that? It does, at least a little bit. That’s why it ultimately costs less than private health-care insurance. But it can’t do as much bargaining as other countries do. That’s probably because Medicare only accounts for about a sixth of the system, and if they drive prices too low, doctors and device makers and hospitals can simply refuse to do business with them and only deal with private insurers until Medicare gives in.

But perhaps not. Maybe our government is, for various reasons, simply much less willing to squeeze providers and drug and device manufacturers. Note that when Republicans passed the 2003 Medicare Prescription Drug Benefit, they prohibited Medicare from negotiating any discounts on drug prices whatsoever, and though Democrats furiously opposed that rule, they couldn’t muster the votes to overturn it during health-care reform.

Nevertheless, this means that the closest thing to a surefire way to cut costs into Medicare is to make it bigger, which in turn gives it more clout. Letting adults between 55 and 65 buy into the program would’ve helped with that, though probably not so much that it would’ve made a difference. A public option that partnered with Medicare for bargaining purposes and was open to everyone would’ve been more of a gamechanger.

There are various reasons to oppose making Medicare bigger, of course, but they’re mostly about innovation and decision-making, not cost control. If you’re trying to cut costs, there’s no evidence that privatization works — the second-most private system, Switzerland, is also the second-most expensive — and lots of evidence that more government works.

Because America’s baseline ideology is skeptical of the government and optimistic about markets, that’s hard for people to swallow and the folks who argue for single-payer and its variants are often written off as ideologues and radicals. But when it comes to health care, it’s the pro-privatization position that’s really a radical, ideologically motivated leap into the unknown.

 
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