What is the Point of Reforming Medicare?

Would Rivlin-Ryan fragment the Medicare risk pool? That’s Matt Yglesias’s take:

What Ryan-Rivlin does is buy less Diet Coke. It sets a hard cap on Medicare expenditures, thus reducing government outlays. Then in an unrelated move, it dismantles the publicly administered single risk pool of Medicare and replaces it with multiple privately administered for-profit risk pools. The combination of these two moves is a sleight of hand designed to make you think that the structural shift is “saving money” when in fact it does nothing of the sort. Creating multiple privately administered risk pools doesn’t offer any efficiency gains. It simply creates an adverse selection problem and ensures that the rationing decisions made necessary by the hard cap will be made by employees of for-profit firms rather than government employees. It also makes the political economy of restraining Medicare spending worse, since in addition to senior citizens and health care providers you’ll add insurance companies as a new constituency ready to demand that Medicare account for an ever-larger share of national output.

This is not the best way to understand the Rivlin-Ryan approach, though the Roadmap is not as detailed on this front as some of us would like it to be. Matt is concerned about “segmentation” of the risk pool, i.e., the prospect of some insurers attracting enrollees who are more expensive to cover than average. But the Ryan Roadmap explicitly calls for “risk adjustment,” which can take many different forms. Medicare could put in place a public reinsurance program, or it could allow all participating insurers to move premiums from insurers with below average risks to those with above average risks. There are a number of ways to proceed. But the basic idea is that the risk pool will not be segmented.

And Matt imagines that the hard cap will have no impact on underlying cost structures. This is understandable — his mental model is the way in which Medicare FFS limits provider reimbursements. But the point of the premium support model is that participating insurers aren’t just presented with a hard cap. They are also given more room to push providers to embrace productivity-enhancing business practices. Right now, Medicare FFS facilitates the continuing fragmentation of medical provision. Phasing out Medicare FFS will address this problem. To be sure, the new system will no doubt create a new set of problems. 

I apologize for having taken so long to write this post — had I not experienced a Biblical travel delay, I might never have gotten around to it!

On a related note, a number of bloggers, including Ezra Klein, have argued that Rivlin-Ryan is essentially identical to the structure of PPACA. And he detects something fishy in the conservative embrace of Rivlin-Ryan:

Right now, Medicare is much cheaper than private insurance.

It’s worth thinking through the many reasons why this is true. One reason is the superior negotiating power that Medicare enjoys. Another is that Medicare is less likely to scrutinize provider reimbursements. And then there is the fact that we’re not making an apples-to-apples comparison in terms of the amenities provided. Many beneficiaries of private insurance are consuming goods other than barebones medical care.

If you think that moving Medicare to a model of private insurance sold on exchanges will make it even cheaper, what you’re saying is that an ObamaCare model will not only be cheaper than the current private-insurance system, but cheaper than the even-cheaper Medicare system.

Again, the apples-to-apples point is very important. If you think that moving Medicare to a model of offering defined contributions towards the purchase of private insurance sold on exchanges will make it even cheaper, what you’re saying is that a defined contribution is, well, defined and predictable. Because it is defined and predictable, it will have an impact on providers, who will understand that they are no longer dealing with a defined benefit system but rather a defined contribution system. That is, the consumers of medical services will have a vested interest in the cost as well as the quality of medical services. Coupled with more freedom to organize care delivery systems in new ways and insurers have the means and the motive to offer the same or better care at lower cost. 

So no, you’re not necessarily saying that an ObamaCare model (I hate the term “ObamaCare”) will be cheaper than the current private-insurance system. You’d have to unpack that sentence first. Cheaper to taxpayers? Yes, the ObamaCare model will be cheaper than a single-payer system for all Americans insofar as an ObamaCare model calls for a defined contribution towards the purchase of private insurance. Will this system be even cheaper than the Medicare system? Yes, depending on how generous we make the defined contribution. 

But here’s the thing: without PPACA, we don’t have a single-payer system for all Americans. Medicare already exists. Finding a way to make Medicare cheaper seems like a reasonable way to reduce taxpayer exposure to an existing safety net commitment while potentially encouraging provider innovation that will benefit everyone. If we were designing a health safety net for all Americans, it’s not clear that a Medicare-like program would be our starting point. 

If you believe this logic, the Affordable Care Act is a great bill that will save much more money than CBO currently assumes. And yet this is the reform package that’s gaining adherents among the group of people who want to repeal the Affordable Care Act and think it a monstrous and unconstitutional piece of legislation with no redeeming features worth mentioning.

I find this to be something of a non sequitur. Those of us who oppose PPACA believe, among other things, that the subsidies will cost much more than CBO currently assumes because CBO’s baseline currently assumes a sharp reduction in the unemployment rate. Moreover, as James Capretta and Douglas Holtz-Eakin argue, it seems entirely plausible that many employees will encourage workers to take advantage of the new subsidized exchanges:

Over time, both employers and the labor market are certain to adjust to take advantage of the new subsidy structure. Employers with large numbers of low- and moderate-wage workers are likely to move them into the exchanges, even if it means giving their higher-salaried workers extra wages to compensate for the loss of the tax break for employer-paid premiums. As new businesses are formed, they could organize, in part, with a view toward taking maximum advantage of both the subsidies available in the exchanges and the tax break that remains for those with higher incomes. 

The end result would be that enrollment in federally subsidized insurance in the exchanges would likely far exceed the 19 million people that the CBO has estimated. Indeed, the safe assumption is that an additional 35 million workers and their families with incomes below 250 percent of the poverty line — who would clearly be better off in the exchanges as opposed to on job-based coverage — could end up there over time, one way or another. 

And when they do, costs will soar. The CBO projects that the premium-assistance program will cost about $450 billion from 2014 to 2019, but that cost would rise to $1.4 trillion if workers and their family members with incomes between 133 percent and 250 percent of the poverty line were to migrate out of their current job-based plans and into the exchanges on Day One. That’s nearly $1 trillion more than the amount advertised by the law’s supporters. 

In an alternate universe in which LBJ made Medicare a poorly-designed universal health entitlement rather than a poorly-designed health entitlement for the elderly, I might very well see something like PPACA as a step forward. But fortunately that didn’t happen. 

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

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