Posted on 02/05/2010 3:48:56 PM PST by SeekAndFind
This post from The Economist's Democracy in America blog seems pretty compelling on the surface. Unfortunately, it is based on a basic misunderstanding of how the U.S. health system works and the sources of cost growth. The post, by "M.S.," notes that Paul Ryan's plan to transform Medicare from a defined benefit to a limited defined contribution program toward the purchase of insurance is a departure from current practice, which is accurate. She or he then makes a number of interesting extrapolations from said departure.
Under Mr Ryan's proposal, starting in 2021, Medicare would be gradually eliminated. Instead, seniors would be issued vouchers to buy private health insurance. The voucher for a 65-year-old would be worth $5,900, in 2010 dollars. (Mr Ryan's site says the vouchers would be worth "an average of $11,000" in 2010 dollars, but that's the average for the entire 65+ population. Individual health-insurance premiums for a 90-year-old are obviously going to be astronomical.) The voucher would then grow at the average of the annual medical inflation rate (CPI-M) and the general urban inflation rate (CPI-U). In other words, since medical-cost inflation is higher than general CPI inflation, the voucher would deliberately fail to keep pace with medical costs.
What would such a voucher buy? According to the Kaiser Family Foundation, the average individual premium for workers under 65 (ie, a median worker in his early 40s) was $4,824 in 2009. But here's the thing: the voucher is supposed to cover insurance for 65-year-olds, who are much more expensive to insure than younger workers. Kaiser doesn't break down average premiums by age. But according to the Bureau of Labor Statistics, mean health-insurance premiums and health-care expenditures for people aged 55 to 64 in 2008 were a good 50% higher than those for mean individuals between the ages of 35 and 44. (The exact dollar figures in the Census Expenditures Survey can't be used for this purpose because they don't include employer contributions to premiums. And costs for 65-year-olds aren't comparable because they're covered by Medicare; let's assume they're about the same as costs for 64-year-olds.) Assuming a 65-year-old is at least 50% more expensive than the median, the average individual premium could easily be $7,200 (1.5 x $4,800). This jibes with the fact that average medical costs for those 65 and up were over $9,800 annually in 2008.
One can dispute the back-of-the-envelope calculations or note the existence of Medigap plans that offer supplementary coverage, etc. But the real problem is the use of static analysis. "M.S." is suggesting that transforming Medicare into a limited defined contribution would have no impact on the broader health system. Given the size and significance of Medicare, this is a very dubious assumption.
Fortunately, James Capretta wrote a very accessible and comprehensive treatment of the relevant issues for National Affairs.
Instead of building a network of high-quality preferred providers, political control of Medicare has resulted in an open network that pays all licensed providers exactly the same fee, regardless of the quality of the care provided. And the only cost-cutting remedy Congress can ever seem to pass is a fee reduction. If applied more systematically across all of health care, such price-setting would, in time, lead to a reduction in willing suppliers of services, to waiting lists, and to government-driven rationing of care.
The alternative is a functioning marketplace in which consumers choose their insurance and the services they use, and so become far more conscious of the costs of their choices. An essential feature of such a marketplace would be fixed, rather than open-ended, subsidization of insurance by the government. That would mean the conversion of today's Medicare entitlement — as well as of the tax break for employer-sponsored insurance, and even of Medicaid — into limited defined contributions toward the purchase of insurance. With fixed contributions, a consumer who wanted to buy more expensive coverage would have to pay more. Conversely, anyone willing to economize and choose a plan with more controls and a tighter network would keep the money he saved. (Such a switch in Medicare could be phased in with new retirees to prevent disruption for those already in the program.)
Opponents argue that this kind of reform would be dangerous for the middle class, and especially for Medicare recipients, because health-care costs would rise faster than the premium subsidies. But with a functioning marketplace, there would be much greater pressure on doctors and hospitals to reorganize themselves into more convenient, cost-effective, and patient-focused systems of care. It is far more likely that the inefficiency in health care the president so often mentions would be reduced through the power of consumer choice than through bureaucratic regulation.
