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The supply of dollars and the demand for healthcare

April 4, 2011 | 12:24 pm

RyanJust about any discussion of how to slow the growth of healthcare costs boils down to a question of rationing. So it will be too with the proposed Medicare and Medicaid changes that House Budget Committee Chairman Paul Ryan (R-Wis.) plans to include in the fiscal 2012 budget proposal he unveils this week. But Ryan thinks about the healthcare cost problem in a different way than many folks in Washington do, so his version of rationing will trigger a different kind of debate.

The main reason rationing seems inescapable in these discussions is that demand for healthcare is unlimited -- people may avoid seeing the doctor for minor ailments, but they won't generally go without healthcare when they really need it. So the cost-cutting mechanisms left at our disposal tend to be on the supply side, that is, rationing the availability of doctors and treatments.

Some of that rationing is economic. Although we're not willing as a (humane) country to deny emergency care to people who can't afford to pay for it, other forms of care are out of reach of many of the uninsured or poorly insured. Some of it is by insurance companies, which can withhold funding for procedures they don't deem necessary. And some of it is by the government, which can deny Medicare and Medicaid reimbursements and FDA approval for treatments deemed ineffective.

Ryan has approached the issue by ...

... trying to reduce the overall supply of dollars into the healthcare system. No details are available yet on this year's proposals, but his Medicare strategy is to shift the government from being an insurer to being a subsidizer of private insurance plans, as it does with prescription drugs. The change, which would apply to those 55 years old and younger who aren't yet eligible for Medicare, would allow the government to limit the amount of dollars it contributes to the program without making decisions about how those dollars are spent.

Limiting is the point of the exercise. Under Ryan's Roadmap proposal from 2010, which was a preview for this year's budget plan, the amount beneficiaries receive would grow more slowly than the rate that medical costs increased. That puts pressure on the system to hold down costs because otherwise the gap between the cost of insurance and the federal subsidy renders coverage unaffordable.

The assumption is that the limited supply of dollars would force insurers and providers to be more efficient and effective than they are today. Because they're more directly responsible for the cost of their care, Medicare beneficiaries would (in theory) be smarter shoppers when it comes to healthcare and insurance. In other words, competition would have the same effect on healthcare as it has in other markets.

But again, healthcare isn't like other markets. The demand for many types of care isn't price-sensitive; people don't say "no thanks" to chemotherapy in greater numbers when new, more effective drugs drive the cost up. 

One consequence of Ryan's strategy, then, is that more of the risk posed by healthcare inflation would shift from Washington to retirees, who already complain about the increasing burden of healthcare costs not covered by Medicare. His Roadmap called for the government to provide higher subsidies for elderly Americans who are poor or in need of more expensive care, which would help mitigate the shift in risk. Yet if healthcare inflation continued unabated under the new regime, retirees with limited resources would be the ones to feel the greatest pinch.

The new budget proposal would take a similar approach to Medicaid, switching from a joint federal-state insurance plan for the poor to federal block grants for state insurance programs. Again, the point is to limit the supply of federal dollars into the system. The main difference is that the states, not poor Medicaid recipients, would be left to manage the gap as the block grant grows less rapidly than healthcare inflation.

I don't have an opinion as to whether supply-side rationing can produce the changes needed to stop healthcare spending from growing faster than the economy as a whole. Depending on the political headwinds encountered, it could prevent healthcare spending from growing faster than the federal budget can manage them, which is something devoutly to be wished. Whether it can force the changes in delivery and payment systems needed to produce a more efficient and effective healthcare system is another question.

-- Jon Healey

Photo: Rep. Paul Ryan (R-Wis.). Credit: Mark Wilson / Getty Images

 

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