How to reform Medicare with faith in market principles – including vouchers
Most important, it allows free-market competition to work to fullest effect, which tends to increase choice while decreasing costs. The downside is that it’s politically radical. And critics worry that voucher amounts might be too stingy, and that a robust private insurance market wouldn’t materialize because seniors are simply too costly to insure. But if we decide that vouchers are too stingy, then we can raise the national sales tax rate to fund them more generously. If people don’t want to do that, then what they really want is magic.
As for a robust private market not materializing for seniors, this problem in the pre-Medicare 1960s was largely an artifact of insurance being offered increasingly by employers. While it is true that insurance companies didn’t want to add new retirees to their roles, that does not mean they would not have been happy to continue insuring retirees that they had insured all along, because, in this case, the adverse selection problem (the sickest seeking out the most generous policies) would have been minimal.
Had health insurance never gotten tied to employment in the first place, some health insurance companies would have offered policies that smooth premiums over a person’s life while others would have offered policies whose premiums rise as one gets older, just as life insurance companies do now. A voucher plan would eliminate preferential tax treatment to employer provided insurance, thereby severing this unhealthy link.