Could Paul Ryan’s plan to abolish Medicare actually make sense?

Rep. Paul Ryan wants to get rid of Medicare and Medicaid, and replace them with vouchers to buy health insurance. In conservative circles, the idea is quietly ignored because it could be unpopular. In media circles, the idea has christened him as the intellectual leader of the Right (not because it’s a good idea, but because it’s an idea—a rare sight amount today’s Right). And in liberal circles, the idea has been lambasted as one which would gradually result in poor people unable to afford health care.

People poo poo the Ryan plan because his vouchers would increase more slowly than health care expenses currently are. So it stands to reason that over time, the voucher would buy less and less health care.

Of course, the key assumption here is that health care costs would continue rising at the same rate after Ryan’s plan were passed. But that’s not necessarily a safe assumption, because our willingness to pay a lot for health care isn’t just a result of high health care costs—it is also a cause.

Part of the problem with Medicare is that because it pays for unlimited health care, providers and medical technology manufacturers have little incentive to control costs. If the trough of health care dollars is ever expanding, just line right up and drink.

But if instead of unlimited insurance dollars, people were given a fixed voucher, health care providers would have to compete for a limited pool of health care dollars. Patients would be more hesitant to consume health care, and when they did consume it, they would be more likely to shop around for lower costs (assuming information on quality and costs were available to them). This would give providers a strong incentive to keep costs down. In this sense, it’s possible that the Ryan plan could bring down the rate of increase in health care spending so it’s more in line with the money available to pay for it.

Moreover, experience in developing countries suggests that lack of money to pay for health care doesn’t discourage innovation—it simply shifts innovation And in poor countries where people DON’T have unlimited Medicare money to spend on health care, companies like GE are innovating low-cost medical technologies that deliver 50% of the benefit for 10% of the cost of similar technologies in the West. From a previous post:

Check out what GE Healthcare is doing in India. Conventional wisdom holds that with a per capital GDP only 5% that of the United States', India would be a poor market for a company that makes million-dollar imaging machines, but that's exactly where GE Healthcare decided to invest. And the risk paid off. The need to serve people without much money to spend on health care has produced a $1,000 electrocardiogram device and a $15,000 PC-based ultrasound machine - roughly 15% the price of the top-end devices sold in the US. And costs keep falling. In fact, today GE is finding markets in the United States for these "50% solutions at 15% prices":

Consider GE’s health-care business in the United States. It used to make most of its money on premium computed tomography (CT) and magnetic resonance (MR) imaging machines. But to succeed in the era of broader access and reduced reimbursement that President Obama hopes to bring about, the business will probably need to increase by 50% the number of products it offers at lower price points. And that doesn’t mean just cheaper versions of high-tech products like imaging machines. The company also must create more offerings like the heated bassinet it developed for India, which has great potential in US inner cities, where infant deaths related to the cold remain high. And let’s not forget that technology often can be improved until it satisfies more demanding customers. The compact ultrasound, which can now handle imaging applications that previously required a conventional machine, is one example.

Anticipating the effects of health care reform, GE recently announced a plan to invest $3 billion to invent 100 more low-cost medical solutions in the US. Reading the article, I can scarcely contain my optimism over companies' abilities to innovate if given the right carrots (or sticks).

In other words, we don’t have to accept the current rate of health care cost increase as a given. If it is true that the availability of health care dollars is a cause of the increase in health care costs, reducing those dollars would bring down the costs as well, making health care more affordable than many liberals anticipate.

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