Medicare Saves Money. That’s the Problem.

Paul Krugman notes in today’s Times that Medicare is cheaper than private insurance. He draws upon a nice column by Austin Frakt and Aaron Carroll, which in turn draws on an impressive line of research by McWilliams, Meara, and colleagues to document that delaying Medicare eligibility is bad for health, and may increase costs, too.

I endorse everything Krugman says. There is much evidence that Medicare has controlled costs better than private insurance–not well enough, but better than the alternative. I would note one omission, though. Krugman writes:

O.K., the obvious question: If Medicare is so much better than private insurance, why didn’t the Affordable Care Act simply extend Medicare to cover everyone? The answer, of course, was interest-group politics: realistically, given the insurance industry’s power, Medicare for all wasn’t going to pass, so advocates of universal coverage, myself included, were willing to settle for half a loaf.

In my view, this misses a large part of the story. If insurers were the only obstacle, we would probably have a public option or some sort of Medicare buy-in for people nearing retirement. Both of these ideas are politically appealing to a target demographic both parties care greatly about. Insurers have been hit with many new regulations and requirements. Insurers wanted a strong individual mandate. ACA enacted a relatively weak one, which itself faces political and legal challenges across the country. Insurers would probably like to see other provisions such as a strong Independent Payment Advisory Board (IPAB) to provide political cover for their own efforts to constrain marginal but costly treatments, drugs, and devices. These are a hard sell. The industry has influence, but it is hardly all-powerful. It does not, to say the least, poll very well.

What’s missing from Krugman’s analysis is the quiet supply-side voice of the medical economy: Everyone from pharmaceutical companies and medical equipment suppliers to community hospitals, physician groups, academic medical centers, and more. Each of these stakeholders understands that Medicare’s massive bargaining power is the key leverage point for cost-control efforts. Whatever their public complaints about our fragmented, inefficient network of private and public insurers, many supply-side stakeholders are deathly afraid that the alternative will be a powerful Medicare near-monopsony sitting across the table from them in determining what’s covered and at what price. Such fears provide very strong reason to support the status quo.

The logic of counterveiling power is central to European efforts at cost control. It was a huge, sometimes implicit, aspect of the debate over the public option. Sometimes progressive policy wonks proceeded as if we were the only ones really listening. We weren’t. As we look to control costs, we will need to focus more explicitly on constraining medical prices. Whether we do so by expanding public coverage or we do so through some other option, this will be a fight, maybe one no less bitter than last year’s health reform. The sooner we realize that the issue goes beyond insurers, the sooner we can have a realistic conversation about what really needs to be done.

[Cross-posted at Same Facts]

Harold Pollack

Harold Pollack is the Helen Ross Professor at the School of Social Service Administration at the University of Chicago.