Do private vouchers help control health care costs?

Basically not.  Austin Frakt writes:

Why is the market-based Advantage voucher system not helping to control Medicare costs? The answer is that health care cost control is tough, technically and politically. Provider groups typically resist it. When it pertains to Medicare, beneficiaries resist it too. By adding another private-sector layer to the program–health insurers–the Advantage program invites a third source of political pressure. Rent-seeking by providers and insurers, as well as the power of the beneficiary constituency, align in their encouragement of higher Advantage payments. Congress, apparently, is willing to yield to that encouragement.

So, it’s really no surprise that Advantage plans have not, to date, been part of a Medicare cost control solution. Congress has not consistently been willing to say no to the combination of powerful interests that advocate for higher payments to private plans. Given the track record, it is also not unreasonable to conclude the mandatory voucher program Ryan advocates wouldn’t save money either. As Krugman suggests, it could even be worse because in time 100% of beneficiaries would be enrolled in vouchers, not the 24 percent that are enrolled today.

The politics of Medicare are such that Ryan’s idea, paying for care entirely through private plans, costs more. That’s not due to a market failure, but a political one. Congress likes to spend money; insurers, providers and beneficiaries like to receive it. Congress spends even more when it can satisfy those interests under the guise of a seemingly pro-market, pro-competitive program.

Yglesias and Krugman have a good public choice critique of this aspect of the Ryan plan.  Ezra says the Ryan plan will end up reviving Simpson-Bowles, and more comment here.  Here is praise for the Ryan plan from Chris Edwards.  Here is Arnold Kling on morality.

The way to turn the Ryan plan into genuine cost control is to offer people a choice of 5-10 “public options,” some of which involve converting future Medicare benefits into current or future cash.


You can't attain cost control in medicare by making an individual election govern the outcome. The same forces that drive the creation of medicare will recoil from the notion that I could make that election and "screw it up" when some other thing happens to me. Similarly, you can't show people a pile of money that will run out because then its not social insurance anymore.

The truth is, it isn't insurance and someone will have to make the call about when to stop paying. No, there is no version of social insurance that simply covers everybody for everything no matter what. A solution to medicare has to maintain the illusion that society is doing everything it can for you - that you are protected from your own decisions and from fate. That means we can't put it on you the individual to make any hard choices, and it probably means we can't show you an account that depletes over time. I would love it if we could all be adults and handle finite health dollars, but I suspect what we will have to do is have experts tell us what the acceptable care level is going to be. That way we can all feel warm and responsible for our fellow man up to the approved limit. Its not just about sharing costs, it's also about exporting hard decisions. The only way we can save ourselves is for the experts to take a dim view of protracted end of life care.

JasonL, You might reconsider your views after watching Robert Schiller's discussion of social insurance in his economics finance class at After viewing the lectures on insurance v. social insurance, you might have a different view.

The issue of social insurance, though, is different than the issue of what insurance will cover, and what limits will be placed on it (for example, hip surgury for a 95 year old or extraordinary measures for the brain dead (EXCEPT Schiavo!). Now, we probably can agree on limitations here. But, in the social insurance/private insurance debate, the real question you might ask is: who do you want to create and who do you want to enforce the end of life rule: an insurance company with profit motive or persons who you elect. Your choice.

The value proposition for social insurance should include both benefits and costs. My ideal would be competing models for end of life care, with the greatest flexibility available to those willing to pay. I certainly don't want end of life care for all to be identical with an appointed bureaucrat's self interested notion. The real question is what should an end of life welfare plan look like? I suspect politics will not permit acknowledgement of a finite cost figure. We will have to obscure that calculation behind some kind of myth about the rightness of bureaucracies.

At the end of life, those with the most resources, medicare notwithstanding, have the greatest flexibility.

I get to choose from many insurance companies. There is only one federal government and practically speaking I have no influence on who is in it.

Better consistently save every penny, every paycheck, for that insurance, and be sure you have the discipline to do so, because I certainly am not going to pay for your healthcare when you show up at the hospital, at 75 years old, saying: I made some bad choices, save me.

Social, compulsory insurance spread out over large populations beats private insurance eveery time.

Go to, go to Economics, look up Shiller's Economics of Finance Course, and listen to the lectures on social insurance and insurance.

If you add a Public option you certainly won't have trouble getting Democrats to go along with it. But I don't know in what sense it would still be "the Ryan plan"

So is this the first time in history that popular liberal pundits have taken a public choice argument seriously?

