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Private-Market Tooth Fairy Can’t Cut Medicare Cost

Author: Peter R. Orszag
August 21, 2012


The vast bulk of health-care costs arise from an extremely small share of patients, whose insurance will inevitably bear a substantial share of their expenses.

That's why competition in health care doesn't work as well as in other sectors, and it's also why the key to keeping costs to a minimum is to encourage providers to offer better, less costly care in complex cases.

Unfortunately, proponents of moving Medicare to a private "consumer-driven" system, including Republican vice presidential hopeful Paul Ryan, seem to instead believe in a health-care competition tooth fairy -- that if we just increase the patient's share of costs and bolster competition among insurance companies, the expense will come down. As Karl Rove recently argued, "Competition will lower costs by using market forces to spur innovation and improvement."

Someone might want to tell that to the Congressional Budget Office, which evaluated Ryan's original 2011 proposal to gradually move all of Medicare to private insurance companies. (In all these comparisons, we must remember that the goal is to reduce total cost -- to the government and the beneficiary combined -- compared with current projections. Merely shifting costs across the two categories is not a particularly impressive accomplishment.)

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