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How Choice and Competition Are Slowing the Rise in US Health Care Costs

How to explain the slowdown in US health care spending? The more you look, the more it seems choice and competition are playing a big role. As I noted last week, the increase in high-deductible, employer-provided health insurance — frequently paired with a health savings accounts — are one likely cause.

Another candidate can be found in the CBO’s recently updated budget forecast. The budget scorekeeper dropped its 10-year cost for Medicare by $137 billion. Here’s why, according to the CBO: “The largest downward revision in the current baseline is for spending for Medicare’s Part D (prescription drugs).” Indeed, 75% of that decline, notes economist and AEI visiting scholar James Capretta, was due to the drop in expected Medicare drug benefit spending. Moreover, actual 2012 spending was 40% below what was projected in 2007. And over the last two years, “CBO has dropped the expected cost of the drug benefit over the eight-year period from 2013 to 2020 by nearly $250 billion, or 33%.”

What’s going on with Medicare Part D? Capretta:

And this is occurring in a program run entirely through private insurance plans competing with each other for enrollment among Medicare beneficiaries. Naysayers continue to argue that this cost experience has nothing to do with consumer pressure—it’s all supposedly due to the transition from branded drugs to generics. But what’s driving seniors out of branded drugs? It’s the design of the drug benefit being offered by the private plans. Those plans are offering seniors low-premium products with strong incentives for generic substitution, and—surprise, surprise—seniors are readily taking them up on the offer. It turns out that Medicare beneficiaries are just as eager to save on their monthly insurance premiums as everyone else in America. It’s just that this is the first time in the history of Medicare that they have been given the opportunity to cut their expenses by signing up with lower-cost options.

More evidence that injecting market forces throughout Medicare, as would be done with premium support reform, stands a good chance at reducing costs without hurting the quality of care.

  1. Chris Campion

    This can’t be right.  The gov’t should intervene and stop letting seniors make choices based on their own self-interest.

    Then this problem will be fixed.

    Now get back to work.  Taxes are due April 15th.

  2. JimGoneWild

    The free market works. Who knew!? 

    Jim, what did Medicare recipients do before Part D? Thanks.

  3. Scott R

    More evidence that the much-reviled Bush was smart to push for market-oriented prescription drug coverage for Medicare. If he hadn’t, by now we’d have a Dem drug plan that would be spiraling out of control like the rest of Medicare. And people forget that W’s legislation expanded HSA’s, too.

    Bush played the long game on that one. Good for him.

  4. Mike H

    This is why Medicare Part D is so hated by liberals. Not only was it started by a Republican, it uses market mechanisms to control costs instead of government price controls, and it actually works. It is popular with seniors and seriously controling prices, which makes Democrats very scared. This is why Obamacare eliminates Part D and high-deductible plans for those over 30. They fly in the face of everything the Left believes in: sacrifice, conformity, and the preeminence of government and a planned society.  

    Part D is the blueprint for the GOP’s version of healthcare reform. We don’t need to be the party of the old status quo. We must be the party of new, ingenious, effective policies. Now we need to make it happen.

  5. civil westman

    Who knew? I will wait and see what happens over the next few years. The IPAB may have a significant impact by denying payment for services arbitrarily. I predict an uproar.

    My son is Swiss. There, the government has only 3 regulations:

    1. Everyone must buy his own insurance (the government subsidizes 3% of the population)

    2. Community rating, to socialize the cost of pre-existing conditions.

    3. Each of 70 private insurance companies must offer a policy with no more than a 2000 CHF annual deductible. One may but a policy with a higher deductible for a lower premium.

    Companies compete on premium cost and panel of doctors/hospitals. Result: Care at least as good as here at 58% of the per capita cost. (“malpractice” cases are minimal). Hospitals are efficient, immaculate and friendly. As a visitor, I was asked by a nurse if I wanted coffee or a sandwich! After I caught my breath, I asked why this is done. She replied that it is important that visitors as well as patients be comfortable. Were I to become a resident there (tempted!), at age 68 I could buy a policy with excellent coverage for $850/month.

  6. Dan Hanson

    The “donut hole” in Medicare part D is a pretty strong cost containment feature. So of course the Democrats wanted to do away with it.

  7. Mike H

    @civil westman

    If our country only contained Swedes, everything would work much better here too. Uniform demographics do a lot to avoid the “free loader” perception found is societies with many different cultural enclaves.

