Economix: Would Privatizing Medicare Lead to Better Cost Controls?

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

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.

Indeed, a December 2010 report by the American Health Insurance Plans, or A.H.I.P., the industry’s trade association, itself cast doubt on that score. The table below, taken from that report, illustrates the price trends faced by the insurance industry.

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The association provides the average transaction prices that the nine largest private health insurers paid hospitals in Oregon from 2005 to 2009 for a number of well-defined episodic services; the price data are made available from the Office for Oregon Health Policy and Research.

It can be seen in the table that the average annual compound increases in the average prices for these services are generally north of 10 percent.

The average price paid hospitals for a normal vaginal delivery, for example, rose to about $6,400 in 2009, from $3,800 in 2005, an average compound annual growth rate of 14 percent. The average price of a knee replacement rose to $28,700 from $19,000, or about 10 percent a year.

Unlike Oregon, California does not seem to make available to the public detailed hospital transactions prices with private insurers. The A.H.I.P. instead reports cumulative increases in average net inpatient revenue per inpatient day over the period 2000-9.

Inpatient revenue per day for Medi-Cal, California’s Medicaid program, rose by 18 percent over the decade. The corresponding statistic for Medicare was 76 percent. For private insurers it was 159 percent.

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.

As the A.H.I.P. report notes on this point:

Some hospital systems and their affiliated physician groups have attained dominant market shares in their regions, and they have used their market power to drive up hospital prices for private plans. For example, the dominant hospital system in northern California costs private health insurance plans 44 percent more (inpatient reimbursement per discharge) than the state average for private plans in 2009. However, this “cost-shift” to private payers may not be sustainable.

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.

The available data do not lend credence to the prediction sometimes made in connection with the Ryan plan for Medicare that private insurers will be able to control the overall health spending of elderly Americans any better than traditional Medicare has been able to.

A complete privatization of Medicare will have to be rationalized on other grounds — either with appeal to superior coordination of care or simply on the argument that government must by statute shrink the taxpayers’ obligation for the health-care cost of the elderly by shifting those costs to the elderly themselves.

Article source: http://feeds.nytimes.com/click.phdo?i=4b2185a016b17a052e1b347d0eb2c1a0