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.

Fact Checking the President

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.

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.

The Ryan-Wyden Medicare plan

A lot has been said about the Ryan-Wyden plan to reform Medicare.  Much of it is exaggerated, some just downright false.  It’s a voucher plan.  Seniors will have to pay $6,400 more for their health care.  The plan will make Medicare beneficiaries responsible for solving Medicare’s fiscal crisis.  Is all this true?  How could Ryan be so callous?

A limited number of factual studies have emerged analyzing the workings of a premium support system for Medicare.  (The best label for the Ryan-Wyden plan.)  One of the most recent (coauthored by Harvard economist and Obama healthcare adviser, David Cutler) looks at the competitive bidding in the Medicare Advantage program (in practice since 2006).  Plans across the country submit a premium they are willing to accept to cover seniors in a specific region.  Ranking premiums mirrors the results of a “reverse auction.”  Under the Ryan-Wyden plan, the second lowest premium establishes the “benchmark” payment rate.  Seniors could choose any plan they preferred and receive the benchmark amount to help them pay the premium.  If they choose the lowest cost plan, they keep the savings.  If they choose the benchmark plan, they pay nothing out-of-pocket for their insurance.  If they choose any other plan, they pay the difference.

Using data from Massachusetts, Cutler and his colleagues (“Potential consequences of reforming Medicare into a competitive bidding system,” Journal of the American Medical Association, August 1, 2012) found that in 2009, the benchmark plan bid was 9% below the cost of traditional Medicare.  In fact, traditional Medicare had the tenth-lowest bid.  Let’s be clear about this hidden nugget.  There were 9 private insuance plans available to Massassacusetts seniors that were cheaper than traditional Medicare.  Seniors choosing any one of these plans would have received the same benefits as traditional Medicare (and in some cases more benefits), and saved the taxpayer money.

Would such a plan force seniors to solve Medicare’s fiscal crisis?  As someone who reaches the magic threshhold of 65 within the year, I’m more than happy to do my part in helping to solve Medicare’s fiscal crisis.  What’s the alternative plan?  More on that tomorrow.