The Corner

Means, Ends, and Premium Support

Ezra Klein today once again tries out the peculiar notion that Paul Ryan’s (and now also Ron Wyden’s) idea for Medicare reform is basically the same thing as Obamacare, since both involve a form of premium-support—even though the idea is employed in very different parts of our health-care system for quite different purposes.


The confusion on this point, if it is confusion, is rather telling about how even policy wonks on the left think about health care: It ignores the basic point of the Ryan reform (and of conservative reforms of the rest of our health-care system), which is to move our system in the direction of more market competition to improve its efficiency and reduce the growth of costs. Ryan’s Medicare reform would use a form of premium support to do that while Obamacare’s reforms of the under-65 market would use a form of premium support to push in the opposite direction. Ignoring that crucial difference of ends because the means bear some similarities to one another is an odd way to think about health care.  


Our health-care financing system now consists of three large parts and a fourth smaller part. The three large parts are Medicare, Medicaid, and the employer-provided insurance market, and the smaller part is the individual market. The system is composed of these parts because we seem to have come to a rough agreement that the government should very heavily subsidize comprehensive insurance coverage for the elderly, should heavily subsidize a decent insurance benefit for the poor, and should modestly subsidize the purchase of insurance by everyone else. That general agreement is fairly well established, but the system we have for achieving its goals works very poorly because every one of those three elements creates powerful perverse incentives: Medicare’s fee for service system (which utterly dominates the economic logic of our entire health sector) incentivizes volume over efficiency and so inflates costs; Medicaid’s federal-state structure incentivizes overspending (since states decide what to spend but the federal government pays for a large share of it) and so inflates costs; and the tax exemption for employer-provided insurance incentivizes high-premium health insurance, and so inflates costs. It is therefore no surprise that costs are inflated.


The Ryan-type reforms are based on the premise that the solution to these problems is to put in place market incentives for efficiency and lower costs rather than inefficiency and higher costs, and that the way to do that is by creating a competitive insurance market in which consumer pressure moves insurers to provide more appealing and cheaper high-quality options, which in turn would drive providers to organize their work more efficiently. The underlying assumptions about what we want our system to do for the elderly, the poor, and the rest of us are still there, but they would move that entire three-and-a-half-part system in the direction of a competitive market to better achieve those goals. They would transform Medicare from an open-ended, single-payer, fee-for-service insurer into a premium-support system in which insurers compete for customers on a level playing field, which would drive them all to pursue more efficient and appealing means of providing a comprehensive benefit. They would transform Medicaid into a block grant to the states, giving them a powerful incentive to contain costs and more flexibility to experiment with ways of making the system more efficient. And they would turn the tax exclusion for employer-provided coverage into a tax credit for all, so that the people who pay for insurance would be the same as the people who use it and we would move toward a genuine consumer market with sensible economic incentives for all involved. The result would in time be a three-part system, and each part would be far more market-friendly (and therefore, we believe, efficient) than today’s.


The Obamacare reforms are based on the premise that the solution to these problems is to put in place greater centralized control of the entire sector, and that the way to do that is to make the government an even greater buyer and regulator of insurance coverage. They would therefore move the entire three-and-a-half part system in the direction of greater centralized control and thus away from a competitive market to achieve these goals. Today’s employer-provided insurance system and individual market would gradually be turned into a heavily regulated system of heavily subsidized premium-supports, today’s Medicaid system would be vastly expanded but not otherwise changed (giving government purchasing and regulation an even greater role), and today’s Medicare system would remain a single-payer, fee-for-service insurer but its spending would be cut by a board empowered to impose more price controls but not to change the basic payment system. In each case, the move is away from market incentives and toward more regulation and centralized control.


So it’s true that there is a system of heavily regulated and subsidized premium supports in both cases, but in the Republican case it is offered to senior citizens (and is thus a move toward markets in the over-65 insurance sector) and in the Democratic case it is offered to younger people (and is thus a move toward government in the under-65 insurance sector). The fact that similar means are employed in a different part of the system for a different purpose doesn’t really make these two reforms the same. Means have to be understood in relation to ends. Pushing an old lady out of the way of an oncoming bus is not the same thing as pushing an old lady into the way of oncoming bus, even though both involve pushing old ladies and oncoming buses. Using premium support to replace the least market-oriented part of our system as part of a broad move to push the entire system toward market mechanisms is not the same as using premium support to replace the most market-oriented (but still not nearly enough so) part of our system as part of a broad move to push the entire system away from market mechanisms, even though both involve premium support and market mechanisms.

Yuval Levin is the director of social, cultural, and constitutional studies at the American Enterprise Institute and the editor of National Affairs.


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