Inheritance From Hugo Chavez: How Not To Fix Healthcare

Venezuela was one of the world's leading producers of coffee - that is, until former President Hugo Chavez implemented price controls on consumer goods in 2003. His goal was to make coffee and other products more affordable, and the move did immediately reduce prices. But within a few short years, Venezuelans were having an even harder time buying coffee - not because they couldn't afford it, but because they couldn't find it.

Coffee growers and roasters were barely able to break even under the government-mandated prices and stopped investing in new plants and fertilizers. Land that had been devoted to coffee crops was diverted to other uses. By 2009, coffee was so scarce on grocery shelves that the Venezuelan government had to import lower-quality Brazilian beans to fill the void.

Venezuela's experience is a cautionary tale for those who would focus exclusively on price to increase access - and the effect is the same for virtually any industry anywhere in the world.

In fact, you can see it clearly at work in America's health care market. Take Medicare Part B, for example. In an effort to ensure that health care services are affordable for American seniors, the federal government establishes which services Medicare will reimburse doctors for, and at what rate.

These low, fixed rates might make health care services more affordable, but they don't guarantee that beneficiaries will be able to find a doctor to perform them. Based on diminishing reimbursement rates, the number of doctors that stopped accepting Medicare tripled between 2010 and 2012.

Don't get me wrong: cost-containment measures are a critical component of health care. But they only add real value in a system where consumers have the power to accept or reject them. Problems arise when a single government agency or entity is put in the position of picking winners and losers for the system as a whole.

Fortunately, other Medicare programs are moving in the right direction. Medicare Part D -- signed into law 10 years ago last month -- and Medicare Advantage both balance the use of market competition and consumer choice with government support to maximize the value derived from health care resources. Part D offers beneficiaries a standalone prescription drug benefit, while the Medicare Advantage program allows seniors to receive their entire health care benefit through a private health insurance plan - and it provides seniors that can't find a doctor willing to treat Medicare beneficiaries with a viable alternative.

Both programs have been successfully holding down costs and premiums for years. The latest numbers are no exception. This year, monthly premiums for Part D stayed at $31 for the fourth consecutive year. The program also has far exceeded expectations, with overall costs coming in 40 percent below original Congressional Budget Office estimates. And according to the Department of Health and Human Services, the average monthly premium for a Medicare Advantage plan in 2014 will be $32.60 - a mere $1.64 increase from 2013.

Beyond simply holding down monthly premiums for seniors, the competitive market fostered through the Part D and Medicare Advantage programs also allows insurance companies to internalize the preferences of consumers. Insurers aren't just competing to offer the most affordable plans, they're also competing to offer the highest quality plans that best meet the needs of consumers. As HHS recently reported, "Medicare Advantage quality continues to improve as over one-third of contracts will receive four or more stars, which is an increase from 28 percent in 2013." More than half of all seniors in the program are opting to enroll in higher-quality plans, regardless of the necessary jump in premiums.

Similarly, with as many as 55 plans competing for Part D customers in a given region, insurers have no choice but to pull out all the stops in order to both attract and retain customers. This drives insurers to find new and better ways to provide high-quality, affordable benefits.

And as long as insurers are competing to offer cutting-edge formularies, it also incentivizes pharmaceutical companies to continue to invest R&D dollars with confidence, knowing that the treatments we're working to find will have an opportunity to succeed or fail in the marketplace - medicines that can make life better for tens of millions of people suffering from diabetes, cancer, Alzheimer's and dozens of other diseases.

It's easy to make short-term gains with price control policies. As the example with Venezuela's coffee industry demonstrates, it's much harder to covert those gains into sustained, high-quality improvements in the marketplace. Part D and Medicare Advantage clearly show that competition and greater consumer choice are principles that can lead to better health care - and that these policies can work just as well in federal agencies as in the private sector.