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A Closer Look at Ryan’s Medicare Plan

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Sgt. Pepper’s Lonely Hearts Club Band was released in 1967.  I was 19 years old then, and now, 45 years later, I too am 64.  The lyrics of one of the ballads on that album really sink in. 

When I get older, losing my hair, many years from now,
Will you still be sending me a valentine, birthday greetings, bottle of wine?
If I’d been out ’til quarter to three, would you lock the door?
Will you still need me; will you still feed me when I’m sixty-four?

I, along with millions of Baby Boomers, have a vested interest in the current Medicare debate.  How will changes to the program affect my wife and me?   Its cost to me, my continued access to provider services, and the quality of care are central to the debate.  As I peruse the partisan quarreling over the different plans for the program’s future, I am struck by the tone of the debate and the disregard by some of Medicare’s sustainability in its current form. 

In my last post I introduced you to a study (“Increased costs during retirement under the Romney-Ryan Medicare Plan”) by David Cutler and two colleagues who work for the organization that posted the report (Center for American Progress Action Fund).  It’s difficult to find a positive comment about the reform plan in its 10 pages.  Rather than address the criticisms point-by-point (that strategy would take up entirely too much space), I’ll comment on the overall approach that Cutler takes in his criticism. 

The study relies heavily on several reports released by the Congressional Budget Office (CBO) analyzing the Ryan budget proposal, Pathway to Prosperity, released last year.  It’s important to note that several aspects of Ryan’s proposed changes to Medicare have been modified as a result of further discussions with key stakeholders in the debate, most notably Alice Rivlin, former White House Budget Director and founding director of the CBO.  Rivlin who served with Pete Domenici on the President’s Debt Reduction Task Force was initially critical of several aspects of the plan that have now been modified.   I’ll comment further on the Rivlin-Ryan connection later. 

Ryan’s original plan called for full privatization of Medicare.  Instead of traditional fee-for-service Medicare, all participants would receive premium support (what the President refers to as a voucher) for a specified amount of money.  Seniors that chose a more costly plan would be responsible for the difference.  The benchmark premium would grow at the rate of inflation as defined by the Consumer Price Index.  This is the Medicare plan that was analyzed by the CBO and served as the target of the Cutler criticism. 

At best what Cutler has done is set up a straw man to shoot down because that plan is not the Ryan plan.  Ryan made several critical changes in his plan that make Cutler’s Medicare remarks irrelevant.  Under the modified plan Medicare is only partially privatized.  Seniors over that age of 55 are not affected and future participants will always have traditional Medicare as an option.  For all practical purposes, the Ryan plan establishes a Medicare exchange similar to the state exchanges created by the Affordable Care Act with one exception, a traditional Medicare is available as the public option. 

A second major difference in the modified plan is that the benchmark premium is determined by competitive bidding (a reverse auction where the second lowest premium becomes the benchmark).  The plan has an important a safety mechanism for those who want the standard features of traditional Medicare (assuming that it is not one of the two plans available at a premium at or below the benchmark).  A plan with the benefits and out-of-pocket costs of traditional Medicare will always be available at a premium that does not exceed the required premium for Part B.  Additionally, overall program spending is not limited by the growth in the CPI but by the growth in GDP plus 0.5% (which by the way is the proposed growth rate in the President’s budget plan). 

Why doesn’t the CBO analyze the current Ryan plan?  Simply put, the CBO doesn’t have the tools to evaluate the impact of choice and competition in the market.  CBO Director Douglas Elmendorf admitted when testifying to Congress that there is a “gap in the toolkit” when it comes to analyzing competitive reforms.  It seems that the benchmark premium in the Ryan plan is not set at a fixed amount, but determined by competitive bidding. 

So when the President says that seniors will have to pay an extra $6,400 per year for Medicare under the Ryan plan, he’s talking about a nonexistent plan.  He can’t make those claims based on CBO data because the CBO can’t score the new Ryan plan. 

