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.