Grasping the Medicare Distortion

by alexvanbuskirk

Grasping the Medicare Distortion: The Left’s case against the Romney-Ryan plan is not based on the facts

By Yuval Levin @ National Review (August 12, 2012)

It is simply a fact that the United States government is now on track for an unprecedented fiscal disaster — with debt quickly surpassing the size of our GDP and reaching twice that size in the coming decades, crushing any chance for robust growth. It is also a fact that the rising cost of Medicare is at the very heart of that disaster. The program has been growing far faster than the rest of the federal budget for decades, and the trend is only set to accelerate.

According to the Congressional Budget Office, Medicare spending as a share of the economy is five times what it was in 1970, while all other federal spending combined (excluding interest) is 1.1 times what it was. By 2035, CBO expects Medicare costs to be nearly twice what they are today as a share of the economy, while all other federal spending combined will actually decline somewhat as a share of the economy. The debt problem is a Medicare problem. There is no way to avert fiscal disaster without significantly reining in the growth of that program. Even President Obama has acknowledged that no other solution, and certainly not his symbolic class-warfare tax proposals, could be sufficient, saying last July that “if you look at the numbers, then Medicare in particular will run out of money and we will not be able to sustain that program no matter how much taxes go up.”

And yet, even though he acknowledges this fact, the president has chosen to do nothing, and indeed to stand firmly in the way of doing anything meaningful to solve the problem. Obamacare’s Medicare cuts and its board of price controllers aren’t a solution — the CBO debt and Medicare growth numbers cited above already include them, and the agency (along with Medicare’s actuary, who works for the president) has said they are very unlikely to work. What is needed is a structural reform of the program, to enable it to deliver coverage to seniors far more efficiently by driving more efficient delivery of care. But seniors who are now in the program don’t want to hear that it’s going bankrupt, and don’t want to think about changes to it, so the politics of Medicare argue strongly against any kind of solution. The president and his party have chosen to make the most of that political reality, quietly raiding Medicare to fund Obamacare but otherwise leaving the program to its sorry fate. They have denied the need for reform. It would take real political courage to do otherwise.

The Ryan-Wyden idea solves that problem through a clever combination of defined-contribution and defined-benefit insurance. The federal government would still define a package of required benefits that would constitute comprehensive insurance coverage — the same benefits that Medicare covers today. But each year, private insurers as well as a federal fee-for-service insurance provider (akin to today’s Medicare program) would submit bids to the government to provide that comprehensive coverage at the lowest cost they could manage. The government would then provide seniors in each region of the country with a premium-support payment equal to the second-lowest bid in that region or to the bid of the federal fee-for-service option, whichever was lower. That way, every senior would be guaranteed to have at least one comprehensive coverage option that cost no more than the premium-support payment he received (and thus involved no more out-of-pocket costs than Medicare does today), and would also have other options that cost more (whether because the offering companies could not manage to be as efficient in working with their provider networks or because they offered more benefits than the required minimum and thus charged a higher premium).

There are some very good reasons for believing competition would indeed dramatically reduce costs. The way markets work in the rest of the economy offers one powerful kind of evidence, of course. But recent research into the Medicare system itself offers another. For instance, on August 1, three Harvard researchers published a study in the Journal of the American Medical Association (you can find it here, but it requires a subscription) that used data from the Medicare Advantage program (a much more limited experiment in insurer competition in Medicare) to consider how the Wyden-Ryan reform would have worked if it had been in effect in 2009. They found that, “nationally, in 2009, the benchmark plan under the Ryan-Wyden framework (i.e., the second-lowest plan) bid an average of 9% below traditional Medicare costs (traditional Medicare was equivalent to approximately the tenth-lowest bid).”

In other words, even under the very constrained competition of Medicare Advantage, in which prices are set by Medicare’s bureaucracy, the Ryan-Wyden approach would have reduced per-beneficiary spending by 9 percent in a single year while still providing seniors with the same comprehensive insurance coverage. With real competition through a bidding system, the reductions in the rate of the program’s growth over time could be enormous. And if those savings don’t in fact materialize, we would just end up where we are today — which is where Democrats seem to want to end up anyway.

In order to be scoreable by CBO, the Wyden-Ryan reform also has a kind of backup: a requirement that Medicare’s growth not be faster than 0.5 percent more than GDP growth per year. That is, not by coincidence, the same maximum rate of growth set in President Obama’s budget. Neither maximum rate is really all that meaningful — it’s a scoring convention, not a reform; if it were exceeded, Congress would almost certainly just suspend it, as it has when past maximum growth rates (like the one in place since 1997) have been exceeded. So in this respect, too, if Ryan-Wyden’s competitive system didn’t keep costs down, we would just be in the same place the Democrats want to end up. It is not the maximum growth rate but the mechanism for remaining below it — the bidding process that allows for the transformation of Medicare into a new kind of intensely competitive insurance system with both a defined benefit and a defined contribution at once — that is the real key to the Ryan-Wyden reform.

Essentially all of the criticisms of the Ryan-Wyden(-Romney) proposal ignore its innovative combination of defined-contribution and defined-benefit insurance — directing themselves instead to older versions of the premium-support idea — and ignore the fact that it would leave all current seniors and near-retirees untouched. Thus just minutes after Paul Ryan was announced as Mitt Romney’s running mate, Obama campaign manager Jim Messina said in a statement that Ryan’s Medicare plan would “end Medicare as we know it by turning it into a voucher system, shifting thousands of dollars in health care costs to seniors.” Some Democrats even put a particular dollar figure on that supposed cost shift — $6,400. That figure comes from a (rather rough) CBO calculation regarding a prior version of the premium-support idea, not the Ryan-Wyden proposal that Romney has endorsed. CBO would certainly not claim that the figure applies to what is now the Romney-Ryan plan, or indeed that any such shift would occur under that plan.

The Democrats continuing to make such charges either do not know about the difference between Ryan-Wyden and past premium-support ideas or are knowingly lying. And those who argue that “Medicare as we know it” is the alternative to the Ryan-Wyden proposal are also either ignoring or denying reality. The fact is that Obamacare cuts Medicare by $700 billion over its first ten years to fund other programs and imposes a board of price controllers — the Independent Payment Advisory Board (IPAB) — over Medicare to cut costs in ways that (particularly by driving providers out of the business of serving Medicare patients through inadequate payment rates) would reduce the access of both current and future seniors to care. And without further reforms, the Medicare program will soon run out of funds in ways that would either require dramatic benefit cuts or would drive the government bankrupt.

Medicare as we know it is thus not an option. The choice is between, on the one hand, a reform that leaves current seniors untouched for life and offers future seniors a guaranteed comprehensive benefit and more choices about how to get it or, on the other hand, cuts that affect both current and future beneficiaries and yet are still likely to fail to avert the program’s fiscal collapse. Mitt Romney offers the first — a plan for saving Medicare without increasing the risk to seniors. Barack Obama offers the second — a plan for raiding Medicare and watching it crumble.