What’s the Point of Medicare Privatization?

David Brooks wants to privatize Medicare:

But it should be possible to strengthen the safety net while modernizing some of the Great Society structures. Paul Ryan, a Republican, and Alice Rivlin, a Democrat, have come up with a Medicare reform plan in which new enrollees would receive a fixed contribution from the government, growing a bit faster than inflation. They would apply that money against the cost of health insurance. This would make Medicare a defined contribution program and save hundreds of billions. If Obama said he was open to thinking about this sort of fundamental reform, he’d generate tremendous excitement on the right.

I think this is a dubious use of the term “save.” If I went to CVS, bought a box of Diet Cokes, and kept them in the fridge in the CAP kitchen I’d save a substantial amount of money relative to my current practice of constantly going to the soda machine. That is to say, I’d have the same amount of Diet Coke but I’d be spending less money. Alternatively, I could reduce expenditures by not buying as much Diet Coke.

What Ryan-Rivlin does is buy less Diet Coke. It sets a hard cap on Medicare expenditures, thus reducing government outlays. Then in an unrelated move, it dismantles the publicly administered single risk pool of Medicare and replaces it with multiple privately administered for-profit risk pools. The combination of these two moves is a sleight of hand designed to make you think that the structural shift is “saving money” when in fact it does nothing of the sort. Creating multiple privately administered risk pools doesn’t offer any efficiency gains. It simply creates an adverse selection problem and ensures that the rationing decisions made necessary by the hard cap will be made by employees of for-profit firms rather than government employees. It also makes the political economy of restraining Medicare spending worse, since in addition to senior citizens and health care providers you’ll add insurance companies as a new constituency ready to demand that Medicare account for an ever-larger share of national output.

As best I can tell, the privatization idea is in here essentially as an ideological tic. The conservative establishment in America is very hostile to “spending” and “entitlements” but the reality is that conservatives don’t actually want to cut Medicare. They don’t want senior citizens’ health care rationed and they don’t want health care providers’ incomes to decline. So there’s an enormous market for concepts that will paper this dissonance over. But the fact of the matter is that Medicare is extremely efficient at transforming tax revenues into purchases of health care services; if you want to spend less money, you need to buy fewer services. There’s almost no administrative efficiencies to be found.


Jon Walker over Twitter observes that the other way to cut Medicare costs is price controls. Deploy monopsony power to demand lower prices closer to the marginal cost of production, and hope this doesn’t result in too much quality deterioration. This is a key element of most countries’ lower health care costs.

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