Vouchers’ Impact on Price When the Price Isn’t Right

May 24th, 2011 at 8:25 pm

An interesting thread came up in the comments.  It’s the notion that Ryan’s Medicare vouchers will reduce the cost of coverage because if enough people are out there trying to buy the same insurance coverage with less money, the insurers will lower the cost.

That would be nice, but I don’t see it.  Instead, I think seniors will end up with either less coverage or paying significantly more for Medicare coverage comparable to what they’re getting today.

Start with simple supply and demand, forgetting for a moment that the health insurance market doesn’t always work so well.

Anyway, if people want (demand) a particular quantity of something, whether it’s an insurance package or a Snickers, they have to pay the market price to get it.  If they bring less than the market price to the seller, all else equal, they will get less.  Of course, if demand contracts–people want less insurance or Snickers—the price will fall.  But it’s unlikely the demand or need for insurance coverage will decline much at all.  (Those who suffered through econ 101 will recall that the first case is sliding down a demand curve; the second, a shifting in of the demand curve.)

In the general case, in other words, people are “price-takers” not “price-makers.”

Now, since we’re in the dangerous land of health-care economics, let’s relax the constraint that we’re talking about a rational market.

What do we expect to happen if a lot of people, like everyone on Medicare, now must try to find coverage comparable to the current program with a lesser voucher?  Mostly, one of two things.  Since the underlying demand hasn’t changed, those with the means will make up the difference out of their own pockets.  That’s just cost shifting.  Those without means will settle for less coverage.  That’s cost shifting too but you absorb the higher costs by buying less.

It’s possible that the impact of a large reduction in income to the system could show up in slightly lower costs as reduced “effective” demand— people still want the old amount but can no longer afford it—could nudge prices down a bit.  But any such price decline is likely to be small as cost shifting will dominate.

In fact, it’s possible that the outcome will be worse than described so far because of another unique aspect of this “market.”  The cost of insurance is in large part a function of what the insurance companies can negotiate with providers—doctors, hospitals, etc.  Medicare works like a giant pooling mechanism and uses its bargaining clout to get better deals from providers.  That’s one reason why health costs grow more slowly under Medicare than in the private sector.

By moving to vouchers, you lose that power, and if anything, the costs providers will extract from private insurers will be higher, and folks will end up being able to afford even less coverage.

OK, enough already re Ryan’s lousy Medicare plan.  Back to jobs next.

Update: For those who want to dig deeper in the economics of this, Holly in comments links to an incisive Rortybomb post, and Austin Frakt adds some interesting nuance to the above.

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9 comments in reply to "Vouchers’ Impact on Price When the Price Isn’t Right"

  1. Basil says:

    I agree 100% – health care demand is superbly inelastic.

    It’s like higher education. If the government stopped giving out Pell Grants, or if universities stopped giving out financial aid, the cost of college would not fall. Demand is too inelastic; students would just rack up more student debt.

    The Paul Ryan-equivalent is seniors going into debt to pay medical bills. Not a good plan.

  2. DanG says:

    “It’s the notion that Ryan’s Medicare vouchers will reduce the cost of coverage because if enough people are out there trying to buy the same insurance coverage with less money, the insurers will lower the cost.”

    Desperate, marginal insurers will lower the cost. Which usually comes back to bite them. Insurers price their products to cover their costs (and hopefully profits). Their price is based on what they expect to pay out. And insurers regard it as “underwriting discipline” to resist chasing premiums by undercutting the competition. The price of health insurance can be brought down by lower medical costs. But if insurance companies could control medical costs they would have done it by now. They haven’t because they can’t.

  3. Holly says:

    This reminded me of a post I read recently on Rortybomb, based on a 2009 NBER paper on the Earned Income Tax Credit vs the Negative Income Tax


    “With my preferred parameters the EITC increases
    after-tax incomes by $0.73 per dollar spent, while the NIT yields $1.39.”

    The privatization debate so often assumes that a dollar given in voucher form is the same as a dollar spent directly on buying the service, but it isn’t true.

    If we must subsidize a good or service through the government, it is always more efficient to provide it directly.

    This applies to housing, labor, health care, and education

  4. namename says:

    Good post.

