The Agenda

The Rivlin-Ryan Plan to Reform Medicare

Two members of the Bowles-Simpson deficit commission, Rep. Paul Ryan and Clinton-era OMB director Alice Rivlin, have endorsed a sweeping plan to overhaul the Medicare system.

Many critics have taken Bowles-Simpson to task for “hand-waving” at Medicare cost growth by declaring an intention to cap Medicare to a growth rate of GDP growth + 1% while retaining its defined benefit structure. Given that Medicare has grown at a far faster rate in recent years, the idea is that this is a highly unrealistic projection. And if the only method we use to contain cost growth is IPAB-driven tweaks to the payment system and careful monitoring, one can’t help but agree.

But of course the cost growth derives from a number of structural factors, including the fact that the Medicare benefit encourages the overconsumption and misallocation of medical spending. The sheer size of Medicare FFS also makes it hard for other payers to encourage productivity-enhancing business model innovation, as James Capretta suggested in National Affairs last year:

Employers have been trying for years to move away from Medicare-style FFS in favor of steering patients to higher-quality, lower-cost networks of service suppliers. The private sector is also well ahead of the federal government when it comes to disease management and wellness efforts. But employers can only do so much when Medicare, the dominant payer in most health-care markets, pushes in exactly the opposite direction. Because Medicare will finance unlimited use, many individual practitioners and institutions see no reason to give up their autonomy and join an organized delivery model. All manner of ancillary service providers — labs, home health agencies, hospices, and others — also survive as stand-alone operations because of Medicare’s open network and provider-centric payment systems. [Emphasis added.]

One of the goals of IPAB is to tackle this problem through a centralized approach of imposing new delivery models on providers. The danger is that this will short-circuit the discovery process that happens in competitive markets, in which innovation occurs not in leaps and bounds but rather through an accretion of incremental, ground-level improvements in response to new challenges and new information.

One of the main drivers of this kind of incremental innovation in competitive markets is cost pressure. A defined benefit reduces the cost pressure on providers. A fixed subsidy, in contrast, would create strong cost pressure, as Capretta explains later in the same article:


With fixed contributions, a consumer who wanted to buy more expensive coverage would have to pay more. Conversely, anyone willing to economize and choose a plan with more controls and a tighter network would keep the money he saved. (Such a switch in Medicare could be phased in with new retirees to prevent disruption for those already in the program.)

Opponents argue that this kind of reform would be dangerous for the middle class, and especially for Medicare recipients, because health-care costs would rise faster than the premium subsidies. But with a functioning marketplace, there would be much greater pressure on doctors and hospitals to reorganize themselves into more convenient, cost-effective, and patient-focused systems of care. It is far more likely that the inefficiency in health care the president so often mentions would be reduced through the power of consumer choice than through bureaucratic regulation. [Emphasis added.]

This approach represents a dramatic break from established practice, and it is precisely the approach that Ryan and Rivlin propose. This much I can promise you: the Rivlin-Ryan plan will be ferociously attacked for the reasons Capretta outlined. But it is, in my view, the best way to address the central problems facing the U.S. health system and the U.S. public sector more broadly. Love it or hate it, it’s important for all of us to understand it. 

Rep. Ryan has written an explanation of his approach for the Economix blog that you can find here:

In order to make good on Medicare’s promise, I’ve put forward reforms that offer future seniors the same health coverage options I enjoy as a member of Congress. My reform plan makes no changes for those 55 and older, as efforts to save this program ought not disrupt benefits for those in and near retirement. For those now under the age of 55, Medicare would provide seniors with a payment, a list of Medicare-approved coverage options and the ability to choose a plan that works best for them. The Medicare payment would be adjusted so that the wealthy receive a lower subsidy, the sick would receive a higher payment if their conditions worsen, and lower-income seniors would receive additional assistance to cover out-of-pocket costs.

The Rivlin-Ryan plan is closely modeled on the Medicare reform proposal in the Ryan Roadmap. The CBO offered a preliminary evaluation [PDF] of the proposal in January:

Both the level of expected federal spending on Medicare and the uncertainty surrounding that spending would decline, but enrollees’ spending for health care and the uncertainty surrounding that spending would increase. Under the Roadmap, the value of the voucher would be less than expected Medicare spending per enrollee in 2021, when the voucher program would begin. In addition, Medicare’s current payment rates for providers are lower than those paid by commercial insurers, and the program’s administrative costs are lower than those for individually purchased insurance. Beneficiaries would therefore face higher premiums in the private market for a package of benefits similar to that currently provided by Medicare. Moreover, the value of the voucher would grow significantly more slowly than CBO expects that Medicare spending per enrollee would grow under current law. Beneficiaries would therefore be likely to purchase less comprehensive health plans or plans more heavily managed than traditional Medicare, resulting in some combination of less use ofhealth care services and less use of technologically advanced treatments than undercurrent law. Beneficiaries would also bear the financial risk for the cost of buying insurance policies or the cost of obtaining health care services beyond what would becovered by their insurance. [Emphasis added.]

The CBO has offered a brief preliminary evaluation [PDF] of the Rivlin-Ryan plan itself, which includes a number of other provisions relating to Medicaid and the CLASS program. 

It is the CBO’s job to be cautious in its analysis. One important thing to keep in mind is that the CBO uses an extended baseline and an alternative fiscal scenario to evaluate any new proposals, and these models of the shape of the economy depend on many assumptions that merit careful scrutiny. Earlier this month, I described the CBO’s operating assumptions about unemployment and how they impact cost projections for PPACA.

It is possible that Rivlin-Ryan will prove so inadequate to providing decent coverage for Medicare beneficiaries that political pressure to make the benefit more generous will prove overwhelming, a charge that has been levied against the payment reductions under PPACA. It is also possible that a fixed subsidy and voucher-like structure will improve the cost-effectiveness of medical care. The real debate we’re having is over which approach is more likely to yield greater cost-effectiveness over time: a centralized, IPAB-driven approach or a decentralized discovery process. 

I fear that Alice Rivlin and Rep. Paul Ryan are in for a bumpy ride. They are taking on deeply entrenched ideas and deeply entrenched constituencies. I’ve been told that some version of Rivlin-Ryan may become a central part of a Republican budget proposal. If that really is true, congressional conservatives will have proven those of us who’ve at various points doubted their seriousness and sincerity about reforming the welfare state wrong. We’ll see. 


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