Republican Congressman Paul Ryan's plan for controlling Medicare costs is interesting. What it boils down to is this: instead of paying for old people's heath care, the government would buy health insurance for them from private companies. People would choose which plan they wanted, and insurers would be free to craft any sort of plan, as long as they accepted anyone eligible for Medicare on the same terms. The plan saves money by setting an absolute limit on what the government would pay toward these insurance plans, an amount that would rise more slowly over time than the projected rise in health care costs.
There are two ideas behind this plan. First, it assumes that American health care is very inefficient, so somebody ought to be able to figure out how to deliver quality care at a lower price. Second, it assumes that competition in the marketplace, and the free choice of consumers, is the way to realize those savings. These, incidentally, are exactly the same ideas behind Obamacare, so it is a little weird that Republicans should be endorsing them. But there is nothing particularly radical about the ideas; the Ryan plan, which he developed with liberal economist Alice Rivlin, is just Obamacare for old people.
I see two problems: one, Medicare is a lean program with a much lower overhead than any private insurance plan, so introducing private insurance companies into the system will increase administrative costs. More fundamentally, I doubt the system will really control health care costs because nobody knows how to realize the savings that Obamacare and the Ryan Plan both depend on.
One of the weird things about American health care is how much the costs vary from place to place; in some counties, health care costs are 25% or more higher than in other, comparable counties. Look deeper into the numbers, and you find that doctors in some communities are more likely to do many common surgeries than those in other communities, more likely to order tests, and so on. And certain doctors are much more likely to order or perform expensive procedures than others. But people in communities where health care is more expensive are not any healthier; the extra money spent does not lead to better outcomes. If we could get the expensive doctors to act like cheap doctors, and the doctors in expensive communities to act like those in cheap communities, we could immediately achieve a huge savings in medical costs.
But how to do this? We tried to do it with HMOs in the 1990s, and the result was an ugly public outcry against HMOs that excluded expensive doctors or wouldn't pay for certain procedures. Americans think it is their right to see any doctor they want, and they want their own doctors, not insurance companies or the government, to decide what care they get. Obama's original plan included boards that were supposed to figure out what care is best and pressure doctors to follow those guidelines, and but those boards were rendered toothless after the outcry that they are "death panels." The Ryan plan essentially outsources the job of denying care to the insurance companies, but this will only lead to a repeat of the 1990s blow-up over HMOs. Medicare recipients will demand that their insurance cover all the care they want, the insurers will be forced to cave, Congress will vote more money, and Ryan's savings will evaporate. Thus I predict.
There is no way to control health care costs without taking decision-making power away from doctors and patients, and in America that remains politically impossible.