    However, you really should back up your claims. Uwe Reinhardt has a couple of columns on the subject: http://goo.gl/oKPfL and http://goo.gl/dUXt4

  5. Ed says:

    Two additional points.

    As Bernstein knows, but probably finds it too obvious to repeat — so I will — Kenneth Arrow wrote the book a long time ago on why anyone who tries to apply a simpleminded equilibrium model to the health insurance — and provider, for that matter — market has no business even being in the discussion. It’s not even a close call.

    Second, there is a level of dishonesty in Ryan’s proposal for Vouchercare — yes, let’s take a leaf out of Frank Luntz’s playbook and brand it as that — that has gone unnoticed in much of the discussion of Ryan’s plan, even the critical discussion.

    Ryan has tried to sell his Vouchercare by saying that his plan will provide Medicare recipients with the “same” coverage as he and his Congressional buddies — and most Federal employees, for that matter – have in the form of their Federal Employees Health Benefit Plan (FEHBP). In most statements I’ve seen or heard from him on the matter, Ryan doesn’t even weasel word this with the same “sort” of coverage, where “sort” in this context, of course, would be in the same category as I’m sort of as sexy as George Clooney.

    He continues to repeat this mendacious nonsense even though the critics have pointed out that a huge difference between his current FEHBP plan and what he is proposing in Vouchercare for retirees is that his current FEHBP is indexed to medical inflation – in terms of his coverage and his employer’s (we the taxpayers) premium contribution (72%) — while Vouchercare would be indexed to CPI inflation, and thus decline inexorably in value over time.

    But Privatizer Ryan’s hypocrisy is actually deeper than this – if that’s possible.

    When he retires, if he stays in Congress long enough to have an “annuity” — essentially a pension, and the rules are, surprise, surprise, very liberal for Congressmen in this regard – yes, he’ll be on Vouchercare along with the rest of is. But, mirabile dictu, he will be able to flip over his same – and I mean really same — current FEHBP coverage, without skipping a beat, and make it his Medigap policy to supplement the wasting asset of Vouchercare.

    The rest of us, who can afford it, will also be able to buy supplementary Medigap policies, of course, just as current retirees can now.

    But here’s the difference. Paul Ryan’s Medigap policy, which will shelter him from the ravages of the declining value of Vouchercare, will continue to be paid for at 72% of the premium by his former employer. We’ll still be on the job as taxpayers supporting him, of course.

    And it gets smarmier – smary to the extent that Ryan has not acknowledged it when he blathers on about “sameness”…. But you’ve already figured out where this is going. Yes, Paul Ryan’s Medigap policy — his, not yours, unless you happen to be in a union that the Republicans, the Koch Brothers, or the Supremes haven’t busted by then – will also be indexed to medical, not CPI, inflation.

    The poor dear, out there sucking it up with the rest of us – and our children – under the “shared sacrifice” of Vouchercare.

    We’re into Rawlsian Social Contract theory here, folks.

    Next time you’re near the “original position,” and happen to see Paul Ryan, or your own local friendly sociopathic, Ayn Rand sniffing Republican Congressman, ask him – or, alas, there are some hers in this category as well, cf. Virginia Foxx, Marsha Blackburn, Michele Bachmann – to explain to you why it is fair to ask us to accept Vouchercare along with him – but not have his taxpayer subsidized medical inflation indexed Medigap policy to go along with it.

    I see that Paul Krugman in his blog today used, for the first time I think, the word “contemptible” to refer to the mind blowing hypocrisy and double-speak of the current crop of moral chameleons running for the GOP presidential nomination in 2012.

    I admire his restraint.

  6. Howard Schrader says:

    Dr. Bernstein:
    At the Peterson Conference this morning Paul Ryan (unsurprisingly) disagreed with the CBO conclusion that his Medicare proposal would actually increase health costs. As evidence, pointed to the Medicare Part D program, which came in well below CBO cost estimates.

    I wonder if you have a response to this argument.

    • Jared Bernstein says:

      And here’s your answer, from my very helpful CBPP colleague, VP for Health Policy, Edwin Park:

      Note the paragraph that starts: “Moreover, there is evidence that, far from reducing costs, the use of private plans to deliver the
      Medicare drug benefit has increased costs…”

  7. spencer says:

    Remember one of the reasons that we have Medicare now is that before it existed seniors were not able to obtain affordable health insurance because the private insurance companies would not offer it.

