Obamacare's Cruel and Inhumane Inflation-Indexed Vouchers

Published April 21, 2011

National Review Online

Editor’s note: After publication of this column, the author issued two follow-up blog posts on how the indexation of Obamacare’s vouchers works, which can be found here and here.

Hypocrisy and cynicism come awfully easily to some people.

Recall that in October 2008, then-candidate Barack Obama launched a ferocious political attack on his opponent. In debates, and then in tens of millions of dollars’ worth of advertisements, the Obama-Biden campaign excoriated Sen. John McCain for proposing to “tax health benefits for the first time in history.” Never mind that the McCain proposal would have provided a refundable tax credit that would have more than covered the lost tax benefit for the average household—and that the whole point of the McCain reform was to give individuals control over a tax benefit that today is under the total control of employers. Obama saw an opportunity for serious political demagoguery, and facts weren’t going to stand in the way.

And this was no sideshow in the presidential race. It was a top-tier issue, one of a few that ultimately decided the outcome. Indeed, in October 2008, when the race moved from a dead heat to Obama’s advantage, no issue was featured more prominently in TV attack ads than McCain’s supposed plan to “tax health benefits.”

Then, after assuming office, President Obama had a very sudden and inexplicable change of heart. Taxing benefits for the first time in history really didn’t seem like such a bad idea after all. The change of heart was so thorough that Obama went from chief opponent to chief proponent of the idea in a matter of months. As Obamacare wound its way through Congress, the administration gave the concept a new name—the “high-cost-insurance tax,” or “Cadillac tax”—and insisted that it be included in the final version of the legislation, to the great consternation of organized labor. Now that’s shameless.

Fast-forward to April 2011—the early stages of the next presidential contest. House Republicans—led by Budget Committee chairman Paul Ryan—have drafted a budget plan to put the nation’s fiscal house in order. It includes a proposal to reform Medicare. Everyone who is 55 and older today will remain in the current Medicare structure. Those below age 55 will get their entitlement in the form of “premium-support credits,” which will be applied to private health plans of their choice on an annual basis. The government will oversee this new Medicare marketplace, organize the information and choices for the beneficiaries, and ensure that all of the plans meet minimum standards.

The program will begin in 2022, at which point the premium-support credits will reflect what the traditional Medicare program costs at that time. In the years after 2022, the premium support credits will be increased commensurate with the rise in consumer inflation, as measured by the consumer price index (CPI).

By the Democrats’ reaction, you’d think this idea was the beginning of the end of Western civilization.

“Cruel.” “Inhumane.” “The end of Medicare as we know it.” From the president on down, liberals everywhere have jumped on the Ryan Medicare plan as the worst idea ever conceived. In the president’s budget speech last week, which was really just a partisan attack on the Republican budget plan, the concept was where he focused his most intense fire. According to the president, no proposal like the Ryan Medicare plan will ever meet his approval.

And what is it about the Ryan plan that liberals find so appalling and unacceptable? Well, according to the president’s speech—and columns by Alan Blinder, Paul Krugman, and Ezra Klein—it’s the fact that the Medicare “premium-support credits” could be used only for private insurance, and that the credits themselves would be indexed on an annual basis to consumer inflation, not health costs. They argue that, as the years go by, the credits will fall farther behind the actual cost of insurance, and leave seniors with larger and larger premium bills.

But, wait a second, there’s something vaguely familiar about how the Ryan Medicare plan is supposed to work. Inflation-indexed credits. Competing private insurance plans. Government oversight of the marketplace. Oh yeah: That’s the description of Obamacare that advocates have been peddling for months.

Here are the facts. In the new state-based “exchanges” erected by Obamacare, persons with incomes between 133 and 400 percent of the federal poverty line will be eligible for new, federally financed “premium credits”—dare we say “vouchers”? These vouchers can be used only to purchase the private health-insurance plans that are offered in the exchanges. There will be no “public option” to choose from. Initially, the vouchers will be pegged off of the average cost of silver plans in the exchanges, with a limit on the premium owed by the consumer based on their income. In future years, however, growth in the government’s contribution will be limited, first to the rise in average incomes and then the CPI.

That’s right: Obamacare’s new health-entitlement vouchers are indexed to general consumer inflation too. So if Ryan’s Medicare plan is “cruel” and “inhumane” because the credits supposedly fall behind rising costs, then the exact same criticism can be leveled against Obamacare.

But somehow, that’s never acknowledged. Even by Washington standards, the cynicism at work here is stunning. Liberals everywhere are practically giddy at the thought of running against the way the Medicare credits are indexed in the Ryan plan. Only problem is, it’s in their plan too.

The real issue here is what really needs to be done to control health costs. To Congressman Ryan and others, the fundamental problem is how Medicare works and operates today. The dominant Medicare fee-for-service model is the No. 1 reason we have a fragmented and inefficient health sector. That being the case, the key to slowing the pace of rising costs—for everyone—is Medicare reform.

Liberals have essentially conceded this point, but never say so. In Obamacare, all of the “delivery system reforms” that the law’s apologists tout—bundling of payments, Accountable Care Organizations, even the Independent Payment Advisory Board—are aimed at changing how traditional Medicare fee-for-service works today. The idea is that the federal government has the capacity to “reengineer” how health care is delivered by adjusting the levers of Medicare.

Ryan and others have a far more plausible theory. The key to “delivery-system reform” isn’t more government regulation but cost-conscious consumption on the part of Medicare participants. If they can reduce their premiums by signing up with high-quality, low-cost networks of care, they will do so. They just need to be given the opportunity.

The Congressional Budget Office analysis that shows seniors in 2030 paying higher premiums compared to current Medicare assumes two things that are not plausible. First, it assumes that Obamacare’s deep and permanent cuts in what Medicare pays hospitals and other providers of care can be sustained in some form. They can’t. The chief actuary of the Medicare program has stated repeatedly that if these rates were to stay in place, seniors would have very restricted access to care, because nobody would see them.

Second, CBO assumes that the Ryan plan’s Medicare reform will induce no response, or at best a minimal one, from those supplying services to patients. This is absurd. It’s as if the CBO doesn’t believe in economic incentives. The whole point of the Ryan plan is to build a marketplace, and the key is cost-conscious consumers. If seniors are given a fixed level of support from the government, they will immediately seek out the best value they can find. Health plans that can deliver better value at lower cost will be highly attractive, and thus gain market share. The race will be on to find better ways of doing business to cut costs. That’s the way to get genuine “delivery-system reform.”

In fact, there’s already a model in place in Medicare that demonstrates the value of this approach. It’s the much-maligned drug benefit that was enacted in 2003. Costs for the program have come in 41 percent below expectations, in large part because seniors have signed up in droves with low-cost plans that heavily push generic substitution.

The president’s real alternative to Ryan’s plan is rationing. He wants to empower the Independent Payment Advisory Board to ratchet down even further on what hospitals and other providers are paid. This is truly a crazy idea. Obamacare has already pushed Medicare rates below those of Medicaid. Now he wants to double down on irrational price cutting, and thus drive even more providers out of the program.

Talk about cruel.

James C. Capretta is a fellow at the Ethics and Public Policy Center. He was an associate director of the Office of Management and Budget from 2001 to 2004.

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