Ryan's Rules for Reform

Yesterday, I interviewed U.S. Rep. Paul Ryan, Chairman of the House Committee on the Budget, about the near complete absence of market signals in health care in the U.S., the future of medical innovation under the Affordable Care Act, and how providers - finally - might be coming around to the view that a market-based, patient-centered health care system is the only thing that will save them from gradual strangulation under IPAB's price control regime.

Chairman Ryan's summary of what life is going to be like under IPAB has the merit of being both true and funny:

"For providers in an [Independent Payment Advisory Board] price-controlled system, they're really just trying to pay their hostage takers to shoot them last, and that simply won't work. Providers are beginning to realize this. They're beginning to realize that hard-core price controls don't pay them based on quality. Even if they innovate, even if they work hard, even if they increase productivity, they're paid the same as anybody else who doesn't do that. They're not being rewarded in the way the market would reward them for [innovation]."

IPAB is fatally flawed in many different ways: it is entirely unaccountable, treats different providers differently (hospitals, for instance, are exempted from cuts for five years), can't change benefits or premiums for Medicare beneficiaries, and has to hit its budget targets annually, which will penalize innovations that may be high cost at first, but in the long run save the system much more money.

Switching to the defined contribution model for Medicare that Chairman Ryan advocates would have many benefits over the status quo. First, it would provide a true safety net for seniors, especially the sickest and poorest beneficiaries. Second, it would empower seniors to choose the insurance that best fit their individual needs. Third, private insurers would have a powerful incentive to coordinate care for beneficiaries, keeping costs down and improving overall quality. Finally, since Washington couldn't play favorites among providers any more, insurers would shift spending to whatever technologies or services truly offered the best outcomes at the least cost.

This is not throwing seniors to the wolves, or letting insurance companies run rampant - it simply adds much of what has been missing from health care markets up to now: price signals, transparency, and consumer choice. Competition and comsumer choice have already proven their worth in Medicare's part D drug program, which has come in more than 40% under initial budget estimates.

Chairman Ryan's plan has been portrayed as radical, but in reality it is merely a common sense approach to incorporating basic market principles into Medicare while still protecting seniors from catastrophic costs.

On the other hand, maybe common sense is a radical idea in Washington, D.C.

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Rhetoric and Reality—The Obamacare Evaluation Project: Cost
by Paul Howard, Yevgeniy Feyman, March 2013

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