First the kudos to Paul Ryan. He is correct that unless we address Medicare we have little hope of addressing the Federal Government’s long-term structural deficits. Now the slam on two fronts:
1. His plan is a wolf in sheep’s clothing regarding the long-term viability of Medicare, and
2. He puts the primary burden of the fix on future generations of retirees.
Wolf in Sheep’s Clothing
In essence Ryan’s plan is to change Medicare from providing benefits to providing a subsidy for health insurance. Today’s Medicare offers an array of benefits eligible participants receive, subject to deductibles and co-pays. Participants pay no premiums for Medicare Part A, and pay highly subsidized premiums for Medicare Parts B and D. Only about 5% of participants pay increased Part B and Part D premiums because of their higher income levels.
Ryan’s proposal seems innocent enough. To understand how it would work, let’s say benefits cost $1,000 a year and are provided “free” by the government. Step one is to credit each participant with $1,000 and let them buy the equivalent benefit from a private insurance company. This will “get the government out of the medical insurance business.” Right?
Not so much. Government will still need to develop a whole set of regulations because it will cost a lot more to insure my parents than to insure me. Credits will need to be age-adjusted and perhaps, health-adjusted, to be fair. But let’s ignore that little issue. Let’s say they manage to get the credits and regulations right.
Why would an insurance company want to take on these plans? To make a profit—a profit not extant under the current system. Who will pay for that? The plan’s participants—unless the insurance companies are more efficient than the government in administering the plan. From your experience in dealing with insurance companies, what do you think? I’m not convinced. I think the approach will add Insurance Company profit to Medicare costs and will exacerbate the cost structure.
Additionally, the government does not need to charge a risk premium because if benefits are greater than expected, the government is on the hook. Not so with an insurance carrier. If its actuaries guess (oh, I mean misestimate) wrong about the level of costs, the insurance company is on the hook. They will want compensation to accept that risk. More added costs.
Now for a history lesson, which I think should be remembered in order to understand how Ryan’s plan will likely work in practice.
Let’s revisit the corporate world of medical plans during the 70s, 80s & 90s when I was consulting on plan design. The 70s began with employer-pay all plans (or plans with very modest employee contributions). Enter HMOs (Health Maintenance Organizations), which corporations first fought because it meant lack of control and then embraced because they promised lower costs.
For a fixed fee these entities would cover employees for all the basic medical services, but you had to receive care “in network” or be charged a premium. For a short period, medical costs stabilized before rocketing again. Then came insurance-company-sponsored PPOs (Preferred Provider Organizations). Same thing: an initial decline in the rate of cost increases before reverting to continued acceleration. (Note: there was never a decline in costs, just in the rate of increases.)
Corporations gave employees the choice to maintain their current plan, but with increased contributions, or take a lesser plan at little or no increase in their costs. Healthy employees took the new plan; those more likely to use benefits stayed with their dinosaur plan. This adverse selection drove traditional plan costs through the roof until no employees could afford them and employers dropped that choice.
During any of these changes did you notice your recordkeeping or dealing with insurance companies became easier? Me neither and I’ve been very fortunate to be healthy.
Now let’s peer into the future. In year two, what happens under Ryan’s proposal? From the sketchy details I’ve read, it will work like this: Your voucher grows with CPI, which let’s say increased 3%. Your new voucher is $1030. Good deal, until the insurance company mentions that medical inflation ran at, say, 15%. Now, the same benefits will cost you $1150. You can personally pay the $120 difference, or you can enroll in a less generous plan that just happens to cost $1030. It provides almost as good benefits—you’ll hardly notice the difference—or so they say.
The poor have no choice and must migrate to the reduced plan unless they know they are going to need the better benefits of the original plan, in which case they find some way to pay up. The rich pay the extra $120.
After a few years of this, an interesting trend arises. Three kinds of plans emerge. The lesser plan annually cuts benefits to match what the voucher provides. The well-off pay for benefits similar to those originally provided by Medicare except they are purchasing those benefits through voluntary associations. To participate, you had to be a professional of some sort, or earn a PhD or be a member of some other affinity that insurance company underwriters can use as a proxy for well off. In the meantime a third group has arisen. These people need the better benefits because they use them. They don’t qualify for the affinity plans and their costs escalate out of sight.
Ultimately this third group cannot afford the coverage because of pre-existing conditions, although they are never denied coverage because of that. They are the last ones in the original pool. Everyone else swam away.
Nothing in this process I have described addressed spiraling medical costs. The medical system is privatized (a Libertarian goal), but the voucher covers fewer and fewer benefits each year. Benefit cuts are implemented through the mechanism of having vouchers that do not keep up with the cost of benefits.
The system quickly bifurcates into haves and have nots. The haves can still get liver transplants; the have nots will not be covered and will die.
Ryan would undoubtedly object and state that because he has put consumers in charge, they will be able to change the trajectory of medical costs. Consumers with skin in the game will decide to go to cost-efficient providers, etc. etc. and the cost of delivering medical care will decline because of the competition.
Let me ask this: if the largest US employers with all of their bargaining power have been unable to put a dent in long-term medical cost increases, why should we think 300 million individual consumers each scrambling on his own will succeed?
They will not succeed. If anyone has a chance to put a lid on cost increases it would be the Federal Government IF and ONLY IF Congress did not fetter it as it currently does by refusing to allow the government to negotiate deals directly with medical providers, drug manufacturers, etc.
Ryan’s plan will not solve the problem, because it does not address the causes of the problem.
Anyone currently over fifty-five is exempt from the structural changes Ryan requires for those younger. I am in this protected class and I object on several counts. First, we citizens of the United States must be required to make shared sacrifices to solve our problems. Seniors vote; seniors are generally more conservative. Ryan’s cynical approach of not asking anyone close to Medicare eligibility to make sacrifices exacerbates the "us versus them" schisms politicians utilize to get elected.
Second, this approach of grandfathering seniors does not address the question of which cohort of taxpayers caused the Medicare problem. My children did not cause the imbalances in the system. Medicare came into existence in 1965. When I first started working full-time in 1972, I paid 0.6% of wages up to $9,000 toward Medicare. It wasn’t until 1986 that the current 1.45% rate went into effect and only in 1994 was the income limit removed.
Increases in medical costs have been significantly greater than increases in wages, which means if 1.45% was the correct rate in 1986, it is guaranteed to be woefully inadequate now. My father paid Medicare taxes for about 20 years, almost all before the 1.45% rate went into effect. My parents have both benefited from Medicare for over twenty years and (thankfully) appear to have many more years ahead of them. During their retirement, Medicare benefits continued to expand. Only in the last few years have those with higher incomes (over $85,000 for an individual) paid greater Part B premiums than the standard 25% of the cost of the benefits charged other participants.
This has been a great deal for my parents, and while not quite as great a bargain for me, I expect a financial analysis would show it will take me very few years to “earn” back my contributions into the system.
Medicare’s problem doesn’t start in 2021 when the first people currently under age 55 will start to receive Medicare. It is a current problem and to solve it means a shared sacrifice by those presently receiving benefits, those soon to receive benefits and those much farther away from receiving benefits.
The solution is to deal with the underlying cost structure of our medical system (everyone agrees it is broken) and the terms and conditions for receiving benefits under Medicare. That means we need to honestly move away from thinking it is government’s responsibility to give everyone over age 65 an almost unlimited right to whatever care might extend their life.
That’s a harder issue for us Americans, but if we don’t have that honest discussion, we will never address the underlying cost structure of our broken medical system in these United States.