 Does competitive bidding work to lower the cost of medical care?  Our experience with competitive bidding in the Medicare Advantage program provides evidence that it can lower costs.  Ironically, Cutler’s own study in The New England Journal of Medicine (August 2012) estimates that in 2009 the second lowest Medicare Advantage bid in Massachusetts was 9% below traditional Medicare.  Feldman, Coulam, and Dowd also examined competitive bidding in their American Enterprise Institute paper (“Competitive bidding can help solve Medicare’s fiscal crisis”).  Their estimate closely mirrors Cutler’s with a 9.5% savings. 

Cutler’s concern that the cost of traditional Medicare may rise is totally understandable.   Critics of Ryan’s plan are simply too pessimistic about the prospects of competitive bidding along with premium support in Medicare.  Our experience with the prescription drug benefit program reflects the likely outcome of more competition in Medicare.  Part D premiums have not changed appreciably for the past several years and Medicare Advantage premiums actually fell from last year’s levels.  Finally, those individuals who would pay premiums that exceed their support payments to keep traditional fee-for-service Medicare always have the option of choosing a more affordable plan that has the same actuarial benefits.   

I am extremely fortunate in that my personal concern is not whether I’m need and fed when I’m 64, but how will I receive medical care when I’m 65.  I’m not just getting older; I’m moving up a step on Maslow’s hierarchy.

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Fact Checking the President

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In a campaign stop in Florida this weekend, the President discussed Medicare reform, or at least the Republican version of it.  Citing a new study from the progressive Center for American Progress Action Fund, tied closely to the administration, the President claimed that the Romney-Ryan reform proposal “would mean as much as $16-26 billion in new profits for insurance companies.” Continuing his criticism he said: “Your costs would rise by the thousands and the insurance companies’ profits would rise by the billions.” Just how accurate is this study cited by the President? 

First of all the authors (well at least one of them) are heavyweights in the health policy debate.  David Cutler, Harvard economist and former Obama adviser, is the lead author in this Internet hit piece.  Second, the study purports to analyze the Romney-Ryan plan using data from several reports provided by the Congressional Budget Office (CBO) examining the impact of Ryan’s 2011 budget plan as it pertains to Medicare and Medicaid (without its most recent revisions).  In other words, Cutler’s analysis does not take into consideration of recent changes in the Ryan approach. 

Cutler’s angst is primarily focused on Romney’s promise to repeal the Affordable Care Act and not the long-term sustainability of traditional Medicare.  (In all but one week since passage of the ACA, Rasmussen’s tracking poll reports that at least 50% of those surveyed favor repeal of the legislation.)  There are several obvious omissions in Cutler’s analysis.  Looking at the reference section of the report, there are two obvious omissions that stand out.  He cites several points made in a paper by Ezekiel Emanuel in the August 2012 New England Journal of Medicine (“A systemic approach to containing health care spending”) without citing the counterpoint paper in the same publication by Antos, Pauly, and Wilensky (“Bending the cost curve through market-based incentives”).  In addition he failed to cite his own paper in the August 1, 2012, Journal of the American Medical Association (“Potential consequences of reforming Medicare into a competitive bidding system”).  I guess Cutler doesn’t like alternative views, even if they are his own. 

The viability and acceptance of any premium support plan depends critically on the type of coverage available in the plans offered and the adjustments to the premium support levels.  Ryan’s most recent plan requires that a traditional Medicare option is always offered and that at least one of the plans available at the benchmark premium has traditional Medicare benefits.  The target for spending growth is set at the growth in GDP plus 0.5% and not the CPI as reported by Cutler.  In fact, if spending exceeds the target, Congress is required to act in much the same way that the Independent Payment Advisory Board does to curb spending growth.  To date I haven’t seen Cutler lashing out at the IPAB. 

The basis of the CBO report on the Ryan plan are simply too pessimistic.  Self admittedly “CBO does not have the capability at this time to estimate such effects [of a competitive bidding process] for the specified path of Medicare spending”(CBO, “The long-term budgetary impact of paths for federal revenues and spending specified by Chairman Ryan,” March 2012).

I’m currently working on a more detailed critique of the Cutler report and hope to have it available shortly.

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The impact of the ACA on young Americans

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“Young Americans,” the classic David Bowie song repeats these lyrics:

“We live for just these twenty years
Do we have to die for the fifty more?
All night
He wants the young American.”

