But Medicare is a mess driven by a hidden subsidy. In discussing Netflix' problems with its provision of free or inexpensive streaming, Megan McCardle sums it up. Netflix could obtain licenses for content inexpensively as long as it did not threaten providers' normal distribution channels. Those channels would cover the average cost of producing content and, as long as Netflix paid more than the marginal cost of providing the content to it, licensers were happy to accept the additional revenue. A great deal for Netflix but not one that could be extended to the marketplace as a whole. She writes:
You can get a sweet deal if you are the customer who gets marginal cost pricing. Medicare does this--reimburses hospitals at above their marginal cost, but below their average cost, so that private insurers have to pick up most of the hospital overhead. European countries do this with prescription drugs: reimburse above the marginal cost of producing the pills, but below the total cost of developing the pills, so that the US has to pick up most of the tab for drug development.
But just as providers of content cannot extend Netflix' pricing to the rest of the market, Medicare cannot become the model for the entire market.