OP-ED

Medicare, Medicaid Get Squeezed in Ryan Plan

Everyone agrees that controlling health care costs is the key to bringing long-term federal budget deficits under control. Government spending on Medicare for seniors and Medicaid for the poor has grown nearly twice as fast as the rest of the economy for decades and is by far the largest component of future projected deficits.

But government funded health care programs aren’t unique in that regard. Employer-based coverage for the working population, which is provided through private insurance companies, has grown just as fast. The problem in a nutshell is the cost of health care, not its funding source.

That’s why it’s important to consider how the two separate sides of our health care system – public plans and private plans – will interact should the Medicare privatization plan that Rep. Paul Ryan, R-Wis., touted on Fox News Sunday become law. The House Budget Committee chairman’s alternative budget would turn Medicare over to private insurers for anyone who retired after 2021. Future retirees would receive a capped payment to buy insurance (he called it “premium support,” not a voucher). Medicaid would be turned into a capped block grant – which translates as a fixed sum awarded to states.

Capping expenditures is central to cost-control in the Ryan plan, which is essentially the same plan that he co-authored with former Congressional Budget Office director Alice Rivlin during the fiscal commission deliberations. The plan limits the annual growth in the amount earmarked for either premium support or block grants to one percentage point more than gross domestic product (call it GDP+1).

That’s about half of the actual health care cost outlays in most years. According to Congressional Budget Office projections released in January, federal spending on Medicare and Medicaid is expected to nearly double to $1.6 trillion by 2021, about a 7 percent annual increase. If the primary goal is holding down taxes and spending, capping that rise at GDP+1 provides the upside. With a wave of the legislative wand, government spending on health care for the old and poor would be reduced to more manageable proportions – between 3.5 and 4.5 percent a year depending on how fast the economy grows. Taxpayers could rejoice.

But just because the government slowed its spending doesn’t mean that old people and the poor wouldn’t have the same health care bills they had before. Health care for these vulnerable populations absent some other force in the marketplace would continue growing at rates significantly faster than the Ryan plan’s GDP+1 formula, just as it has for decades.

Who would pick up the costs that once were picked up by the government? Under the existing system, doctors and hospitals already complain bitterly about the insufficient fees that Medicare pays for the services they provide seniors. Whenever Congress gets close to actually cutting physician pay, which is mandated by prior cost control laws, they immediately restore the cuts out of fear thousands of doctors will carry out their threats to stop seeing Medicare patients.

One option for physicians and hospitals under a capped Medicare premium support system would be to step up what they have always done when faced with inadequate Medicare reimbursement. They could shift even more costs to private, non-Medicare payers, that is, employers and their covered employees. For working stiffs and their bosses, higher taxes would be replaced by higher insurance premiums.

Another option would be for insurers to begin making skimpier plans available to seniors, who would have to make up the additional costs out of their own pockets. Co-pays would rise. Deductibles would rise. Fewer services would be covered.

Isn’t it possible that making seniors have “more skin in the game” through higher out-of-pocket expenses will succeed in cutting out wasteful spending and keep premiums within the capped limits? That’s what a group of conservative think tank experts argued in a letter to Congressional leaders on Friday. Premium support “is a new way of structuring the financing of Medicare benefits that gives beneficiaries more control over their health choices and spending,” they wrote. “This premium support arrangement would reverse the incentives now in Medicare that promote wasteful spending.

What this ignores is an extensive body of research that shows raising out-of-pocket expenses has consistently failed to hold down costs. Moreover, when people do self-ration care based on price, they are just as likely to eliminate vital and cost-effective health and preventive services as they are to jettison waste. Most citizens, especially the frail elderly and the under-educated poor, are ill-prepared to sort out the wheat from chaff in modern high-technology medicine.

There is one way to avoid these negative outcomes. The government could set minimum standards for the insurance plans sold to seniors and the poor and set up exchanges, perhaps in the states, to enforce those standards. It could also guarantee that the premium support was adequate for poorer seniors (about half live solely on Social Security) to purchase those plans.

