(Bloomberg View) — When arguing about national health care in this country, those favoring some sort of government-led system always come back to one argument. "But everyone loves Medicare," they say. "If Medicare's so great, why not expand it to everyone?"
Indeed, Alan Grayson, a Democratic congressman from Florida, recently introduced a bill that would allow people of any age to buy into the program.
And what's wrong with that? After all, if people buy in, it won't cost the government a dime, right?
I'm so glad you asked.
For one thing, as Obamacare has shown, "people will be paying for it, not the government, so what's the problem?" is not quite as simple as it sounded when you were saying it in front of a room of cheering supporters. For whom is it likely to be a good deal? Sick people. Medicare can adjust the buy-in premium to take account of this, but then next year, folks are going to be looking at the new higher premiums, and who is likely to opt in at that high price? The sickest folks in the insurance pool. Better adjust those premiums again …
Yes, it's our old friend, adverse selection, which pops up whenever you build an insurance market without underwriting. Medicare is a government program, so it can't death spiral out of existence. However, there will be considerable political pressure to set the premiums well below the expected actuarial expenditure on care for beneficiaries. So instead of a death spiral, you get a fiscal crisis in Medicare.
Yet here's a measure of how badly thought out this idea of expanded Medicare is: Adverse selection isn't even its biggest problem. A far bigger problem is what this might do to hospital budgets. Why? Because Medicare doesn't necessarily pay enough to keep those hospitals running.
Deep in the weeds of health wonkdom, a long battle has been going on over whether — and to what extent — Medicare controls its costs by offloading them onto private insurers, a phenomenon called cost shifting. Conservatives often promote a somewhat simplistic version of this argument: Medicare pays too little, so hospitals have to charge insurers more to make up the lost reimbursements. As stated, this is probably wrong. The empirical evidence to support it is weak, and even just theoretically, this misunderstands how market actors behave. It treats costs as a budget problem: Companies have to cover certain costs, and if one customer pays less, another customer has to pay more. (Liberals often make this mistake in reverse when talking about drug prices, assuming that if the U.S. cracked down on pharmaceutical reimbursements, European governments would have to raise their reimbursements to make up for the lost cash, thereby ending their free riding on the new drugs produced from U.S.-derived profits.)
In fact, economists generally assume that sellers are charging each buyer as much as they can. Having one customer refuse to pay so much doesn't make your other customers more willing to pay, so there's no reason to think that you'll be able to raise the price you charge them.
However, there remains an undeniable fact: Medicare pays significantly less than private insurers. And this can't simply be explained by the fact that Medicare covers a huge number of people, because so do Aetna and Humana and Anthem and Blue Cross.
There's some evidence that Medicare reimbursements don't quite cover the average cost of having a patient in the hospital. The hospital's fixed costs are mostly getting covered by higher reimbursements from private payers. (Though this varies by hospital, and is difficult to tease out, and therefore disputed.)
