Medicare Is Not the Model for Health Care Reform

The "public option" health care plan will not be financially sustainable

President George W. Bush concocted the connection between al-Qaida and Saddam Hussein to justify the Iraq invasion. Now President Barack Obama is concocting an equally fantastical theory to justify a de facto government takeover of health care.

He is claiming that the way to slash health care costs and achieve universal coverage is by creating a Medicare-style government insurance plan that is open to everyone. In the world that Obama and other universal health care advocates inhabit, Medicare allegedly has done a far superior job than private plans of keeping a lid on rising medical costs. Forcing these plans to compete with a plan modeled after it will--in Obama's words--"keep them honest and keep prices down."

But before demanding honesty from others, Obama will have to show some himself, especially concerning the performance of Medicare.

That Medicare is in serious, serious trouble no one can dispute. Its projected unfunded liabilities over 75 years, from 2007 to 2082, are about $36 trillion, according to the latest Medicare Trustees report. If current trends persist, by the end of that time Medicare will be devouring 19% of gross domestic product--or $3 trillion, an amount equal to the entire U.S. budget right now. It will take a heartburn-inducing 135% increase in payroll taxes to bring it into actuarial balance.

Despite Medicare's dismal record, Obama and his comrades hold Medicare up as an example for the private sector. Why? Because between 1997 and 2006, Medicare's health spending per enrollee grew 4.6% annually while that of private plans grew 7.3%. By tapping this 2.7% difference, they argue that they can perform the triple miracle of reining in escalating health care costs, and at the same time extending health insurance to the 46 million uninsured without imposing any extra cost on the economy.

But this is 21st century snake oil.

Medicare hasn't controlled costs by discovering some wonder drug to deliver new efficiencies that the private sector doesn't have. In fact, the Government Accountability Office lists Medicare as a "high-risk" program, thanks to its long-term financial problems and its vulnerability to fraud. Rather, Medicare has cut costs by deploying the economic equivalent of leech-therapy: slashing payments to providers. The only reason providers haven't been bled out of existence is because they have offset these cuts by raising prices charged to private insurance plans. In effect, then, the good performance of Medicare that Obama and Co. tout has been purchased by beggaring the private plans that they deride.

There is a rich literature testifying to this phenomenon. A study last December by Milliman Inc., an independent consulting firm, commissioned by America's Health Insurance Plans, found that underpayment by Medicare and Medicaid accounted for nearly an 11% increase in the health care costs of private plans. This means that on average a privately insured family is forced to pick up about $1,800 extra every year of the government's slack. Private plans, all in all, are subsidizing government programs to the tune of $90 billion annually.

Milliman's findings are far from ground-breaking. They merely confirm previous research, including a 2006 study by Jack Zwanziger and Anil Bamezai in Health Affairs, which found a clear correlation over the years between decreasing government payments and rising insurance premiums in California. They calculated that a 1% relative decrease in the average Medicare price is associated with a 0.17% increase in the corresponding price paid by privately insured patients.

"Policymakers, in considering the implications of decreasing Medicare and Medicaid payment rates to health care providers, must include the likelihood that some of this reduction will result in higher payment rates by private payers," they concluded. "In turn, higher hospital payments will tend to increase health insurance premiums and reduce private insurance coverage."

In making his case for universal coverage, Obama disregards this reality and emphasizes a different cause for the rise of premiums, namely that private plans are being forced to absorb the cost of uncompensated care for the uninsured, who land in the emergency rooms because they can't get timely treatment. Cover the uninsured through universal health care, he says, and things will be dandy again.

But the fact of the matter is that uncompensated care costs only $40 billion--or about 2% of the $2.26 trillion that the U.S. spends on health care. This is less than what department stores lose to shoplifting every year. "Underpayment by the public programs dwarfs any problem created by the uninsured," says Greg Scandlen, director of the Heartland Institute's Consumers for Health Care Choices program. Indeed, the problem for private plans is not so much that they are being forced to subsidize the uninsured as the publicly insured.

Obama told the American Medical Association in a major health care speech Monday that doctors shouldn't regard a public insurance option as their enemy, but as their friend. He is lying. He has already proposed slashing $200 billion in reimbursements to hospitals to pay for universal coverage. And, if past is prelude, this trend will only accelerate if a government-run insurance plan becomes available.

But ultimately this public option will not be sustainable because it will set in motion a downward spiral in which the more it grows, the more it will raise the costs of private plans. This will drive patients out of these plans and into the public plan, which, in turn, will grow more and eventually drive the private plans out of business.

How will the public plan sustain itself once it has killed the very host it is feeding off? Essentially, by embracing a taxpayer funded, government-run, single-payer system. Obama pooh-poohs those who suggest that the public plan is a Trojan horse for socialized medicine. But then Bush too pooh-poohed those who suggested that Iraq would become a quagmire.

Shikha Dalmia is a senior analyst at Reason Foundation and writes a biweekly column for Forbes, where this piece first appeared. Ben Tonkin provided research assistance for this column.

Shikha Dalmia is Senior Analyst





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