Point of View

...Tackle medical monopolies instead

December 22, 2011 

— Last week, Democrat Ron Wyden and Republican Paul Ryan unveiled a plan that would partly transform Medicare from a traditional government entitlement into a privatized insurance plan.

The deal has already been called "an extraordinary political breakthrough," and offers promise that political leaders can overcome the deadlock that has prevented Congress from addressing the nation's most pressing economic challenges.

But the proposal has a fatal defect: it does nothing to stem the unsustainable growth rate of health care spending. If we don't address the foundational problem of rising health care prices, then the Ryan-Wyden plan will merely turn the government's eventual bankruptcy into inevitable bankruptcy for millions of seniors.

The proposal offers future seniors a choice between conventional Medicare and other Medicare-approved private insurance plans. The plan would introduce a "premium support" system that would help seniors pay for the premiums associated with the plan they choose.

The premium support illustrates a basic math problem: the Ryan-Wyden plan subsidizes Medicare at a rate that grows annually by 1 percent-plus GDP growth. If the subsidy's baseline is set at the current average Medicare premium, and we optimistically assume annual GDP growth of 2.5 percent (our current "recovery" has generated 1.4 percent growth in 2011), the Ryan-Wyden subsidy under the GDP + 1 formula would be $15,752 a year per senior by 2022.

Yet Medicare has grown at an annual rate of 8.2 percent over the last 15 years. At its current cost trajectory, the average Medicare expenditure would be $28,875 per senior by 2022.

Seniors who wanted insurance would be required to pay the difference on an out-of-pocket basis or through reduced health benefits. If they had to purchase the coverage, the difference between the Medicare costs and the premium support payment would consume more than 70 percent of the average Social Security check.

In short, if health care costs continue to rise, the Ryan-Wyden plan does little more than shift the unsustainable cost of health care onto seniors' limited budgets.

Policymakers need to think of the health care crisis not as a public budget crisis, but as a systemic economic failure. Among the real drivers of health care costs are forces that are elementary to any undergraduate economics class: monopolies.

In what has properly been described as a comprehensive policy failure - by state and federal agencies, legislatures and courts - hospitals throughout America were permitted to engineer a swell of mergers in the 1990s and again in recent years.

Hospital mergers have led to documented price increases of 40 percent in local markets, and dominant providers now pose a severe challenge to health care affordability.

One reason monopolies have had such an impact on health care spending is because of its harmful interaction with health insurance.

Ordinarily, a monopolist's pricing freedom is constrained by consumers' unwillingness to pay more than they can afford or believe the product is worth. However, health insurance in the United States hides the true price of health services from patients at the point of service because the cost is largely borne by the health insurance plan. Consequently, prices most consumers would not pay (and monopolists could not charge) in the absence of insurance are prevalent in health care and paid through higher health insurance premiums for all Americans.

Policymakers have been slow to recognize the severe dangers of market power in health care. In fact, they have been rather forgiving toward hospital monopolies.

Courts have permitted mergers in the belief that hospitals use their monopoly revenue to pursue publicly desirable activities. State agencies have immunized otherwise-illegal monopolies from federal prosecution. Now, the Affordable Care Act is encouraging further provider consolidation through the formation of so-called Accountable Care Organizations. These policies only exacerbate the monopoly problem.

Rather than a budget fix from Washington, we need to tackle the fundamental forces driving the escalating costs of health care, including insurance that encourages non-value added costs, monopolies that expand unnecessary infrastructure and regulations that prevent competition. We also need to challenge hospital CEOs in America to build a business model dedicated to offering good value to consumers, not one that arises from unresponsive and costly monopolies.

Barak Richman is a professor of law and business administration at Duke University. Kevin Schuman, a professor of medicine and business administration, is director of the Health Sector Management Program at Duke's Fuqua School of Business.

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