Recently, economist Paul Krugman derided the premium support plan to reform Medicare:
Still, wouldn’t private insurers reduce costs through the magic of the marketplace? No. All, and I mean all, the evidence says that public systems like Medicare and Medicaid, which have less bureaucracy than private insurers (if you can’t believe this, you’ve never had to deal with an insurance company) and greater bargaining power, are better than the private sector at controlling costs.
Of course, Medicare has been shown to be “efficient” enough to lose more money to fraud than private insurance. Peter Suderman of Reason magazine recently pointed out a number of studies suggesting that the private sector can effectively control costs in health care. One notable study recognizes that private plans do have the potential to control costs better than the government, as illustrated by Medicare Advantage’s success in constraining costs compared to traditional Medicare.
Suderman only scratches the surface. Consumer-driven health plans (CDHPs) allow for the use of tax-free health savings accounts (HSAs) to allow people to control health care dollars directly, while still having protection against catastrophic illnesses. HSAs can be effective at reducing costs, as illustrated by Governor Mitch Daniels’s (R) recent consumer-driven reforms in Indiana as well as a recent academic study published in Health Services Research.
A 2007 study published in the Journal of the American Medical Association found that HSA users visit emergency rooms less frequently than users of more traditional plans. This reduction in use is attributable to the fact that HSAs offer patients greater financial incentives to take care of their health, as well as their health care costs.
Nonetheless, critics fear that consumer-driven plans will attract healthy, low-risk enrollees, and traditional plans will subsequently incur a greater concentration of more chronically ill patients. As a result, many fear that the chronically ill may subsequently incur higher costs. Proper risk adjustment mechanisms, however, mitigate this effect.
Others argue that health insurance can’t operate like a traditional market. However, it has long been understood that patients do make health care decisions in a manner similar to other purchasing decisions. For example, a 1994 study found that consumers considered a number of factors—including hospitalization coverage, choice of doctors, policy premiums, and dental coverage—in purchasing insurance.
So, if health care can operate like a traditional market, why hasn’t the market reduced costs all around? The answer is that law and regulation have traditionally undercut the ability of health insurance to operate like a traditional market in controlling costs.
Consumers are typically restricted in purchasing insurance by a restrictive tax policy, as well as by federal law governing insurance markets, including restrictions on people purchasing coverage in a national market like they buy other goods and services. And within states, consumers must cope with costly and often unnecessary regulations and mandates on their insurance coverage. A study published last year suggests that allowing people to purchase insurance across state lines could reduce the number of uninsured by as many as 12.5 million.
So, there is indeed a growing body of academic evidence that competition can help reduce health care costs. Those seriously engaged in public policy should not ignore this literature. Anyone interested in an honest discussion of the issue can start by reading Martin Gaynor and Robert Town’s comprehensive review.