Ryan's Plan for Market Medicine

Why The Paul Ryan Plan Might Be Right About Medicare

By ROBERT J. SAMUELSON
Posted 08/17/2012 06:29 PM ET

Investors Business Daily

Overlooked in the furor surrounding Paul Ryan's Medicare proposal — a plan that wouldn't start until 2023 and even then would affect only new beneficiaries — is a just-published study in the Journal of the American Medical Association (JAMA) suggesting that, well, Ryan might be right. The study finds that a voucher-type system might noticeably reduce costs compared with traditional fee-for-service Medicare.

Three Harvard economists, including a prominent fan of the Obama health care overhaul, did the study.

The study compared the costs of traditional Medicare with Medicare Advantage, a voucherlike program that now enrolls about 25% of beneficiaries. Medicare Advantage has cost less for identical coverage. From 2006 to 2009, the gap averaged 11% between traditional Medicare and voucher plans that, under the proposal by Ryan, would serve as a price benchmark.

The central issue here is whether the runaway cost of the health sector, comprising nearly one-fifth of the economy, can be controlled without eroding medical quality. Almost all agree that the delivery system — hospitals, clinics, doctors and nurses — should be reorganized to lower the price and eliminate unneeded care. The question is how.

One group favors marketlike mechanisms. Consumers would receive vouchers — payments or tax credits — to buy coverage. The theory: As people shop for low-cost and high-quality plans, competition forces the delivery system to restructure. Hospitals, doctors, insurers create more efficient networks with more coordinated care than today's fee-for-service system.

By contrast, fee-for-service reimburses doctors and hospitals for services they perform; this encourages unneeded tests and procedures.

The JAMA study doesn't surprise consumer-driven health care advocates. "Medicare fee-for-service is an inefficient way to deliver care," says James Capretta, associate director of the Office of Management and Budget from 2001 to 2004. "It's an engine for volume-driven spending."

Cost savings under a full-fledged voucher system would be much larger, he argues, because Medicare Advantage's modest size has created only "muted competition."

Medicare Advantage reinforces another bit of real-word evidence for marketlike policies. This is the Medicare drug benefit launched in 2006 with a voucher approach. In 2012, beneficiaries could choose from at least two-dozen plans. Its costs have been about 30% below early government estimates, though vouchers are not the only reason (more generic drugs is another). In 2013, average monthly premiums — paid by recipients — are projected to stay at $30 for a third straight year.

The other way to control costs is regulation, as embodied in the Affordable Care Act (ACA). One argument for this is that cost savings from vouchers are a statistical mirage. Harvard health economist David Cutler — a co-author of the JAMA study and an outspoken supporter of the ACA — thinks this is possible. Medicare Advantage's lower costs might stem mostly from healthier patients, who use fewer services. It's unclear that statistical "risk adjustments" eliminate all these differences, he says.

Lower reimbursement rates are the most common form of cost regulation. The ACA cuts $700 billion from Medicare over a decade by slashing payment rates. But reimbursement cuts don't change the delivery system. Providers often react by increasing the volume of services; the system becomes more wasteful. (The Medicare cuts don't actually reduce health spending; they just transfer funds from Medicare to spending mandated by the ACA.)

The rest of the ACA's cost controls are mostly fluff. One idea is accountable care organizations (ACOs), which link payment to better coordination of medical treatment. The administration says its ACO proposal might save $470 million from 2012 to 2015, when projected Medicare spending exceeds $2 trillion; savings would be a rounding error.

Then there's the Independent Payment Advisory Board, a body of 15 experts who limit Medicare spending if it passes certain targets. But the law handcuffs IPAB. It can't increase patient cost-sharing, restrict benefits, modify eligibility requirements or — in any one year — cut spending by more than 1.5%.

Limits must be imposed on the health sector, and the growing evidence from large-scale experience is that market mechanisms offer the best chance of reconciling our desire for choice with cost control. If there are better ideas, let's hear them. Otherwise, don't reject the obvious because it's unfamiliar.

Voucher plans are not right-wing, extremist ideas. They enjoy support in both parties. Ryan would permit continuation of fee-for-service; if it's more efficient and effective, it would survive. If not, its decline would be no great loss. The Ryan plan's greatest defect may be that it doesn't start for a decade. We can't wait that long.