Ethics & Public Policy Center

Grasping the Medicare Distortion

Published in National Review Online on 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.

To their enormous credit, congressional Republicans over the past few years have decided that they cannot leave Medicare to collapse and take the government’s finances (and the nation’s economic future) with it, and so they must address the problem despite the standing threat from the left to demonize anyone who tries. Thanks to the creativity, tenacity, and flexibility of Paul Ryan in particular, they have worked through several different versions of a market-based reform of the system, and earlier this year they arrived at one that effectively addresses the key concerns of past critics of such “premium support” reforms—an idea that could dramatically improve the efficiency of Medicare (and so reduce its cost) without increasing risks or out-of-pocket costs for beneficiaries.

Because Mitt Romney (to his own enormous credit) has endorsed that reform, and because Paul Ryan (its architect) is now Romney’s running mate, this idea will come under blistering attacks in the coming weeks and months. Medicare will not be the central issue of this fall’s campaign—economic growth and jobs are far more important to voters. But President Obama and his supporters seem intent on distracting voters from the failed economic policies of the past four years by scaring them about the Romney-Ryan Medicare reform. And it is already perfectly clear that their criticisms of that reform are based on either a misapprehension or an intentional misrepresentation of the actual proposal, and of the very significant ways in which it differs from past Medicare-reform ideas (including those proposed by Ryan in the past). So it is worth taking a moment to understand the proposal—generally known as the Ryan-Wyden reform after its originators, Paul Ryan and Democratic senator Ron Wyden of Oregon—and to see what its critics are missing or misrepresenting.

At first, the idea seems rather similar to past “premium support” reforms, which have basically proposed to transform today’s “defined benefit” Medicare system (in which the government decides on a set of insurance benefits and then pays health-care providers a price the government defines for providing each of those covered services) into a “defined contribution” system (in which the government decides on an amount of money to provide to beneficiaries and then lets them use that money to choose from an approved set of competing private insurance plans that each offers all those benefits at whatever cost it is able or willing to offer). Such a system would use the power of intense competition among insurers seeking Medicare dollars to increase the efficiency of health-care provision and drive down costs. But the foremost criticism of this sort of defined-contribution reform is that if the amount provided to seniors to buy coverage were too low, or if its annual growth did not keep up with the growth of health-care costs, seniors would be left to make up the difference out of their own pockets, and those who didn’t have the money wouldn’t be able to afford insurance.

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).

The market itself, rather than Medicare’s administrators, would set the level of each year’s premium-support payment, which would ensure that the payment was sufficient to pay for comprehensive coverage. A senior who chose a plan that cost less than the premium-support payment would get to keep the difference (deposited into a tax-free health savings account to use for future out-of-pocket health costs), and a senior who chose a plan that cost more than the premium-support payment would pay the difference out of his pocket. Poorer, older, and sicker seniors would get somewhat higher premium-support amounts than the rest.

Such a system would include the key advantages of defined-benefit insurance without its key drawbacks (since there would be a guaranteed comprehensive insurance benefit just as in today’s Medicare, but without the open-ended spending to provide it), and the key advantages of defined-contribution insurance without its key drawbacks (since the federal payment would be set, and so would drive intense competition for consumer dollars among insurers and providers, but, because the set payment would be determined by an annual bidding process, no gap would open up between the cost of coverage and the amount available to seniors to pay for i
t). It is based on the premise that intense competition in a genuine market could dramatically reduce the cost of Medicare without cutting the actual insurance benefit provided to seniors. And it puts the burden of proving that premise on the government, not the beneficiary: If costs in fact go down, then the cost of Medicare will decline and the government’s fiscal crisis would ease; if they do not go down, then the cost of Medicare will not decline and the fiscal crisis will remain, leaving reformers to find other solutions. Either way, Medicare beneficiaries will have the same comprehensive, guaranteed insurance coverage they have now.

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.

The proposal would also have this reform begin only ten years from now, and affect only new entrants into Medicare, so that all current seniors and everyone now over 55 would be left entirely untouched for the rest of their lives, unless they chose to enter the new system. Thus, today’s seniors have no reason to complain about the proposal, since it would not affect them, and tomorrow’s seniors have essentially nothing to lose by it, since they would still be guaranteed a comprehensive benefit at only today’s out-of-pocket costs.

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.

The only way for Democrats to avoid the political consequences of this painful fact is to deny it, and to insist that the opposite is the case: that Romney and Ryan seek to arbitrarily cut Medicare and increase costs for seniors. In the wake of Paul Ryan’s selection as Mitt Romney’s running mate, some of them have seemed downright giddy at the prospect of unleashing that lie, and perhaps even building their entire fall campaign around it. Many of them surely don’t even know it’s a lie. But it is, and a strategy based on a lie can work only if it is left unchallenged. Romney, Ryan, and their supporters must not leave it so.

Yuval Levin is the editor of National Affairs and a fellow at the Ethics and Public Policy Center.

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