I know I show my age by citing a Bowie song, but he was an icon of my generation.  And I liked his music (and still do).  The lyrics have more meaning for me today as the Democrat’s nominating convention winds down.  I see them as reflective of our government’s view of young Americans:  “You’re only young once (and for a very short time) and then you die.  We’d better get as much out of them while we can because the dying process begins all too soon.” 

The cornerstone of the Affordable Care Act is the individual mandate, declared constitutional not by the commerce power of the federal government, but because it is viewed (at least by one person) as a tax.  Why do we need a mandate in the first place?  Now that coverage is available, won’t everyone want to have it?  Not by a long shot and let me explain why. 

Before implementation of the act, approximately one-half of all uninsured people in the US were between the ages of 18 and 34.  Now several million under the age of 26 are receiving coverage through their parents’ policies.  Will the rest purchase insurance when the ACA is fully implemented?  First, understand that about one-third are offered insurance through their jobs but refuse to participate because of it costs too much.  Their share (averaging 25% of the total premium) is too much.  Second, they’re young and healthy and don’t think they need it.  Has anything changed? 

These are people who on average have about $800 in annual medical expenses.  Ignoring administrative costs and profit, the actuarially-fair premium would be $800 (about $67 per month).  A 75/25 split between employer and employee would result in a net monthly premium of about $16.  This result would require homogeneous risk pooling with only adults age 18-34 in the pool. 

In contrast, people 35-64 years old spend on average 6 times the amount of those 18-34, or about $4,800.  The same homogeneous risk pooling will require they pay their own way and not rely on younger Americans to subsidize them.  Thus, their annual premium is $4,800 (or $400 per month).  A similar agreement with their employer would result in a worker share of the premium of around $100 per month, roughly 6 times that of their younger co-workers. 

How does the Affordable Care Act affect this result?  Well, the ACA only allows a premium differential of 3 to 1.  Let’s see what this does to premiums.  According to the 2010 US Census, there are approximately 2 times as many people in the older age category.  Assuming that the risk pool has twice the number of 35-64 year olds and 18-34 year olds and that the older group’s premium is only 3 times the younger group, the annual premium for the young American will be $1,480 and that of the older co-worker will be $4,440. 

The 3:1 ratio in premiums results in the younger group paying 85% more than the actuarially-fair premium so the older group can pay about 8% less.  Remember in my last post I noted that Jonathan Gruber failed to take adverse selection into consideration in his predictions on the ACA’s impact on premiums?  How does adverse selection affect my example?  I’ll tell you how.  Young people won’t buy the insurance.  There will be fewer in the pool to subsidize their older co-workers and premiums will rise for everyone. 

If half of the young refuse to purchase insurance, the premium will rise another 4% to $1,540 for young people and to $4,620 for everyone else.  In economists’ lingo, this is the beginning of the death spiral.  More young Americans will drop out and premiums will rise for everyone.  Soon 35-44 year olds will resent paying the same premiums that 45-64 year olds pay and demand separate pooling.  If they don’t get what they want, they too will drop out of the pool and premiums will continue to rise.  Soon insurance for the older group costs more than $4,800 and even those with chronic medical conditions will consider the prospects of dropping insurance.  Drop the insurance, pay the penalty, and re-enroll when you need medical care.  The structure of the act encourages this type of gaming. 

Our problem is that “we live for just these twenty years,” the time of our lives when we do not have much money.  There are demands on our money other than the purchase of insurance.  And the last thing we want to do is subsidize a bunch of older, sick co-workers who make more money than we do.  Even though we too will one day be old and sick.  But as Scarlett O’Hara said: “I can’t think about that right now.  If I do, I’ll go crazy.  I’ll think about that tomorrow.”

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Let’s hear from the Democrats

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The DNC begins its convention in Charlotte today, one week after a reasonably successful Republican convention in Tampa.  (That is if you measure success by a 6-point bump in the polls.)  A stark difference between the two parties will be their approach to President Obama’s signature domestic policy achievement, the Affordable Care Act.  The Republican mantra “Repeal and Replace” was repeated frequently.

