As part of his plan to reduce the budget deficit, Republican Congressman Paul Ryan of Wisconsin proposes replacing Medicare as we know it with a voucher system. Under this system, seniors would receive a credit from the government that can be used to purchase health insurance from private sector providers.

The Ryan plan would reduce Medicare payments far below what is currently available, and this would leave many without the means to obtain the care they need. But even if the vouchers were adequate, I would still not be in favor of a voucher system for health insurance.

I am not opposed to vouchers in general. They are offered as an alternative whenever government wants to broaden the availability of private sector services, e.g. vouchers for housing and education, and sometimes vouchers are the best available solution. But not always. So how can we tell if a voucher program is likely to work? And what does this tell us about the Ryan proposal?

Health insurance vouchers are, in essence, the same as giving people cash to purchase health insurance. Using a voucher instead of cash ensures that the money is used to purchase insurance.

Since using a voucher is just like spending earmarked cash, the principles that tell us when ordinary markets are likely to fail can also tell us when a market involving cash-equivalent vouchers is likely to run into trouble. Those principles state that markets work best when there are a large number of buyers and sellers, consumers have full information about the product, the good or service is nearly identical across producers, and there are no barriers to entry or exit. There are other conditions as well, most of which can be summarized by the requirement that prices provide the correct signal to consumers and producers in order to encourage optimal behavior.

There are concerns about some of these conditions in health insurance markets, e.g. while purchasers of health insurance are numerous, providers are much fewer in number. And in some case, e.g. pharmaceuticals, there may be only one or a very few suppliers of a particular drug. In addition, though regulation attempts to ensure that the alternative plans are transparent, easy to understand, and easy to compare, many consumers have trouble comparison shopping for insurance due to incomplete information about insurance plans.

Another big problem, one that isn’t always present in voucher systems, is that insurance companies pay the bills but have difficulty getting doctors and consumers to make cost effective choices. One reason for this is that consumers are charged very little over and above their insurance premiums for health care, and hence have little regard for the cost involved as they make their health care decisions. Prices do not regulate behavior as they should, and this leaves cost control in the hands of insurance companies. In addition, profit incentives that cause excessive tests and other types of health service overprovision make costs even harder to control.

Our experience with HMOs in the 1990s shows that insurance companies are not very good at controlling health care costs within this type of a system. At first, it looked as though HMOs would be the answer to the health care cost control problem, but in the end the promise was not realized. More recent experience with the Medicare Advantage program where costs have risen instead of falling also shows that the private sector is not the silver bullet for cost control.

Thus, it’s not the vouchers per se that are the problem; it’s the implicit reliance upon insurance companies to enforce cost control that comes with them. But is there a better answer? Consumers themselves are in no position to make informed decisions about health care, especially with the stress, worry, and need for instant decisions that an illness can present. If a doctor says you need a costly emergency procedure at 3 a.m. to save your life, will you be inclined to shop around for the best deal?

The solution – and it's in the Affordable Care Act – is for people with the necessary knowledge about medical services and a commitment to the public interest to do what HMOs did in the 1990s, decide which procedures should and should not be covered by Medicare. This does not rule out a particular procedure, it only defines whether taxpayers or the individual should pay for it. Those who want broader coverage can still purchase insurance in the private sector.

Consumers are unlikely to trust any limitations on something as important as their health care from insurance companies or government appointed boards; they certainly didn’t like this part of HMOs. But our long run budget problem is driven mainly by the expectation of rising health care costs, and we have no choice but to find some way of bringing these costs under control. The only question at this point is how these decisions will be determined, and among the feasible choices a board of experts is the best choice that we have.

We know what works for health care cost control. Other countries deliver universal care at lower costs and similar quality, and I believe that once we’ve tried other avenues that fail, this is where we will end There will be lots of false starts, delays and dead-ends along the way—and a voucher program, if pursued, is one of those dead ends. But the day will come when we realize that using successful systems in other countries as models for reform is the best way to provide universal access to health care at the lowest possible price.

Related Links:

Republicans in Congress Get Earful on Medicare (USA Today)

Paul Ryan: Medicare ‘Premium Support’ Is Vouchers Under a Different Name (The Wonk Room)

Ignoring Political Risk, Ryan Renews Push for Medicare Vouchers (Kaiser Health News)