I still think, in the end, that simply budgeting to the CPI is the only solution that will/can work, and if that doesn't over time, then I don't care how you actually structure it- we will just spend ever higher fractions on medical care until the pain of it makes it stop.

You'd just get the AMA making the argument of cost shifting.

I'll have to remember your support of price controls for another post.

If you fix the price, Q has to change, so be prepared to discuss how you will ration at the same time you set a limit on price changes.

Bill, not spending ever higher amounts isn't "cost control" in the sense I think you mean it. I call it smart budgeting. We go round and round trying to find some painless way (political and otherwise) to spend less when just spending less is what you should be doing from the start. We seem congenitally unable to set a budget that rises at CPI every year, and then figuring out how to stay under that. The way I view it, budgeting in the excess increase from the start of the fiscal year is the problem, and always was- it isn't like the government budgets that amount, then pocket the savings when costs come in under that due some efficiency gain- it all gets spent, then the next fiscal year it is overbudgeting again, and rinse and repeat. There is nothing like a real budget cap to give politicians and bureaucrats the actual incentive to control those costs. You are asking me for the proposed ways to do this- you are asking exactly the wrong people since I am neither of those groups.

In other words, I am content to support Medicare/Medicaid budget rising at CPI + population growth, then letting the the requisite agencies figure out how to spend that each and every year. No doubt this might well entail changing services year to year, but so what?


Rather than say to a bureaucrat: "here is your fixed budget, you go and figure it out", why not go directly to the problem and begin to specify what end of life care, for example, you will provide or not.

As you said, "We go round and round trying to find some painless way (political and otherwise) to spend less..."

It sounds painless to say CPI plus now,

Pain later.

No, Bill, it isn't painless- that is the point. Right now, there is no incentive to make the changes- the budget for both programs is largely on autopilot, which suits both parties and the agencies responsible for administration just fine- that is the problem. Until there is a real restraint right at the top of overall appropriation, you will continue to see what we see- fiddling around with various proposals for which no follow through occurs, while the burden grows year to year.

Today, as I understand it, Medicare is administered by insurance companies, managing payments as an administrative service organization. I do not think it is a step too far from where we are if we maintained medicare but added a managed care oversight component to it. Insurance companies already manage and oversee doctors, and paying carriers to do this additional function would probably reduce costs, or at least deter abuse.

>some of which involve converting future Medicare benefits into current or future cash.

So, you want to take advantage of poor people by offering them cash now (which they need more than most, so they'll take it) in exchange for denying them critically important health care when they'll need THAT most, with the full knowledge that lots of these people will be undereducated/minorities/immigrants who will be called the least-able to see what kind of evil predator you are?

Yeah, that'll fly.

If giving people $200,000 to pay for their house at a great mortgage rate is called "predatory," what are they going to call you for giving them $20,000 in exchange for forgoing cancer treatment at age 82?

Ha, I say to this.

In general, what are the possible ways to control health care cost inflation? Supposing we want to control it, that is.

If Congress shuts down, why do the President and Congresspersons still get paid? They are the first ones who should not get paid, since they are responsible for not resolving the budget and thus for the government shutdown. Anything else seems absolutely unbelievable and nonsensical.

You find it absolutely unbelievable that the people who set the rules for who gets paid would set them in such a way that they get paid first?

In general, what are the possible ways to control health care cost inflation? Supposing we want to control it, that is.

The first thing would be to cap Sec. 106 of the Internal Revenue Code, which allows the unlimited tax-free treatment of all employer paid health insurance premiums and creates a tax-induced preference for health insurance over cash compensation.

Of course, this section was enacted after the IRS attempted to impute tax liabilities on employer paid premiums in the 1940's and for the same reason it is politically infeasible to limit the exemption now, as I believe Mr. Obama found out when he attempted to add this ingredient to the sausage of Obamacare and some of the people he owes explained that to him.

Except high cost plans are taxed for the excess over a limit in ACA, and that was one of many aspects that was attacked by Republicans/conservatives. More important, the size of the "voucher" for Medicare Advantage is reduced in ACA by a more modest amount than Ryan is proposing, and that aspect of ACA was attacked by Republicans/conservatives. Ryan is clearly proposing rationing of care, and that in a more modest and tentative mode was attacked in ACA. Proposals to have Medicare patients pre-plan end of life decisions in ACA was attacked by conservatives as death panels. ACA was claimed to be denying health care options to millions, but that is clearly integral to the Medicaid block grants at significantly reduced spending levels.

