In a speech at the Hoover Institution today, Representative Paul Ryan (R-WI) argued again that his proposal to reform Medicare, and now his tax credit proposal for replacing the Democratic health care law for those under-age 65, would guarantee to citizens “options like the ones members of Congress enjoy.”
His proposals would not give people the guarantees members of Congress, and all other federal employees for that matter, now enjoy.
This is not a small point.
Previously on this blog, I have argued that many of the defined contribution reform proposals, Ryan’s included, should be faulted for putting all of the future risk of health care costs on beneficiaries.
Ryan’s Medicare plan would create a premium support system for seniors. The premium support amount would increase each year by the rate of basic inflation, even though health care costs have historically increased much faster. Seniors would then take this premium support payment to the market and buy their own private health insurance policy. Another recent Medicare reform proposal by the health care industry would increase a similar health care premium support payment each year by the rate of increase in the gross domestic product (GDP) +1%.
In both cases, neither insurers nor health care providers would have any of the risk, and therefore responsibility, for keeping costs under control. The entire burden for the adequacy of these premium support payments would be with the beneficiary. If health care costs rose faster than these premium supports, tied to these indexes that have always trailed health care inflation, too bad for the beneficiary. Any excess cost is borne by the individual.
Ryan and his colleagues would argue that this is just what we need to create—a market so robust we can finally begin to control costs. Beneficiaries struggling to make their health care dollars stretch would seek out those health insurance plans that really did control costs. From his speech at the Hoover Institution today:
“The growth of these [health care] defined contributions should be capped, to reduce the inefficiencies that have led health-care costs to spiral out of control.”
As I have said before, after more than 20 years of defined contribution health insurance experience in the market there is no evidence this will occur. The Ryan school of health care thought argues that, “By putting the power into the hands of individuals, we can let competition work in health care just as it does everywhere else.”
I am continually amazed at those who argue the health care market can work, as Ryan put it today, “as it does everywhere else.” They are right that the health care system is too much driven by third-party pay and its beneficiaries have historically had too little incentive to be prudent buyers. But the health care market is also a one driven by complex science, major and legitimate philosophical differences about treatment choices, and enormous supply-side powers.
In short, grandma, or you or me for that matter, is no match for the American health care system.
That aside, Ryan is wrong when he says his plan is just like the plan members of Congress have. These schemes to cap health care premium support are fundamentally different from the Federal Employee Health Benefit Plan (FEHBP) that members of Congress enjoy.
From the federal employee handbook:
“The [federal employee health insurance] premiums for your enrollment are shared by you and your Federal agency or retirement system. The government pays the lesser of: 72% of the average total premium of all plans weighted by the number of enrollees in each, or 75% of the premium for the specific plan you choose.”
So, the federal government guarantees to Congressman Ryan, all of his Congressional colleagues, and all federal employees, that it will pay for at least 72% of the average cost of the health plans offered to and selected by federal workers—no matter how much the cost of the program rises over the years.
Ryan’s proposal would make no such guarantee.
I am not arguing that the federal government must guarantee that everyone should have 72% of his or her health care costs underwritten by the federal government year after year—or by anyone else for that matter. Nor am I arguing that defined contribution health care should not be part of any solution.
What I have consistently argued on this blog is that everyone—individuals, health care providers, and insurers—must all have some skin in the game in order for us to have the systemic change needed to finally reform our health care system.
The problem I have with the Ryan plan, and those plans similar to his, is that they give beneficiaries 100% of the risk and then just tell them to trust the market. If costs grow faster than the inflation indexes that underlie these premium supports, as they always have, tough luck.
For the Ryan plan to really be effective, and fair, he and the others proposing this kind of solution must put the same kind of responsibility on everyone else—particularly the most powerful in the health care system.
More, I will suggest that hospitals, doctors, drug companies, and insurers have the potential to affect the cost of health care far more than your grandmother will ever have.
Robert Laszewski serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. Before forming HPSA in 1992, Robert served as the COO, Group Markets, for the Liberty Mutual Insurance Company. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog, where this post first appeared.
We do need consumers to have better incentives to make informed decisions that take cost into consideration, but that isn’t the complete answer. What is going to work is all parties being incentivized to make good decisions, good information available to make those decisions, and reform in how insurance and health services are distributed. I just started a blog that will talk about many of the important issues to healthcare and the insurance industry. http://www.benefitinnovators.com/blog.php
Right Brad.. i totally agree with you
What Paul Ryan does not reveal is that the free market does in fact have a way to control the cost of health insurance.
That method is to raise the deductible each year, so as to maintain affordable premiums. Eventually the insurance doesn’t cover anything under $20,000.
(I recently reviewed a policy for an 80-year old that charged $500 a year with a $30,000 deductible. Affordable, but useless. Thanks to Medicare, the 80-year did not really need this little rip-off.)
About 25 years ago the private insurance industry got Congress to hold off on public long-term care insurance, saying that free markets could do the job.
Today less than 10% of eligible seniors have LTC coverage, and even some of that number will drop the policies before they need them, due to endless rate increases.
Ryan does know more than most public figures about the federal budget.
He is correct to look for some form of capitation or ‘defined contribution.’
But his reliance on private insurance is, at worst, mercenary, and at best,
like the man who marries six times, ‘The triumph of hope over experience.”
Bob Hertz, The Health Care Crusade