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Taming Medicare

The plan proposed by Paul Ryan and Ron Wyden promises to use competition to control costs. History suggests that won’t necessarily be the case.


Teaming up: Rep. Paul Ryan (left) and Sen. Ron Wyden(AP Photo/Jeffrey Phelps (L), AP Photo/Charles Dharapak (R))

When House Budget Committee Chairman Paul Ryan, R-Wis., unveiled a plan last year to replace traditional Medicare with a voucher system, he won House Republican support but caused an outcry among Democrats and seniors. The Democratic response that Republicans wanted to “end Medicare as we know it” quickly became a campaign refrain and was repeated so often that it became PolitiFact’s “lie of the year.”

But that furious reaction hasn’t dissuaded leading Republicans from seeking ways to privatize Medicare. In fact, all but one of the GOP presidential candidates has embraced a version of the Ryan plan, although several prefer a system that would let seniors use their voucher to purchase either traditional Medicare or a private plan.

“The case that competition works is just not there.” —Judy Feder, Georgetown University public-policy professor

The most detailed proposal came last month from Ryan himself, who agreed to soften his original plan, and Sen. Ron Wyden, D-Ore., who said that a voucher system with Medicare as a choice could be an important first step toward managing Medicare’s projected cost growth without gutting benefits for seniors. But here’s the problem: It may not work.

Ryan, Wyden, and other boosters of so-called premium support say that it could save money by encouraging “choice and competition,” which would drive down the cost of comprehensive health insurance. Although such a plan may make sense when applied to other markets, competition has not lowered costs historically in health care. Witness the current private market for Americans under 65: Costs have risen at a faster rate for private health plans than for Medicare, with many Americans encountering double-digit premium increases in a single year. Or consider Medicare Advantage, the current Medicare private option, which enrolls about 25 percent of beneficiaries and has always cost more than its traditional sibling.


Part of the explanation is that the game is rigged. Medicare harnesses its huge market share to effectively set prices for the services it covers, and few medical providers can afford to turn it away. The same doesn’t hold true for private insurers. (In fact, most private insurers end up paying high prices to subsidize providers for what they lose on Medicare rates.) Medicare, however, has also proven to be remarkably efficient, with overhead representing a much smaller percentage of claims than that of private insurers. On a per capita basis, Medicare looks even better. As its patient mix gets younger in the coming years, the program is expected to grow at a rate roughly equivalent to the gross domestic product through 2019.

“The case that competition works is just not there,” said Judy Feder, a professor of public policy at Georgetown University, who said that it would be impossible to reap major savings from a premium-support plan without shifting costs to seniors or significantly reducing benefits. “The case for market share does work.”

At the event where Wyden and Ryan introduced their plan, Ryan pointed to the success of the Medicare prescription-drug benefit as evidence of how market forces can drive down health care costs. That program allows private plans to administer drug benefits, and has turned out to be much less expensive than anticipated. But most health care economists say that those savings are largely the result of prescription drugs’ life cycles. Several big blockbuster drugs went generic, while fewer new drugs hit the market than expected. Those developments mean a government-run drug program might have been just as cheap.

The real driver of Medicare’s scary cost trajectory isn’t just its per capita costs—it’s the ever-growing denominator. The aging of the baby boomers means that 1.6 million seniors will join Medicare’s ranks every year until 2030. Their full impact will continue to be felt for decades longer as these seniors get older and require more expensive care. The enrollment explosion is destined to drive up the cost of the entire program, even if significant savings can be found at the individual level. The Ryan-Wyden plan hopes to hold overall Medicare growth to GDP plus 1 percent, a tough target when Medicare’s rolls are projected to double between 2000 and 2030.


The plan is murky on what would happen if Medicare fails to hit such targets. Ryan’s original proposal, to limit the growth of vouchers regardless of health care inflation rates, is now off the table, he and Wyden say. If choice and competition don’t lower costs, then Congress will have to “do its job,” Wyden said. How Congress could control the spending of private insurers is unclear.

Of the premium-support plans out there, the Wyden-Ryan version is the one most likely to attract broad support. It spells out a series of consumer protections designed to keep competition between traditional Medicare and private plans fair, which could prevent private payers from scooping up all the healthy patients and making traditional Medicare’s costs spike as its population gets sicker. The devil is in the details, although the plan does address many of the key concerns of privatization opponents. For politicians who think the market will design better products than the government, the Wyden-Ryan plan may be appealing. But they shouldn’t count on it solving Medicare’s cost problem.

This article appears in the January 7, 2012 edition of National Journal Magazine.

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