Economics, Health Care, Pethokoukis

How choice and competition are slowing the rise in US health care costs

Credit: Altarum

Credit: Altarum

How to explain the slowdown in US health care spending? The more you look, the more it seems choice and competition are playing a big role. As I noted last week, the increase in high-deductible, employer-provided health insurance — frequently paired with a health savings accounts — are one likely cause.

Another candidate can be found in the CBO’s recently updated budget forecast. The budget scorekeeper dropped its 10-year cost for Medicare by $137 billion. Here’s why, according to the CBO: “The largest downward revision in the current baseline is for spending for Medicare’s Part D (prescription drugs).” Indeed, 75% of that decline, notes economist and AEI visiting scholar James Capretta, was due to the drop in expected Medicare drug benefit spending. Moreover, actual 2012 spending was 40% below what was projected in 2007. And over the last two years, “CBO has dropped the expected cost of the drug benefit over the eight-year period from 2013 to 2020 by nearly $250 billion, or 33%.”

What’s going on with Medicare Part D? Capretta:

And this is occurring in a program run entirely through private insurance plans competing with each other for enrollment among Medicare beneficiaries. Naysayers continue to argue that this cost experience has nothing to do with consumer pressure—it’s all supposedly due to the transition from branded drugs to generics. But what’s driving seniors out of branded drugs? It’s the design of the drug benefit being offered by the private plans. Those plans are offering seniors low-premium products with strong incentives for generic substitution, and—surprise, surprise—seniors are readily taking them up on the offer. It turns out that Medicare beneficiaries are just as eager to save on their monthly insurance premiums as everyone else in America. It’s just that this is the first time in the history of Medicare that they have been given the opportunity to cut their expenses by signing up with lower-cost options.

More evidence that injecting market forces throughout Medicare, as would be done with premium support reform, stands a good chance at reducing costs without hurting the quality of care.

4 thoughts on “How choice and competition are slowing the rise in US health care costs

  1. Puhleeze. If Medicare negotiated directly with pharmaceutical companies, it could costs by $200 billion a year.

    The answer is ‘no’ Obama is not tackling the ban against direct negotiation that was enacted in the Part D legislation. (Big Pharma: “Only please, Brer Fox, do not throw me in the briar patch.”)

    Only an AEI scholar could look at a law diluting Medicare’s market clout and pronounce it “free market.”

  2. I agree.. it’s an interesting argument that a subsidized govt program is motivating a ‘free market”….

    makes one wonder if it would be even better “free market” if we repealed Medicare part D, eh?


      • ” Well don’t all the defense contractors bid on government national defense programs in the free market?”

        with certain parameters.. yes. the contractor has to be “qualified” and adhere to other regs that apply to contractors – such as security clearances, and monitoring of employees to make sure they are not so low paid as to be tempted to accept bribes from foreign governments, etc….

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