I am a bit confused by Professor Reinhardt’s post on Rivlin-Ryan. He offers an adequate summary of the basic idea, rightly noting that a bipartisan commission recommended something very similar in 1995, but then he makes a peculiar turn:
In this connection, for example, I find troubling a recent report on growth in prices for hospital care published by the American Health Insurance Plans, the national association of private health insurers in this country. This short report is well worth a read.
The chart below shows the average payments made by the nine largest private health plans to Oregon hospitals for a set of fairly standard medical procedures. The average payment for a vaginal delivery, for example, rose to $6,424 in 2009 from $3,805 in 2005, and the payment for a knee joint replacement to $28,682 from $19,866. Data for California hospitals shown in the report are just as alarming.
Evidently, private insurers have not been able to prevent these significant price increases. The question is whether they would be able to keep premiums quoted Medicare enrollees under the Rivlin-Ryan plan to anything as low a growth rate as G.D.P. plus one percentage point.
If not, the ever-growing gap between the annual growth of the Medicare voucher and the premiums quoted Medicare enrollees after 2021 would become a major burden on the elderly and, under our democratic system, would lead to vehement political opposition to the Rivlin-Ryan plan.
Let me help Reinhardt: the whole idea of Rivlin-Ryan is that it will change the way Medicare works in a way that will make it easier for private providers to restrain costs. Here’s how Jim Capretta explained the phenomenon in National Affairs:
Employers have been trying for years to move away from Medicare-style FFS in favor of steering patients to higher-quality, lower-cost networks of service suppliers. The private sector is also well ahead of the federal government when it comes to disease management and wellness efforts. But employers can only do so much when Medicare, the dominant payer in most health-care markets, pushes in exactly the opposite direction. Because Medicare will finance unlimited use, many individual practitioners and institutions see no reason to give up their autonomy and join an organized delivery model. All manner of ancillary service providers — labs, home health agencies, hospices, and others — also survive as stand-alone operations because of Medicare’s open network and provider-centric payment systems.
And in December I highlighted Ezra Klein’s astute take on the same problem:
Just as private insurance handicaps Medicare’s potential advantages, so too does Medicare handicap private insurance. Medicare is such a giant payer that it’s easier for everyone involved to just do things pretty much as Medicare does them. Medicaid and private insurers frequently base their payment rates on Medicare’s, and the same goes for things such as the way they deal with medical errors and pay doctors. Dealing with dozens of different payers is hard enough for hospitals as it is. They’re really not interested in dealing with dozens of payers who do things in dozens of different ways. [Emphasis added.]
The advantage of a single-payer system is that the payer has total bargaining power and can pretty much dictate prices. The disadvantage is that it’s not particularly innovative or agile. The advantage of a multi-payer system is that competition generates experimentation and innovation. The downside is that the payers don’t have much power to bargain with the providers.
Uwe Reinhardt is presumably well aware of the role of Medicare in stymieing payment reform and business model innovation in the health sector, which is why I found myself confused. Note that the Rivlin-Ryan plan aims to replace the existing Medicare FFS system.