Mitt Romney Embraces the Confident Market Solution

by Reihan Salam

Incredibly, Mitt Romney has embraced the best Medicare reform proposal out there — Yuval Levin’s confident market solution, which I’ve previously discussed in this space. Here is Yuval’s description:

How would that work? First, Medicare would define the minimum insurance benefit it would seek to provide to all covered seniors​—​presumably at roughly the level of coverage it now provides. Then, in each region of the country (Medicare is already divided into geographic regions), there would be a competitive bidding process each year in which private 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 in each region for that year would be set at, for instance, 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 in their area. Thus, in each region, there would be at least one option that would cost less than the Medicare benefit, and seniors choosing that option would get the difference back as cash in their pockets; 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.

Such a system could even allow a form of the traditional fee-for-service Medicare to be one of the bidders​—​offering government-provided insurance, but on the same terms as the private insurers, and thus with its ability to throw its weight around suitably constrained. This would appease some on the left concerned about the disappearance of “Medicare as we know it,” but would not take much away from the effectiveness of the new system if the rules allowed for real competition.

In such a system, the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset 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, and the broader health care system would be liberated from the stranglehold of the economically obtuse fee-for-service system. But seniors would not face the risk of greater out-of-pocket costs​—​if markets failed to bring down costs, the federal budget would suffer, but Medicare recipients would not. The risk would be borne by the government, not the elderly. [Emphasis added]

Yuval’s approach closely resembles that of Robert F. Coulam, Roger Feldman, and Bryan E. Dowd, which we’ve also discussed at length. The authors describe their proposal as follows:

Medicare should be an entitlement to a set of benefits, not to a particular way of financing or delivering those benefits. However, under the current structure of the program, federal payments for Medicare-covered services differ depending on whether the beneficiary is enrolled in the FFS Medicare plan or through private MA health plans. This arrangement creates inefficiency and raises Medicare costs unnecessarily.

There is a solution: full competitive pricing that applies equally to FFS Medicare and MA plans. …

Medicare faces a fiscal crisis. The 2009 annual report of the Medicare trustees warns that the Medicare hospital insurance trust fund will pay out more benefits than it receives in revenues by 2017,[2] making it crucial that the government pay only the cost of providing the Medicare entitlement benefit package from the most economical health plan in each market area. The way to do that is to have all health plans–both FFS Medicare and MA plans–submit bids for the entitlement benefit package, and then set the government’s contribution to premiums equal to the lowest bid in each market area.

As Bryan Dowd explained to me, the authors stuck to estimating the modest static benefits of this proposal:

We have estimated the “static” savings from competitive pricing at around 8 percent of Medicare costs. I expect there also would be “dynamic” savings of the type you describe once a larger proportion of beneficiaries were in price-competitive private plans and FFS Medicare was forced to respond with more aggressive purchasing strategies of its own.

Austin Frakt seems skeptical of the Romney proposal, and he criticizes the concept of raising the Medicare eligibility age. I’m surprised that he doesn’t seem to have registered that Romney seems to have proposed a Medicare competitive bidding proposal that guarantees a defined benefit, as opposed to Chairman Ryan’s defined contribution.

Why do I think Romney has embraced Yuval’s confident market solution? Consider the following from Jonathan Weisman in the Wall Street Journal:

Mr. Romney did not say how much money he believes his proposal would save the government. He cautioned that he would make no changes to the system for current Medicare beneficiaries or those approaching retirement, meaning that any savings from his plan would be slow in coming.

But by turning the federal role in seniors’ health care into a voucher – or “premium support – Mr. Romney would give the government considerably more latitude to lower its costs. A Congressional Budget Office analysis of the Ryan plan suggested that a voucher system would shift costs from the taxpayers to seniors, as the rising cost of health care outstrips the value of the voucher.

The Romney campaign, however, is putting its faith in the ability of a competitive market place to maintain health-care quality at lower costs and greater efficiency. He said the private plans would be required to offer coverage at least as good as Medicare’s. Seniors could choose more generous plans but would have to pay more out of pocket. Seniors who choose less expensive plans would be able to keep leftover cash from their vouchers to pay other medical expenses such as co-payments and deductibles.

Ironically, the plan Mr. Romney laid out parallels President Barack Obama’s health-care law, which the former governor has vowed to repeal. In both cases, taxpayers would subsidize the purchase of private health plans, with larger subsidies going to poorer consumers.

That last paragraph is pretty odd, as the same could be said of Chairman Ryan’s proposal. Medicare is an existing program that guarantees a defined benefit to over-65s. The same is true of Romney’s proposal, yet he allows more choice. Instead of creating a new entitlement, Romney is introducing a level-playing field into an existing entitlement to allow private firms to compete with the incumbent public firm. 

(Update: The relevant language in Romney’s speech can be found below.)

[T]omorrow’s seniors should have the freedom to choose what their health coverage looks like. Younger Americans today, when they turn 65, should have a choice between traditional Medicare and other private healthcare plans that provide at least the same level of benefits. Competition will lower costs and increase the quality of healthcare for tomorrow’s seniors.

The federal government will help seniors pay for the option they choose, with a level of support that ensures all can obtain the coverage they need. Those with lower incomes will receive more generous assistance. Beneficiaries can keep the savings from less expensive options, or they can choose to pay more for a costlier plan. [Emphasis added]

Note the careful language: “a level of support that ensures all can obtain the coverage they need.” This is not the same as Rivlin-Domenici’s “competitive bidding on a budget,” which takes the following approach:

The growth in per-beneficiary federal support will be limited to one percentage point faster than the growth of the economy – “GDP+1%” – compared to the current projection of growth that is 1.7 percentage points faster. If costs rise faster than the established limit, Medicare beneficiaries will have to pay higher premiums.

Instead, Romney is proposing that per-beneficiary federal support will grow as necessary to maintain “a level of support that ensures all can obtain the coverage they need.”

(End of update)

It is to his credit that Romney hasn’t thrown out an arbitrary number for how much Medicare competitive bidding might save, because there is no way to know. Medicare competitive is a bet that a more decentralized system that gives providers an incentive to raise productivity, a la CareMore in California, is a better way to reduce costs than administrative price controls.