Politics & Policy

Save Money, Live Longer

Rep. Paul Ryan has a model for fighting inflation in health-care costs.

One can learn much about the state of liberal thinking on health care by considering the following statement: “The theory of the Medicare system, of the European systems, is that the best way to do this is to have the government fund research to discover the effectiveness of treatments and then use its purchasing power the same way Wal-Mart would — to drive prices down.”

The statement was uttered by the Washington Post’s Ezra Klein in the context of a discussion with Rep. Paul Ryan (R., Wis.) on the problem of health-care-cost inflation. The average cost of a health-insurance policy for a family of four doubled between 2000 and 2007, and it is projected to double again over the next seven years. Klein and Ryan were debating what should be done about this. Ryan said he favors policies that would put health-care spending decisions in the hands of patients, forcing providers to compete on quality and price. That’s when Klein made his illuminating comparison of a government monopsony to Wal-Mart.

The theory makes sense intuitively: Due to its size and dominance over the retail sector, Wal-Mart has the power to dictate to its suppliers the prices it is willing to pay. If the government had even greater power over the health-care sector, then it could keep the cost of health care down by dictating prices. Here is the problem: The government is not Wal-Mart. More precisely, the government and Wal-Mart are dissimilar in ways that prevent the former from ever functioning like the latter. And this is why Klein and Ryan spent much of their conversation talking past one another.

Wal-Mart’s customers vote with dollars. Wal-Mart delivers fair quality and low prices, and its customers reward it with their business. The relationship between the government and its “customers” is not nearly so straightforward. For example, poor Wal-Mart shoppers cannot vote that rich Wal-Mart shoppers be required to pay a larger share of the total Wal-Mart consumption tab. Wal-Mart’s suppliers do not have powerful lobby groups the way that doctors and hospitals do. Its customers do not elect its board. Most important: If Wal-Mart’s customers grow dissatisfied, they can shop somewhere else.

Here it is worth excerpting the exchange that followed Klein’s Wal-Mart comparison, with my notes interspersed:

RYAN: But Medicare is growing at an unsustainable rate. And yet it underpays doctors.

KLEIN: But private insurance is growing that quickly as well.

This is something of a red herring. Whether the government or the private sector is providing the insurance, what is driving health-care costs skyward is the third-party payer problem. There is not much disagreement on this question, only differences of opinion about the solution.

KLEIN: And this question of underpayment is doctors and hospitals making less than they expect to make. What you’re talking about, bringing Medicare spending down very sharply, is even more vulnerable to that critique. You do it on the patient side, not the provider side, but they will feel they’re getting vouchers that aren’t generous enough to keep up with health-care costs.

Ryan backs a plan that would replace traditional fee-for-service Medicare with a voucher program. Over time, total spending on the vouchers would be much less than the government is projected to spend on Medicare under current law. This leaves liberals such as Klein aghast, and he protested, “You do [rationing] on the patient side.” There is broad agreement that the current level of Medicare spending is unsustainable, but Klein’s solution is to increase the government’s power to force doctors and hospitals to accept lower reimbursement rates — rationing from “the provider side.”

But as Ryan pointed out in the interview, this has been tried. Congress has proved incapable of doing it (See: The government is not Wal-Mart, above). Liberals’ hope for a solution to this political problem — a Hail Mary of sorts — is riding on the establishment of an Independent Medicare Advisory Board, whose recommendations for cutting Medicare costs would have the force of law unless blocked by supermajorities in Congress. This is the health-care rationing board that Sarah Palin famously called a “death panel,” referring to the prospect that its decisions on what treatments Medicare should and shouldn’t cover would have life-or-death ramifications.

RYAN: So what I’m saying is that rather than having government ration care to manage decline, let’s take those market signals that work in every sector of the economy to reduce cost and improve competition. I got Lasik in 2000. That’s a cash surgery. It cost me $2,000 an eye. Since then, it’s been revolutionized three times and now costs $800 an eye. This sector isn’t immune from free-market principles.

That’s because Lasik does work like Wal-Mart. Doctors who perform the surgery have to compete with other Lasik providers for customers on the basis of quality and price. Competition has brought the price of the surgery down even as the technology has improved.

I spoke to Ryan after the Klein interview. “What I’m trying to do is make our health-care dollars stretch further and change the system to a patient-centered system,” he told me.

“What’s really important about my plan, as I was trying to explain to Klein, is that you’ve got to look at all the other reforms in this bill as it relates to health care,” he said. “Fixing the tax exclusion on employer-provided care, providing for the purchase of health insurance across state lines, setting up state-based exchanges, plus real transparency on price and quality and best practices, tort reform — all those things are designed to make the provision of health care a competitive marketplace.”

The disagreement between people like Klein and people like Ryan (liberals and conservatives, broadly speaking) boils down to this: One doesn’t trust markets, and the other doesn’t trust government, to get health care right. Liberals “have no faith that the health-care sector can work like the rest of the free-market economy,” Ryan said. They think health care is just too complex for consumers to make informed decisions about. “They believe in order to control costs, you need to make health care more of a government monopoly, and just have really smart people manage and ration care,” he told me. “I couldn’t disagree more.”

Other liberals might concede that making the market for health-care more competitive would bring down costs. But they object that it would leave health-care consumers vulnerable to their own bad decisions. Even if given a voucher to pay for medical care, someone might scrimp on a treatment or skip a test they actually need. Is this not rationing by another name? When I raised this objection, Ryan responded: “If we are going to get serious about controlling costs, then either the individual is going to be in control of their health-care decisions or government is going to be in control. The question going forward is whether we put people in charge of lives or the government in charge.” At the same time, Ryan said his plan includes “real safety nets — we fully fund out-of-pocket costs for the poor and the sick,” while means-testing the rest so that the government is not subsidizing care for those who can afford it.

Ryan’s plan would solve the problem of exploding health-care costs and put the U.S. government back on the road to fiscal solvency by making the market for health-care services more like other markets: transparent, efficient, and accountable to the consumer. In other words, it would make the health-care business, not the government, more like Wal-Mart.

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