Wednesday, August 24, 2011

Medical Expenses

From Igor Volsky:

The Center On Budget and Policy Priorities’ (CBPP) Paul N. Van de Water is out with a new report warning lawmakers on the Super Committee against considering proposals that would gradually raise the Medicare eligibility age from 65 to 67 . . .

Van de Water argues that raising the age would actually increase overall system costs and only save the federal government money “by shifting costs to most of the 65- and 66-year-olds who would lose Medicare coverage, to employers that provide health coverage for their retirees, to Medicare beneficiaries, to younger people who buy insurance through the new health insurance exchanges, and to states”

I think that this outcome is obvious from the structure of the problem. It seems obvious to me that single payer systems are able to reduce costs by exerting market power. When I look at procedures, they generally have three costs: out of pocket, insurance reimbursement rates, and medicare rates (in descending order of costs). For a lot of procedures, the costs are thousands of dollars apart.

This is why simply switching to a free market (and going to out of pocket prices) is problematic as a transition (as costs, already the highest in the world, will go up). It also explains why other countries (example: France, Britain, Canada) have decided to go with universal single payer systems: it lower costs (and, if you believe the Incidental Economist, it certainly does not lower quality).

Now it may be that there is a benefit to our current health care system and that other countries may be free riding on our innovations. I am open to this argument. But it is also true that we need to make a decision about what are goals are. If we want to reduce costs (in aggregate) then lowering the medicare eligibility age makes sense (why could it not be 60?).

But if we want to both increase and shift (away from government) the total costs of medical care, that is a lot more concerning. From a societal perspective that seems like an awfully bad deal. It seems unlikely that we are going to increase innovation by all that much by growing the private and medicaid markets by a small fraction. But the costs to those effected by the policy are high.

Why is this a good policy?

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