Cost is tricky in health care

An interesting Yglesias post:

Instead the existing Medicare Advantage program tries to apply a risk-adjustment formula to the patients, and Ryan proposes doing the same in his greatly expanded version of Medicare contracting-out. But this doesn't change the fact that the real profit-making opportunity here is to try to identify and exploit inevitable flaws in the risk-adjustment process. The winning strategy is to craft products that are appealing to customers the formula is willing to overpay for and unappealing to customers the formula would underpay for. Now that could be a small problem or a it could be a giant problem, all depending on how good the government is at setting the rates. Which is to say that for bringing private bidders into the process to work well, you need really effective central planning. And to the extent that you have effective central planning, it seems to me that it makes sense to take advantage of the economies of scale that come from a single-payer system.

I think that this understates just how tremendously difficult epidemiological risk modeling really is.   But I do not think it undermines the central point -- once you put the work into risk adjusting the payouts to private companies you have all of the machinery for a single payer approach.  And it is dead obvious why a naive approach won't work.  But even the modern risk models aren't that great accoridng to Peter Orszag:

In 2006, Medicare Advantage plans were overpaid by more than $3,000 per beneficiary because they were able to select beneficiaries who cost less than their risk-adjusted payments. About $1,000 of that overpayment reflects what the plans were paid, rather than what they bid. So relative to their bids, the plans were overpaid by $2,000 per beneficiary -- or roughly 25 percent of the bid, on average.

That is a huge profit making potential (just think of the return on investment for that statistical model).  So you focus the incentives of the private sector on finding weak spots in the model (because that is incredibly profitable) and not on reducing health care costs (because that is hard and painful). 

I am somewhat sympathetic to the "put lot's of resources in medicine and technological improvements will follow" types of arguments.  But it seems to me that this approach is going to focus the innovation in precisely the wrong spot.