There’s a precedent for this approach. Republicans call it “Obamacare.” Democrats call it health care reform, which also included an Independent Payment Advisory Board that every year after 2015 is going to recommend to Congress cuts in Medicare anytime expenditures go over GDP+1. Republicans want to repeal this measure, along with the rest of the bill.

Turning Medicare and Medicaid over to the insurance industry selling exchange-regulated policies would require one more law change in order to achieve the savings promised by Ryan-Rivlin. It would require the government directly regulate the prices charged by insurers so they never grew faster than GDP+1. While Democrats were willing to put that on the table for Medicare (subject to a Congressional vote, of course), no one has been willing to suggest price controls on the private sector.

Princeton University health economist Uwe Reinhardt, who sits on the boards of device-maker Boston Scientific and Amerigroup, a managed care provider, argued in his February critique of the Ryan-Rivlin plan that the most likely outcome of turning Medicare into a defined contribution plan from its current defined benefits would be an ever-widening gap between the level of government support and what constitutes good health care in our society. That would lead to “a multi-tiered health system with a highly financially constrained, bare-bones system for tax-financed health insurance, a broad but varied set of tiers for privately insured patients and a boutique tier for Americans able to afford that style of care.”

Ryan suggested his plan would avoid this fate by means testing the premium support handouts. “Wealthy seniors” would get less, while poorer and sicker seniors would get more. Yet he acknowledged that a premium support system would shift more costs onto seniors as a group.

And it was that element that drew immediate fire from his counterpart on the Budget Committee, ranking member Rep. Chris Van Hollen, D-Md., who was more than willing to send a surge of current down the third rail of American politics. The Ryan plan, he said, would “end the current health care guarantees for seniors on Medicare, and deny health care coverage to tens of millions of Americans. That’s not courageous, it’s wrong.”

Merrill Goozner has been writing about economics and health care for many years. The former chief economics correspondent for the Chicago Tribune, Merrill has written for a long list of publications including the New York Times, The American Prospect and The Washington Post. His most recent book, “The $800 Million Dollar Pill – The Truth Behind the Cost of New Drugs ” (University of California Press, 2004) has won acclaim from critics for its treatment of the issues facing the health care system and the pharmaceutical industry in particular. You can read more pieces by Merrill at  GoozNews, where this post first appeared.

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jane crimminsnate ogdenDan Urbach, MDkimBarry Carol Recent comment authors
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jane crimmins
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jane crimmins

Insurance should be just that. Our premiums should pay for the cost of our medical care and whatever portion is unused in a given year should be banked and available for use in future years. In years when an individual’s healthcare costs exceeds their premium contribution, the insurance company could adjust that individual’s premium (using a formula to cap the percentage of increase while also making the individual accountable for some increased premium for a set time period). We would have to provide some form of subsidy for those unable to pay the premiums, just as we do today. This… Read more »

nate ogden
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nate ogden

One benefit of getting governemnt out of healthcare and not going with the minimum benefit plan or required base plan is allowing the market to create solutions. All sorts of good and bad ideas come out of the self funded employer market. Good ideas succeed and bad ones die. Same with insurance companies. When you have a government mandated benefit plan and government selected payors there is no innovation or need for improvement, or even baseline decency for that matter. If Washington says you are the only payor for a region who cares if your service sucks you can’t be… Read more »

nate ogden
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nate ogden

“This premium support arrangement would reverse the incentives now in Medicare that promote wasteful spending. What this ignores is an extensive body of research that shows raising out-of-pocket expenses has consistently failed to hold down costs.” Merrill, this is an extremely flawed argument. Your comparing the affect of OOP spending on private insured in a system with a fraction of the fraud and abuse that is present in Medicare to the Medicare system. If Private insurance had a 10% fraud rate and even higher waste rate those would surly drop without any effect on needed care. Just moving from Medicare’s… Read more »

Dan Urbach, MD
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Dan Urbach, MD

Waste and abuse are not at all the whole problem, and not the biggest part either. We have a very large and complex set of problems. I agree that vouchers for a fixed benefit won’t solve much, and I think they will move too much power into the hands of insurance companies (since the government will only be dealing with them and not with individual providers or their groups). We need to start looking at this as an ecosystem. You cannot simply redesign it and expect to know the outcomes. I think we need to do some sensible things, restrain… Read more »

Barry Carol
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Barry Carol

I don’t know for certain but I’m pretty sure it’s 8% of pretax income. I know that’s the criteria the U.S. will use to determine who is eligible for a subsidy starting in 2014.

