Medicare vs. FEHB Spending:  A Rare, Reasonable Analysis 
Jeff Lemieux
6/23/2003

The numerical food fight between advocates of government-run health care and private health insurance has had some amateur moments.  However, a new analysis by the Joint Economic Committee (JEC) Republican staff, is definitive, and hopefully, the last word.

It started when Marilyn Moon and her colleagues at the Urban Institute released a paper in the journal Health Affairs claiming that the Medicare program's cost control efforts had outpaced those of the private sector over the last 30 years.  Then Joe Antos from the American Enterprise Institute fired back that Urban's comparative work was flawed because it didn't take into account that benefits in private health plans had increased dramatically, while those in Medicare had not.

The Progressive Policy Institute tried to put a lid on this dispute by pointing out that trends in Medicare and private insurance spending were interrelated, and cannot be independently evaluated.  That is because employers put pressure on private plans to control costs when Medicare appears to be doing a better job, and politicians reduce Medicare payments when private plans' cost control efforts seem superior.  

But then, the Kaiser Family Foundation came out with a highly publicized "study" of the Federal Employees Health Benefits (FEHB) program that limited its comparative cost analysis to the last several years, when Medicare costs slowed after the Balanced Budget Act of 1997, and private spending surged after the extremely tight "managed care" cost control period in the mid-1990s.  Of course, using such a limited period was not analytically rigorous.  The Kaiser short-run comparison got a fair amount of publicity, but it was highly misleading.

Now, the JEC Republican-side staff has produced a compelling paper that shows the Medicare's cost control success has been roughly equivalent to that of large group purchasing systems, like the federal employees' program and the California public employees benefits system (known as CalPERS).  Using data over two decades, JEC shows that the large purchasing pools have been able to increase benefits more than Medicare, while keeping cost growth under relative control.

Ultimately, these sorts of disputes could go on forever.  Advocates of government-run health insurance might say that many of the benefit increases that private plans have embraced (and which have not been added to Medicare) have been accompanied by restrictions:  network-based providers, drug formularies etc.  That's true, but... Advocates of private health plans could just as easily point out that many private health plans like HMOs and PPOs have adopted patient safety features, consumer self-help tools, and care coordination and case management programs that don't show up in the listed benefits, but are highly desirable for patients' health.  It's impossible to quantify any of these things (although the think tanks pushing one side or the other in this debate will probably try).

But the bottom line isn't that complicated.  Medicare and private plans both have the potential to control costs when the market and political pressures require austerity.  Medicare's fee-for-service system has powerful potential price controls at its disposal, which can be used when politicians find it necessary.  However, those price controls cannot be wielded perfectly -- government-set prices will inevitably cause market distortions that essentially forego opportunities for better health care. 

Private health plans, when the market allows, have been quite inventive and innovative in developing cost control systems.  Some private plans have been more successful than others balancing the needs of cost control and patients' inherent desire for unlimited health care services.  But in general, the private health plans have done a decent job controlling costs despite the fact that they can't control prices by fiat.  And despite consumer complaints, they have done a better job than Medicare of updating benefits for the changing needs and possibilities of modern health care.

End of debate?

Links:
Joint Economic Committee Health Insurance Spending Growth -- How Does Medicare Compare?  by Michael J. O'Grady (June 10, 2003)

Centrists.Org The Pointless Debate Over "Efficiency" of Government-Run vs. Private Health Insurance
(May 12, 2003)

Kaiser Family Foundation The Federal Employees Health Benefits Program:  Program Design, Recent Performance, and Implications for Medicare Reform by Mark Merlis (May 2003)

Progressive Policy Institute McDonald's v. Burger King:  A "Nothing Burger" Debate on Medicare Reform Testimony before the Senate Special Committee on Aging (May 6, 2003).

Cristina Boccuti and Marilyn Moon, "Comparing Medicare and Private Insurers: Growth Rates in Spending Over Three Decades," Health Affairs, March/April 2003, www.healthaffairs.org.

Joseph R. Antos, with Alfredo Goyburu, "Comparing Medicare and Private Health Insurance Spending," The Heritage Foundation, www.heritage.org.