The Corner

Re: Romney on Entitlements

I have a piece up on my Forbes blog where I echo some of Yuval’s comments about the Romney plan. The main thing Romney will need to do is ensure that private insurers under his plan are on a level playing field with his Medicare “public option.” Some explanatory excerpts:

Competitive bidding has some left-of-center fans, most notably Boston University’s Austin Frakt. It was part of the bipartisan proposal for Medicare reform under President Clinton. A form of competitive bidding was even part of Obamacare, or at least the version of Obamacare passed by the Senate. (The House of Representatives, under Nancy Pelosi, objected to the approach, and persuaded Senate Democrats to throw it out in the House-Senate reconciliation bill.) . . .

The difficulty of ensuring a level playing field between government and private insurers

The biggest problem with the “confident market solution” idea is that government and the private sector don’t play on a level playing field. Traditional Medicare is much larger than private insurers, and therefore has much greater power to dictate prices to hospitals and doctors. In addition, many of Medicare’s administrative costs are paid for by other government agencies, allowing a government plan to undercut its potential competitors.

Private plans do have one thing going for them: they are able to set up preferred provider networks, in which they steer their patients to the most cost-efficient hospitals and doctors. Traditional Medicare, on the other hand, is legally required to provide access to any health-care provider who accepts its fee schedule.

What this suggests is that, unless the playing field is adjusted, traditional, government-run Medicare is likely to dominate private insurers in rural areas and other markets where hospital monopolies rule the roost. Private insurers could better hold their own in large cities, and other areas where there is enough competition among the major hospitals.

It will therefore be critical for Romney to articulate exactly how he intends to level the playing field between private insurers and traditional, government-run Medicare. Just as important, he will need to explain how he intends to protect such a program from statist alterations by a future, more left-leaning government.

In addition, we don’t know how much money competitive bidding can save, though it’s likely that it would fare much better in urban vs. rural areas. Politically, while the plan may encounter less resistance than Ryancare among Democrats, it could face fierce opposition from certain health-care interest groups:

How much money would competitive bidding save?

One of the biggest differences between Ryan-style premium support and competitive bidding is how prices are set. The Ryan plan is a true defined-contribution plan, in which the government says “we’re going to spend X dollars, growing at Y percent per year,” leaving insurers to work out the details: presumably by increasing the degree to which seniors share directly in the cost of their care. Competitive bidding is more correctly a defined-benefit plan, in which the benefits are pre-determined, but prices are not. The government pays out whatever the bidding process yields…

Coulam, Feldman, and Dowd estimate that competitive bidding could shave 8 percent off of Medicare spending: a modest amount, given the program’s rapid growth rate. In the late 1990s, the City of Denver implemented a Medicare competitive bidding demonstration project, and found that bids came in at 25 to 38 percent below those of traditional Medicare. Unfortunately, that demonstration project, like nearly all others of its type, was shuttered due to fierce opposition from interest groups opposed to competitive pricing: hospitals, doctors, and other providers of medical supplies and services.

The bottom line, however, is that a competitive bidding bill won’t be credited with any savings by the CBO. Maybe this is a good thing politically, maybe it’s not. And it’s still not clear what exactly Romney is proposing, since he states that his plan is a “defined contribution” one.

The rest here.

Avik Roy — Avik Roy is the President of the Foundation for Research on Equal Opportunity (FREOPP.org), a non-partisan, non-profit think tank.

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