Another Step Toward Medicare Reform

While the Republican presidential race continues to flirt with catastrophe, Rep. Paul Ryan continues to advance the ball in some remarkable ways on the key conservative policy reforms of our time. This evening, the New York Times is reporting that Ryan has managed to get Democratic senator Ron Wyden of Oregon to sign on to a premium-support reform of Medicare.

Apparently, Ryan and Wyden are jointly proposing a reform essentially identical to the one that the Republican members of the supercommittee proposed to their Democratic colleagues (to no avail), and very much along the lines of the one House Republicans proposed in their budget this spring. It would leave current seniors and people who are now over 55 untouched, but for all younger Americans would transform the Medicare system into a premium-support system, in which Medicare would offer a fixed amount per recipient each year and individuals could use that amount to choose from a menu of private insurance options as well as one public fee-for-service option.

The latter would be a fee-for-service plan as an option within the capped premium-support system and so competing with the private insurers, not today’s open-ended fee-for-service Medicare as an alternative to a premium-support system (an idea that Newt Gingrich has proposed, and which alas would be very unlikely to help alleviate Medicare’s woeful inefficiency or the government’s fiscal problems). This far better Ryan-Wyden idea seems to be roughly the same as the one proposed by Mitt Romney last month, and advocated by champions of premium-support (including Ryan, but until today not Wyden) since at least the Breaux-Thomas commission of the late 1990s.

Moreover, under the Ryan-Wyden proposal, as I understand it, the value of the premium-support payment would be set by competitive bidding. The government would define the minimum insurance benefit it would seek to provide to all covered seniors, based on the level of coverage Medicare now provides, and then there would be a process each year in which the competing insurers would offer bids proposing to provide that (or a greater) benefit at the lowest cost they could. The level of the premium-support payment would be set at the level of the second-lowest of the bids. Seniors would then be able to apply that amount toward the purchase of any of the plans on offer. Thus, there would be at least one option that would cost less than the premium-support benefit, and seniors choosing that option would get the difference back; there would be at least one plan that cost the same as the benefit, so that seniors could obtain it with only the same out-of-pocket costs they have today; and there would be other plans that cost more (perhaps because they offered more, or because they failed to find ways to drive greater efficiency in their networks of doctors and hospitals) and for which seniors would pay an additional premium if they chose. Poorer and sicker seniors would get additional help, while the wealthiest seniors would get less. (I laid out how such an approach would work and why I think it’s a very appealing idea in the Weekly Standard a few months ago, here).

To help CBO score such a proposal, and to make sure the government’s maximum costs are reasonably predictable, the competitive bidding process would also be backed up by a maximum growth index (of nominal GDP plus 1 percent per year)—an idea suggested to the supercommittee this fall by Democratic budget guru Alice Rivlin and former Republican senator Pete Domenici as a revision of their original premium-support proposal from earlier this year, and apparently proposed by the Republicans on the supercommittee to their Democratic counterparts, who rejected it.

That index is made necessary by the scoring conventions of this kind of debate, but the key to this reform is the competitive bidding process, which would allow the premium-support benefit to grow exactly as slowly as possible while providing a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a pre-set formula. Information about costs and prices would flow from those who had more direct on-the-ground knowledge (insurers, doctors, and hospitals) to those with less (Medicare administrators) rather than the other way around, as now happens. Insurers and providers would have a strong incentive to innovate, to improve efficiency, and to cut costs while offering high-quality services to consumers, and the broader health care system would be liberated from the stranglehold of the economically obtuse fee-for-service system.

In a sense, competitive bidding is an even more market-based reform than the original Ryan proposal; it’s a way for those of us who believe that markets can help control health-care costs to show confidence in our expectations of competition. If market forces do drive costs down, as conservative health-care experts expect, the reform would save an enormous amount of money, leaving both our budget and our health-care system in vastly better shape. If market forces do not drive costs down sufficiently, then we would have to find another way to address our entitlement costs. We would be back where we started, which is where most Democrats want to end up anyway. (The index alone wouldn’t do all that much in that case; as we’ve learned over and over, Congress won’t let costs for seniors actually go up much, the only way to cut costs for the system as a whole is to use market forces to drive efficiency without undermining quality and access.) Whether the reform succeeds or fails, seniors would have a guaranteed benefit and essentially no added financial risk—which of course also reduces the political risk for elected officials willing to back such an idea.

As the Times puts it, “the proposal is sure to come under fire from beneficiaries and Democrats.” I don’t know about beneficiaries, but it will surely come under fierce fire from many Democrats, as it badly disrupts their plans for 2012. Wyden’s support for this proposal is the largest crack yet in the Democratic wall of demagoguery on Medicare, and will certainly complicate the Democrats’ efforts to paint premium-support—which has basically become the consensus conservative position on Medicare reform since the Ryan budget was introduced this spring—as a crazy right-wing assault on the elderly. In fact, premium-support is more or less the only plausible way to save Medicare from fiscal collapse, to save the federal government from a debt crisis, and to free the health sector from the crushing burden of the Medicare fee-for-service system, allowing for far greater efficiency and innovation and restraining the growth of costs.

Some key details are left rather vague in what Ryan and Wyden have so far had to say about their proposal—perhaps especially the restraints on the fee-for-service option necessary to have it compete on a level plain with the private insurers. It would, for instance, need to be divided into regional insurers, and to be entirely self-funded through premium payments. Paul Ryan has often made clear that he understands what this would require, down to the weeds, but it will be interesting to see how specific he and Wyden will want to get.

Thanks for this thread.

HEY YUVAL LEVIN! YEAH YOU!

You have written a puff piece about why the ALWAYS incompetent US FEDERAL GOVERNMENT should try to replace the free market for 1/6 th of the US economy!

These stupid ideas that you are so damned proud of are EXACTLY why we are the Nation with the largest debt in the World.

You, Paul Ryan, ALL the Democrats have learned NOTHING from the Great Recession. REPEAL THE NANNY STATE PROGRAMS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

BTW, just stop trying to replace the free market, as we can’t afford you anymore, because we are TAXED ENOUGH ALREADY!

BTW, BTW, here is some of your own govspeak to re-enforce my point:

“Moreover, under the Ryan-Wyden proposal, as I understand it, the value of the premium-support payment would be set by competitive bidding. The government would define the minimum insurance benefit it would seek to provide to all covered seniors, based on the level of coverage Medicare now provides, and then there would be a process each year in which the competing insurers would offer bids proposing to provide that (or a greater) benefit at the lowest cost they could. The level of the premium-support payment would be set at the level of the second-lowest of the bids. Seniors would then be able to apply that amount toward the purchase of any of the plans on offer. Thus, there would be at least one option that would cost less than the premium-support benefit, and seniors choosing that option would get the difference back; there would be at least one plan that cost the same as the benefit, so that seniors could obtain it with only the same out-of-pocket costs they have today; and there would be other plans that cost more (perhaps because they offered more, or because they failed to find ways to drive greater efficiency in their networks of doctors and hospitals) and for which seniors would pay an additional premium if they chose. Poorer and sicker seniors would get additional help, while the wealthiest seniors would get less. “

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