Mark V. Pauly - Markets Without Magic: How Competition Might Save Medicare (AEI Studies On Medicare Reform)

2. WHAT C AN G O R IGHT , AND W HAT C AN G O W RONG ? 19

3. HOW M ANY P LANS ? 29

4. WHAT K IND OF C OMPETITION ? 43

5. PAINFUL BUT U NAVOIDABLE A DJUSTMENT

6. MARKETS W ITHOUT M AGIC

C ONCLUSION 61 N OTES 65 R EFERENCES

A BOUT THE A UTHOR

v

Medicare is consistently rated as one of the federal governments most valued programs. Seniors give it strong support, and even taxpayers generally favor it. This is surprising, given that it is a government-managed insurance program, with the government setting the prices for most of the services provided to beneficiaries.

The surprise may be greatest for those who believe competitive markets generally do a better job of achieving productive efficiency and consumer satisfaction than government-run firms paying with government-administered prices. Given the popularity (up to this point) of the government administration model as compared to more market-based arrangements, what can we say about the choice between those two broad organizational forms for the Medicare of the future? Given its current structure, the costs of Medicare relative to the size of the economy are sure to rise, mak ing questions about the performance of, and preferences for, todays system virtually inevitable. This monograph investigates whether greater use of competitive market-type arrangements might answer those questions.

Generally, I believe that unique (and favorable) financial circumstances in the past have been responsible for the relatively good performance of Medicare to date, which is why so many people have a positive view of the program. However, unavoidable changes in these circumstances will eventually make that model much less effective than market-based institutions. I argue that social health insurance for the elderly and disabled in anything like its current form cannot continue to function as it does now. Specifically, I argue that the effects of dramatic demographic changes, which will increase the

share of the population on Medicare, combined with a continued growth in medical costs driven by technology, will lead inevitably to a financial crisis if the conduct of the program stays as it is. There is no magic that can preserve Medicare as we know it today.

While limits to key financial aspects of the Medicare program are almost certainly unavoidable, I believe they would be best and least painfully implemented through market-based choices, rather than government direction. Not all is gloom and doom. The structure needed to make Medicare work well in this challenging future envi ronment is one that relies largely on the availability of private insurance alternatives to the traditional government-managed Medicare fee-for-service insurance. This structure is, thankfully, already in place, tested, and functioning. The key policy decision here is a negative one: to avoid making changes that weaken the ability of private alternatives to survive and function. Policy should strengthen, not abolish, this structure, even at some short-run cost. Some elements of the current system (primarily applying to the traditional Medicare plan) need to be modified to do so, but the most important modification I advocate is a change in policy perspective that recognizes the substantial merit, and perhaps the necessity, of maintaining private options in the future world of constrained Medicare (and national health expenditure) budgets.

We do have much to be sober about. On the benefits side, the need for access to ever more effective medical care for seniors will continue to grow; its provision can be facilitated by a modified version of Medicare (and not by the traditional approach). But the financing side, whether measured by financial burdens on seniors or tax burdens on others, is bound to worsen. Market-based arrangements will make the best of this bad lot.