Democrats and Obama agreed to a lot of things and were attacked by conservatives and Republicans with lies and distortions.

So,when Ryan laid out his plans, he knew that almost every attack, most being lies and distortions, on Obama and ACA will apply equally to Ryan's plan.

But Ryan's plan offers new lines of attack, like reducing access to health care to the people with the least ability to compensate. Plus shifting the cost burden to the States and the private institutions which will be faced with kicking people out of hospitals for failure to pay bills. Will the States repeal their laws making such actions illegal? Will politicians steadfastly say "hard choices must be made to make way for tax cuts" as the TV footage rolls of the sick dying on the sidewalks outside hospitals? Or perhaps the States will legalize replacing pure oxygen with cheaper pure nitrogen to save money on health care?

Actually, it was big labor that squealed the loudest and was exempted (so much for equality under the law)

Do you reaize how little credibiliity you have when you write something like this?

"almost every attack, most being lies and distortions, on Obama and ACA"

"hard choices must be made to make way for tax cuts” as the TV footage rolls of the sick dying on the sidewalks outside hospitals?"

Look, I get it, you drink the Kool-Aid, but you could you at least not show up frothing at the mouth with the blue raspberry discoloration?

"The way to turn the Ryan plan into genuine cost control is to offer people a choice of 5-10 “public options,” some of which involve converting future Medicare benefits into current or future cash."

Could you please explain futher how this choice turns mud into gold?

If people are rational and have a choice of 5-10 public options, they will choose the most expensive.

OTOH, suppose someone needs cash desperately now and so takes cash in exchange for worse
benefits later. Ten years down the road, they then need better benefits. You think society is going
to say, "Tough luck"?

What ever happened to taking the low hanging fruit? Adopting the methods of the several industrialized nations which get better health care results for less money?

Instead, we see increasingly Byzantine proposals which provide all sorts of opportunities to transfer risk to citizens and guarantee bigger profits to the health care industry. Hmmm. That should work as well as individual stock market accounts has for financing retirement.

These people forget Occam's Razor. Every problem must require an even more complex solution!

"Everything is so hard, it must need an advanced sophisticated solution. Luckily we have a group of people whose very job means Smart."

Because it's not true for one thing. Demographically, the UK is probably the best analogy to the US. Adjusted ONLY for our larger African American population, their life expectancy is probably lower than ours.

Life expectancy is not a medical outcome.

True, but we get better outcomes. It's the higher cost that is the problem.

Who is "we"?

"Why is the market-based Advantage voucher system not helping to control Medicare costs? "

Because the other 76% is NOT vouchers?

Hasn't a big complaint about health care costs been the enormous proportion required for administrative costs? How can any voucher system fail to substantially increase these costs?
Any new plan has to be simpler than what it replaces.


"Given the track record, it is also not unreasonable to conclude the mandatory voucher program Ryan advocates wouldn’t save money either."

I don't think this clarifies my misunderstanding of the program very well.


So Austin Frakt says the Ryan vouchers will not work because it will be politically impossible to stick to the plan. In other words, 75 years of the welfare state have infantilized the population to believe in a magical government that can repeal the law of scarcity. Kling puts his finger on the problem - either you accept the reality of scarce means or you delude yourself or mislead others (that's where the immorality comes in).

The Ryan plan lays it on the table for voters to see and decide. The Obama plan relies on just the sort of cuts that Frakt says are impossible, and is designed to lock us into a system that will inevitably lead to a mediocre and coercive system. When that becomes clear, some years down the road, hey, tough luck suckers!

1. The Ryan plan invokes magic (i.e. the magic of the market) as its mechanism of cost savings. The theory is that private insurance companies, seeking to offer customers good care but keep costs low, will data mine and negotiate like crazy to lower health spending while keeping the customers happy. The problem is that there's an easier way for private health insurance to end up with good profits and happy customers, screen out the sick, expensive ones. This can be done, even if the law formally bans it, by offering policy 'choices' that are designed to appeal to the healthy (i.e. gym memberships, massage discounts, 'holisitic therapy' options like armatherapy) but not look so great to those thinking they may need serious medical services ("hey, the only 'in network' oncologists are 75 miles away!").

