Top-down Controls Not the Solution: Response to Marmor, Oberlander, and White

Ted Marmor and colleagues argue that the problem is not Medicare but the entire health system. We do indeed have a system-wide problem, but if we expect to solve it we have to start with Medicare. The program sets the pace for the rest of the system through its myriad regulations, instructions, and other guidance, which have tremendous influence on how health care is delivered in this country. Medicare is not only the largest individual payer, but it also has the threat of legislative, judicial, and political action to ensure that providers fall into line. Changes in Medicare quickly spread throughout the system as providers and private insurers adapt to the latest fiat.

Although Medicare has considerable leverage over the health system, that does not mean Medicare's rules will produce exactly what policymakers have in mind. Despite considerable expertise at the Centers for Medicare and Medicaid Services (CMS), information about the program's operation is incomplete and slow to arrive. Even if the information was comprehensive and could be analyzed in a timely manner--an unrealistic expectation now and in the future--neither the experts nor Congress can accurately anticipate how patients, providers, and plans will react to a change in policy. This uncertainty partly explains why Congress enacts so many changes in Medicare's statute and why CMS issues so many regulations, attempting to perfect a system that is constantly changing.

The single-payer policy supported by Marmor, Oberlander, and White is subject to the same lack of accurate information and inability to predict behavioral responses to policy changes. Their vision of an orderly society ignores the failures of economic planning and price controls around the world. Bad guesses about either the absolute price level or relative prices misallocates resources, leading to shortages or surpluses.

Moreover, a central price authority will set rules defining not only the prices but also which products get which price. That will spawn efforts by suppliers to either change their product enough to be reclassified into a higher payment category (even if the alteration makes the product somewhat less desirable to consumers) or to use their political clout to get an exception.

Sound familiar? The Balanced Budget Act of 1997 attempted to expand health plan choices for seniors, but overly tight limits on payments caused half of the plans to drop out within two years. The Medicare physician fee schedule was supposed to increase payments for primary care, but the physician experts who advise CMS have done the reverse. The Affordable Care Act (ACA) was supposed to guarantee that insurance would have a generous annual limit on benefits, but hundreds of union and employer plans that would have had to drop their coverage received waivers from a chastened U.S. Department of Health and Human Services (HHS). These examples are clearly not the outcomes that proponents of price-setting policies--including Republicans--wanted, but they are the kind of unanticipated reactions that we can expect.

Expert judgment, including that of top economists, can easily lead policy astray. Indeed, Marmor, Oberlander, and White fall into a logical trap set unwittingly by the Congressional Budget Office (CBO), which estimated Medicare beneficiary costs under ACA and Representative Ryan's version of premium support (CBO, 2011).
CBO assumed that ACA would be fully and permanently implemented, driving costs down sharply. A recent analysis for the Medicare actuary shows that Medicare payment rates would drop permanently to Medicaid levels (Centers for Medicare and Medicaid Services, 2011), which means seniors would face the same access problems Medicaid enrollees now face. In contrast, CBO assumes that private plans would have to pay the market rate to maintain current levels of access. Hence, the performance standard set for premium support through this exercise is far higher than for Medicare under ACA. The higher cost under premium support assumes ACA works perfectly and premium support fails to work at all.

Marmor, Oberlander, and White seem to believe that Congress would be able to maintain Medicare pricing at Medicaid levels without much question, citing a study by two of my former CBO colleagues (Horney & Van de Water, 2009). Cuts have been implemented with regularity--but so have later legislative acts that give back much of the money. Even the substantial payment cuts in the Balanced Budget Act of 1997 were negated by subsequent legislation, culminating in the 2003 prescription drug legislation that raised Medicare Advantage payments to levels at least as high as fee-for-service costs. Can we really expect system-wide price controls to be less vulnerable to political manipulation?

The power to price is the power to micromanage, and the wrong price signals will retard changes that can improve efficiency, effectiveness, and patients' satisfaction with their health care. Experts cannot anticipate the innovations in medicine and management that could allow us to get more for our dollars. A macro approach that gives patients and their providers a say in the resource allocation decisions allows the flexibility needed to create a health system we can live with.

As Marmor, Oberlander, and White state, deciding what kind of Medicare the country can afford is primarily a question of social values. The health policy debate for too long has focused on health and nothing else. That is why the budget perspective is valuable. We need to find a sustainable balance between health spending and other priorities, both now and for future generations. Implemented carefully, premium support provides the kind of flexibility and responsiveness that can allow the health sector to find innovative solutions to our most fundamental problems.

Medicare is a social insurance program that has the unfortunate characteristics to be expected from any centrally controlled provision of services. It is inflexible and proven to be unable to respond to improvements in benefit design embraced by private insurers. The program did not cover essential prescription drugs for more than three decades and still does not provide protection against catastrophic health care costs. Seniors say they are happy with Medicare, but most have supplemental coverage that fills in Medicare's gaps. Without that coverage, they would be far less satisfied. Those who support a Medicare-for-all model should look first to restructuring Medicare into a sensible insurance plan before taking on the rest of the system.

Joseph Antos is the William H. Taylor Scholar in Health Care and Retirement Reform at AEI.

Centers for Medicare and Medicaid Services. (2011, May). Projected Medicare expenditures under an illustrative scenario with alternative payment updates to Medicare providers. Retrieved May 27, 2011, from

Congressional Budget Office. (2011, April). Long-term analysis of a budget proposal by Chairman Ryan. Letter to the Hon. Paul Ryan. Washington, DC.

Horney, J. R., & Van de Water, P. (2009, December). House-passed and Senate health bills reduce deficit, slow health care costs, and include realistic Medicare savings. Washington, DC: Center on Budget and Policy Priorities.

"Top-down controls not the solution: Response to Marmor, Oberlander, and White," Joseph Antos, Journal of Policy Analysis and Management, published online ahead of print, June 24, 2011. Copyright © 2011 Wiley Periodicals, Inc.

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