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Is Medicaid a magic bullet?

As President Obama’s Affordable Care Act continues to unfold, recent debate has returned to the role that Medicaid—not to mention public insurance in general—might end up playing in the future of our health care industry.

Along these lines, it has been suggested lately that Medicaid is favorable to market-based health care because Medicaid is cheaper than private insurance. Paul Krugman, an economist and now editorialist for The New York Times, recently argued, “Medicaid—if provided directly—is way cheaper than private insurance,” before concluding that “the obvious answer is to expand public insurance.”

Paul Krugman’s assertion that public insurance represents an “obvious” solution to rising health care costs, however, rests on a somewhat complicated premise. The first part of this premise is that Medicaid is, in fact, as effective at keeping costs down as Krugman and others suggest that it is. The second part of the premise is that Medicaid not only keeps costs low, but provides a level of access to health care that is at least comparable to its more expensive competitors. The third and final part of the premise is that Medicaid could continue to do both of these things even on a much larger scale. If any of these premises can be effectively disputed, then Krugman’s case for public insurance may be less obvious than he would prefer to admit.

Let’s start with the first part of Krugman’s premise, which, in his own words, is that “there’s overwhelming evidence that Medicaid is much cheaper than private insurance.” He provides as evidence for this claim a single journal article—a 2008 Health Affairs study by Leighton Ku and Matthew Broaddus—and vaguely asserts that Medicaid saves money by avoiding administrative costs and by “bargaining” with health care providers. His reasoning is problematic on several levels.

For one thing, money saved on administrative expense is only good if the expense is wasteful or unnecessary in the first place. As it turns out, it’s not entirely clear that all of them are. Michael Cannon of the Cato Institute, for instance, argues that programs like Medicare and Medicaid cut their administrative costs by “avoiding important administrative activities” and “tolerating vast amounts of wasteful and fraudulent claims.” The Congressional Budget Office agrees. Although government-run health care “does relatively little to manage benefits, which tends to reduce its administrative costs,” the CBO points out that this “may raise its overall spending relative to a more tightly managed approach.” Whether or not Medicaid is saving us money, then, is at least less evident than the first part of Krugman’s premise seems to be suggesting.

On a related note, Medicaid does not actually “bargain” with anybody. Medicaid sets the prices that it is willing to pay for procedures, and then reimburses any physicians who are willing to perform those procedures at the listed prices. If the prices set by Medicaid are too low, then the program runs the risk of driving physicians away from it. This brings us to the second part of Krugman’s premise, which is that Medicaid is able to provide access to health care on a level comparable to that of private insurers.

This assumption is, unfortunately, especially complicated. A tandem of 2011 studies by Joanna Bisgaier and Karin Rhodes, published in Pediatrics and The New England Journal of Medicine, suggest that access to care under Medicaid is significantly inferior to that under a private form of insurance. In one of these studies, Bisgaier and Rhodes found that 36.5 percent of simulated Medicaid beneficiaries were granted appointments for urgent oral care, while 95.4 percent of simulated Blue Cross policyholders were granted appointments. In the second study, the two found again that 34 percent of simulated Medicaid beneficiaries were granted appointments for specialty care and waited an average of 42 days, while 89 percent of simulated Blue Cross policy holders obtained appointments and waited an average of just 20 days. Additionally, a survey conducted by Sandra Decker for Health Affairs found that one-third of physicians planned to refuse any new Medicaid patients in 2011. This alone should be enough to at least call into question the second part of Krugman’s premise.

On top of all that, the Decker study also analyzes Medicaid acceptance rates on a state-by-state basis, and finds that the number of physicians in any given state willing to accept new Medicaid patients is positively correlated with Medicaid reimbursement in that state. “Unsurprisingly,” Avik Roy, a senior fellow at the Manhattan Institute, says of the study’s findings, “the best-paying states, like Wyoming and Alaska, also enjoyed broad physician acceptance of Medicaid, whereas poorly paying states, like New York, New Jersey and California, had the opposite effect.” Furthermore, “the blue states that have been most aggressive in expanding their Medicaid programs are the ones that have had to rein in costs by paying doctors less, leading to poorer Medicaid access.” This upsets the third and final part of Krugman’s premise, which is that Medicaid could continue to achieve similar outcomes on an even more expansive scale.

In the end, it seems that all three of Krugman’s assumptions are, upon further inspection, more vulnerable than he acknowledges. This in turn casts doubt on his conclusion that the expansion of public insurance is an “obvious” answer to rising costs in our health care industry. In fact, as common sense might suggest, there are few obvious answers in this area, and there are certainly no magic bullets.

Chris Bassil, Trinity ’12, is currently working in Boston, Mass. His column runs every Wednesday. You can follow Chris on Twitter @HamsterdamEcon.

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