The Agenda

Medicare in a Post-PPACA World

Yuval Levin has written an excellent post on Mitt Romney’s entitlement reform proposals. The Romney campaign has offered a bit more on its approach, though many details have yet to be ironed out

One aspect of the conversation surrounding the Romney Medicare proposal, or rather Romney’s germ of a proposal, has been a curious insistence, coming mainly from the left, that the acceptance of a traditional Medicare as a “public option” alongside competing private plans somehow means that the case against PPACA has been badly undermined. I’ll consider this argument from a couple of different angles:

(1) If Medicare becomes a premium support program, regardless of how the amount of premium support is determined (e.g., whether it is pegged to the changing cost of delivering a defined benefit or some other moving target), at least some on the right, including Michael Cannon of Cato, believe that Medicare beneficiaries should be able to redeem the premium support as cash. But instead, premium support proposals tend to stipulate that premium support can only pay for qualified medical insurance purchased on a Medicare exchange. Does this constitute a “mandate”? And if so, is this “mandate” unconstitutional?

Another way of looking at Medicare, however, is as a tax-financed social program devoted to providing a health safety net for the elderly. Had PPACA been built along similar lines, it would have been a tax-financed social program that would offer premium support to all non-elderly Americans. Instead, it is a combination of a tax-financed social program for some non-elderly Americans and a compulsion to purchase a tax-favored but not tax-financed product from competing private insurers participating in a regulated marketplace. The distinction is a subtle one. Yet it was politically crucial, as it markedly reduced the “sticker price” of the universal coverage law. The argument from constitutional hypocrisy doesn’t seem very strong, in part because it was always relatively easy to put PPACA on sound(er) constitutional footing: just pay for it honestly and transparently.

(2) Is Medicare-for-all the only or the best solution to the interrelated problems of cost growth, lack of coverage, and lack of accountability that define the U.S. health system? Many on the left believe this to be the case, which is why they assume that reforming Medicare along the lines Romney proposes will create overwhelming pressure to reduce (rather than to raise) the Medicare eligibility age, particularly if the reform proves successful in restraining cost growth. 

But what exactly would make the Romney approach successful? The working assumption behind it, pending more detail, is that premium support in a defined benefit context will encourage insurers to compete to become the lowest-cost provider of the benefit, as premium support will be pegged to the lowest or second-lowest bid to provide the benefit in a given area. The lowest and second-lowest bidders will attract large numbers of Medicare beneficiaries uneager to pay an additional out-of-pocket amount. And so, the theory goes, insurers would start organizing care delivery in new ways to improve cost-effectiveness. What is usually left unsaid in these conversations is that this would require the pruning of regulations that protect incumbent medical providers. To successfully compete with private firms, traditional Medicare (the public option) would presumably have to revise its fee-for-service structure. Presumably, the drivers of innovation in this space will be the new entrants, i.e., the private firms. One can imagine that some of the cost-saving innovations in this new Medicare market will be offered to under-65s as well. 

Why would the success of private firms in the Medicare market inevitably lead to calls for a larger role for public insurance providers for the non-poor, non-elderly? The argument, as I understand it, is that only a public insurance provider could provide price competition. But if the tax subsidy for private health insurance is curbed, i.e., if the health system for under-65s becomes defined contribution, there will be a strong new source of fiscal discipline in this market. The two markets could thus remain on parallel tracks. Over time, the Medicare public option might mainly survive in sparsely-populated rural regions in which private insurers aren’t able to build effective integrated provider networks while it fades away in dense cities. Something similar would obtain in the under-65 market, except with Medicaid playing the role in areas without a competitive provider landscape. 

All of this is to say that while a defined benefit approach can work reasonably well for Medicare, a defined contribution approach might be more appropriate for non-poor households headed by prime-age adults. That is, it might be sensible to employ different policies for different phases of the life-cycle. We have a different financing regime for higher education than for K-12 education. While many of us want to reform both, relatively few people argue that the financing regimes for higher education and K-12 should be identical. Indeed, the idea that reform measures appropriate for the higher education space necessarily apply to K-12 would strike many of us as peculiar.    

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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