The Agenda

Yuval Levin’s Confident Market Solution

Austin Frakt writes:



The debate over health reform, the 2010 election cycle, and the political rhetoric since has demonstrated that Medicare is front and center in our political debate. The big picture contrast is between those who see the program’s current structure as a strength to be preserved and those who see it as the source of its problems. The president appears to be in the former camp, though the health care reform law he signed and his latest proposal clearly demonstrate that he is aware of the financing problems the program faces. Heading into 2012, he is attempting to position himself as a defender of the program in its current form while appearing to be reasonable about its future needs. To be sure, some will argue that income adjusting Medicare premiums undermines the program and, in that sense, the president is threatening its current structure. But it is not clear what political role additional income adjusting will play going forward. It exists today and the program enjoys overwhelming popularity.

The two principal alternatives that have been offered in recent months would change the structure of Medicare and the federal government’s liabilities commensurately. Congressional Republicans support a plan to privatize Medicare by removing FFS Medicare as an option for beneficiaries in 2022. Meanwhile, under their plan, public support for private coverage would erode over time so beneficiaries would bear more of the cost of care. Eventually, the government’s fiscal responsibility for the program would become vanishingly small in real terms. [Emphasis added]

In characterizing the Ryan Medicare reform proposal, Frakt seems to implicitly assume that competitive pricing will do nothing to restrain cost growth, which is a debatable proposition. I am, however, in complete agreement with Frakt on at least one point: “With his proposal, Obama has solidified his view that Medicare’s fundamental structure is sound.”

I take strong exception to this view, and conservatives aren’t alone in this regard. The Bipartisan Policy Center’s Debt Reduction Task Force released a plan that overhauls Medicare’s basic structure to create a sustainable health safety net for over-65s and that has won the support of many people across the political spectrum. 

The trouble, of course, is that these proposals are being offered in a competitive political environment, and the president is eager to contrast his “Medicare’s fundamental structure is sound” approach against a congressional Republican plan to “privatize Medicare,” or more precisely to turn Medicare into a system of limited defined contributions towards the purchase of private health insurance. That is why the eventual Republican presidential nominee is going to have to offer his or her own alternative to the president’s approach. Jon Huntsman has explicitly endorse the Ryan proposal, but my sense is that he is the only Republican presidential candidate to have done so thus far. This creates room for maneuver.

In the past, I have praised a proposal from the health economists Robert F. Coulam, Roger Feldman, and Bryan E. Dowd that has many of the virtues of the Ryan and the Heritage and the Bipartisan Policy Center proposals, all of which embrace some version of premium support, but that distributes risk very differently. As I wrote last month, the basic idea behind their proposal is that it guarantees a defined benefit. Premium support will be pegged to the cost of the cheapest plan in a given region that offers a complete benefit package as defined by Congress. If a private insurer offers a cheaper plan than Medicare FFS, beneficiaries have to pay the difference out of pocket if they want to stick with Medicare FFS. If Medicare FFS is the cheapest, beneficiaries will have to pay extra for a private plan. 



A defined benefit approach has obvious political advantages over a defined contribution approach, yet it has the potential to achieve significant “dynamic” savings as private insurers compete with Medicare FFS. The main difference is that taxpayers bear the risk if competition doesn’t yield big savings, not Medicare beneficiaries. The problem with the Coulam, Feldman, and Dowd proposal is that it hasn’t found a champion.

Fortunately, Yuval Levin has offered a proposal that has the virtues of Coulam, Feldman, and Dowd as well as a compelling political rationale. In the latest issue of the Weekly Standard, Yuval describes the vulnerabilities of the Ryan plan before outlining his solution:

[T]he most politically potent critique of the plan has also been the most substantively serious. It has focused on the rate at which the premium-support payment would grow, and on seniors’ fears that their costs would rise. The concern, voiced by some congressional Democrats and by liberal health care experts like former Clinton budget director Alice Rivlin, has been that the competitive pressures unleashed by the Ryan plan would not be sufficient to cause health care costs to grow only at the rate of inflation​—​which is far lower than their growth rate in recent years​—​so that the premium-support payment would not keep up with the cost of insurance, and seniors would face a steady increase in out-of-pocket costs over time to cover the gap. It is hard to gauge exactly what the gap would be (and most Democrats voicing this concern have used figures that assume that competition would not bring down costs at all, which is ridiculous), but it is not unreasonable to worry that there would be some such gap, as even in a competitive marketplace health care costs are likely to continue rising faster than inflation, especially if inflation remains fairly low. 

This concern about increasing out-of-pocket costs has been the most effective line of attack against the Ryan budget, and has even been voiced by some Republicans. Rep. Michele Bachmann, a Tea Party stalwart and Republican presidential candidate, has said that while she voted for the Ryan budget and supports its discretionary cuts, she would put “an asterisk” over its Medicare reform because she’s “concerned about shifting the cost burden to senior citizens.” 

Ryan’s response to this critique has been that the critics underestimate the power of competition to bring down costs, and that the particular growth rate of the premium-support payment in his plan is in any case open to negotiation and could be adjusted over time if it proved inadequate. Other reformers have also sought to address this concern by adjusting that rate: The debt-reduction task force of the Bipartisan Policy Center, chaired by Rivlin and former Republican senator Pete Domenici, proposed a Medicare plan very similar to Ryan’s but with a premium-support payment that would grow at one percentage point above the rate of growth of the gross domestic product each year, rather than at the rate of inflation. This, they argue, might be a more realistic pace of growth given the savings likely to result from competition. 

