Can the Competition Fairy control healthcare costs?

As I've explored in the last three posts, the Medicare reform plan in Ryan's 2013 budget blurs Democratic attack lines because it looks very much like an Affordable Care Act for seniors (who, er, already have affordable care) while staking an at least ostensibly credible claim to preserve the Medicare guarantee.

The simplest counterargument was just voiced by a Florida voter to Washington Post reporter Felicia Sonmez: if it ain't broke, don't fix it. The counterargument is that Medicare is broken insofar as its cost to taxpayers has wildly outrun inflation and threatens to bankrupt the federal government.  The debate boils down to the best means to control costs while preserving the Medicare guarantee.

The means employed in the ACA are to use the government's pricing power both to limit pay increases to hospitals and doctors by fiat and to change the rules under which healthcare providers are paid in ways that reduce unnecessary care, e.g. by providing incentives to form Accountable Care Organizations or reduce hospital readmissions. The Independent Payment Advisory Board (IPAB), demonized by Republicans, has a mandate to keep finding new methods of this sort to curb cost increases when they exceed GDP growth +0/.5% in a given year.

This is a relative baby step toward the means that governments in virtually every other wealthy country in the world have managed to keep healthcare costs at a level between half to two-thirds those of the U.S.: complete government control over pricing and coverage rules.  Some governments, such as those of Japan and Germany, impose such control through a network of private insurers, who all pay the same prices for procedures and operate under uniform coverage rules. Under a variety of systems, government monopsony is the proven method to keep healthcare costs down -- at least relative to the fragmented U.S. market.

Republicans, excoriating "bureaucrat control" of healthcare (as the Ryan 2013 budget characterizes the ACA), repose their trust in what Paul Krugman might call the "Competition Fairy" -- the faith that if private insurers are drawn to compete in a large market, they will develop innovations that tame healthcare inflation.  The Ryan 2013 plan is a paean to the Competition Fairy:

Program growth would be determined by the competitive bidding process--with choice and competition forcing providers to reduce costs and improve quality for seniors. The competitive market for Medicare choices would foster innovation and quality, while ensuring that the program is financially stable...As opposed to pegging the growth rate to a predetermined formula, competitive bidding offers the ideal means of harnessing the power of choice and competition to control costs....

[this plan] strips unaccountable Washington bureaucrats of their rationing power, puts patients in control of their health care decisions instead of government, and forces providers to compete for the right to serve seniors...Harnessing the power of choice and competition helps tackle the root drives of health inflation that are bankrupting the current system.

Democrats, too, have invoked the Competition Fairy. Here is part of the outline of the ACA provided on Whitehouse.gov:

This Act puts individuals, families and small business owners in control of their health care...Americans without insurance coverage will be able to choose the insurance coverage that works best for them in a new open, competitive insurance market – the same insurance market that every member of Congress will be required to use for their insurance. The insurance Exchange will pool buying power and give Americans new affordable choices of private insurance plans that have to compete for their business based on cost and quality

The Fairy is not entirely a figment. Health insurance providers have been in bad odor in the U.S. because they have operated under poor and fragmented coverage rules that have permitted them to deny coverage to millions, render coverage unaffordable to millions more, and render coverage illusory or fatally limited to millions more (via annual and lifetime caps, unilateral rescissions, and onerous exclusions). In its worst form, Republican faith in the Competition Fairy undercuts any potential benefits of competition even further by allowing insurers under the present system to sell insurance across state lines, thereby making the weakest state regulations the de facto law of the land in a race to the bottom.

Under decent ground rules such as, perhaps, those established by the ACA (though the rules governing state exchanges remain ambiguous), insurers competing in an exchange may in fact develop innovations that provide improved care at reduced cost. The problem with introducing an exchange into Medicare, however, is that doing so fragments Medicare's pricing power, which is at present considerable but not unlimited, as the growing numbers of doctors opting not to accept Medicare demonstrates.  That is, a decentralized Medicare market may raise rather than lower costs -- and pass them on to consumers -- unless insurers within the exchange pay providers on a price schedule imposed by the government, as is the case in many other countries.

I have accorded Ryan's 2013 Medicare plan a measure of respect in the last two posts. I should add that whatever potential merit there is in the plan architecture is largely undercut by 1) Ryan's gutting of Medicaid, which he relies on as a backstop to ensure the Medicare guarantee to low income seniors;  2) his assumption of the Medicare cost savings in the ACA while eliminating IPAB, a major means of implementing those savings; and c) the studied vagueness of the rules that would ensure that plans in the exchange offer benefits comparable to those of traditional Medicare.

P.S. I used (and to my knowledge coined, though probably not) the phrase "competition fairy" here a couple of days before Peter Orzag came out with "competition tooth fairy."

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How Ryan duped Wyden
How Wyden muddled the Democrats' attack on Ryancare