When Medicare is Changed Under the Republican Proposal.

Some Economics of Replacing Medicare with Private Insurance with Premium Subsidy .

Jared Bernstein has some interesting ideas on how economics works in the health care industry, and what he calls a voucher program, which is what The Dismal Political Economist calls a Premium Subsidy program,

See here for Truths and Un-Truths on Private Insurance for the Elderly

and this brings up the question of what to expect were Premium Subsidy to be enacted.  It is entirely possible that the result would be increased cost to recipients, no better coverage and increased profits for private insurers.  Here is the logic that supports that conclusion.

Suppose there are two types of consumers, those who will pay $1,500 a month for health insurance and those who will pay $2,000 per month.  Let’s also assume two types of Plans.

Plan A – Great Plan – Price $2,000 a month

Plan B – Good Plan – Price $1,500 a month.

Now in the absence of Premium Subsidy, those willing to pay $2,000 a month will purchase the $2,000 a month plan, those willing to pay $1,500 a month will pay $1,500.

If the government provides a $500.00 per month subsidy, there will be the following results.

1. Plan B customers will start to migrate to Plan A, since their out of pocket costs remain the same and they can get better coverage at the same (to them) cost.

2. Seeing the increase in demand, Plan A will tend to raise their price to $2,500.00 a month. Plan A will not lose any of its original customers, since its existing customers will still have the same out of pocket cost, $2,000.00. The $500.00 extra per month is pure profit for the company providing Plan A.

3. Plan B will tend to raise its prices to $2,000 a month.  This will attract the customers they lost to Plan A which now has an out of pocket cost of $2,000 per month.  Plan B can get their old customers back because Plan B original subscribers are now priced out of Plan A.  At $2,000 a month for Plan B, the out of pocket costs are $1,500.00, exactly what is was before the Premium Subsidy of $500.00.

The equilibrium position will tend towards Plan A customers staying in Plan A, Plan B customers staying in Plan B, little cost savings to consumers and  up to $500.00 a month per subscriber accruing to the private insurance companies sponsoring Plan A and Plan B.

Now it is entirely possible that the additional profit will result in more competitionamong existing private insurance providers, and new entrants into the private health insurance business, with prices falling and some of the Premium Subsidy flowing to the subscribers.  And the hope in the Ryan Proposal is that competition for the former Medicare recipients will push insurance companies to force health care providers to lower prices.   But Private Insurance is not all that competitive, entry is difficult and the end result is likely to be a little decrease in out of pocket costs for private health insurance.  And it is hard to see how insurance companies can push for lower medical care costs with any more effectiveness than they are doing today.  So, the result of all this is largely a nice increase in profits for the health insurance providers with some but not much lower out of pocket premium costs to seniors.

Maybe that is what the Republicans have in mind all along.