2. The 'we won't stick to it' is a legitimate concern. Will the people who picked the cheaper, sexier 'holistic' plan be able to change when they get cancer and need the best care? Probably so, in which case the cost savings then disappear.

3. If it works, then, it only works by screwing patients. If patients 'choose wisely' then the serious plans will become expensive (all the people who are or will be sick will sign up for them). If people choose stupidly, then they will pile into cheap plans and then be stuck when they can't get the care they need. Then the 'budget wins', but if the electorate goes for #2 then the budget ceases to win.

4. "The Obama plan relies on just the sort of cuts that Frakt says are impossible, and is designed to lock us into a system that will inevitably lead to a mediocre and coercive system"

Actually just the opposite. The cuts are primarily designed to first try to tap true cost savings...either by eliminating treatments that don't work or stopping reimbursement for things that can be easily avoided (such as post-op infections). There's no incentive to 'save costs' by simply shuffling the expensive patients onto someone else's rolls because Medicare is covering just about all seniors. But let's just say, for the sake of the argument, that Medicare goes beyond just efficiency savings and starts to cut real stuff.

Well look, Medicare doesn't cover dental care now. Does that mean seniors are 'coerced' into a 'mediocre' dental system? No. Seniors go to the dentist and either use their own OOP money to pay or buy their own dental insurance. Medicare pays only 80% of standard medical treatments. Seniors pay the other 20% or buy supplemental insurance. If tomorrow Medicare changes to 75% of standard treatments....well again seniors are free to buy more.

The trade off is crystal clear with Obama's health plan. If reimbursement falls 5%, well seniors know exactly what that means. It's not clear under Ryan's plan, its obscured. Are benefits shabby because gov't isn't putting enough into the voucher or are they shabby because you the individual made bad choices when choosing among the competiting policies? Or is the problem the regulation of the insurance companies that's causing them to offer crappy plans? Hard to say and even harder to solve because lobbyists will fight any effort to confront the issue directly by pinning the blame on someone else. If, though, Medicare isn't reimbursing what it used too the issue is much more clear. Either argue that the voters should accept more Medicare spending (which means either other spending cuts, higher taxes or more borrowing) or accept lower benefits and make up for it with private spending on supplemental coverage.

The reason we have Medicare in the first place is that no private, for profit insurance company will take the risk of selling health insurance to seniors.

So who actually believes that Ryan's vouchers will actually induce private insurance companies to suddenly take on this risk?


That first statement is really ignorant. There are plenty of insurers who insure seniors (including the Medicare Advantage plans cited in the post).

Have you tried to buy insurance, not supplemental, for someone over 65? My insurance broker would not even quote a price. As to Medicare Advantage, they have Medicare rates to fall back on. They can offer the same services and offer the same fees as traditional Medicare. The result is that, on average, it costs 14% more than traditional Medicare.


I'm not sure you can really expect vouchers to contain costs, unless you get extreme price transparency as well. Health care providers need to list prices for everything up front, on line, so people can compare and, when things "turn out to be more complicated than expected," the doctors need to be forced to stick with the rate they quoted. And, as Porter argued well in Redefining Health Care, the prices need to be the same for everyone, not negotiated individually with insurance companies.

A question for Tyler or anyone else who thinks he can field it:

Why has Redefining Health Care has so little impact on the discussion? It was written by the most prestigious guy in the universe. It was boring to read but the ideas were persuasively argued and, while they advocated major changes, they didn't seem so radical to my eyes that they are absolutely politically impossible.

Let's think about this at a larger level.

There's a few paths to lower spending by 'insurance' in general. I think there's only a few so we are dealing with a closed set here:

1. Get lower prices, work out 'preferred supplier' lists and what not that charge lower prices for services. (See auto insurance companies who have lists of mechanics who will do repairs for clients). Savings here is achieved by negotiating skills and volumn (instead of 3 shops running at 60% capacity, the insurance company steers enough business to 1 shop for it to run at 95% capacity....more customers means fixed costs can be spread out among a higher base making it a win for the mechanic, a win for the custoemr and a win for insurance).

2. Avoid the problem to begin with. Fire insurance companies want you to have sprinklers, auto insurance funds commercials to remind you to drive carefully. If you don't have a fire or accident you win and the insurance wins. Who doesn't quite win are the people who would have made money fixing things if you did have a fire or accident or who incur expenses without any direct gain. Hence insurance companies lobby for car makers to be required to install airbags. Car companies don't like that for the most part. Building developers chaf at the extra cost of building to fire codes enacted partially at the request of insurance.

