A Private Obsession

By PAUL KRUGMAN

New York Times

November 18, 2005

"Lots of things in life are complicated." So declared Michael Leavitt, the secretary of health and human services, in response to the mass confusion as registration for the new Medicare drug benefit began. But the complexity of the program - which has reduced some retirees to tears as they try to make what may be life-or-death decisions - is far greater than necessary.

One reason the drug benefit is so confusing is that older Americans can't simply sign up with Medicare, as they can for other benefits. They must, instead, choose from a baffling array of plans offered by private middlemen. Why?

Here's a parallel. Earlier this year Senator Rick Santorum introduced a bill that would have forced the National Weather Service to limit the weather information directly available to the public. Although he didn't say so explicitly, he wanted the service to funnel that information through private forecasters instead.

Mr. Santorum's bill didn't go anywhere. But it was a classic attempt to force gratuitous privatization: involving private corporations in the delivery of public services even when those corporations have no useful role to play.

The Medicare drug benefit is an example of gratuitous privatization on a grand scale.

Here's some background: the elderly have long been offered a choice between standard Medicare, in which the government pays medical bills directly, and plans in which the government pays a middleman, like an H.M.O., to deliver health care. The theory was that the private sector would find innovative ways to lower costs while providing better care.

The theory was wrong. A number of studies have found that managed-care plans, which have much higher administrative costs than government-managed Medicare, end up costing the system money, not saving it.

But privatization, once promoted as a way to save money, has become a goal in itself. The 2003 bill that established the prescription drug benefit also locked in large subsidies for managed care.

And on drug coverage, the 2003 bill went even further: rather than merely subsidizing private plans, it made them mandatory. To receive the drug benefit, one must sign up with a plan offered by a private company. As people are discovering, the result is a deeply confusing system because the competing private plans differ in ways that are very hard to assess.

The peculiar structure of the drug benefit, with its huge gap in coverage - the famous "doughnut hole" I wrote about last week - adds to the confusion. Many better-off retirees have relied on Medigap policies to cover gaps in traditional Medicare, including prescription drugs. But that straightforward approach, which would make it relatively easy to compare drug plans, can't be used to fill the doughnut hole because Medigap policies are no longer allowed to cover drugs.

The only way to get some coverage in the gap is as part of a package in which you pay extra - a lot extra - to one of the private drug plans delivering the basic benefit. And because this coverage is bundled with other aspects of the plans, it's very difficult to figure out which plans offer the best deal.

But confusion isn't the only, or even the main, reason why the privatization of drug benefits is bad for America. The real problem is that we'll end up spending too much and getting too little.

Everything we know about health economics indicates that private drug plans will have much higher administrative costs than would have been incurred if Medicare had administered the benefit directly.

It's also clear that the private plans will spend large sums on marketing rather than on medicine. I have nothing against Don Shula, the former head coach of the Miami Dolphins, who is promoting a drug plan offered by Humana. But do we really want people choosing drug plans based on which one hires the most persuasive celebrity?

Last but not least, competing private drug plans will have less clout in negotiating lower drug prices than Medicare as a whole would have. And the law explicitly forbids Medicare from intervening to help the private plans negotiate better deals.

Last week I explained that the Medicare drug bill was devised by people who don't believe in a positive role for government. An insistence on gratuitous privatization is a byproduct of the same ideology. And the result of that ideology is a piece of legislation so bad it's almost surreal.