 Preconvention comments indicate that the Democrat’s talking points will focus on 3 points: dependents will be able to stay on their parents’ insurance until age 26, contraceptives will be available without copay, and insurance cannot be denied due to pre-existing conditions.  You probably won’t hear much about $716 billion in cuts to Medicare, the individual mandate and tax to ensure participation, or the billions in other taxes to pay for it all.  You will hear about Paul Ryan’s plan to change Medicare as we know it, but you probably will not hear that the Dem’s own Ron Wyden of Oregon is a cosponsor of the legislative proposal. 

You also won’t hear much from Jonathan Gruber, Harvard economist and expert on health policy matters.  You see, in 2009 Gruber using his own micro-simulation model predicted that by 2016 premiums in the individual insurance market would be 13% lower for young people and 31% lower for older Americans.  At the same time the consulting firm PriceWaterhouseCoopers came out with a study that reached far different conclusions.  Instead of lowering premiums, they predicted that those same premiums would be 47% higher.  It was widely publicized that the PWC study was funded by the American Health Insurance Plans.  Waffling members of Congress were appalled that AHIP would resort to such underhanded tactics in their opposition.  Little did they realize that Gruber was not as “objective” as they thought.  He actually served as an outside adviser to the President.  Gruber carried the day and the legislation passed. 

Fast forward to today and Gruber is telling a different story.  Consulting for state legislatures in Wisconsin, Minnesota, and Colorado, his simulation model now seems to indicate that premiums in the state exchanges will rise, not fall.  In Wisconsin they will go up 30% because of the ACA, in Minnesota it will be a 29% increase, and in Colorado the increase will be a modest 19%. 

Why the different conclusions?  Adverse selection will be a bigger problem than originally thought.  Actually, PWC took it into consideration in their study in 2009, but Gruber did not.  During the reform debate, the President stated repeatedly that annual premiums for the average family would fall $2,500.  This will not happen.  More liberal benefits, lower out-of-pocket spending requirements, and generous subsidies serve to increase demand.  Those who qualify for expanded Medicaid will benefit as will low income workers who qualify for subsidies.  But as we’re used to hearing: “There is no such thing as a free lunch.”  Somebody will pay and in this case it will be US taxpayers.   

All week I plan on considering the ACA’s impact on different aspects of the economy and the various stakeholders.  Summarizing the impact on health insurance premiums is easy, they will increase.

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The Most Influential People in Healthcare

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The magazine Modern Healthcare came out with its list of the 100 most influential people in health care this week.  The list is dominated by politicians (understandable in this chaotic year of the ACA constitutionality battle and the presidential election).  Justice Roberts tops the list, President Obama is fourth, and HHS Secretary Sebelius is fifth (in my opinion she should be higher on the list).  Mitt Romney is 13th and his Vice Presidential running mate, Paul Ryan, is 24th.

Washington, DC, is the obvious epicenter of influence on policy, thus, the inordinate number from that area.  What’s more interesting is the significant number of hospital system and health insurance executives on the list from all over the country.  You see representatives from familiar organizations like Aetna, Kaiser Permanente, WellPoint, Humana, Mayo Clinic, Cleveland Clinic, and Geisinger Health System.

As important as these individuals and the organizations they lead and represent are, I’m glad to see leaders from organizations in my home state (Texas) who are not so well known are also on the list: Dan Wolterman of Memorial Hermann in Houston, Joel Allison of the Baylor Health Care System in Dallas, and Trevor Fetter of Tenet also in Dallas.  I’m familiar with these organizations and their fine work in the state of Texas.

Sometimes those of us in the “flyover country” go unrecognized and unrewarded.  I say, “A tip of the hat to my fellow Texans for the work you’re doing.”

By the way, there was only one health economist on the list, Jonathan Gruber of Harvard.  Seems that those of us toiling in academe have a long way to go before we’re perceived as having much influence on what we study.

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Fact Checking Paul Ryan’s Speech

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I received an email this morning from Jim Messina, the President’s campaign manager, accusing Paul Ryan of lying in his acceptance speech last night.  “He lied about Medicare.  He lied about the Recovery Act.  He lied about the deficit and debt.  He even dishonestly attacked Barack Obama for the closing of a GM plant in his hometown of Janesville, Wisconsin — a plant that closed in December 2008 under George W. Bush.”

