Grasping the Medicare Distortion
The Left’s case against the Romney-Ryan plan is not based on the facts.

Mitt Romney introduces Paul Ryan as his running mate, Norfolk, Va., August 11, 2012.


Yuval Levin

At first, the idea seems rather similar to past “premium support” reforms, which have basically proposed to transform today’s “defined benefit” Medicare system (in which the government decides on a set of insurance benefits and then pays health-care providers a price the government defines for providing each of those covered services) into a “defined contribution” system (in which the government decides on an amount of money to provide to beneficiaries and then lets them use that money to choose from an approved set of competing private insurance plans that each offers all those benefits at whatever cost it is able or willing to offer). Such a system would use the power of intense competition among insurers seeking Medicare dollars to increase the efficiency of health-care provision and drive down costs. But the foremost criticism of this sort of defined-contribution reform is that if the amount provided to seniors to buy coverage were too low, or if its annual growth did not keep up with the growth of health-care costs, seniors would be left to make up the difference out of their own pockets, and those who didn’t have the money wouldn’t be able to afford insurance.

The Ryan-Wyden idea solves that problem through a clever combination of defined-contribution and defined-benefit insurance. The federal government would still define a package of required benefits that would constitute comprehensive insurance coverage — the same benefits that Medicare covers today. But each year, private insurers as well as a federal fee-for-service insurance provider (akin to today’s Medicare program) would submit bids to the government to provide that comprehensive coverage at the lowest cost they could manage. The government would then provide seniors in each region of the country with a premium-support payment equal to the second-lowest bid in that region or to the bid of the federal fee-for-service option, whichever was lower. That way, every senior would be guaranteed to have at least one comprehensive coverage option that cost no more than the premium-support payment he received (and thus involved no more out-of-pocket costs than Medicare does today), and would also have other options that cost more (whether because the offering companies could not manage to be as efficient in working with their provider networks or because they offered more benefits than the required minimum and thus charged a higher premium).

The market itself, rather than Medicare’s administrators, would set the level of each year’s premium-support payment, which would ensure that the payment was sufficient to pay for comprehensive coverage. A senior who chose a plan that cost less than the premium-support payment would get to keep the difference (deposited into a tax-free health savings account to use for future out-of-pocket health costs), and a senior who chose a plan that cost more than the premium-support payment would pay the difference out of his pocket. Poorer, older, and sicker seniors would get somewhat higher premium-support amounts than the rest.

Such a system would include the key advantages of defined-benefit insurance without its key drawbacks (since there would be a guaranteed comprehensive insurance benefit just as in today’s Medicare, but without the open-ended spending to provide it), and the key advantages of defined-contribution insurance without its key drawbacks (since the federal payment would be set, and so would drive intense competition for consumer dollars among insurers and providers, but, because the set payment would be determined by an annual bidding process, no gap would open up between the cost of coverage and the amount available to seniors to pay for it). It is based on the premise that intense competition in a genuine market could dramatically reduce the cost of Medicare without cutting the actual insurance benefit provided to seniors. And it puts the burden of proving that premise on the government, not the beneficiary: If costs in fact go down, then the cost of Medicare will decline and the government’s fiscal crisis would ease; if they do not go down, then the cost of Medicare will not decline and the fiscal crisis will remain, leaving reformers to find other solutions. Either way, Medicare beneficiaries will have the same comprehensive, guaranteed insurance coverage they have now.

There are some very good reasons for believing competition would indeed dramatically reduce costs. The way markets work in the rest of the economy offers one powerful kind of evidence, of course. But recent research into the Medicare system itself offers another. For instance, on August 1, three Harvard researchers published a study in the Journal of the American Medical Association (you can find it here, but it requires a subscription) that used data from the Medicare Advantage program (a much more limited experiment in insurer competition in Medicare) to consider how the Wyden-Ryan reform would have worked if it had been in effect in 2009. They found that, “nationally, in 2009, the benchmark plan under the Ryan-Wyden framework (i.e., the second-lowest plan) bid an average of 9% below traditional Medicare costs (traditional Medicare was equivalent to approximately the tenth-lowest bid).”


Sign up for free NRO e-mails today:

NRO Polls on LockerDome

Subscribe to National Review