Critical Condition

A Liberal Voucher Plan for Medicare

In my previous post, I wrote that it would be nice to see liberals come up with constructive alternatives to Paul Ryan’s Roadmap for Medicare reform. Fortunately, Austin Frakt has picked up that gauntlet, with six posts over the past three days on his own reform plan.

Frakt criticizes Medicare Advantage, the most market-oriented component of Medicare, because it has higher costs on average than traditional, government-run Medicare (14 percent higher, according to the latest figures). This development surprised most experts, who believed that privately administered plans would be more efficient than traditional Medicare. So why are Medicare Advantage plans more expensive? Frakt argues:

The answer is that health care cost control is tough, technically and politically. Provider groups typically resist it. When it pertains to Medicare, beneficiaries resist it too. By adding another private-sector layer to the program–health insurers–the Advantage program invites a third source of political pressure. Rent-seeking by providers and insurers, as well as the power of the beneficiary constituency, align in their encouragement of higher Advantage payments. Congress, apparently, is willing to yield to that encouragement.

In summary, Frakt is arguing that, for insurers, it’s easier to yield and say “Okay, we’ll pay for that benefit,” and pass the costs on in the form of higher premiums, than it is to actually clamp down on costs and get yelled at by politicians. He’s right to point this out. But it is also true of government-run Medicare, so it doesn’t really explain why private insurance costs more. Rent-seeking insurers only account for a small fraction of the discrepancy.

The real reason that Medicare Advantage costs more is that the private insurers who participate in it are smaller, and less subsidized, than traditional Medicare. The government plan stacks the deck in its own favor.

Because traditional Medicare controls more than 35 million patients, the government has the market power to force hospitals and doctors to accept lower prices. Without those 35 million patients, the hospitals and doctors would lose too much business. Large private insurers under Medicare Advantage might control a few million patients each, and therefore don’t have that kind of influence. In fact, for the private insurers, market power goes in the other direction: Hospitals tell insurers, “We’re going to jack up our rates, and either you pay them, or we won’t accept your patients.” Hospitals can’t do that as easily to the government. (Indeed, Frakt has written eloquently about this problem.)

Another key factor is that traditional Medicare benefits from its status as a government program. Three percent of Medicare’s administrative costs are paid for by other government departments. In addition, private insurers are subject to taxation, whereas traditional Medicare is not. Between 8 and 13 percent of Medicare expenditures — $60 to $100 billion a year — go to paying fraudulent claims, something that doesn’t show up in traditional Medicare’s true costs. (One of the reasons private plans cost more is that they spend more to weed out fraud.)

Frakt’s own voucher proposal contains many promising ideas for Medicare reform, but it doesn’t address the problems above. Frakt advocates a pilot program in which competitive bidding is introduced to Medicare. This is an interesting idea, and Rep. Ryan would be well advised to consider it. His other suggestions, such as establishing a minimum benefit package, are within the realm of a reasonable debate.

But no pilot program is going to succeed when traditional, government-run Medicare enjoys such significant structural advantages over the private sector. This is why the Bush-era reforms subsidized the extra 14 percent cost of Medicare Advantage, and why the private-sector Medicare market will wither now that Obamacare has taken those subsidies away.

Frakt looks into but ultimately dismisses the experience of the popular, market-oriented Federal Employees Health Benefits Program (FEHBP), which the Clinton-era Bipartisan Medicare Commission saw as a model for a reformed Medicare program. “FEHBP’s experience does not count,” writes Frakt. “It’s apples to oranges,” because it is “largely untested for [the Medicare] market.” This isn’t a persuasive argument: FEHBP plans do include retirees, who do just fine in the program. And any meaningful reform of Medicare, by definition, is “untested.”

I hope Frakt takes more time to learn about the FEHBP. He makes a disappointing comment in reference to FEHBP disquisitions by the Commonwealth Fund, Heritage Foundation, and Wikipedia:

Ugh! This is no way to learn about a program. Can I have some analysis from a source that’s broadly viewed as unbiased please? How about CRS? (I searched, not finding something easily.) How about GAO? (I also looked.) How about the academic literature? (Yep, I checked.) I’m sure I am missing some good documents. Do you know of any?

Does Frakt really believe that government and academic research is “unbiased,” whereas think-tank research is not? Research, whatever its origin, is research. Either the data is accurate and the methodology sound, or not. Research from Harvard can be horrible, and research from conservative and liberal think tanks can be thorough.

At any rate, as has been pointed out elsewhere, Frakt (and anyone else interested in the subject) would benefit from reading Walton Francis’ 300-page book on Medicare and the FEHBP program, Putting Medicare Consumers in Charge: Lessons from the FEHBP. It’s a through and fair-minded examination of the program. Francis also wrote the Heritage report that Frakt considers biased, but that is manifestly unfair to Francis, who is one of the nation’s leading experts on FEHBP.

At the end of the day, this entire argument misses the point. The emphasis in Medicare reform, on both sides, has been on who the insurer should be: the government, or a private entity? But the reason that Medicare keeps costing more is because it heavily subsidizes the excessive consumption of health care, whoever does the actual insuring. As John Goodman writes in a perceptive post:

The fundamental problem in health care is not that we are using too much of one payment mechanism and too little of another. The problem is that the person who benefits from the service is not the same as the person who pays the bill.

If health care is nearly free to retirees, don’t be surprised that they use a lot of it. If you want to bring costs down and encourage retirees to spend their health care dollars wisely, they need to have an actual stake in doing so. That stake comes from sharing more of the costs.

Avik Roy is an equity research analyst at Monness, Crespi, Hardt & Co., and blogs on health-care policy at The Apothecary.

Avik RoyMr. Roy, the president of the Foundation for Research on Equal Opportunity, is a former policy adviser to Mitt Romney, Rick Perry, and Marco Rubio.


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