Economix: Does the Ryan Plan Curb Health Spending?

Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

My post last week, on the budget plan offered by Representative Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, ended with the observation that the plan did not propose measures to control overall health spending in the United States, “nor does that appear to have been Mr. Ryan’s objective.”

To which one reader responded:

I do completely reject that there are no cost controls in the Ryan budget. If there is no federal, state, insurance or private money to pay for extremely expensive care such as in Post No. 7 above, such care will simply not be delivered or paid for.

Let me, for all to see, acknowledge this well-taken point. If less money were available to be spent on health care, then overall health spending would be lower.

But let me also reproduce a comment from that Post No. 7:

If cutting Medicare is so important, why not start now, rather than with today’s 55-year-olds? Start by not paying for life-support treatments for critically ill very old people, as Medicare did for my 92-year-old father’s PEG feeding tube three years ago. He got one, recovered enough to spend three more years in nursing homes and died last month after running up another $300K or so in medical bills paid by Medicare and his health insurance as a retired teacher.

Clearly, these comments land us smack in the middle of the treacherous terrain of cost-effectiveness analysis, end-of-life care and rationing of health care — all issues over which President Obama and his allies in Congress got into hot water during the health care debate of the last two years.

Among the harshest critics were Betsy McCaughey, the former lieutenant governor of New York, and Sarah Palin. Longtime readers of this blog may recall that I have explored all of these topics in a number of earlier posts, for example in a piece on rationing; a post on cost-effectiveness analysis and one on pricing human life.

The two readers I cite above advocate rationing of health care through the marketplace, by price and the patient’s own ability to pay, rather than by government. Furthermore, at least one of them argues, with apparent approval, that the Ryan plan will force that result.

The general idea is that, using whatever financial resources are available to them, patients or their loved ones will, of necessity, engage in a benefit-cost analysis and decide whether the anticipated benefits of end-of-life care exceed its expected cost to the household in terms of what that household has to forgo to buy the extra care. This is how markets work.

Economic theory suggests that, other things being equal, rich and less rich households will come to different conclusions on this question. If less money is available over all to spend on elderly Americans, it is the lower middle class that is likely to do most of the self-rationing.

Note that the Ryan plan proposes a means test to determine the federal contribution to Medicare — the very poor elderly will receive larger federal subsidies, although the size of these subsidies remain unspecified. But the middle and lower-middle class is likely to be on its own.

Another way of putting this issue is that patients and their loved ones will calculate the cost of end-of-life year per unit of medical outcome, measured by “quality-adjusted life years” (known as QALYs). That cost is, in effect, a price at which the household can purchase added QALYs from the health care sector.

Once that price is known, patients or those responsible for them can decide whether to buy the added QALYs yielded by end-of-life care at the available price. This forces patients or loved ones to compare the price with the monetary equivalent value of the benefits they anticipate from those QALYs.

This is the private version of what is known as cost-utility analysis, the analytic approach that is anathema in the halls of Congress (see the section starting on Page 519).

For reasons that escape me, many Americans do not regard rationing scarce resources through the marketplace, by price and ability to pay, as rationing at all, reserving that term for government withholding of marginally beneficial procedures, based on formal cost-effectiveness analysis.

I do beg to differ. In their well-known textbook “Microeconomics,” Michael L. Katz of Harvard and Harvey S. Rosen of Princeton, put it thus:

Prices ration scarce resources. If bread were free, a huge quantity of it would be demanded. Because the resources used to produce bread are scarce, the actual amount of bread has to be rationed among its potential users. Not everyone can have all the bread that they could possibly want. The bread must be rationed somehow; the price system accomplishes this in the following way: Everyone who is willing to pay the equilibrium price gets the good, and everyone who does not, does not.

That states the matter succinctly, although the authors could have been more precise by writing “willing and able to pay” rather than just “willing to pay.”

I have also applied the economist’s reasoning to an analysis of styles of rationing in Canada and in the United States and would be happy to hear what readers make of that.

Others commenting on last week’s post have suggested that privatizing Medicare along the Ryan plan will not lead to rationing, because the private health insurance system can deliver the same quality care more efficiently and more cheaply. They cite the prescription drug plan under Medicare Part D as support for their position. I will take up that proposition in the future.

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