Further Thoughts on Wyden-Ryan, Or: What’s So Scary About Cash Refunds?

While I’m sympathetic to Josh’s argument — it would be good to implement the premium support model sooner than 2022 — I tend to think that moving up the timetable would be (a) politically risky and (b) there are legitimate reasons to delay a structural overhaul for several years, if not for a decade. 

Having read the coverage of Ryan-Wyden (or Wyden-Ryan, as everyone else seems to be calling it) from the left, I’m struck by a few things I’ve seen pop up more than once. 

Matt Yglesias raises a number of interesting points:

Relative to the Medicare status quo, this would be a gigantic rightward leap. But relative to where Paul Ryan was 12 months ago, it’s a gigantic leftward leap. Most notably, there’s at least some reason to believe that competitive bidding between private and public Medicare providers will generate some real cost savings. But if publicly run Medicare continues to be the most cost-effective option for most people (as I think there’s every reason to believe it will be) the vast majority of elderly people will still be basically getting insurance from Medicare.

Another possibility (more likely, in my view) is that publicly-run Medicare will emerge as the most cost-effective option in rural areas while private plans will tend to dominate in urban and suburban areas. Why? Austin Frakt has written about this possibility:

If we do force private plans to compete against traditional Medicare in a fair, head-to-head test, the results are likely to be mixed. What we are likely to find is that traditional Medicare is cheaper in rural areas, due to the high costs of establishing provider networks in such areas. Provider market power in rural areas mean private insurers would have to pay high prices, costing the government and/or beneficiaries more. Traditional Medicare, being immune from market forces (though not political forces) can counter that provider market power, essentially setting “below market” prices by fiat. (Don’t go thinking this is an affront to a perfectly competitive market. High provider market power is itself a deviation from a perfect market.)

The flip side is that private insurers (or some of them) might actually be cheaper in urban markets in which there is enough provider competition. Though politics essentially compels traditional Medicare to pay providers enough so that nearly all will participate, private insurers need not do so. They can establish networks, excluding higher cost providers. The benefit of selective contracting is lower prices.

The vast majority of Medicare beneficiaries reside in urban markets, which of course vary in the potential degree of provider competition. To “concede” that there should be a Medicare public option is merely to recognize that the U.S. is a large and diverse country, in which some rural markets might give rise to natural monopolies. Eventually, these natural monopolies might be successfully undermined by private plans that draw heavily on distance medicine, but the existence of a Medicare public option won’t prevent that from happening. 

Let’s return to Matt’s post:

The real cost savings here, however, don’t actually come from the structural reforms. Instead, as in Ryan’s original Medicare privatization plan, money is saved via an arbitrary cap on spending.

Well, that’s because we haven’t actually implemented the structural reforms. The CBO can’t just assume that these structural reforms will yield savings, just as they couldn’t assume that IPAB would yield savings. 

But while the plan the House of Representatives passed early this year capped the growth in Medicare spending at an absurd rate of CPI + one percentage point, Ryan-Wyden caps it at a still-ambitious-but-not-totally-insane GDP + one percentage point. And the cap, to be honest, is where all of the action is.

The cap is where all of the action is as far as determining a CBO score, not in terms of how this new structure will work — how it will shape the larger provider marketplace — in practice.

The big difference between US Medicare and single-payer health plans that exist abroad (aside from the fact that only old people get it) is that Medicare is unique in not having a fixed budget. Most public programs in the United States, and most health care programs abroad, have a certain amount of money appropriated to them and then they provide what services they can within the budget constraint. Medicare, by contrast, has a benefits formula and then whatever it costs that’s what ends up getting spent. That’s a great deal for America’s doctors, hospitals, and senior citizens but it’s not sustainable. When you have a budget, then you can have a debate about how to deliver services cost effectively. I wish Congress would actually separate this budget issue out from the question of Medicare structure. How large a share of America’s output do we want to allocate to health care services for the elderly is a very important question. What that spending should look like is also a very important question, but it’s a fundamentally separate one.