Barry Carol
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Barry Carol

Margalit – A little further research on the Swiss health insurance system shows that the insurers are, in fact, not allowed to make profits on the basic plan but can sell supplemental plans for what the market will bear. However, since estimating medical claims costs a year in advance is far from a precise science, it’s not clear if there is a government backstop or some other mechanism that protects the insurers from losses or lets them raise premiums as much as necessary the next year to rebuild their capital reserves to ensure solvency and claims paying ability. For 2010,… Read more »

Margalit Gur-Arie
Guest

Looks like a lot of money, but 8% isn’t so bad. Is it 8% of income before taxes or 8% of net income?

Margalit Gur-Arie
Guest

“There’s lots of talk about paying for “quality” not “quantity,” but the implementation so far has been frighteningly incompetent. It’s a nice theory, like a wish in a bottle thrown out to sea.” …. and peace on earth. I don’t know what paying for quality means, and I think those who say they do, are not being completely honest. Certainly, there are metrics for measuring processes, but they all assume an ideal, standard patient and disease. I don’t think medicine is like making cars for Toyota, and I don’t think manufacturing theories apply to services provided to living creatures which… Read more »

Dan Urbach, MD
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Dan Urbach, MD

“If the government sets the price they will pay, and the scope of benefits that are paid for, don’t you think it will put pressure on providers to make do with whatever cash is available?” How does this square with improving quality? Simply setting prices in our system does not work, as has been proven by our experience with Medicare and Medicaid. There’s lots of talk about paying for “quality” not “quantity,” but the implementation so far has been frighteningly incompetent. It’s a nice theory, like a wish in a bottle thrown out to sea.

BobbyG
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“There’s lots of talk about paying for “quality” not “quantity,” but the implementation so far has been frighteningly incompetent. ”
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Extremely difficult to operationalize, is it not, given the relatively loose cause-effect coupling in much of health care. Dr. Urbach is treating Mr. Jones day-to-day (usually via iterative SOAPe episodes), not an aggregate statistical distribution of Joneses.

A vexing problem, to be sure.

Margalit Gur-Arie
Guest

Barry, as far as I know, and I may be wrong, the Swiss insurers cannot make profit from the standard plan. They can only profit from the extra services the sell, and people buy more insurance enough to keep those insurers happy, I presume. I don’t have a problem with an anti-trust exemption, and the ACOs are already moving in that direction anyway, as long as the process is heavily regulated by government (State or Federal). Peter, fixed dollar amount vouchers are a cruel joke. Fixed benefits vouchers, where the dollar amount the government pays insurers fluctuates yearly, are a… Read more »

Peter
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Peter

Tell me how fixed vouchers pay for yearly increasing medical costs? Medicare patients are now having trouble finding PCPs at the Medicare rate and I can’t think Medicaid is any better. Hospitals also complain about the Medicare/Medicaid rate now. Tell me what a voucher purchased policy covers with deductibles and co-pays. There’s nothing to stop providers from extra billing though up front fees for these voucher plans which do not address costs but only address government payments. You’ll quickly get even a larger stratification of treatment tiers and inaccessibility for those unable to pay extra. If you think vouchers will… Read more »

Barry Carol
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Barry Carol

Margalit – Regarding the Swiss healthcare system, insurers, just like the non-profit insurers here, are not really non-profit. They’re low profit. They need to make an adequate margin to cover their medical claims costs plus administrative costs plus maintain an adequate capital reserves to ensure that they remain sufficiently solvent to pay claims on a timely basis. What they don’t have are shareholders. As the executives of non-profit hospitals like to say, “No margin, no mission.” There are at least three important differences between the U.S. and the Swiss healthcare systems. First, insurers in each canton negotiate with providers as… Read more »