Now, this could prove an overoptimistic analysis, in which case one assumes that the limited defined contributions would be made larger. The Ryan roadmap generates enormous savings, and thus offers considerable room for maneuver. But for whatever reason, "M.S." doesn't engage with the case for limited defined contributions given fiscal realities. This makes for a punchy blog post, but not a very informative one.
On the off chance that "M.S." is reading, I'd also point to Capretta's brief explanation of how the outsized role of Medicare FFS shapes the broader health system.
In the case of Medicare, most beneficiaries are enrolled in the program's traditional "fee-for-service" insurance arrangement. Medicare FFS allows enrollees to see any licensed service provider, with no questions asked. Medicare does require substantial cost-sharing — including a 20% co-pay to see a physician, and a deductible of more than $1,000 per hospital admission. But this is ineffective, because about 90% of the enrollees also have some form of supplemental coverage, which pays for what Medicare does not. Thus, in most instances, more care does not cost Medicare beneficiaries any more money.
It's not surprising, then, that the Achilles' heel of Medicare is volume. According to CBO, the real price Medicare paid for physician fees dropped between 1997 and 2005 by nearly 5%, but total spending rose 35% because of rising use and more intensive treatment.
Employers have been trying for years to move away from Medicare-style FFS in favor of steering patients to higher-quality, lower-cost networks of service suppliers. The private sector is also well ahead of the federal government when it comes to disease management and wellness efforts. But employers can only do so much when Medicare, the dominant payer in most health-care markets, pushes in exactly the opposite direction. Because Medicare will finance unlimited use, many individual practitioners and institutions see no reason to give up their autonomy and join an organized delivery model. All manner of ancillary service providers — labs, home health agencies, hospices, and others — also survive as stand-alone operations because of Medicare's open network and provider-centric payment systems.
That is, the fact that Medicare is an unlimited entitlement that operates on an FFS basis distort the choices made by all participants in the market for medical care in ways that sharply exacerbate cost growth.
A number of left-of-center observers are delighted by Paul Ryan's entitlement reform proposal, seeing it as a bogeyman that can make various centrally directed proposals look attractive by comparison. This is a debate I'd like to see.
Incidentally, one criticism has been that Ryan exempts workers who are 55 and older from his proposed reforms, a move seen as a sop to today's elderly. One could also see this as a deferential nod to the fact that older workers have developed certain expectations regarding how their medical care will work. This reflects one of the conservative critiques of the extreme policy swings we've seen in the Greenspan-Bernanke era: stable policies are their own reward. The Ryan proposal offers a stable, sustainable course for the welfare state that promises to be far more stable than a centrally directed alternative that burdens the federal government with more complexity than it can successfully manage. Cutting checks — the core business of the Social Security Administration — is something government does well. Micromanages medical providers, as we've discovered through long experience, is not something government does well.
The Kenyan and his socialist goons care little about solvency since they are out to destroy America. Ray Charles could see this stuff but not these buttheads.
How ‘bout we limit medicare to CITIZENS who have paid in for a minimum of 25 years and their spouses of 20 years or more. Stop giving free health insurance to every dang fool that manages to live to the age of sixty five and happens to be here in the US right now.
A very small start to a much bigger problem. Government must cut it’s payroll immediately, by 15%, cut program expenses by 10% and unshackle the private sector. Anything less will take us deeper and deeper into a state of oblivion.
As far as I’m concerned, HSA is the way to go for everyone. When consumers write the checks to pay the medical bills, they will be much more selective about what they have done and where they get it. That will force providers to compete. Everybody wins, and you have an account that grows tax free just like your IRA.
Why should medicaid recipients on welfare (not the disabled) be given better health plans than taxpayers who pay for it?p>
The working poor (those making less than or the same as welfare recipients after taxes, health care, child care and transportation are paid) cannot afford to go to the doctor because their health plans have high co-pays and deductibles so they go without unless they become really ill.
When there is no financial investment, health care is abused and over used by both the doctors and the welfare clients.
Unless the child has a chronic illness (or the parent)
medicaid should cover 100% of urgent care only (broken bones, fevers higher than 102, bad cuts or head wounds) as well as yearly check ups and vaccines. All other visits should be out of their own pocket.
When there is no copay at the doctor and 1.00 for medication, heck some go every week, just for entertainment or moral support.
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