Thinking About Wyden-Bennett

This morning David Brooks praises the Wyden-Bennett healthcare reform plan:

On May 12, the Senate Finance Committee held a hearing on health care reform. There was a long table of 13 experts, and a vast majority agreed that ending the tax exemption on employer-provided health benefits should be part of a reform package.

They gave the reasons that experts — on right or left — always give for supporting this idea. The exemption is a giant subsidy to the affluent. It drives up health care costs by encouraging luxurious plans and by separating people from the consequences of their decisions. Furthermore, repealing the exemption could raise hundreds of billions of dollars, which could be used to expand coverage to the uninsured.

Democratic Senator Ron Wyden piped up and noted that he and Republican Senator Robert Bennett have a plan that repeals the exemption and provides universal coverage. The Wyden-Bennett bill has 14 bipartisan co-sponsors and the Congressional Budget Office has found that it would be revenue-neutral.

and continues by explaining why the plan doesn’t have a chance of passing:

Now you might think that in these circumstances someone might take a second look at the ideas incorporated in the Wyden-Bennett plan, which already has a good C.B.O. score, bipartisan support and a recipe for fundamental reform.

If you did think that, you are mistaking the Senate for a rational organism. For while there are brewing efforts to incorporate a few Wyden-Bennett ideas, there is stiff resistance to the aspects that fundamentally change incentives.

The committee staffs don’t like the approach because it’s not what they’ve been thinking about all these years. The left is uncomfortable with the language of choice and competition. Unions want to protect the benefits packages in their contracts. Campaign consultants are horrified at the thought of fiddling with a popular special privilege.

I like the Wyden-Bennett plan but, unfortunately, I don’t believe that it can achieve its objectives, at least not in a way that’s consistent with good public health, because it relies solely on curbing the demand side of the equation.

For a more detailed description, analysis, and critique of the plan see here. The critique portion suggests that the plan be amended to reduce adverse selection by precluding high-deductible options, give more guarantees to Medicaid and SCHIP recipients, and increase subsidies to low- and moderate-income individuals. As I read the tealeaves that would eviscerate the plans cost-saving measures. Ezra Klein, too has a thoughtful but sympathetic critique of the plan. Note, however, this snippet:

In my experience, their problem is not, as Jon Cohn suggests, that “liberals don’t like the Wyden-Bennett plan…primarily because it lacks a public insurance option.” That’s a problem, but given the radicalism of the proposal, I’d take the trade. Rather, the concern is with the guts of the Wyden-Bennett cost control mechanisms.

Think of how a single payer plan controls costs: It imposes a budget. In other words, it pays health care providers X dollars a year, and it decides how much X grows by every year. The system has to figure out how to live on that amount of money, which leads to various forms of rationing and cost-cutting and bargaining among providers.

particularly the portion I’ve highlighted. Ezra finds a single payer approach attractive because it imposes fiat pricing. That’s a short-sighted approach. I’ll repeat here something I learned in economics more than forty years ago: we don’t know how to create abundance but we do know how to create shortages and fiat pricing is it. The problem with any system of fiat pricing is that it obscures the very price signals that a system requires to become more efficient.

Over time such a system will create a degenerative spiral of rising costs and dwindling supply. You might ask why don’t the UK and France see that? The answer is that they do. Healthcare costs are rising fast in both places.

The reason I like a single payer system is that in the near term it would achieve something like 15% savings on the total healthcare bill by cutting the insurance companies out of the equation. But I only like it in conjunction with reforms affecting healthcare’s supply side. The 15% gives you breathing room to make the supply side reforms work. In the long term by themselves they’re worthless, even counter-productive.

I like Wyden-Bennett, too. It achieves good objectives using a market-based approach. The simple-minded approach that’s being proposed by some, Medicare for all, won’t work. Check out the trend on Medicare: it’s on an unsustainable path that won’t be fixed by enrolling all comers, at least not without fiat pricing and fiat pricing is a horrible, terrible, no good, very bad idea.

But Wyden-Bennett alone will not achieve its cost control objectives (if amended to suit those for whom only single payer will suffice) or it won’t achieve its cost control objectives in a manner that’s consistent with good public health.

9 comments… add one
  • Andy Link


    Could you please define “fiat pricing” for me? Thanks!

  • Sure. “Fiat prices” are prices set by edict, without reference to cost of production, supply, or demand. The government says, “nobody can charge more or less than X for a widget”.

    If the market clearing price of a widget is less than the set price, that’s a subsidy on widgets but fewer are sold than otherwise would. If the market clearing price of a widget is greater than the set price, fewer widgets are offered for sale than otherwise would be.

    In the old Soviet system all prices were fiat prices, set by edict. “Command prices”.

  • Andy Link

    Thanks! For once, googling failed to provide a satisfactory answer.

  • Brett Link

    Sure. “Fiat prices” are prices set by edict, without reference to cost of production, supply, or demand. The government says, “nobody can charge more or less than X for a widget”.

    Keep in mind, though, that it’s not as if, say, the Canadian provincial governments simply dictate a fee schedule From On High. They have to work it out with the provincial medical associations.

    That’s actually one thing I don’t like about the current public plan proposal – it’s all federal, even when living and business expenses can vary drastically from state to state. I’d much rather have it be a federal-state program, absorbing the Medicare, Medicaid, and SCHIP people, with the states negotiating the rates and the Federal government being required to cover some amount of the total expenses.

  • Drew Link


    See Greg Mankiw’s site for an interesting set of reads. Look for June 19th forward.

  • Richard Crockett Link

    The “fiat pricing” issue is close to the mark on the health care problem. However, we presently have fiat pricing, but the fiat is determined by the health care industry. In economics 101, you may have learned of “market failure” and inelastic demand. Well the cost containment issue for health care is precisely that– that health care is a commodity where demand exhibits inelastic tendencies, hence, market failure. Put another way, the health care consumer, when he is sick enough, will seek care no matter what the price, and this is especially true if someone else is paying the tab. This is why a public “option” is necessary.

  • Ron Cohen Link

    Let’s get away from fiat pricing for a moment, and back to Wyden-Bennett. No matter what plan we’re considering, the discussion always comes back to cost control. That’s the first question we must address.

    On his web site, Sen. Wyden argues that insurers will find it necessary to compete on cost under the new rules of the game imposed by W-B, and they will do so by promoting wellness programs — that is, lifestyle changes — among their enrollees. For me, that’s a stretch. It would require an entirely new way of thinking for these companies, a new corporate culture. I think it’s equally likely they would take the tried-and-true course, find new and subtle ways to cherry-pick, and/or new and subtle ways to divide the market among themselves, to avoid competing.

    I’d be much happier with W-B if it included a public option, to “keep the the companies honest.” I say that believing the only way to bring total, societal, health costs down — not just government costs, as scored by the C.B.O. — is to control costs on both sides of the ledger, the supply side (insurers/providers) as well as the demand side (patients).

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