This is an excellent point. It happens that the Wyden-Ryan proposal does two things: it sets a global budget and it creates a plausible mechanism, though obviously not an assured mechanism, for introducing constructive competition that can restrain cost growth. 

At its heart, Wyden-Ryan is a version of the defined benefit proposal first advanced by a (bipartisan) group of health economists, Robert F. Coulam, Roger Feldman, and Bryan E. Dowd. This post from August offers some background on the concept. Like Yuval Levin’s Medicare reform proposal, however, it matches premium support to the second-cheapest plan in a market area, so that Medicare beneficiaries will have at least one cheaper plan that will offer cash back. 

Austin Frakt has been offering a studiously neutral take on Wyden-Ryan. 

To be clear, Wyden-Ryan is a gamble that competition in urban markets will reduce costs with a global budget as a backstop. As for quality, Wyden-Ryan guarantees a certain benefit and then allows Medicare beneficiaries to pay an additional amount if they seek services of higher quality. If the gamble succeeds and the new premium support structure is able to hold down the cost of today’s benefit, it seems plausible that many Medicare beneficiaries will be willing to pay top-up fees for plans that offer richer benefits. Consider one of the problems with the existing Medicare Advantage system, which the Wyden-Ryan team describes in their working paper:

Medicare Advantage is not without flaws. The program has been plagued by payment issues and access problems. Furthermore, because of geographic disparities in the cost of health care, seniors are often limited in their choices of plans and options. Moreover, while Medicare Advantage currently offers seniors a choice of private Medicare coverage, plans are limited in their ability to compete directly with traditional fee-for-service Medicare. Namely, if a private Medicare Advantage plan has lower costs than traditional Medicare, then by law, the plan may not offer a rebate to the senior. Instead, the plan must compete by offering additional benefits, which in some circumstances increases the use of services – and therefore costs.

This proposal builds on the coordinated-care model of the Medicare Advantage system while ensuring that those who are currently in the program see no disruptions in services. Future Medicare enrollees would have access to plans that provide access to care similar to the way that Medicare Advantage plans do now, but they would benefit from a more efficient, competitive marketplace. [Emphasis added]

Placing public and private plans on a level playing field helps address this problem by sending clearer price signals. 

Note the similarity to the Domenici-Rivlin proposal:

Medicare Advantage already offers private plans to Medicare beneficiaries. However, if a private healthcare plan currently has lower costs than FFS Medicare in its area, it cannot offer to rebate the entire cost difference to enrollees as an incentive to sign up. Instead, it must increase benefits – which in and of itself increases Medicare spending. Therefore, beneficiaries in areas with high FFS Medicare costs who enroll in private plans receive a host of free supplementary benefits, financed by the government. There is no policy justification for selectively offering free, government-financed supplementary benefits to beneficiaries in one geographic region but not another.

Instead, the new Medicare Exchange will provide strong incentives for plans to manage care-delivery efficiently and to offer the public evidence that their plans achieve quality outcomes at comparatively low cost – because low-bidding plans would be rewarded with increased enrollment.

Some Democratic Hill staffers have been quite harsh, per TPM:

[T]o give you a sense for just how poisonous Wyden’s colleagues on the Hill find this alliance — both on policy merits and on political grounds, here’s a quote from a very senior Dem congressional aide.

“For starters, this is bad policy and a complete political loser,” this aide said. “On top of the terrible politics, they even admit that it dismantles Medicare but achieves no budgetary savings while doing so — the worst of all worlds. Thanks for nothing.”

The staffer in question doesn’t seem to understand the nature of the proposal. The fact that it establishes a global budget for Medicare clearly does achieve budgetary savings. As for the structural reform, it basically says that Medicare Advantage plans will no longer have to offer free, government-financed supplementary benefits in some regions and not in others. Instead, seniors will have the option of getting cash back if they choose inexpensive plans. This isn’t exactly dismantling the welfare state. 

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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