I write about health policy, so I’m not going to comment on all the accusations, but I will say this about the Janesville plant closing.  President Obama visited that plant during his 2008 campaign.  During that visit the President said: “I believe that if our government is there to support you. . . this plant will be here for another hundred years.”  Ryan’s comment:  “Well, as it turned out, that plant didn’t last another year.  It is locked up and empty to this day.”  Yes, the plant was scheduled for closure during the Bush administration, but I believe the point was not to blame President Obama for its closure, but to point out that promises are easy to make, but hard to keep.   And one of the themes of the speech was that we shouldn’t judge someone by their promises, but by their actions.  By the way, the Wikipedia account of the plant closing has already been edited to clarify the actual sequence of events.

Now let’s focus on the Medicare “lie.”  Ryan referred to the Affordable Care Act (out of concern for all those leftist pundits who are stroking out because they see racism in certain code words, I’ll refrain from calling the ACA, Obamacare) as the “coldest power play of all [coming] at the expense of the elderly.”  He went on to explain that “the planners in Washington … didn’t have enough money…. So, they just took it all away from Medicare.”  Ryan is referring to estimated $716 billion that is removed from Medicare to fund the expansion of Medicaid and the state exchange subsidies in the new law.  He concludes the Medicare portion of his speech by saying, “The greatest threat to Medicare is Obamacare.”

I’m assuming that the last statement is the “lie” that Messina is talking about.  So to what extent does the ACA threaten Medicare?  The obvious threat is the one to Medicare Advantage.  About 25% of the cut comes out of the Medicare Advantage program.  As a result the CBO estimates that about half of its enrollees will be forced out of the program and back into traditional Medicare.  It’s fair to ask the seniors who will lose their insurance of choice and are forced back into traditional Medicare whether or not that’s a threat.

Possibly the biggest threat to the program comes as a result of the creation of the Independent Payment Advisory Board (IPAB) and its control over payment rates to providers.  As I said in an earlier post (“The Obama Medicare Reform Plan,”  August 24, 2012) if historical growth rates prevail into the future, using the ACA formula, spending on physicians’ services will have to be reduced by almost 5% annually.  Ignoring the obvious threat to provider incomes, how are these spending cuts a threat to Medicare?  The obvious answer, they will affect patient access to medical services.

The Affordable Care Act was about giving people access to health insurance with little thought to providing access to medical services.  Too many physicians do not accept new Medicare patients now.  How will payment cuts affect future access?  How will the Act affect access to hospitals?  Only about 12% of all community hospitals make enough on Medicare to cover their expenses.  Without the ability to shift costs to privately insured patients, an out-of-date financial model, those who can’t at least break even on Medicare will only accept Medicare patients in emergency situations.  Seniors will simply receive their medical care at hospital emergency rooms.

Is this a threat?  I’ll let you answer that question.

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Private Medicare that Works

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I told my undergraduate health economics class today that only members of Congress read the New York Times.  Well, for the second day in a row I’m writing about a Times article.  I’m not a member of Congress so I must be wrong about the newspaper’s readership.  I’ll admit that I’m not in agreement with much of the editorial content of the New York Times, but when I do agree I should acknowledge that fact.

Robert Pear writing this past weekend (“Despite Democrats’ Warnings, Private Medicare Plans Find Success”) looks at the success of Medicare’s two privately-run programs, Medicare Advantage and its out-patient prescription drug program, Part D.  Both have proven quite popular and relatively successful in controlling spending.  Medicare Advantage provides primary insurance coverage to over 12 million enrollees, over 25% of the eligible population.  The competitive bidding process for 2013 recently concluded and for the third consecutive year premiums remained constant.  Similarly, Part D, which is exclusively private coverage, provides drug coverage for a premium that is 30% lower than predicted when the program began.

Competition and choice are powerful partners providing incentives to improve efficiency and hold down spending.  These are the same incentives that Paul Ryan believes can accomplish similar results for the rest of Medicare.

But Ryan has his doubters.  When Part D was being debated in the House 10 years ago, then Speaker Nancy Pelosi said: “Most seniors will be worse off.  This is the beginning of the end of Medicare as we know it.”

