Obama Doubles Down on Price Controls

President Obama has outlined a set of proposals for reducing the cost of Medicare. The White House assumes that empowering an independent panel to simply pay less for services will reduce the overall cost of care. On the surface this may seem a reasonable approach, but in reality this won’t address the problem.

In fact, it’s the same rationale that’s behind the sustainable growth rate: the program that’s the reason the “Doc Fix” has to be enacted every year or so. That program failed because while the payment per service was supposed to be reduced, the number of services continued to rise and hence overall cost continued to rise.

Let’s not forget that the political maneuvering around this issue is brutal and has left Congress completely unable to work a solution.  After all, physicians were scheduled to have a 29% reduction in overall Medicare payments but the recission was cancelled by Congress.  It’s always been rejected. The idea that this time around an independent payment commission will be immune from all political pressures and can hold the line on payments is wishful thinking at its most wildly optimistic.

The Ryan plan actually calls upon the basic idea of the Clinton health care plan of the 1990s. It employs the managed care model in which an insurance company is the intermediary between payers (in this case the federal government) and physicians and hospitals or other providers of care. This is the only model that has been shown to reduce health care expenditures (see health care spending in the mid-90s).

Admittedly, it’s not very popular but it is effective and it leads to improved care. Also, when well executed, it can be very popular with patients: Kaiser Health Plan has a superb patient satisfaction rating.

The Ryan approach has a chance of success since it makes patients extremely price sensitive, puts in local regulation of health care, and gives the insurance intermediary the incentive to keep costs low and thereby maximize their profits.

Give seniors the opportunity to define their health care plans, to have a financial stake in their care, and provide insurance companies the opportunity for both oversight of care and also the possibility of real competition for subscribers. This plan has a chance to work.

Why would the President’s plan for price controls work this time when they’ve never worked before?

Moreover, the Medicare shortfall will be about $37 trillion by 2050. How will a $430 billion reduction by 2023 and a $1 trillion reduction in the next decade cover a $37 trillion deficit?

Paul Ryan’s approach calls for a defined contribution for Medicare rather than a defined benefit. Of course this will cost individuals more than the defined benefit approach. But what’s the point of a defined benefit promised by a bankrupt nation that can’t afford the benefit?

The nation has now heard from both Republicans and Democrats that Medicare is a successful program.  This couldn’t be more wrong.   A successful program is a sustainable program. Employing price controls to control spending will be as successful as Prohibition.

Tweet