Why Simple is Better for Old-Age Insurance Programs
Matt Yglesias on one reason that it's probably not a good idea to turn Medicare into a voucher program:
We all know that some cognitive impairment tends to be a part of the aging process....That's why elder fraud is a recognized problem. A great study by David Labison finds that about half of 80-somethings have "significant cognitive impairment, effectively rendering them incapable of making important financial choices."
....[This is one of the problems] with the Romney/Ryan plan to replace Medicare with a system of subsidies for the purchase of private health insurance on regulated exchanges. This is essentially the same idea as what ObamaCare will do for the non-elderly, but in the opposite direction. In the case of the Affordable Care Act, it's not clear to me that there are sound non-political reasons for doing it this way rather than constructing a single public program. But in the case of a program targeted at the elderly, the case for consumer sovereignty is clearly weaker. Insurance forms are confusing, and calculating the real actuarial value of different offers is difficult. This is not an ideal task to assign to a 92 year-old. It's possible to make it work with adequate regulation, but you really are counting on building a very effective regulatory agency to manage the program. So why not just build an effective agency and manage Medicare?
If private competition among insurance companies were truly likely to lead to substantial cost reductions, it might be worth doing this regardless. But the evidence we have suggests that competitive bidding, at best, would lead only to modest savings. The reason is simple: The high cost of healthcare in America is mostly related to the high prices we pay to providers — hospitals, doctors, drug companies, device manufacturers, etc. — and only slightly related to insurance company efficiency. There's just not much reason to think that competition among insurance companies will have a big effect on provider prices.
It might still be worth trying. That's a judgment call. But everyone should understand both the tradeoffs and the likelihood that, at most, it will produce only modest savings.