Jonathan Chait

David Brooks Needs To Read Burke, Or Kenneth Arrow

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David Brooks channels the argument Paul Ryan has been making -- that the health care debate comes down to limiting cost inflation through either bureaucratic rationing (boo!) or markets (yay!). Brooks says that Ryan's method of privatizing health insurance works:

They also note that the Medicare prescription drug benefit also uses a competition model. Consumers have been adept at negotiating a complex marketplace, and costs are 41 percent below expectations.

This is another one of the things that Ryan says that is totally misleading. Edwin Park explains:

This claim does not withstand scrutiny.  The two primary factors driving the reduction in Medicare Part D spending were:

The sharp decline in growth in spending for prescription drugs throughout the U.S. health care system.   In the late 1990s and early 2000s, prescription drug spending grew rapidly, reflecting the availability of new “blockbuster” drugs, rising prices for existing drugs, and greater utilization by beneficiaries. Drug spending growth began to moderate unexpectedly and then slowed more significantly around the time the Medicare prescription drug benefit took effect in 2006.  But this was not caused by enactment of the drug legislation, as is evidenced by the fact that growth in spending on pharmaceuticals slowed throughout the health care system.  This slowing of expenditure growth was the result of other developments, including some major drugs going off-patent, fewer new blockbuster drugs coming to market, and much greater usage of lower-cost generic drugs. Indeed, overall U.S. prescription drug spending was about 35 percent lower in 2010 than had been projected back in 2003. As the Medicare Trustees noted in their recent annual reports, these system-wide drug cost trends have been key factors in reducing Medicare Part D spending below the levels projected when the Medicare drug benefit was enacted.

Lower-than-expected enrollment in Medicare Part D.  On average, about 93 percent of Medicare Part B beneficiaries were expected to enroll in the Medicare drug benefit (or receive employer-sponsored retiree drug coverage subsidized by Medicare) during its first eight years. CBO now estimates, however, that only about 77 percent of Part B beneficiaries enrolled in Part D or subsidized retiree coverage in 2010. That means roughly 6.5 million fewer beneficiaries were enrolled in Medicare Part D last year than originally projected, causing costs to be substantially lower than CBO originally assumed.

Moreover, there is evidence that, far from reducing costs, the use of private plans to deliver the Medicare drug benefit has increased costs.  Prior to the creation of Medicare Part D, Medicaid provided prescription drug coverage to “dual eligibles” the low-income beneficiaries enrolled in both Medicare and Medicaid.  Then, starting in 2006, Medicaretook over drug coverage for the dual eligibles.  When Congress enacted the Medicare drug benefit, it assumed that the private insurance companies that would participate in Medicare Part D would be able to negotiate larger discounts from drug manufacturers than those required under Medicaid.  In fact, however, research shows that the private insurers offering Part D coverage are getting significantly smaller discounts for drugs than the rebates that manufacturers are required to provide state Medicaid programs. One estimate found that drug prices, net of discounts, under Part D to be at least 20 percent higher than the estimated net prices that Medicaid pays.

Right, again -- Medicare Part D costs 20% more than regular Medicare. Which is not surprising at all. Health insurance is inherently rife with market failure. The largest factor for any insurer is always going to be avoiding sick customers. Introducing private insurers layers just layers on a private bureaucracy engaged in cost-shifting. The experience of Medicare Part D does not vindicate Ryan's theory, it undercuts it.

Brooks argues that neither Obama's bureaucratic approach nor Ryan's free market approach has been tried, and therefore we can't know which one will work, except -- hint, hint -- top-down bureaucracy always fails. And it's true that nothing exactly like either what Obama has proposed nor what Ryan has proposed has ever existed. But, as Jonathan Cohn notes in his excellent response to Brooks, we did have something pretty close to what Ryan envisions before Medicare existed:

As Princeton economist Uwe Reinhardt wrote in his Times some week ago, the Republican plan would likely "shift an ever-larger share of the total health spending on Medicare beneficiaries from the books of government to the household budgets of these beneficiaries."

Perhaps it goes without saying, but this would almost surely put decent health insurance beyond the reach of many seniors. If you want to game this out, the most likely outcome of the Republican proposal is that private insurers would start offering radically scaled back benefit plans in order to cater to the market of moderately low-income seniors. They'd end up with the equivalent of junk insurance, or something close to it, and facing huge medical bills that forced them either to skip care or undergo severe financial hardship. This is basically the situation that existed in the 1950s and 1960s, before Medicare came along.

That was a really free market solution. It didn't work at all! So we created Medicare.

Meanwhile, we do use some form of what Brooks would describe as heavy-handed government bureaucracy in every other advanced country. And every other advanced country spends far less on health care than we do, and they're so happy with their systems that even conservatives support them wholeheartedly.

Again, Obama's plan isn't exactly like any particular foreign country's system. But it does move us in the direction of more government influence, and given that every other advanced country has both more government control and more cost-effective health care, this does seem like a reason to believe it might work.

Indeed, for a Burkean like Brooks, you would think that the international comparison might put some weight on the value of government involvement, wouldn't it? When every other advanced country has government-directed universal health care and it works better than ours, is putting all our chips on a radical market-based plan really the Burkean way to approach the problem?

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