The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

Peter Orszag on Paul Ryan


Peter Orszag notes that medical cost growth appears to be slowing down. What he does not note is that U.S. medical cost growth has not been much higher than that of other advanced market democracies in recent decades. Rather, it is growing from a much higher base. So while restraining medical cost growth is indeed valuable, it is not enough. That said, if medical cost growth is indeed slowing down, the obvious implication is that Wyden-Ryan will be more successful than is commonly understood in protecting the interests of taxpayers.

Orszag’s analysis rests on a non sequitur:

Altarum Institute researchers, in a separate report published last week in the New England Journal of Medicine, note that the slowdown predates the recession, making it difficult to argue it is solely due to the downturn. Evidence from Medicare suggests the same thing: A simple analysis shows no statistically significant relationship between Medicare spending trends across states between 2007 and 2010 and the rise of unemployment in each state over that period, suggesting something other than just the economy is at play.

Instead, as I have written, a number of structural changes — including actual and anticipated payment reform, and the expanded use of information technology to drive clinical decisions — are playing at least some role in slowing the growth of health-care costs. Along with others, I have put forward numerous proposals to reinforce these trends. Our proposals have three core attributes: They build on recent progress, they recognize there is no one simple solution to increase value in health care, and they emphasize the role of providers rather than insurance companies in improving that value.

Ryan, by contrast, ignores the recent progress — which in some sense is understandable, lest he diminish the energy for his own radically different course. Ryan is enamored with one big but wrong idea: that all we need to do is reshuffle risks and health-care costs will magically decelerate. He would shift risk onto Medicare beneficiaries through his premium support proposal and onto state governments by block-granting Medicaid. Both would rely substantially on insurance companies to make them work, and neither is likely to turn out the way he says.

As Bryan Dowd argues, however, the form of premium support advocated by Ryan is the “ultimate form of bundling.” Instead of having a centralized authority determine how information technology will be used to drive clinical decisions, etc., competitive bidding allows medical providers to use a decentralized trial-and-error discovery process to determine which approaches are most cost-effective. This is not a “simple” solution, as it harnesses the collective intelligence of large numbers of providers as they attempt to meet the needs of diverse populations in a variety of different environments. This is not a “magical” process. Moreover, it is a process that is backstopped by a global budget identical to the global budget embraced by the Obama White House. 

Orszag begins by criticizing Paul Ryan’s Medicaid proposal, and he is right to do so. It is the weakest aspect of Ryan’s approach to the long-term budget, for reasons Josh Barro has explained more ably than the former White House budget director. 

Yet when Orszag turns to Medicare, he engages in sleight-of-hand:

What about Medicare? Under the Ryan budget, after some time, the government would issue payments that would allow new Medicare beneficiaries to purchase insurance from private firms. The payments would not keep pace with currently projected health-care spending (notice a theme here?), and as a result would appear to reduce costs for the federal government.

We don’t have a full analysis from the CBO of the most recent rendition of the Ryan plan, so I’m forced to rely on CBO’s analysis of his plan from 2011. (If Ryan believes that changes to his plan since then would result in any different conclusions, he should request that CBO publish an updated analysis.)

But of course the Wyden-Ryan plan is backstopped by a global budget of GDP+0.5%. As Yuval Levin has explained, competitive bidding is not a pure defined contribution system, but rather a hybrid of defined contribution and defined benefit designed to preserve the current Medicare benefit for future beneficiaries. In light of the significant differences between Ryan’s 2011 proposal and Wyden-Ryan, which, to name one example, gives Medicare beneficiaries the option of choosing traditional Medicare FFS, Orszag’s reliance on a version of Medicare reform that Ryan himself has rejected is peculiar, not least because David Cutler, and ally of President Obama and his coverage expansion efforts, has co-authored a study describing in detail the fiscal impact of Wyden-Ryan had it been implemented in 2009. Its core finding is that savings would have been at least 9% that year, as traditional Medicare spent significantly more to deliver the Medicare benefit than Medicare Advantage plans in a large number of regions. Assuming providers had more scope to embrace information technology and to integrate care over time under the pressure of price competition, there is at least some reason to believe that they could continue to yield efficiencies over time.  


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