Ezra Klein’s public-private fetish 

Ezra Klein has a chart up which he dubs “The most important graph in health-care policy.” It’s not. It’s worthless.

The chart is from the Organization for Economic Development and Cooperation (OECD) and it shows total health expenditures as a percentage of GDP by country. The key part of the graph is the split it shows between “public” and “private” health care spending. Ezra uses the chart to argue for more government control of the health care sector since the current system’s reliance on “private” spending has done nothing to control costs. He’s right about one thing: The U.S. health care system is terrible at controlling costs. But it has nothing to do with any phony distinction between “public” and “private” health care spending. It has everything to do with how U.S. government policy protects American health care consumers from out of pocket health care spending.

Consider employer-funded health insurance tax preferences. Tax policy incentivizes employers to compensate their employees, not through cash, but through generous first-dollar coverage health insurance plans. Because the owners of these policies do not have to pay anything out of pocket for most of the care they receive, they have been anesthetized to most health care costs. Meanwhile, doctors have every incentive to push for more treatments at higher costs. So, all thanks to public policy, none of the parties that actually make most private sector health care decisions (neither the doctors providing the care nor the patients receiving it) have any incentive to keep costs low. But this is all labeled “private” spending. The dollars go from the employer, to the health insurance company, to the doctor. No money ever touches government hands so it is not “public” spending.

There are better measures. The OECD also keeps data on out of pocket health care spending by country. Turns out, American health care consumers, as a percentage of total health care spending, pay far less out of pocket than most other OECD countries do. In 2009, U.S. consumers paid less out of pocket, 12.3 percent, than all but three other OECD countries (France, United Kingdom, and Luxemborg). Not surprisingly, France also spends more on health care as a percentage of GDP than all but two OECD countries (the U.S. and the Netherlands). Correlation does not equal causation, but as the graph below shows, generally, the higher percentage a country’s consumers pay for their own health care, the less that country spends on health care as a percentage of GDP:

Ezra is a little fuzzy on the link between out of pocket spending and health care costs. He recently attacked Paul Ryan’s Path to Prosperity writing:

The GOP outsources Medicare to private insurers and gives senior citizens checks that cover less and less of the cost of insurance every year. Republicans hope that when faced with more cost pressure and more options, seniors will be able to exert the sort of consumer pressure that lowers prices while retaining, or even improving, quality.

What they’ve got in mind already exists in Medicare. “Our premium-support plan is modeled after the Medicare Part D prescription-drug program,” Paul Ryan (R-Wis.) told me. But Part D hasn’t controlled costs. Instead, premiums have risen by 57 percent since 2006, and the program is expected to see nearly 10 percent growth in annual costs over the next decade.

What Ezra either doesn’t know, or doesn’t mention, is that the 57 percent premium increase number he cites, assumes Medicare beneficiaries will keep the exact same plan they had in 2006. But Medicare beneficiaries do not have to do so. They can switch to a competing plan that offers less generous coverage at lower costs. That is the whole point of a cost sharing mechanism: ensuring consumers to control costs.

Ezra’s 10 percent growth over the next decade number is also either uninformed or misleading. The reason Medicare Part D costs are set to explode over the next decade is because the Democrats filled the Medicare Part D donut hole when they passed Obamacare.

What is the donut hole? It was Part D’s biggest cost-sharing mechanism. After making initial out of pocket payments, Medicare then picked up most of a beneficiaries payments up to a certain amount. After that, beneficiaries were responsible for all out of pocket costs up to another point, where Medicare would pick up the rest of the tab. The donut hole was not the most popular part of Part D. But it also helped keep drug spending 31 percent below Centers for Medicare and Medicaid Services (CMS) projections. Remove the donut hole, remove the cost control.

If Ezra is really interested in lower health care spending, he shouldn’t waste his time on “pubic” vs “private” spending distinctions. Reducing third-party payments is the key to lower health care costs. As Arnold Kling wrote last year: “You can have the government tell people what they can and cannot have. Or you can have individuals pay for a larger fraction of the medical procedures that they consume. It really comes down to those choices.”

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Conn Carroll

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