The Republicans' Panty-Raid

In a 1998 episode of South Park, the boys learn that their dresser drawers are being raided by a group of Underpants Gnomes, who have a carefully designed business plan to turn their theft into fabulous wealth. The three-phase plan is laid out on a slide projected in the gnomes' lair: "Phase 1: Collect underpants. Phase 2: ? Phase 3: Profit."

That, in its essence, is how Republicans are proposing to deal with the rising cost of health care and the long-term federal budget deficit. Phase 1: Remove government guarantee of health coverage. Phase 2: ? Phase 3: Savings.

Republicans seem surprised by the negative reaction to Rep. Paul Ryan's budget plan, which would turn Medicare from an insurance program into a voucher program. Under this proposal, seniors would have to seek insurance from a private company and the government would reimburse part of their premiums. Republicans knew the plan would meet some opposition but mistakenly thought they could quell much of the resistance by telling today's Medicare recipients that the change would only apply to future recipients. The more opposition Republicans face, the more loudly they insist that the market's magic must be harnessed for Medicare costs to come down.

Of course, this argument has been directly refuted by reality, over and over again. Relying on the market sounds reasonable, so long as you know nothing about how the health-care system works and why it is unlike any other kind of market. Ryan's contention is that seniors' ability to shop for insurance will pull down the cost of care. Fortunately, we have a direct test of this theory. It's called Medicare Advantage, and that program failed at its fundamental goal.

For a few decades, Medicare recipients have had the option of having their benefits administered by private plans instead of the government. The program has had different names, but when George W. Bush and the Republican-controlled Congress passed the Medicare prescription-drug plan in 2003, they renamed it Medicare Advantage and provided new inducements for the program to expand. And expand it did; today, around one-quarter of Medicare recipients have their benefits administered by private companies. Conservatives said the ability of Medicare recipients to choose from different providers would create competition and spur innovation. This would lower costs since private companies are more efficient than the government.

But the arguments in support of Medicare Advantage turned out to be wrong. According to a Congressional Budget Office analysis, Medicare Advantage plans cost significantly more than traditional Medicare. Why didn't the market's magical power bring down costs?

The answer shouldn't have been a surprise at all. Compared to Medicare, private insurers spend more on expenses other than medical care. This is partly because of economies of scale -- the government plan is so big it brings down per-patient costs -- and partly because private companies spend money on things like marketing and try to accrue profit. While Medicare spends less than 2 percent of its income on administrative costs, private companies can spend as much as 30 percent. That explains why private insurers fought against the requirement in the Affordable Care Act that limits administrative costs to 15 percent or 20 percent of their overall spending (depending on the type of insurer). Insurers claimed that even this, which is 10 times what Medicare spends, was a terribly onerous requirement.

Paul Ryan and his allies are now arguing that if we force every senior onto a plan like Medicare Advantage, costs will come down. How? That would be Phase 2 in the Underpants Gnomes plan, the big question mark.

But the cry we now hear is that we must "do something" about Medicare, and unlike Ryan, Democrats don't have a plan. But Democrats actually passed a law that did quite a few things about Medicare: the Affordable Care Act, which Republicans opposed. Republicans were loudest in their opposition to the parts of the law that sought to bring down the cost of Medicare.

The Affordable Care Act made quite a few changes to Medicare: It cut Medicare Advantage payments to insurers. It cut reimbursements for infections acquired in hospitals, as a way of encouraging hospitals to adopt safety procedures to reduce those infections. It eliminated cost-sharing for some preventative services, to encourage people to take advantage of them and prevent larger expenses down the road. It established the Center for Medicare and Medicaid Innovation to find and encourage new ways of delivering and paying for care. It provided incentives for Accountable Care Organizations to bring down costs by effectively coordinating patients' care. It established an Independent Payment Advisory Board so medical experts, and not members of Congress who know almost nothing about medicine and are constantly lobbied by device manufacturers and drug companies, could make decisions about what Medicare will fund.

All of these measures were aimed at bringing down Medicare costs over the long term. Some will be more successful than others, but it's worth noting that the Republicans now crying that the rising cost of Medicare is a national emergency opposed all of them, then aired demogogic attack ads in which they accused Democrats of trying to cut Medicare.

Perhaps Republicans oppose all those measures because they see them as government meddling in what is, after all, a government health-insurance program. But if Ryan and others were right about private markets being better, then the individual market for non-seniors ought to produce dramatically lower costs than a big-government plan like Medicare. As anyone who has tried to buy insurance on the individual market and been confronted by rejected applications and absurdly high premiums knows, nothing could be further from the truth.

That's the thing about free-market fundamentalism: It's more a religious faith than a theory that yields to empirical evidence. When you try to apply it to a unique and challenging system like health care, you wind up advocating for ideas that have been shown to fail. And Phase 2 of your Underpants Gnomes health-insurance plan remains a big fat question mark.

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