  8. civil westman

    Actually, Swiss are not Swedes (common misapprehension). As well, the country is quite diverse culturally and linguistically. 70% speak German, 20% French, 10% Italian, and a few speak Romansch (the closest living language to Latin). All government documents are written in all four official languages. Culturally, the speakers of these languages have much in common with the countries of the mother tongue. There are also many highly local customs of various cities, towns and valleys. A beautiful patchwork, really. In addition, about 30% of he residents of Switzerland are foreigners – from all over the world – by legal immigration. Switzerland tightly controls its borders.

    Switzerland is said to be a country ‘of choice.’ These diverse peoples previously chose to unite and continue to choose to do so. What the Swiss have in common is a voluntary sense of civic virtue, whereby citizens (and foreign residents) agree to live together in a direct democracy and by and large, govern themselves at the municipal and cantonal level, rather than federal. They have the self-sufficiency and sense of civic responsibility which used to characterize the US. Our leaders fail to understand that community is voluntary. Voluntary community of choice is why Switzerland works.

  9. Rob Long
    C

    The market works.

    Which shouldn’t be news, but is.

  10. Mike H

    Dang, well, I wouldn’t be where I am now if I was afraid to be humbled.

    Switzerland sounds lovely (and is, I’ve been there).

  11. Duane Oyen

    To be fair, Capretta does need to acknowledge the large number of core – and formerly very costly- drugs that have gone off patent recently. 

    But Scott has it exactly right about GWB’s prescient reforms.  Those who opposed them- especially the ” NoNoNo!” types who oppose everything- continue to be very short-sighted.

  12. JimGoneWild

    What did seniors do before Medicare Part D? Anyone?

  13. Duane Oyen
    JimGoneWild: What did seniors do before Medicare Part D? Anyone? · 2 hours ago

    Edited 2 hours ago

    They lobbied their Congressmen for a single-payer drug program added to Medicare, and would have gotten it if not for Bush.

    Because not having some kind of drug element to Medicare was stupid, given the changes in medicine since 1965.  The issue had to be addressed one way or the other.

    Unless you are one of those ultra-pure libertarians who reads Reason, worships the shrine of Harry Browne, and wants to zero out Social Security and Medicare.

  14. JimGoneWild
    Duane Oyen

    JimGoneWild: What did seniors do before Medicare Part D? Anyone? · 2 hours ago

    Edited 2 hours ago

    Unless you are one of those ultra-pure libertarians who reads Reason,worships the shrine of Harry Browne, and wants to zero out Social Security and Medicare. · 3 hours ago

    I don’t read Reason and have no clue who Harry Browne is, but I would like to replace SS/Medicare and privatizing it.

  15. civil westman

    I should add that the view from the front lines of hospital care – where I work – choice and competition are not at all apparent. Rather, we are constrained and scripted into a one-size-fits-none pantomime of actual caring. Our administrative betters pile task upon task per unit time and ever-increasing demands for entering ever more data. They aspire to turn doctors and nurses into nothing more than ventriloquists’ dummies. We even have commands that we begin to smile when we approach within 15 feet of the patient. No kidding! 

    The irony in anesthesiology is that haste and distraction cause most preventable errors. Yet, in the name of quality and safety, our overseers relentlessly add more tasks and documentation, which have become the single greatest distraction from monitoring our patients. Thus, in the name of ‘bureaucratic truth,’ we are actually distracted from essential tasks and forced to act in ever more haste – making us demonstrably less safe. The costs in morbidity, mortality and money of this absurdity are significant. 

  16. Duane Oyen
    JimGoneWild

    Duane Oyen

    JimGoneWild: What did seniors do before Medicare Part D? Anyone? · 2 hours ago

    Edited 2 hours ago

    Unless you are one of those ultra-pure libertarians who reads Reason,worships the shrine of Harry Browne, and wants to zero out Social Security and Medicare. · 3 hours ago

    I don’t read Reason and have no clue who Harry Browne is, but I would like to replace SS/Medicare and privatizing it. · 19 hours ago

    We agree on that.  But meanwhile, the programs exist and will not simply go away because of supermajority public demand that matches almost every developed country in the world.

    However, there is the first problem that virtually no US health care is privatized, so we have a bigger problem than is often acknowledged.  And there are ways to make the system more free-market that involve government.  My goal is free markets and competition; I care a lot less about government involvement as long as it is not single-payer and tops-down as it is now.  Medicare Part D (including the “donut”) was the first important break toward free markets.