The Kaiser Family Foundation just released a study that grossly misrepresents the premium-support model of Medicare reform and apparently misunderstands normal market dynamics and the differences between efficiency, choice, and higher premiums.

The Kaiser study assumes that an entire class of Americans—senior citizens—is insensitive to price. In reality, seniors are price sensitive when they are presented with options. Already, 90 percent of retirees can and do choose the private health plans they like, ranging from supplemental insurance to Medicare Advantage and Medicare drug plans. Premium support encourages intense competition that will change premiums and hold down costs. The larger impact is that seniors would have a choice of the health options they want, while creating needed savings for themselves and the federal government.

Take a simple analogy: Assume that the price of a gallon of gasoline rose from $3 to $300. How much would this affect your driving habits? It is doubtful that you would still buy the same amount of gas every week. Yet that is the economic intuition embodied in the Kaiser study.

The authors of the Kaiser study assume that zero beneficiaries would switch from traditional Medicare to a cheaper plan, despite cost increases. Part of the gain from competition is that health plans must compete for beneficiaries in order to retain or gain market share. They have to secure high satisfaction, as they do today, for example, in Medicare Part D and Medicare Advantage. To create a scenario that simply ignores the gains of market competition grossly misrepresents the economic impact of any consumer-driven market, including a health care market with premium support. The study’s headline is that 53 percent of enrollees in traditional Medicare would pay more, but within the study, when benificiaries respond to higher premiums, the number falls to as low as 33 percent.

The Kaiser study is counter-intuitive. In an intensely competitive market driven by consumer choice, the result would be higher patient satisfaction and cost control. Instead, the Kaiser study assumes that seniors would stay put in traditional Medicare despite the availability of cheaper, more efficient health care options.

Curiously, based on the authors’ logic, the more efficient and cheaper an alternative health plan, the worse off Medicare beneficiaries would be. If plans could somehow manage to save 25 percent compared to current Medicare, Kaiser would report that 96 percent of beneficiaries in traditional Medicare would be worse off. By this logic, people would be worse off when market competition drives down costs—if they continued paying more for traditional Medicare instead of picking the new and less expensive options.

Commenting on the Kaiser study, Joe Antos of American Enterprise Institute adds:

Health plans and providers would also respond to the shift to premium support. Knowing that the government was no longer paying an unlimited subsidy, they would compete for customers by cutting out waste, getting smarter about how to provide the right care at the right time, and reducing premiums.

It is one of the virtues of a premium-support policy that beneficiaries would be directly empowered to make cost-effective decisions, and providers would strive to make those decisions attractive.

The Kaiser study also ignores any potential for efficiency gains from competition in a premium-support program. Sarah Kliff of The Washington Post notes that the study “does not capture how private Medicare plans would react to that new market.” Likewise, former Office of Management and Budget official James Capretta states, “This defies commonsense and experience.”

Too many Washington analysts often assume that efficiency gains and cost control will result from price controls or regulatory restrictions (even though they distort the markets, increase inefficiencies, and shift costs), but when discussing market competition—the real mechanism that drives efficiency and controls costs—they say that the effects are “uncertain.”

Assuming that seniors will not make a choice not only misrepresents premium support but also underestimates the ability of seniors everywhere to make good decisions.