Choosing Failure on Medicare

by Yuval Levin
In clarifying his views on Medicare reform over the past few days, Newt Gingrich has articulated a proposal to give seniors a choice between today’s Medicare system and a premium-support system. The official explanation of his proposal on his website says:
My proposed legislation will offer seniors new choices in Medicare, as well. It will give them the option to choose, on a voluntary basis, either to remain on the existing program, or to transition to a more personalized system in the private sector with greater options for better care. If they select the personalized system, beneficiaries would receive support to cover their private sector premiums. Giving all seniors the option to choose their insurance provider will improve price competition and help lower costs for the program.
On the surface, this might be easily confused with a very different idea championed by Medicare reformers in recent years—an idea that Paul Ryan has expressed some support for and that was proposed by Mitt Romney earlier this fall. That other proposal would transform the Medicare system to a premium-support system, at least for those people who are under 55 today, but within that new system—in which Medicare would provide a fixed payment each year to be used for the purchase of coverage of a senior’s choice—would offer the option of a government fee-for-service insurer. That insurer would have to compete with the private options: It would be broken up into regions, it would have to be funded entirely out of premium payments and not from the federal budget, and it would not be able to throw its weight around and impose price controls the way today’s Medicare does. The idea is to smooth the transition to a competitive market, allowing those seniors who want to stay in a fee-for-service system to do so, but requiring them to pay the difference in costs if that fee-for-service option costs more than that year’s premium-support payment. This would make sense particularly if the level of that premium-support payment each year were determined by competitive bidding among insurers (an idea championed by the Breaux-Thomas commission in the 90s, and which I laid out here)—that way, if the fee-for-service option cost more than, say, the second-lowest of the bidders in a competitive market, seniors would have to pay extra to choose it. In such a system, where the overwhelming burden of today’s fee-for-service Medicare (which totally defines, and distorts, the economics of health care) were lifted, there really would be an opportunity to gradually shift people toward competitive private options, and in any case costs would be capped by a process of competitive bidding. Seniors would not be choosing between one option that gave them an uncapped benefit and another that gave them a capped one.
 
Gingrich’s plan, at least as it is laid out in that brief paragraph on his website and in some of the answers he has given recently, would instead keep in place today’s out-of-control fee-for-service Medicare and allow it to continue dominating the economics of the entire health sector, but then would create a premium-support system alongside it. That system, like today’s Medicare Advantage program, would not have enough leverage to transform the economics of health care to change how doctors and hospitals approach the business side of their work. It would not enjoy the “advantages” of command-and-control health care (like using Medicare’s muscle to force price reductions that shift costs elsewhere) but could not change the providers’ incentives and so could not draw on the far greater advantages of market economics either. It would therefore very likely prove unable to control costs. This is the problem that various “pilot programs” in Medicare have always had.
 
The Medicare program requires structural reforms. It is certainly true, as Gingrich has argued, that these reforms need to be implemented in a reasonably gradual way that limits the disruption imposed on today’s retirees and near retirees and that is explained in a careful and responsible way to the voting public. But what Gingrich is proposing, as I understand it, would not amount to a structural reform. It would leave Medicare spending as it is now: bounded only by political promises that never materialize, rather than by market forces that actually improve efficiency and reduce costs.

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