Will the Romney-Ryan Medicare plan lead to the doom-and-gloom scenario outlined by Center for American Progress (CAP) scholars in a recent op-ed?
Let's address their points one by one.
The Romney-Ryan Plan Voucherizes Medicare
CAP reiterates Democrats' refrain that the Romney-Ryan reform plan for Medicare will lead to greater financial burdens for seniors, and will leave them without adequate access to quality care.
Fortunately, this isn't the case. The Romney-Ryan plan is based on the idea of "managed competition" - better known as premium support. As my colleague, Colleen Chambers, wrote in a previous post, premium support is not the same as vouchers. While the idea of providing a subsidy (that scales with income) to purchase insurance on the private market is based on the idea of vouchers, there are important distinctions. Premium support includes basic protections like: being charged the same price for the same coverage, a guaranteed right to enroll in a plan of your choice, and no discrimination against the sick. The Federal Employees Health Benefit Plan and Medicare Part D - both successful, popular programs - are examples of premium support.
The point is that individuals can make surprisingly reliable decisions when given the opportunity to do so. Premium support relies on the indisputable fact that the market can make better decisions than the government. So instead of being subjected to the whims of budgetary maneuvering in Congress or the whims of unelected bureaucrats (Obamacare's Independent Payment Advisory Board), seniors can buy quality insurance from companies that have to compete against one another. This benefits seniors through higher quality services at lower cost; granny isn't being thrown off a cliff.
Medicare Expenditures Grow Slower than Private Insurance
The op-ed cites a recent study by the New England Journal of Medicine (NEJM), which finds that over the past decade, Medicare costs per enrollee have grown slower than private insurance, and will continue to grow slower into the next decade.
Literally speaking, the NEJM findings are on-point. Annual growth of Medicare expenditures, according to the Centers for Medicare and Medicaid Services (CMS), has slowed down relative to private insurance premiums.
However, there are many confounding factors buried in these findings. For one, Medicare per-enrollee costs - even for common benefits - are nearly three times those for private insurance (see previous link from CMS). Another consideration is that physicians are compensated by Medicare at about 80 percent the rate of private insurance, and by Medicaid at about 60 percent of private insurance. This means that prices for private insurance are artificially inflated by Medicare's and Medicaid's reimbursement schemes. These costs are then passed on to the consumers - those that hold these insurance policies. So in effect, there is an implicit subsidy embedded in Medicare beyond the tax that we all pay; this subsidy helps keep the numbers relatively low and looking good for the public.
More importantly, the projected slowdown in Medicare's cost growth comes from the ACA's $716 billion cuts to Medicare. Much of these cuts are based on reducing Medicare's Sustainable Growth Rate (SGR) payments to physicians by nearly 30 percent. Such cuts have almost always been preempted by Congress in the past, and as such, it's hard to believe that they will be allowed to go through.
Even if these cuts do go through, the money will have already been spent, as it is being used to fund subsidies for the ACA's insurance exchanges. Unfortunately, the real world can't spend money twice like Washington can.
Medicare Has Lower Administrative Costs than Private Insurance
The fact that this bit of 'conventional wisdom' still permeates public discourse is a testament to the success of the administration's PR campaign.
If it were true that government could achieve lower overhead costs than the private sector, then axiomatically it would be true that the government should run the economy, dictate business production decisions, and silence market forces wherever they may creep.
Fortunately, hundreds of years of economic scholarship have taught us otherwise. The famous economist and political theorist, Frederic Bastiat wrote:
[A] law produces not only one effect, but a series of effects...the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.
So when we encounter the argument that Medicare's overhead costs are only two percent versus 10-15 percent in the industry, we have reason to question such a claim's validity.
First, Medicare administrative costs don't take into the account the rampant fraud within the program, which the Government Accountability Office (GAO) pegged at 10 percent of Medicare's outlays - $48 billion dollars in 2010. If these losses were counted as part of administrative expenses, Medicare would be within the industry range. If fraud-combatting efforts, marketing, and sales efforts were as strong as the private sector, there is reason to believe that administrative expenses would be greater.
Second, a 2009 study by Robert Book, found that looking at administrative costs per-person actually shows that Medicare's costs are higher than private insurance. Looking at costs as a percent of total expenditures is misleading because the expenditures will necessarily be higher for Medicare beneficiaries who are older, sicker, and thus more expensive to treat.
While Medicare's administrative "savings" are often touted as an example of Medicare's efficiency, a better measure is per-enrollee costs for common benefits. As mentioned earlier in this post, Medicare is decidedly more expensive.
IPAB Will Design Innovative Policies
The ACA, in an attempt to control costs, established the Independent Payment Advisory Board (IPAB), which consists of 15 appointed (not elected) experts who are supposed to make the hard choices that Congress can't. IPAB is supposed to make evidence-based decisions to determine what procedures, drugs, and diagnostics are cost-effective for the purposes of determining the set of covered services under Medicare. The CAP authors argue that IPAB can make 'innovative' decisions that reward cost-effective policies from delivery systems. This much is true. They can do so. There is no reason to think that they will.
On the flipside, IPAB can do the exact opposite and become what its critics have accused it of being - a de facto rationing panel.
Defenders of IPAB use clever rhetoric to obfuscate the fact that IPAB is unaccountable (its decisions can only be overruled by a supermajority, or its proposal automatically becomes law) and if it fails to make a proposal by 2014, the buck is passed to the Secretary of Health and Human Services.
While IPAB is currently prohibited from recommending healthcare rationing, President Obama has expressed the desire to further strengthen IPAB. Moreover, IPAB can't be dissolved before 2017 and even then, there are strict time-tables for when it can be done.
My colleague, Paul Howard and Doug Holtz-Eakin, president of the American Action Forum, addressed other perversities enshrined in IPAB earlier this year:
IPAB...exempts hospitals and hospices from cuts until 2019...cuts will fall most heavily on physicians, Medicare Advantage plans, medical device makers, and pharmaceutical companies.
[T]he uneven burden of IPAB's cost discipline will penalize some of the most innovative and potentially cost-saving technologies - like new (and expensive) drugs for Alzheimer's, which might save money in the long run by keeping patients out of nursing homes. IPAB's focus on year-to-year cuts also discourages Medicare from implementing quality and cost-containment programs that might save money over the long term.
Moreover, as Holtz-Eakin explained in testimony before Congress, the uncertainty of future reimbursement rates means that care providers will have greater incentive to reduce their exposure to Medicare (by accepting fewer, or no Medicare patients) or to cost-shift to other patients.
IPAB is a legislative monster; the CAP authors' optimistic claim is little more than speculation.
Here's a simple question - if premium support is good enough for the exchanges, why isn't it good enough for Medicare?
Fixing Medicare means harnessing market forces, not stymieing them.