Early this month, it was reported that President Obama and Rep. Paul Ryan (R., Wis.) exchanged harsh words during a meeting. Mr. Ryan criticized Democrats for describing his Medicare reforms as a “voucher plan,” which he insists isn’t the case. And while Mr. Ryan’s proposal is a good starting point for a debate on Medicare reform, that clarification reveals one of its flaws — Ryancare doesn’t allow recipients to buy their own care directly, but it should. Otherwise, it misses an important opportunity to improve health outcomes and generate real savings.
Mr. Ryan serves as chairman of the House Budget Committee. With the U.S. debt at $14 trillion and growing, Ryancare seeks to contain future deficit spending by holding increases in per-patient Medicare costs to inflation — but only after Jan. 1, 2022, and only for those who don’t become eligible for Medicare until after that date. By some standards, it’s not even a cut to Medicare; it’s merely a limit on future increases. Democrats are attacking the plan, however, as the total destruction of the program.
Democrats have one good line of attack: If future Medicare spending increases are limited to the inflation rate, future recipients could be on the hook if health-care costs rise by more than that. Remember that Medicare costs have grown faster than inflation by at least a few percentage points throughout its history. So unless America gets healthier in the next decade, builds a more competitive health-insurance market, or both, Ryancare recipients should expect the value of their health-insurance premium support to fall short by an additional 2 to 3 percent every year (give or take). For millions of future elderly Americans, in other words, Ryancare could mean huge health-care expenses out of their own pockets.
And that’s where the missed opportunity lies.
In the past, Mr. Ryan supported a voucher-based model, and with an interesting side benefit: If recipients could find eligible insurance plans at a cost less than the value of the voucher, they’d get a rebate for the difference. That’s significant, since the potential for a rebate would create huge pressure for private insurers to keep premium costs low. It would also build in a reward for healthy behavior. A non-smoker at age 65, for example, would find it easier to buy cheap insurance than a comparable smoker. Experiments in the U.S. and Britain suggest that cash rewards are an effective tool to help cut the future health-care costs of obesity, smoking-related cancers, and other preventable illness.
But in the current plan, Ryan has moved away from vouchers. Under his new proposal, if you were eligible for Medicare, you’d choose an insurance plan, and then the government would transfer its contribution to the insurer. And the rebate, alas, is gone.
Remember, one of the reasons Medicare costs rise faster than inflation is that Medicare is “free” — aside from some co-pays. Not surprisingly, then, nations with government-run health-care systems experience roughly the same spending increases as Medicare. In Medicare and these other systems, there are limited financial incentives for patients to make healthy personal choices or shop around if they have no stake in the final cost.
Since Medicare reform is so controversial, it’s understandable that Mr. Ryan would want to make his reform ideas more politically palatable. And thus, the move away from vouchers. But his new model misses the opportunity to fully spur price competition, incentivize wellness, and reduce care demand.
While Ryancare isn’t likely to become law anytime soon, the plan will live on for months in Democratic attack ads. But just two years ago, when President Obama himself told Americans that it was urgent that health-care costs be brought under control, he proposed hundreds of billions of dollars’ worth of Medicare cuts — not just caps on the rate of program growth. Now that his own $900 billion health-subsidy plan is law, suddenly, Medicare is a sacred trust — untouchable, except by Democrats.
Thanks to this double standard on health care, it’s unlikely we’ll consider the benefits of building incentives for healthy behavior into Medicare anytime soon. That’s a pity, since those incentives might be the surest way to convince Americans to embrace a healthier lifestyle, saving billions in health-care costs in a competitive market in the process.
— Dr. David Gratzer, a physician, is a senior fellow at the Manhattan Institute.