    So what has changed that private for profits insurance companies would suddenly start offering affordable health insurance to seniors with all of their pre-existent conditions?

  8. Ed says:

    I hope the analysis from CBPP that Bernstein provided settles the matter for Howard Schrader at least as to whether or not Paul Ryan can be trusted to report yet another set of facts correctly relative to fiscal expectations for Vouchercare – in this case his bogus claim about Medicare Part D costs having gone down because it is a privatized program.

    Turns out, No, costs have gone up on a per capita basis precisely where the privatized forces are most at work.

    We can be certain, however, that it won’t cause Paul Ryan to skip a beat in his ongoing crusade to continue to try to get away with fooling enough people enough of the time in order to advance his Roarkian fantasies.

    The man is a serial distortionist, engaged in the well understood logic of the Big Lie. Just keep repeating it and enough people will be fooled.

    Even supposedly intelligent people like David Brooks (sorry, they didn’t ask for my vote), who still has not given up on his program to promote the Ryan plan by calling for generational warfare. As recently as today, rather than expressing some humility over the fact that the conservative voters of the 26th district are apparently not on board with his and Paul Ryan’s rewriting of the Social Contract, David is now hysterically threatening us all with a version of the Yellow Peril if we foolishly don’t get behind something like the Ryan Plan.

    You think I’m making up the bit about the Yellow Peril?


    While it is not incidental that the CBPP shows that Part D is not really saving money when viewed on a capitated basis, I would point out that the ultimate standard for judging the MINO (Medicare In Name Only) plan for Part D is not whether it does or does not save money over its own original projections. The correct standard is to compare it to what would be being spent if it were a true Medicare, i.e., government run not just government subsidized, plan.

    And here the answer is simple. Lipitor is Lipitor is Lipitor.

    Part D pays 20% more than Medicaid for Lipitor, as the CBPP notes. The VA pays 36%-43% less for Lipitor,* and it has bargaining power for only 5 million or so beneficiaries as compared with the 46 million or so on Medicare. And then there is what the French system, the UK system, the Canadian system, the everyone-else-in-the-world system pays for Lipitor as compared to what we pay in the U.S. thanks to MINO Part D.

    And so on for basically every drug in the formulary.

    There is simply no rational justification for this private looting at public expense.

    * These are 2006 numbers, at the dawn of MINO Part D, when the drug manufacturers rushed to raise, not lower, prices in the face of significant increased demand. Put that in your free-market-competition-lowers-prices fog machine! This impeccably documented information can be found here:


    If anyone has newer numbers which changes this picture materially, feel free to send along the links.

    To Spencer’s implicit question about whether under Vouchercare prior conditions will allow private carriers to reject you for insurance, I have not researched the matter directly myself, and, in any event, those kinds of details about Vouchercare are so vague at this point that Paul Ryan could probably manage to duck the question – especially if the interviewer was David Gregory on Meet the Press, not to mention the hardball questions that I’m sure were shot at Ryan at the Petersen Institute.

    But there was this lengthy analysis over at Kos yesterday which seemed convinced that Vouchercare would allow insurance companies to get back in the game of denying coverage for prior conditions – for seniors mind you!


    More likely the Republicans would just figure out a way to shunt the high risk people over to a separate pool, which the government would take care of, so they could get back to the business model they are best at: insuring healthy people who don’t file claims.

    Nah, the Democrats would never let it happen, you say? Well, Huckabee and other Republicans have already attacked the community rating provisions of ACA head on. Really, they have. So what happens if these guys gain the presidency and 55 or so Senate seats, to which they’ll be able to add Ben Nelson, and probably at least 4 more quivering Democrats up for reelection to break a filibuster over such issues – if the Democrats even have the cohones to mount one?

    I mean, who would have ever thought that Dick Durbin would think that he could sit down in a room and come out in one piece with Saxby “Max Cleland is Soft on Osama and Saddam” Chambliss, Mike “I’m not Larry Craig, I’m the Other Senator from Idaho” Crapo, and especially Tom “Meet me for Prayer after Your Affair” Coburn?