We Have to Kill Medicare in Order to Save It!

Paul Ryan released a video last week showing why he thinks it's essential that America kill Medicare adopt his budget. Now, I'm not going to point out how silly this video is, I'll leave that to other bloggers. I'd simply like to challenge Ryan's fundamental premise, that Medicare is going broke and the only way to save it is to make seniors pay for their own health care.

The main thrust of the video is Ryan's claim that consumers, given the opportunity, will hold down the price of healthcare. This is wrong, mainly because the healthcare system in America is a classic case of market failure. To illustrate this point, read this story about a woman going through hell just to find out that a lump in her breast was not cancer. The problem with the Ryan plan is that this woman would be expected to shop around for healthcare, maybe find a doctor doing biopsies half price, or offering a free cat scan with every surgery. The problem is that no one would turn down a doctors recommendation to get a procedure ASAP. The economic reason is Information Asymmetry. The doctor knows so much more than the patient that the patient is inclined to trust the doctor implicitly. If a doctor recommends an unnecessary procedure, how is the patient to know that said procedure is unnecessary? Any time there is Information Asymmetry markets tend to fail, and in the healthcare sector Information Asymmetry is incredible. Doctors spend years studying their field, far more than any patient could hope to do. This causes a huge increase in cost. Imagine if a used car salesman could tell you that if you don't get the rustproof undercoating your car might explode. This is the kind of power a doctor has, and it's a power which has distorted healthcare markets immensely.

Karl Smith, writing in the Washington Post, is correct to diagnose this as a supply side problem, but he's wrong in saying that it's a problem caused by regulations and licensing. Smith is a great economist, but here I think he places too much stock in the power of the market to price goods correctly. Basically, he misses one of the main problems of medicine; it's incredibly difficult to look inside someone without killing them. If a computer tech had to diagnose problems with a PC without cracking open the case the cost of owning a computer would skyrocket. In his post, Smith claims that if people could just point their iPhones at themselves and get a diagnosis healthcare would be a lot cheaper, and he's right! But his is a world of science fiction. It's a world we may inhabit someday, but it's certainly not the world of today. To look inside the human body, and find the microscopic organisms causing problems, is an incredibly difficult thing to do. Unnecessary tests are a huge part of healthcare inflation. An increase in the number of expensive MRI machines and CAT scan technologies is driving costs ever upward. The US is number one in availability of technology, but it hasn't seemed to increase our life expectancy faster than less well equipped countries.

To get back to the Ryan plan, it's important to realize that his plan doesn't actually control healthcare costs, it just controls how much the government spends on healthcare. He claims that this will make the consumer more powerful, and able to demand healthcare that's cost effective. Even ignoring the massive market failure involved in healthcare, look at the consumer in the video at 3:53. A single individual dwarfs healthcare providers. But is that very realistic? After all, can a single person really dictate terms to a hospital? Especially one run by a large corporation? The very idea is absurd. There is strength in numbers, which is how companies are able to get healthcare for their employees. It's how Medicare, which is nearly a monopsony, is able to save so much money compared to other insurance providers. Hospitals can't afford to ignore Medicare, so they have to listen when Medicare tells them that it will no longer pay for hospital caused infections it forces hospitals to find new ways to stop those infections from happening  in the first place. This is the best way to control costs, as other countries have shown, by having a large actor able to negotiate on equal footing with healthcare providers. As DougJ over at Balloon-Juice likes to say, Medicare is the only properly functioning part of a broken healthcare system.

The reason Paul Ryan wants to end Medicare isn't to make sure there are some protections later, or to balance the books. If balancing the books was all he was after he would be willing to consider tax increases, rather than taking a bunch of money away from Medicare to pay for massive tax cuts for the rich. This move is Republican doctrine pure and simple, something they've been trying to do for decades.  Of course it's a part of Republican doctrine that if you take the government out of the system the system will improve, but that's not the case with the healthcare market. If you take away the safety net you'll just end up with a lot of sick people. Or worse.