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A conservative economist explains why Ryan's budget plan is all wrong for the GOP

 

Republicans are losing elections they could win by slavishly clinging to untenable solutions for skyrocketing health care costs that voters reject.

The House Budget Committee, chaired by Paul Ryan, is proposing a plan to balance the budget in 10 years. That requires lowering the trajectory of Medicaid and Medicare costs, which account for 24 percent of federal spending.

Ryan proposes offering seniors the choice of a subsidy to buy private insurance or continuing in the existing Medicare system, and giving the states block grants to manage Medicaid.

Conservatives believe seniors could shop for health insurance, as they do for groceries, to drive down prices. The states, freed from excessive federal oversight, could similarly drive down costs.

That’s absolute fantasy.

Seniors would confront large insurance companies armed with too little information, and limited choices or monopolies when they purchase drugs and hospital care. That's not a fair fight--like individuals with bows and arrows vs. B-52s.

Already, large employers operate in a similar market space—free to negotiate with health insurance companies—and even they have not been able to harness rising health insurance premiums.

To put it mildly, Granny will not do any better than GM jawboning Humana and Walgreens. Federal Medicare spending could only be cut by providing inadequate subsidies that would require seniors to pay much larger premiums and out-of-pocket costs than they currently bear with traditional Medicare.

Similarly, it is doubtful that the states, acting individually, can do a better job of negotiating reimbursement rates for Medicaid services for the poor than does the federal government. In fact, the Ryan solution could drive up prices, because providers could play off states against each other.

The Ryan approaches were incorporated into the 2012 GOP presidential platform and rejected by voters.

If the House budget plan incorporates these approaches, Republican Senators will be forced to choose between supporting those or abandoning the House budget in favor of Senate Democrats’ plans for higher taxes. That could prove poisonous for Republican Senators seeking reelection and House Republicans considering runs for Senate seats.

Sometimes markets don’t work—that’s why we don’t have private fire departments selling subscriptions, or memberships, and why taxi fares are regulated in major cities. Or even more, why governments regulate utility rates-- deregulation of electricity has usually been a disastrous experiment, as in California a decade ago. 

Every other major industrialized country has given up relying on competition to harness health care costs. The chances that Ryan has come up with a better idea--and can sell it to the public in the teeth of Democratic opposition--are laughably nil.

When confronted by those facts, conservatives often point to single provider systems in Britain where some citizens complain about long lines and inferior care. 

Germany has a private provider system quite similar to the one evolving with ObamaCare—everyone has to play and most folks are covered by mandatory government-subsidized, employer-based insurance; however, unlike ObamaCare, that system aggressively regulates prices through private-sector consensus building. 

Again, like, a utility--that’s the point. 

Germany caps health care spending, and sets provider prices through a complex system of private sector negotiations that divides up the pie.

Americans spend nearly $10,000 per person on health care, while the Germans spend half as much. By most measures, German health care is as good or superior to what Americans receive.

Just like the government doesn’t always know best, markets and competition don’t always contain costs effectively and provide the best outcomes. Germans--who aren’t liberals-- get it, but conservative Republicans don’t. 

Moreover, a German solution, by costing the federal government so much less, streamlining the morass of regulations and reporting requirements, better engaging private providers, and reducing federal and state costs, would actually reduce and better limit the bureaucratic burdens insurance companies and government agencies impose on health care providers.

As long as unbending conservatives like Paul Ryan control Republican thinking on fiscal policy,the GOP will not offer solutions to the nation’s budget woes that attract popular support, it won’t win back the Senate in ’14, and it faces terrible difficulties winning the presidency in ’16.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. He is the five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1.