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Public Option To Cut Health Costs Medicare’s Record Says Dream On

July 21, 2009

IBD           22 June 09

by Jeffrey H. Anderson

‘First, the rising cost of health care must be brought down.” That’s what President Obama recently declared when outlining the basic principles of his health care plan.

His supporters have echoed his emphasis. The New York Times writes that, when it comes to health policy, “The president’s main focus is on starting to reduce the soaring cost of health care.”

Speaker Pelosi concurs: Health care reform “is about cost — taking down the cost of health care.”

But can the president’s plan succeed, even on his own terms? If history is any guide, it cannot — and will instead make matters much worse.

The centerpiece of President Obama’s plan is a “public option,” described by Tom Daschle as “a government-run insurance program, modeled after Medicare.” The president asserts that this new Medicare-like program would cut costs.

But there are nearly 40 years of experience to consult, and they offer a resounding rebuttal. Across the years, Medicare’s costs have risen far more than the costs of privately purchased care.

A new study I’ve completed, published by the Pacific Research Institute, takes all health-care spending in the United States and subtracts the costs of the two flagship government-run programs, Medicare and Medicaid. It then takes that remaining spending and compares its cost increases over time with Medicare’s cost increases over time.

The results are clear: Since 1970 — even without the prescription drug benefit — Medicare’s costs have risen 34% more, per patient, than the combined costs of all health care in America apart from Medicare and Medicaid, the vast majority of which is purchased through the private sector.

Since 1970, the per-patient costs of all health care apart from Medicare and Medicaid have risen from $364 to $7,119, while Medicare’s per-patient costs have risen from $368 to $9,634. Medicare’s costs have risen $2,511 more per patient.

These conclusions are true despite very generous treatment of Medicare. My study counts Medicare’s prescription drug expenditures as part of privately purchased care, rather than as part of Medicare. It counts health care purchased privately by Medicare and Medicaid beneficiaries (including Medicare copayments and Medigap insurance) among the costs of private care, without counting its recipients among those receiving private care — thereby magnifying private care’s per-person costs. And it doesn’t adjust for cost-shifting from Medicare to private entities.

The New York Times and others have quoted studies claiming that private insurance has failed to contain costs as well as Medicare. Such studies are deeply misleading, for they omit any consideration of out-of-pocket spending, thereby neglecting a major shift in the private health care market.

From 1970 to 2007, out-of-pocket expenditures dropped from 62% of all private health care to just 26%. Correspondingly, insurance expenditures increased from 38% to 74%. These studies make no allowance for that change. That’s a lot like looking at LP or CD sales, ignoring MP3s, and concluding that Americans are no longer as fond of music.

The president himself says that “over the last decade” Americans “have seen their out-of-pocket expenses soar.” But, according to official government figures, per-patient out-of-pocket costs have risen only 35% since 2000, while Medicare’s per-patient costs have risen 59% — again, even without the prescription drug benefit.

Private insurance and private out-of-pocket spending, in tandem, have controlled costs far better than Medicare. However, if Medicare has, in fact, fared comparatively well vs. private insurance — as the supporters of President Obama’s proposals claim — then that means it has fared particularly poorly vs. private out-of-pocket spending, thereby further strengthening the argument that private consumers, paying out-of-pocket, are the best bargain-shoppers and the keenest pursuers of value in health care.

From a policy perspective, this would suggest that the key to lowering costs is to let consumers control more of their own resources — that when they have the freedom and incentive to pursue value, they know how to keep costs down.

The most important comparison, in the context of the current debate over a Medicare-like “public option,” is between government-run health care and privately purchased health care on the whole.

Across nearly four decades, Medicare’s costs have risen more than one-third more, per patient, than the combined costs of all health care nationwide apart from Medicare and Medicaid. This is true even when viewing Medicare’s costs in a charitable light.

President Obama asserts that creating a Medicare-like “public option” is the way to slow the rising costs of health care. Experience shows the opposite, that costs have risen faster under government-run care. As Benjamin Franklin and George Mason argued at the Constitutional Convention, let’s defer to “experience, the best of all tests.”

• Anderson is a senior fellow in health care studies at the Pacific Research Institute and was the senior speechwriter for Secretary Mike Leavitt at the U.S. Department of Health and Human Services.

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