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Economists Say Market-Based Approach Will Curb Costs Best

A market-based effort to control health care spending would provide Medicare beneficiaries with fixed subsidies, rather than the current system’s open-ended ones, a trio of conservative health economists said Wednesday.

The economists said in an online paper for the New England Journal of Medicine that while the 2010 federal health law aims to slow health spending through programs such as value-based purchasing and bundled payments, it fails to alter fundamentally the health care financing system. The paper was authored by Joseph R. Antos of the conservative-leaning American Enterprise Institute, Mark V. Pauly of the University of Pennsylvania, and Gail R. Wilensky of Project HOPE, a former head of the Medicare and Medicaid programs.

Their perspective appeared alongside a paper by 23 economists and health policy experts brought together by the liberal-leaning Center For American Progress who came up with a different prescription for curbing health care costs. The CAP group called for state spending targets; competitive bidding for medical devices, laboratory tests and other Medicare services; and changing the  traditional way doctors and hospitals are paid for every service.

Journal editors said they presented the differing approaches to stimulate conversation about how best to deal with health care costs.

The conservative thinkers said that changing Medicare from a defined benefit to a defined contribution approach would give seniors an incentive to choose lower-cost plans, and give plans an incentive to provide more cost-effective services.  Their proposal is similar to that espoused by Rep. Paul Ryan, R-Wis., and incorporated into the budget plan of the Republican-controlled House.

The economists did say, though, that setting statutory limits on subsidy growth—such as the gross domestic product plus 0.5 percent limit in the Ryan plan—can sometimes be problematic because they can threaten access to care and “medical progress.”  Those problems are common to all formula-driven spending controls, including the health law’s Independent Payment Advisory Board, they added.

“If competition can keep Medicare spending within the bounds set by the targets, then the targets are unnecessary,” they said.  “If not, price controls will do no better.”

The economists also recommended narrowing the unlimited tax subsidy for employer-sponsored insurance—under which most employees do not pay taxes on such coverage—which they said would have a similar effect.

“Reliance on competitive markets rather than on regulatory controls provides strong incentives for more efficient delivery of the health services that consumers truly value,” they said.

In their paper arguing for a market-based approach, the economists said that seniors in Medicare would receive a subsidy to purchase insurance from a variety of plans that include traditional Medicare and all of which provide a core set of benefits. The subsidy would be based on the low bids and would vary based on financial and health needs. Beneficiaries who wanted to buy a more expensive plan would pay the difference on their own.

KHN (Kaiser Health News) is a national newsroom that produces in-depth journalism about health issues. Together with Policy Analysis and Polling, KHN is one of the three major operating programs at KFF (Kaiser Family Foundation). KFF is an endowed nonprofit organization providing information on health issues to the nation.

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