3. Cover the people who don't need coverage. Life insurance for babies is really cheap. Why? Babies don't die very often. Old people do, sick people do. People with lots of tickets and DUI's get into accidents. Don't cover them, or try to scare them away with lots of extra fees and penalties. What's that, there's a fireworks factory next to your building? Don't bother asking us for fire insurance.......

Now I think the thing is #3 does often help us out in that it either generates good incentives or at least makes people take on the costs of the things they choose to do (if you really want to build you straw house next to the fireworks factory, you'll going to either have to go without insurance or pay a lot for it). When it comes to health it's not so cool because a lot of health problems are really outside our control. True some things like smoking can directly be said to incur direct costs on you in terms of raising your risks, but many other things are much more subtle. Genetics is maybe 30% and we can't do much about that. Lifestyle is maybe 40% but even that's relatively 'locked in'. Maybe the 65 yr old can start exercising now but the last 30 years of being a lazy sob still will increase his chance of diabetes dramatically and there's not much he can do about that now. Insurance is usually a year to year thing so 'lifestyle' changes that impact health costs in a year's time are minimal.

Voucher schemes seem to hope that strategies #1 and #2 will invoke 'the magic of the market' to lower costs. I think it is true insurance companies can and do negotiate lower rates with doctors (#1). Medicare, though, has an advantage in that it's massive so its negotiating power is likewise massive. There's an inherent conflict with the voucher idea and savings achieved by strategy #1. Lots of 'choice' means lots of insurance companies, but lots of insurance companies means little negotiating power. A doctor can simply drop one insurance and start participating in another. If one huge insurance company dominates the market, though, then there's that much less 'choice' which is supposedly the point of the voucher scheme.

On #2, I think there's a good argument that private companies have an edge. They can counter the marketing that doctors receive. They can nudge, or push, lower cost treatments, generics etc. They can datamine looking for ways to get more actual health outcome out of each dollar spent. Medicare I think can and does do this too but I'd give the 'edge' to private companies here.....

On #3, I think we have a big, big problem. Trying to get a patient to change their lifestyle to avoid diabetes is probably impossible when you have insurance for periods of a year or two at a time...the benefit won't show up for maybe ten years, at which time some other company will be covering him. Figuring out a generic drug will work just as good as a premium one for a particular diabetic will save some money but is pretty hard too....and the patient probably won't like your cost benefit people 'getting between' him and what his doctor wants to prescribe. But hey, if you get the diabetic to go to some other insurance company he's not your problem! You don't have to try to force your patients to eat less cake, you don't have to datamine, you lowered your costs! Yay. Medicare, though, doesn't enjoy this. With a few exceptions, if you're 65 you have Medicare period. There is no 'other company' to push the sick people off on. The only way to save for Medicare is #1 and #2.

The Obama plan, then, ironically is to me a test of the Ryan plan in this sense. If you're under 65 and not insured you basically are buying insurance with gov't grants (i.e. vouchers) in a market of plans offered by private insurance companies. At least this 'test' is happening with a population that doesn't have coverage right now. First 'do no harm'. It tries to counter the #3 issue by requiring companies to charge more or less the same to everyone. But IMO that's imperfect. You can still probably make your plan appealing to healthy people by tossing in 'goodies' which would make the sick people want to avoid your plan. I suspect this is what happened with Medicare Advantage. Even though private companies were providing coverage for Medicare patients, it was politically impossible to allow people to end up with less things covered under Advantage plans than regular Medicare. As a result we ended up with spending more per patient when they were covered with supposedly private Medicare Advantage than with regular Medicare.

If there wasn't loop holes in gov't Health Care, Tax, & Insurance, I don't even want to think where my business would be today...

some of which involve converting future Medicare benefits into current or future cash.

You can't credibly commit to turning away grandpa from the hospital door. No one can.

Every plausible method of bringing down costs involves someone somewhere being callous to the sick. In America, that won't fly. It against the unwritten law--the kind of law that juries and bureacrats and politicians and the public enforce, no matter what the written law says.

We have a post and fifty comments of ideology-filled theory about health care ...
... but no mention of the most-salient facts -- How other countries routinely manage to do what the theory says is impossible: provide high-quality care at much lower cost.
This is like a discussion of the US auto industry's problems that doesn't mention the Japanese industry .. pretty well useless.

Simple solution: ban third party payments.

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