Romney's Medicare Reform

Mitt Romney is, among other things, an expert in health care reform; Obama pretty much stole the plan Romney enacted as governor of Massachusetts. So it is worth paying attention to the plan, which he just announced, to reform Medicare. David Brooks summarizes:

Medicare’s central problem is that it institutionalizes the fee-for-service payment system, which rewards providers for the quantity of services provided, regardless of quality, outcome or cost. . . . True Medicare reform replaces the fee-for-service system with premium support. Government gives people money, rising slowly over time, to shop around for their own private insurance plans. The system would reward efficiency and quality, not just quantity. Competition between providers would unleash a wave of innovation. . . .

Many reporters claimed that the Romney approach is similar to the Paul Ryan plan. It’s actually closer to the plan that Pete Domenici, a former Republican senator, and Alice Rivlin, a former Clinton budget chief, devised. Romney would create a premium support system, but he would also give seniors the option of a government-run insurance plan that works a lot like the current fee-for-service Medicare.

This is politically smart because Democrats cannot legitimately charge that Romney is “ending Medicare.” But it is also substantively smart because, while people like me believe that intense competition among private insurers will lead to more innovation and cost reduction, we can’t really be sure. The Romney approach sets up a prudent experiment. If real competition works, seniors will migrate toward that. If it doesn’t, seniors will stay in Medicare and conservatives will have a lot of rethinking to do.

To which I say, David, get ready to rethink. No private insurance plan is more efficient than Medicare. No private insurance plan anywhere in the world is close to as efficient as Britain's entirely socialist system. Competition in health care does not lower costs, period. If Republicans want to try the experiment, great. Let them. It will fail, and then we won't have to listen to them any more.

But as even his admirer Brooks notes, Romney's plan is missing the key number: how fast his premium supports will rise over time. Romney's (and Paul Ryan's) plans only help reduce government spending through magical thinking: once we privatize everything, costs will fall! They will not. The only way to control costs in this system will be to make the premiums rise more slowly than health care costs, which means that the plans will pay for less and less and retirees will be stuck paying for more and more. Given the political clout of seniors, that won't happen. Instead, Congress will require the insurance companies to pay for whatever people want, and premiums will have to rise, and we will be stuck with costs even higher than we have currently, because of the added layer of insurance company bureaucracy.

There is nothing magical about markets. They work when people have the time and know-how to comparison shop. Most health care spending goes toward the very sick, and people who have just had heart attacks are very bad comparison shoppers.