Before Mitt Romney unveiled his plan to overhaul Medicare last week, he compared notes with Rep. Paul Ryan, R-Wis., who kicked off a furor last year with his blueprint to replace Medicare with vouchers to buy private insurance. Ryan later told The Washington Post that Romney’s proposal was “a great development.”
But Romney wasn’t really channeling Ryan when he proposed giving seniors a defined dollar amount to buy either Medicare coverage or private insurance. The idea dates back to the mid-1990s, when it surfaced as a bipartisan cost-cutting legislative proposal by Sen. John Breaux, D-La., and Rep. Bill Thomas, R-Calif. It popped up again in 1999, in 2001, and yet again last year.
On paper, Romney’s plan seems much less radical and politically toxic than Ryan’s. Where Ryan would dismantle Medicare and replace it with a system of vouchers, Romney would let seniors keep traditional Medicare if they like it.
In practice, the plans might be much more similar than they seem. As analysts have shown each time such a proposal has appeared, it’s tough to make a hybrid plan work without all the right elements in place—and Romney hasn’t clarified many of those. Still unspecified: the value of the voucher that seniors would receive and whether it would climb in line with the cost of health care; how much the government would regulate private insurers that compete against Medicare; and how much extra financial help Washington would offer low-income seniors.
The details matter. Here’s one small example. Under the current Medicare program, seniors can already choose between traditional Medicare, which pays doctors and hospitals on a fee-for-service basis, and private plans offered through Medicare Advantage. But to get private insurers to offer those plans, the government had to offer them subsidies. Whatever its other benefits, Medicare Advantage showed that private insurers don’t necessarily want to compete with Medicare. Offering seniors the option hasn’t saved the government any money, either.
That’s not an unusual problem. As much as private insurers would welcome millions of potential additional customers, they don’t find it easy to compete with Medicare. The reality is that Medicare’s costs have historically risen more slowly than those of private insurers—a difference, on average, of about 1 percent per year. Over time, that’s a big competitive gap. Previous experiments have shown that private insurers won’t participate if they don’t like the terms of the deal. Romney contends that the choice and competition offered by private insurers will drive down the costs of health care for seniors. But that hasn’t been the experience so far.
One way to help insurers compete would be to let them offer skimpier but cheaper coverage. That might be good for competition, but it could also aggravate a dangerous spiral of “adverse selection.” Healthier people would flee to the cheap alternative plans, and Medicare would be left mainly covering the high-cost seniors with big health problems. That would make traditional Medicare less and less affordable, and the trend would likely accelerate as the price differential between the public and private plans widened.
Romney’s plan might actually aggravate the risk, because he also promised to change Medicare for future beneficiaries only. That would ensure that fee-for-service Medicare would begin the new era with a disproportionate share of older beneficiaries.
Traditional Medicare could become more expensive even if it’s not just the young and the healthy who opt out. Medicare derives much of its efficiency from its huge market share, which gives it the bargaining clout to set comparatively low pay rates for doctors and hospitals and to operate with low per capita administrative costs. If the program’s market share shrinks, those advantages could evaporate.
Henry Aaron, a senior fellow at the Brookings Institution who helped develop the original concept of “premium support,” which has since come to mean vouchers, says it’s possible to tackle those issues. It wouldn’t be easy, though. To allocate its resources more fairly, Aaron argues, the government would need to develop a system that pays less to insurers that cover only healthy patients. It would also need to level the playing field by requiring that private insurers provide an adequate package of benefits.
The problem, of course, is that those are exactly the kinds of financial and regulatory decisions that could keep private insurers away. Indeed, Aaron now says that the practical and political obstacles are so difficult that he no longer even supports the concept he helped pioneer.
Other health care economists are more optimistic. Gail Wilensky, the Medicare director under President George H.W. Bush who is now a senior fellow at Project Hope, says that the crafters of the plan would have to work carefully to ensure that competition is fair. But if done right, she said, Romney’s plan could both give seniors more choice and save money.
It’s a balancing act. The political appeal of Romney’s concept is that, unlike Ryan’s plan, it doesn’t appear to abolish traditional Medicare. But depending on how Romney fills in the blanks, today’s Medicare might soon end up being too generous to compete.
Far-fetched? Not really. In 1995, then-House Speaker Newt Gingrich championed a similar plan as a means for allowing traditional Medicare to “wither on the vine” as seniors voluntarily left for private options. Romney’s plan might not have the same effects as the Ryan plan, but it’s easy to see why Ryan could see it as a “great development.”
This article appears in the November 12, 2011 edition of National Journal Magazine.