A Closer Look at Ryan’s Medicare Plan

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.

Private Medicare that Works

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.