Economic Principles for Medicare Reform

• Author: Amitabh Chandra,Craig Garthwaite
• Date: 01 November 2019
• DOI: 10.1177/0002716219885582
• Published date: 01 November 2019
• Subject Matter: Social Insurance

ANNALS, AAPSS, 686, November 2019 63

DOI: 10.1177/0002716219885582

Economic

Principles for

Medicare

Reform

By

AMITABH CHANDRA

and

CRAIG GARTHWAITE

885582ANN THE ANNALS OF THE AMERICAN ACADEMYECONOMIC PRINCIPLES FOR MEDICARE REFORM

research-article2019

In this article, we develop an economic framework for

Medicare reform that highlights trade-offs that reform

proposals should grapple with, but often ignore. Central

to our argument is a tension in administratively set

prices, which may improve short-term efficiency but do

so at the expense of dynamic efficiency (slowing inno-

vations in new treatments). The smaller the Medicare

program is relative to the commercial market, the less

important this is; but in a world where there are no

market prices or the private sector is very small, the

task of setting prices that are dynamically correct

becomes more complex. Reforming Medicare should

focus on greater incentives to increase competition

between Medicare Advantage plans, which necessitates

a role for government in ensuring competition; pre-

mium support; less use of regulated prices; and less

appetite for countless “pay for performance” schemes.

We apply this framework to evaluate Medicare for All

proposals.

Keywords: Medicare; value-based care; health care

reform; markets in health care

While the U.S. health care sector is often

described as a private, market-based sys-

tem, the government now controls more than

60 percent of spending (Martin et al. 2018).

Public insurers provide insurance to several

groups, including the elderly, the indigent, and

Amitabh Chandra is a professor at Harvard Business

School and a professor at the Harvard Kennedy School

of Government. He is a member of the Congressional

Budget Office’s (CBO) Panel of Health Advisors and is

a research associate at the National Bureau of Economic

Research (NBER).

Craig Garthwaite is a professor at the Kellogg School of

Management at Northwestern University, the director

of the Program on Healthcare at Kellogg (HCAK), and

a research associate at NBER.

NOTE: We are grateful to Jim Ziliak, Robert Moffit,

and conference participants for very helpful comments.

Correspondence: Amitabh_Chandra@Harvard.EDU

64 THE ANNALS OF THE AMERICAN ACADEMY

the disabled. Of all insurers in the United States, Medicare—which provides

health insurance for the elderly and a subset of the disabled population—is the

largest in terms of spending and is expected to grow even more in coming years

as a result of changing demographics. Given this breadth of coverage, Medicare’s

current coverage decisions and operations, as well as reforms to the program’s

structure, will likely have meaningful market-wide effects.

Medicare reform is important for a number of reasons. First, the demograph-

ics of the baby-boomers means Medicare enrollment is growing rapidly. This

enrollment growth is important as we consider reform, because it creates a politi-

cal constituency that will both demand improvements to the existing program

and push back against any reforms that are seen to decrease the generosity of

existing benefits—even if those reforms increase net social benefits (the net ben-

efit to patients and producers of health care, including the net benefit to

taxpayers).1

Second, even after the implementation of the Affordable Care Act (ACA), a

meaningful fraction of the U.S. population remains without health insurance

coverage (at the time of this writing, the percentage of uninsured hovers at 13

percent of the population, up from 10.9 percent in November 2016 [Witters

2019]). In addition, health care costs for even those who are insured are quite

high, and many individuals are in plans with high cost sharing relative to their

income, which leaves them underinsured to the financial risk of a health shock.

Many see the relative success of the existing Medicare program in providing

broad coverage to the elderly and want to expand it to others. Often described as

“Medicare for All,” these various policy proposals range from allowing progres-

sively younger individuals to purchase Medicare coverage to the expansion of the

existing Medicare program to serve as a single-payer system for the entirety of

the U.S. population.2 These proposals are popular, but popularity does not mean

that the hard work of grappling with the underlying trade-offs has been started,

let alone achieved.

Third, despite the ostensible “dual mandate” of the ACA to both increase

coverage and control costs, health care costs in the United States continue to

grow, albeit at a slower rate than in the past (Chandra, Holmes, and Skinner

2013). Concerns about rising costs and a lack of universal coverage has pushed

policy-makers to call for an expanded role for the Medicare system because of

the belief that a government-run program can be more administratively efficient

than a complex web of private firms offering coverage. In addition, some sup-

porters of such reforms believe a system of administratively set prices will be less

expensive, because these prices will be below those determined by a market

transaction. Other constituents, who are interested in the debt and tax ramifica-

tions of such a large health care program financed by the federal government,

want to reform the program accordingly. Still other reformers do not want to

shrink Medicare per se but believe it can be made more efficient—which

increases its sustainability and reduces the extent to which this program may be

crowding out other public spending priorities.

Finally, the last major changes to Medicare occurred in 2003 with the

Medicare Modernization Act (which introduced Medicare Advantage [MA]) and