Paul Ryan & Friends

House Republicans today released their "Path to Prosperity" budget blueprint for 2012.

I haven't read the document super-carefully, but it appears they are proposing to convert Medicare into a subsidy to be used by insureds to purchase (guaranteed access) private insurance.  "For younger workers, when they reach eligibility, Medicare will provide a Medicare payment and a list of guaranteed coverage options from which recipients can choose a plan that best suits their needs.  These future Medicare beneficiaries will be able to choose a plan the same way members of Congress do."  Id. at 44.

Observers frequently debate whether government insurance is cheaper than private insurance.  I'd like to discuss something different: explicit marginal cost limitations on insurance promises.  That's not anywhere in the Republicans' proposal, but it has real promise for actually constraining costs.  And it does not have to be done by the government.   

Most private insurance turns on "medical necessity" or something similar.  You pay a premium to get medically necessary treatment, without regard to marginal cost.  That is, explicit marginal cost limitations are, generally speaking, not a formal part of  health insurance promise, i.e., "we will not cover treatments that cost more than $X per unit of health outcome."  As a result, the upward cost pressure on medical treatment is high -- patients demand costly treatments, doctors want to provide them, entrepeneurs try to invent them, and so on.  The arguments are well-known.

Explicit cost/effectiveness (C/E) limitations are one way to control costs, for real.  Other cost containment mechanisms -- restrictions on remedies, only insuring the healthy, assigning the medical necessity determination to an actor who will internalize high marginal costs, e.g., managed care -- may be part of the solution, but are unlikely to be all of it.

To compare health outcomes with different epidemiological characteristics, various utility-based outcome metrics, such as Quality Adjusted Life Years (QALYs), have been developed.  With sufficiently robust QALY data, a meaningful alteration could be made to health insurance promises.  Instead of a promise of all “medically necessary care,” one can imagine a promise that covers "all medically necessary treatments less costly than X dollars per QALY."  While QALYs are far from perfect, you get the idea.

Many people, such as Sarah Palin, are frightened of explicit C/E limitations because of government "rationing."  The government, however, doesn't need be the one who rations.  Individuals, contracts, and markets can do it, at least in theory.

Imagine a system where the government compiles a C/E database and either (1) "rates" policies sold as being "1-10" on the C/E scale, leaving individuals to purchase the desirable level of C/E coverage, or (2) where the government compiles a C/E database and leaves it up to private insurers to incorporate, or not incorporate, explicit C/E limitations in their policies, and see how the market reacts.   Professor Korobkin suggested something like the former in a very thoughtful presentation at the AALS annual meeting in January; I've spitballed some ideas on the latter with my frequent collaborator Peter K. Stris.  

I don't post this to advance a particular view on a very complicated issue.  I have no answer.  I'm just reminded in reading the latest Republican salvo that certain sorts of health care cost control -- even if done by private forces -- seem to be political death.