ILLUSIONS OF COST CONTROL IN PUBLIC HEALTH CARE PLANS

July 27, 2009

The rationale for establishing a new "public plan" -- a health insurance program operated by the federal government and modeled on Medicare is based on several erroneous beliefs, says Robert A. Book, a health economist with the Heritage Foundation:

  • Compared to private-sector health plans, Medicare provides comparable access to health care with slower cost growth.
  • Medicare's administrative costs are lower.
  • Medicare uses superior bargaining power to reduce health care costs without harm to patients.

All of these beliefs are demonstrably false, says Book.  Contrary to the claims of public plan advocates, total per-beneficiary health care costs are growing faster for Medicare patients than for private insurance patients:

  • Medicare's per-beneficiary costs appear to grow more slowly than private plan costs only if one ignores the fact that Medicare is paying a rapidly shrinking share of its beneficiaries' total health care costs.
  • Total per-beneficiary patient care costs are growing faster for Medicare than for private insurance. However, spending by the Medicare program is growing more slowly than spending by private insurance because much of the growth in health care costs for Medicare beneficiaries is offset by increased out-of-pocket spending and other sources of private-sector funding.

Medicare's per-beneficiary administrative costs are substantially higher than the administrative costs of private health plans:

  • The illusion of lower Medicare administrative costs comes from expressing administrative costs as a percentage of total costs, including patient care.
  • Medicare's per-person administrative costs are spread over a larger base of health care costs because its beneficiaries are by definition elderly, disabled, or end-stage renal disease patients.

Medicare has no "bargaining power":

  • To the extent that Medicare pays health care providers lower prices than private plans, it is due to the government's regulatory power, not bargaining, and certainly not by reducing the actual costs of providing care.
  • Lobbyists for physicians have persuaded Congress in each of the past seven years to block scheduled reductions in these prices that Medicare pays for physician services--and in six of those years to replace the reduction with an increase.
  • This suggests that Medicare does not, in fact, have enough bargaining power to lower prices further.

Source: Robert A. Book, "Illusions of Cost Control in Public Health Care Plans," Heritage Foundation, July 24, 2009.

 

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