Rep. Ryan, magic, and pixie dust

I just finished watching Rep. Ryan's saving medicare video.

I'm completely lost on how this is supposed to work economically. His argument is that because the person getting care is disconnected from the bill (and thus the cost), he doesn't care what it costs and has no incentive to seek the lowest cost and highest quality care. I guess this is supposed to be moral hazard.

Ryan theorizes that the best way to control cost is to have those seeking care pay for it. He doesn't mention that this is done through a voucher system and if those vouchers don't cover the cost of the care...well, the government has succeeded in transferring the cost of Medicare to seniors. Thus, if you are in that group and you can't afford the difference...you're shit out of luck.

Ryan argues that a single payer system (that's Medicare) has no incentive to lower cost and improve quality. But why not? A single buyer has tremendous leverage (monopsony power) in negotiating cost and potentially quality.

But let's get back to Ryan's plan. He wants to have people buy their own insurance. With the idea that this will somehow be competitive and that health care "customers" have the incentive to seek the best care at the lowest price and will "punish" those care givers that don't meet their needs. But this assumes that the market for medical care is competitive. Is it?

Many years ago, Kenneth Arrow tackled this. Basically, a market solution for medical care is not possible. Consumers cannot discipline sellers because the demand for the services is not regular. In fact, it is uncertain. Is there a menu for treatment at your doctor's office? Nope.

Even if consumers were "empowered" to get the best insurance, there is no incentive on the part of the consumer to shop around. Why? They, according to Ryan, don't pay for it. The insurance company does. So what Ryan proposes is replacing one form of bureaucracy with another. Except, the insurance company has an incentive to deny coverage to those that need it and cover the people it believes won't need a lot of care. The money is in the insurance premiums, not in finding the lowest cost of care.

Which leads to another question, if the key to Ryan's plan is to give individuals power to find the best care, how can an individual enforce quality when the individual (likely) does not know as much as the doctor in regard to the best course of action in care? This is what we like to call an information asymmetry. What's needed is a third-party to reduce this asymmetry or some mechanism that weeds out good from bad.

A market solution won't solve the problem simply because the market is in it for profit, not for your well-being.