Medicare Advantage and Medicare Vouchers

8/23/2012 01:28:00 PM
Here is a point of confusion about proposals to reform Medicare: there are two layers of costs that we tend to lump together as one. The first layer is what we pay to healthcare providers, like hospitals. The second layer is what we pay for the health insurance, which is what we are generally talking about when we talk about the cost of "healthcare."

A while back, congress created Medicare Advantage, which is a program that was designed to get seniors to buy private insurance plans on top of their government-provided Medicare, as a way to try to lower costs. The idea was that private insurance companies would compete for their business, and bid down prices in the process. Here's what happened: the costs charged by health care providers declined, the cost to seniors rose, and seniors' access to healthcare providers declined.
Figure 1. The economic effects of Medicare Advantage
In otherwords, Medicare Advantage acted exactly like a tax on healthcare for seniors. Intuitively, this what went down: private insurance companies have much more overhead costs than does government Medicare--about 20% compared to just 2%. That overhead acts like a tax on healthcare, driving a wedge between the supply curve--which relates the amount hosptials charge for a given supply of healthcare services--and the demand curve, which relates the amount seniors are willing to pay for a given amount of healthcare services.

Normally, the higher overhead costs couldn't prevail in a competitive equilibrium. However, congress strong-armed seniors into opting for Medicare Advantage by imposing stiff penalties on those who opted not to, with the result that these private plans faced little competition from the government.

In order to cover the much larger overhead, two things happen. One is that the insurance companies charge more to seniors, which reduces the amount of care that they can afford, and the other is that the insurance companies pay less to healthcare providers, which reduces the amount of care that they're able to provide. The result is that doctors and hospitals are poorer, seniors are poorer and less healthy, and a group of insurance executives are pocketing 20% of all insurance bills.

Now, it would be bad enough that we are taking money away from doctors and seniors and giving it to insurance companies, but this really isn't where the biggest problem is. The big problem is that in the process of this immoral and pointless transfer of wealth caused by congress, access to healthcare is falling.