Mayor Pete's worse way to do 'Medicare for All'

Mayor Pete's worse way to do 'Medicare for All'
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Mayor Pete ButtigiegPeter (Pete) Paul ButtigiegOvernight Health Care — Presented by Partnership for America's Health Care Future — ObamaCare premiums dropping for 2020 | Warren, Buttigieg shift stances on 'Medicare for All' | Drug companies spend big on lobbying Poll: Biden holds 2 point lead over Sanders nationally Saagar Enjeti: Warren, Buttigieg don't stand a chance against Trump MORE describes his health care proposal as a “better way to do ‘Medicare for All.’” It’s not. The proposal, which extends traditional Medicare to all who prefer it, is touted by the mayor as enhancing choice. But more choice can undermine competition in information-sensitive markets. Indeed, when buyers’ and sellers’ information differ, markets can collapse. This economics-of-information message is so critical that it has garnered four Nobel prizes.

To see the potential for market failure in health insurance, assume we know our health status but insurers don’t. Then the sickest among us will be first in line for coverage. But insurers, knowing the health of their “best” customers, will protect themselves by setting high premiums. This will lead the healthy to forego coverage, leaving a sicker and costlier composition of demanders. Insurers will react by setting even higher premiums, leading even more people to forego coverage, leading to even higher premiums. In the extreme, the market unravels.

Flip this thought experiment 180 degrees and assume only the insurers can tell who is likely to get sick. Now insurers will cherry-pick. Initially, they’ll exclude the very sick to lower their expected payouts. Next, they’ll deny coverage to the mildly sick. Then they’ll cherry-pick the relatively healthy with hopes of insuring just the super healthy. This can also unravel the market, albeit from the opposite end.

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In the wheat market, we don’t see market failure because buyers and sellers have symmetric information. But in health insurance, market failure is routine absent proper government intervention. Go back to the early 1960s, before Medicare’s enactment. Everyone over 65 could buy bread. But half couldn’t buy health insurance.

Next, fast forward to today’s Dallas-Fort Worth. Everyone there can buy bread, but no one can buy a decent ObamaCare plan. Those ObamaCare insurers with the best hospital and doctor networks have used big data to profit-scan every county in the country. And they found too many bad cherries among Dallas-Fort Worth’s ObamaCare patients. So they exercised choice — the choice to pull out. 

Unlike Mayor Pete, Senator Sanders (I-Vt.) realizes that more choice, both across and within health care systems, is an invitation for more cherry-picking. That’s why he’s pushing for traditional Medicare for All, i.e. for no choice. Under this plan, all Americans are enrolled in the same full-coverage policy, which they receive for free. And the government uses tax dollars to pay providers’ bills.

If you’re in an employer’s plan, your doctors and hospitals simply bill Uncle Sam. Thus, the mayor’s statement that BernieCare kicks millions off their plans is disingenuous. For most employees, BernieCare will provide better coverage. And those whose plans are more generous than BernieCare can buy supplemental insurance. France, Canada, Australia and the United Kingdom in essence have Berniecare, delivering far better outcomes at far lower cost than our system.

But there’s another way to handle the information problem, which has a proven 22-year track record and doesn’t involve Uncle Sam administering one-fifth of our economy. It’s Medicare Advantage, which currently covers one in three Medicare participants. Medicare Advantage handles the information problem brilliantly. It simply tells insurers our expected health care costs based on our medical records.

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Under Medicare Advantage, participants choose an essentially uniform plan from competing insurers. Insurers can’t turn you down, and have no interest in doing so since the government pays what you’ll cost, on average. If you’re perfectly healthy, the government will pay your chosen insurer a small premium. If you’re really sick, it will pay your chosen insurer a very high premium. This eliminates supply-side cherry-picking. Demand-side cherry-picking also goes away. You receive the same coverages (health care benefits) no matter which provider you select.

Medicare Advantage for All requires higher taxes. But it replaces the colossally expensive Medicaid, Obamacare, traditional Medicare and employer-plan tax breaks. Employer-provided plans? They’d have the option of becoming Advantage plans, which means covering all applicants, including people who aren’t their employees.

Unfortunately, Mayor Pete’s “reform” takes us in the wrong direction. It keeps Medicaid and ObamaCare, with their second-rate coverage and terrible work disincentives, in place. It continues to subsidize employer-provided health insurance, which locks millions of workers into jobs they should have left years ago. And it expands choice, which is the last thing you want to do when demanders and suppliers have private information.

Good intentions aren’t enough. We need intelligent health care design. Medicare Advantage for All is essentially the health care system of Germany, Switzerland and Israel. Indeed, the developed world has, generally speaking, opted either for BernieCare or Medicare Advantage for All. It hasn’t opted to permit rampant cherry-picking across multiple dimensions of five different health care systems. This should tell us something.                                                                                                                        

Laurence Kotlikoff is a professor at Boston University (BU) and professor of economics at BU. He is also a fellow of the American Academy of Arts and Sciences, a research associate of the National Bureau of Economic Research, a fellow of the Econometric Society and was formerly on President Ronald Reagan's Council of Economic Advisers. Follow him on Twitter @Kotlikoff.