But of course, this last proposal might be subject to the same critique​—​especially from those who simply deny that competition would lower prices. And at the same time, setting ever-higher growth rates risks undermining the potential of markets to bring down costs. Costs would not fall below the preset growth rate, since insurers would have no incentive to push them below the level of payments already promised. Searching for the perfect growth rate thus sends reformers on a fool’s errand without neutralizing the political case against shifting the risk of higher costs onto seniors. [Emphasis added]

Yuval calls his approach “the Confident Market Solution,” i.e., an approach confident enough in the potential for true competitive pricing to reduce costs that it does not expose Medicare beneficiaries to an increased risk of out-of-pocket costs:

How would that work? First, Medicare would define the minimum insurance benefit it would seek to provide to all covered seniors​—​presumably at roughly the level of coverage it now provides. Then, in each region of the country (Medicare is already divided into geographic regions), there would be a competitive bidding process each year in which private insurers would offer bids proposing to provide that (or a greater) benefit at the lowest cost they could. The level of the premium-support payment in each region for that year would be set at, for instance, the level of the second-lowest of the bids. Seniors would then be able to apply that amount toward the purchase of any of the plans on offer in their area. Thus, in each region, there would be at least one option that would cost less than the Medicare benefit, and seniors choosing that option would get the difference back as cash in their pockets; there would be at least one plan that cost the same as the benefit, so that seniors could obtain it with only the same out-of-pocket costs they have today; and there would be other plans that cost more (perhaps because they offered more, or because they failed to find ways to drive greater efficiency in their networks of doctors and hospitals) and for which seniors would pay an additional premium if they chose. 

Such a system could even allow a form of the traditional fee-for-service Medicare to be one of the bidders​—​offering government-provided insurance, but on the same terms as the private insurers, and thus with its ability to throw its weight around suitably constrained. This would appease some on the left concerned about the disappearance of “Medicare as we know it,” but would not take much away from the effectiveness of the new system if the rules allowed for real competition. 

In such a system, the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula. Information about costs and prices would flow from those who had more direct on-the-ground knowledge (insurers, doctors, and hospitals) to those with less (Medicare administrators) rather than the other way around, as now happens. Insurers and providers would have a strong incentive to innovate, to improve efficiency, and to cut costs while offering high-quality services, and the broader health care system would be liberated from the stranglehold of the economically obtuse fee-for-service system. But seniors would not face the risk of greater out-of-pocket costs​—​if markets failed to bring down costs, the federal budget would suffer, but Medicare recipients would not. The risk would be borne by the government, not the elderly.

Such a reform would be a way for advocates of market-friendly health care to show confidence in their own expectations of competition. If market forces did drive costs down, as conservative health care experts expect, the reform would save the government an enormous amount of money (perhaps no less than the Ryan or Rivlin-Domenici plans), leaving both our budget and our health care system in vastly better shape. If market forces did not drive costs down, then we would have to find another way to address our entitlement costs. We would be back where we started, which is where Democrats want to end up anyway. Whether the reform succeeded or failed, seniors would have a guaranteed benefit and essentially no added financial risk. [Emphasis added]

There is, however, an important missing piece of the puzzle, namely a champion: 


Such a proposal would be ideal for the platform of a Republican presidential candidate. A candidate would not have to worry about a CBO score, and his campaign could explain the potential of this approach with the help of academic economists and modelers. Because such a reform would be inherently gradual and might retain the current system as an option, the candidate could also propose to implement it sooner than 10 years from now, and so have it begin bearing fruit far more quickly. 

Most important, a candidate could champion this approach as a safe and reasonable attempt to lower costs and address the country’s monumental fiscal crisis without shifting risk onto seniors. Such a proposal could serve as a way to educate voters about just how central our entitlement crisis is to our coming debt crisis, while showing them that​—​if we set clear goals and rules and then allow the market economy to work​—​solutions are possible without causing undue disruptions in the lives of the most vulnerable Americans. It would thus also function as a model for other reforms of our moribund welfare state​—​pressing the point that what our economy badly needs today is innovation and enterprise, and that these must be at the core of every facet of our domestic policy.  

Much of the left would certainly oppose a market-based reform, which would after all strike at the conceptual core of the liberal welfare state. But on what grounds would liberals base their opposition and seek to scare the elderly? This reform would retain Medicare’s guaranteed benefit, and would simply test whether market competition could dramatically lower the cost of providing that benefit while freeing our health care system from the shackles of command-and-control economics. If it worked, our fiscal prospects would improve dramatically and liberals would have to acknowledge the case for transforming the rest of our welfare state along similar lines. If it failed, we would need to find other means of addressing our fiscal problems, and conservatives would have to acknowledge that their vision of American government beyond the welfare state requires a profound rethinking. Either way, seniors would have their comprehensive health insurance subsidized by Medicare, just as they have for decades. [Emphasis added]

The dividends for the first candidate to embrace this proposal could be great. 


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