Medicare: Why Are Conservatives Scared of Competition?

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Dean Baker
Truthout, Sep. 27, 2006

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In their public pronouncements, conservatives like to claim that they are free-market individualists. They want to leave everything to the markets and let businesses and individuals fend for themselves.

The tough-guy rhetoric makes for a nice story, but the reality is very different. The conservatives need to be constantly coddled against the rigors of an unfettered marketplace. It turns out that life can be tough for rich people in a competitive market. That's why they need the helping hand of the government at every turn.

Let's take Medicare for example. The New York Times had an article last week which talked about private fee for service insurance plans that are operating within the Medicare system. The article reports that demand for these plans has been growing rapidly, with more than 820,000 Medicare beneficiaries (2 percent of all beneficiaries) now enrolled in these plans.

While this might look a victory for the private sector over a cumbersome Medicare bureaucracy, there is a really big footnote to this story. According to Medicare's payment advisory commission, these plans receive a subsidy that averages 11 percent for each patient. This is real money. The subsidy raised Medicare's costs by $770 million last year. If everyone in Medicare signed up with these plans, it would raise the cost to the government by almost $40 billion a year.

It is not only fee for service plans that require subsidies from the government. There have been several studies of the role of HMOs and PPOs in Medicare which also found that they cost the government more on average than keeping beneficiaries in the traditional Medicare program. In other words, the evidence shows that the private insurers simply can't compete with Medicare when the playing field is level, which is why they run to the government for subsidies.

The Medicare Prescription Drug benefit was the latest chapter in this story. The Republican Congress prohibited Medicare from offering its own plan, requiring instead that the plan be offered only through private insurers. According to the Congressional Budget Office, the administrative expenses of the private insurers increased the cost of the drug benefit by almost $5 billion annually, or nearly 10 percent. Private insurers also don't have the bargaining power to force the drug industry to offer prices that are as low as what Medicare would pay. So, the Republican congress passed a bill that effectively offered subsidies to both private insurers and the pharmaceutical industry.

It would be a huge step forward if the country had some conservative politicians who believed that the private sector actually could compete on a level playing field. They would support the elimination of the various subsidies for private insurers within Medicare, and also would allow Medicare to offer its own prescription drug plan under which it negotiated price directly with the pharmaceutical industry.

In fact, if conservatives believed in the efficiency of the private sector, they would let Medicare compete more generally with private insurers. Why not let every individual and employer in the country have the option to buy into the Medicare system? This isn't a handout - we would be paying our own way - why won't the conservatives give us this option? Or, as they use to say in other contexts, what's wrong with giving people a choice?

Well, when it comes to competing with Medicare, we know that the insurance industry and the pharmaceutical industry need to be protected from a competitive market. The top executives, with their multi-million dollar salaries, might be forced to take pay cuts if they really had to compete. The stock of the insurers and the pharmaceutical companies would plummet if their profits dipped due to Medicare expanding its role in the health care sector.

At the moment, these industries control enough politicians that they can rig the deck against Medicare and walk away with huge profits. But, we can at least steal away their bogus story. The conservatives are not free market individualists, they are pathetic cowards who lack the skills and ability to succeed in a competitive market; therefore they buy their success in Washington.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.