In the same vein Democrat Senator Tom Harkin said: “We hear the claim that private-sector competition will drive down costs and save Medicare.  Nonsense!”

I don’t give much credence to bloviating, partisan politicians.  I tend to agree with serious scholars like Roger Feldman, University of Minnesota health insurance professor, when he said: “Competitive bidding could save a substantial amount of money, helping solve Medicare’s fiscal crisis.”

Ryan’s premium support plan to reform Medicare is based on competitive bidding.  Instead of relying on the US taxpayer to shoulder the entire financial risk associated with the growth in Medicare spending (the case with traditional Medicare), why not let private insurers share in that risk (like in Medicare’s Advantage and Part D programs)?  Maybe Paul Ryan is on to something.

Note to self: Don’t be so hard on the New York Times.  Occasionally, they get it right.

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I wish they would have read it first

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Remember when House Speaker Nancy Pelosi said that “we have to pass the bill so that you can find out what is in it?”  As you are aware, they passed the bill and now we’re finding out that there are problems with it.  The New York Times calls the recent discovery “A glitch in health care reform” (see August 25, 2012 edition).

Workers making less than 400% of poverty level income (about $90,000) are eligible for subsidies to purchase their own insurance if they can’t afford the policy available to them through their work.  The “glitch” comes because of the law’s definition of the “affordable” policy.  The employer’s obligation to provide insurance only applies to individual coverage.  For example, a worker making $50,000 can qualify for a subsidy if his or her share of the insurance plan costs more than 6.77% of income, or $3,385.  If the worker pays 25% of the total $4,500 premium, or $1,125, there is no subsidy and the worker pays $1,125.

The problem arises if the worker is looking to insure a family of four.  The typical plan costs $12,130 and the employer is only obligated to provide an individual plan.  The worker is covered, but the family is not.  Remember the worker is eligible for a subsidy only if his or her share is over $3,385.  The worker’s share of the premium for the required plan is still $1,125.  Thus, if family coverage is desired, the worker pays the difference between the cost of a family plan and that of an individual plan.

More proof that it would have been nice if we had known what’s in the law before they passed the law.  The Kaiser Family Foundation has estimated that as many as 3.9 million dependents may be affected by this “glitch.”

The Kaiser Family Foundation Subsidy Calculator can be found at http://healthreform.kff.org/Subsidycalculator.aspx.

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Do you really want the insurance policy your employer chooses for you?

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One of the President’s promises when he was promoting the Affordable Care Act was the now infamous “If you like your health insurance, you will be able to keep your health insurance.” Soon after he made that statement, the Congressional Budget Office (CBO) provided an analysis of the legislation and estimated that 6-7 million Americans would lose employer sponsored insurance (ESI) and instead receive coverage from one of the insurance exchanges.  After the June SCOTUS decision on the Act’s constitutionality, the CBO revised that number and now estimate that it will be more like 20 million.  Other analyses (McKinsey) estimate that the number losing ESI could run as high as 80 million.

I’m not sure whose estimate is closer, but let’s consider the incentives.  Using the table below let’s look at it from the employer’s perspective.  Working with the column on the left, suppose a worker is paid $50,000 in salary and has a generous family insurance plan with the employer paying 75% of the $13,375 annual premium. The total compensation cost of hiring the worker is $41,335 (the employer pays FICA and gets a tax deduction equal to 35% of the before tax expense).  Instead the employer could forego providing insurance and instead choose to pay the penalty ($2,000) for failure to do so.  In that case, the employer could pay the worker an additional $6,200 and still end up with a total compensation cost of $41,335.

With Insurance

Employer

Without Insurance

50,000

Salary Paid

56,200

10,025

Family Premium (75%)

            0

60,025

Salary + Insurance

56,200

   3,570

FICA (7.65% Medicare Salary)

   4,300

63,595

BT Personnel Expense

60,500

22,260

Tax Deduction (35%)

21,165

41,335

AT Personnel Expense

39,335

            0

Penalty

   2,000

41,335

Personnel Expense AT &   Penalty

41,335

Examine the table below to understand how will the employee might respond to this situation.  With insurance the employee receives $50,000 (enjoys a $43,086 before-tax take-home) and a generous insurance policy provided with a generous subsidy from the employer.  Without insurance the worker receives $56,200, pays the FICA tax, a 2.5% penalty for not having insurance, and still has $50,600 to take home before-taxes.  Should the worker seek insurance through an exchange, there is no penalty and the maximum premium of 7.7% of income.  Bottom line, the worker has comparable insurance and $47,573 after paying for health insurance (a 10% increase in take-home pay).