Margalit Gur-Arie
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Kim, check out the Swiss system. It works rather well with all the limitations I mentioned.

kim
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kim

Margalit — You really don’t want the vouchers to be every voucher covers the full price for any insurer offering the standard plan. It needs to be based on the cost of the lowest cost plan(s), so insureds pay more for more expensive plans. There’s where the competition to hold costs comes in. I also think it is very naive to say no profit allowed on the guaranteed issue plans — why again would carriers be in this market? Profit motive should, again, drive cost control. The add-ons are not enough profit potential to offset the risk of losses the… Read more »

Margalit Gur-Arie
Guest

Dr. Urbach, the vouchers I have in mind, differ significantly than those Mr. Ryan has in mind. His are for a fixed dollar amount, mine are for a fixed benefit amount. So this is not like the school vouchers, Bobby. Insurers will be mandated to offer this guaranteed benefits package for whatever price they can negotiate with the government. There will be no profit allowed on this guaranteed issue plan. Insurers can compete and profit from add-ons, as much as they like. We can have a national debate on what the actuarial value of the guaranteed package should be, Barry,… Read more »

Dan Urbach, MD
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Dan Urbach, MD

So the patient comes in with a voucher, or with a voucher-purchased plan, which says it’s worth the basic preventive package. I pay my rent, electricity, supplies, staff, etc for that visit with the money that that voucher/plan pays. Currently, that basic plan, via Medicare, pays less than overhead. You say it’s a voucher for a benefit. It still has to translate into dollars. I can’t pay my landlord in vouchers. If I can’t pay my bills by taking care of a patient, then I have only two choices: pay those bills with money from somewhere else, or refuse to… Read more »

Margalit Gur-Arie
Guest

The voucher is for the insurer. You as a physician would not see any vouchers. You continue to get paid by the insurer at whatever rate you can negotiate. Unlike Medicare, there is no fixed rate. Of course, you can always opt out of contracting with insurers and accept cash only, The patient will then submit your bill to the insurer and get reimbursed at the rate the insurer agrees to pay. I suspect physicians who contract with payers will have more business than cash only physicians, but perhaps cash practices will have larger profit margins. If you choose to… Read more »

Dan Urbach, MD
Guest
Dan Urbach, MD

Thanks for this. I do understand that the vouchers would flow from government to patient to insurance company, then be exchanged by insurance company for money from the government. What that does is remove the doctor/billing office from direct transaction with the government. That already is the case with HMO style Medicare plans. Those plans only work for physicians in large groups who can share risk. The health plans can take the risk instead of the doctors, but then that returns us to the faceless insurance automaton refusing to cover care. The problem is that a patient with a basic… Read more »

Barry Carol
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Barry Carol

Margalit – I think the notion of a premium support payment (voucher) being sufficient to fully cover the cost of a low cost, reasonably comprehensive plan is reasonable. The devil, of course, is in the details. I would envision the low cost plan looking something like a narrow network HMO product which fully covers cost-effective preventive care with no co-pay. There could also be a narrow network PPO product as well with a fairly high deductible that would also be covered in full. Maybe these would be comparable to the so-called Bronze plans, which will have an actuarial rating of… Read more »

Dan Urbach, MD
Guest
Dan Urbach, MD

How is it that vouchers solve the problems in health care, in any way? Aren’t they just another way to cost shift? The voucher is a promise by somebody, in this case the government, to pay the person who receives the voucher from the beneficiary. The government already does that, badly. I don’t see that vouchers would make any salutary difference. Can someone open my eyes?

BobbyG
Guest

Remember when “school vouchers” were the GOP touted education reform panacea? $2,500? Yeah, that’d really have done wonders. My son was in a private Catholic high school at the time — a bargain at about $7 grand a year (late 90’s).

Given that new, accredited schools just don’t instantly pop up like mushrooms on every corner, absent tuition regulation of schools accepting voucher money (oh-NO!), free-market supply & demand 101 says you just raise prices and suck in the voucher money. One more variant of corporate welfare.

How are Medicare vouchers gonna be much different?