Thursday, April 12, 2007

A Shleifer/Cutler approach to Managed Competition in Health Care

Ira Magaziner has moved on, so it's up to me to peddle some prosperity and health too.

How can we use greed to help us find optimal investments in preventive medicine. I think the US should have medicare for all single payer health care. I also think that it is possible to add a bit of managed competition on top to make it even better.

David Cutler et al note huge apparent benefits (accruing to the Medicare administration) from small monetery incentives for preventive medicine by some other public sector health insurance provider (sorry no link). This suggests that profits can be made by a firm which gives more than medicare type payments in exchange for preventive medicine.

"My" idea is based on the theory of yardstick competition by Andrei Shleifer.

A better approach would be to divide the country into regions and allow one private firm per region to sumplement the universal insurance (that is pay people to take pills if there is no copay) and, in exchange get average per patient costs times (per patient costs in their region in the year before the program is introduced minus average per patient costs in the base year) minus their regions costs + average spending on prevention by all such firms times a fixed rate of return equal to the T-bill rate.
(OK different regions are different so they should get

This would have 0 impact on the federal budget deficit by construction if there are no unconvered investments in preventive medicine which return over the t-bill rate and an improvement if there are any. It would imply average (very safe) returns on investment equal to the t-bill rate and it should make us healthier as well as wealthier.

I think it's that simple.

by the way "shleifer" means cutler in German.

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