With Insurance

Employee

Without Insurance

50,000

Salary Paid

56,200

   3,344

Family Premium (25%)

            0

46,656

Medicare Salary

56,200

   3,570

FICA (7.65% Medicare Salary)

   4,300

43,086

BT Take Home

51,900

            0

Penalty (2.5%)

   1,300

43,086

BT Take Home less Penalty

50,600

 

Maximum Exchange Premium

   4,327

 

BT Take Home with Insurance

47,573

With the prospects of insurance and an additional 10% take-home pay, workers have an clear incentive to request (no, demand) the additional income and seek their own insurance through the exchange.  Employers would be indifferent.  How many will pursue this option?  Six million, 20 million, 80 million.  What would you do?  The choice seems obvious, 10 percent more money and the ability to choose my own insurance policy – personal, portable, and designed to fit my needs.  I know which one I’m choosing.

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The Obama Medicare Reform Plan

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I recently had lunch with several of my colleagues and the topic of the Ryan-Wyden plan came up in the conversation.  The question was asked “Is it fair to judge the Ryan plan against traditional Medicare? Shouldn’t we be comparing it with the Obama plan?  Fair question.  But what is the Obama plan for Medicare?  It’s more than simply cutting $716 billion from Medicare and redirecting it to cover Medicaid expansion and the exchange subsidies.  The President’s plan creates the Independent Payment Advisory Board whose 15 members are tasked with reducing the growth in Medicare spending.

Appointed by the President and confirmed by the Senate, IPAB has the power to cut Medicare payments to providers and the private insurers that participate in the Medicare Advantage and prescription drug programs.  Hospitals and hospice payments are exempted from IPAB oversight until 2020.  The board can also change the payment structure from fee-for-service to capitation or some hybrid form to achieve its targets.

Over the period 2013 through 2018 per capita Medicare spending is targeted to grow at a maximum rate equal to the average of the Consumer Price Index (CPI) and the Medical CPI.  Annually the board is responsible to develop a plan to keep Medicare spending below the target.  Not a problem, you say?  Over the past decade the CPI has grown at an annual rate of 2.66% and the Medical CPI 4.53%.  At the same time per capita Medicare spending grew 6.51% annually.  If these results continue into the future, the IPAB would have to cut Medicare spending 2.91%.  But with hospitals and hospices exempt (37% of Medicare spending), spending on physicians’ services and other nonexempt categories would have to be cut 4.62%.

About the only power IPAB has to fulfill its mission is cutting payments to providers.  It may not propose any real reforms to the program (such as a premium support mechanism like the Ryan-Wyden plan).  It also cannot ration care, restrict benefits, modify eligibility rules, or make changes in cost sharing.

Ewe Reinhardt, Princeton economist, says its the “only hope to restrain Medicare spending.”  Peter Orszag, former director of the Congressional Budget Office under Obama, says its the “most important aspect of the Affordable Care Act.”  Regardless of those claims, Paul Ryan calls it a “rationing board” and Jeremy Lazarus, president elect of the American Medical Association says it “would have too little accountability and the power to make indiscriminant cuts that adversely affect access to health care for patients.”

Does the rationing claim stand up to careful scrutiny?  Despite the language of the Act, rationing is inevitable.  The board can set prices for specific services so low that no provider will offer them, or at least fewer will offer them.  Many physicians already refuse to see new Medicare patients and as payment rates fall below those of Medicaid, more will follow.  While hospitals escape the wrath of IPAB until 2020, they too will find it more difficult to remain solvent because of low payment rates.

If economics teaches us anything, it teaches us that price controls create shortages.  And if we refuse to ration via prices, we’ll have to find another mechanism to ration.

Note to self: Another reason to delay retirement.  Keep your job so you can keep your private health insurance.  Delay Medicare’s control over your access to medical care as long as possible.

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