Sunday, September 30, 2012

The Medicare Debate, Part II

It barely made a blip on the news, so you may not have heard that the U.S. credit rating was just downgraded again for the fourth time in the past fourteen months. Downgrades are dangerous because they signal to other countries that the U.S. is now a riskier place to invest in, and this raises our cost of borrowing money. But the bigger problem for Americans is the reason for the downgrades: our government is less likely to pay its debts, and is therefore less likely to honor its commitments to people who are counting on government assistance in their senior years.

One of our biggest obligations is Medicare. It's the third-most expensive federal program ($560 billion spent in 2011, or about $3000 per working-age adult1), and due to the wave of retiring baby boomers its cost is expected to nearly double within a generation.2 Our current path is unsustainable — and will result in millions of people shelling out more for their medical care than they've been planning on.

So what do we do about it? The status quo approach is to cut costs by reducing pay for doctors who treat Medicare patients...but this would also reduce the quality of care (see my last post). VP candidate Paul Ryan has an alternative plan, one that's been both attacked and championed by people who probably don't really understand it. (I know — I was one of them.) But now that I've read his plan, here's what you need to know:

Nothing changes for anyone currently 55 or older.

For everyone else, when you become eligible for Medicare you will choose your own health insurance plan. You can choose the traditional fee-for-service option (the way it is now, where government reimburses doctors directly), or you can select from among a variety of private insurance plans within the new Medicare Exchange.

Every year, each insurer in the Exchange will declare the price that they must be paid in premiums in order for them to cover enrollees' medical costs. Medicare then pays for all or some of your premiums depending on your income and the price of your plan.

The "benchmark" that determines how much Medicare pays for is the price of the baseline plan, which is either traditional fee-for-service or the second-cheapest private plan, whichever is cheaper. But what's not clear is what "benchmark" means — that is, if you choose the baseline plan, are your premiums fully covered or not? What is clear is that of the people who select the baseline plan, Medicaid-eligible seniors will have no out-of-pocket expenses, other low-income seniors will receive additional assistance, and high-income seniors will have to pay a share of their premiums.

If you choose a plan that's more expensive than the baseline, you'll have to cover the difference. Choose a plan cheaper than the baseline and you'll receive a rebate for the difference.

Each insurer in the Exchange must abide by two ground rules. First, they have to cover at least the actuarial equivalent of the fee-for-service benefits package. This means that while each plan will provide different coverage, every plan's coverage will be at least as valuable as traditional Medicare and you'll know upfront what's included in your plan. Second, they have to accept all applicants regardless of any high-risk/pre-existing conditions. Medicare will support this provision by paying for the increase in premiums that's necessary for high-risk individuals and by regularly transferring money from plans with more low-risk seniors to plans with more high-risk seniors.

The vision here is to have companies compete for customers by thinking of creative and efficient ways to cover medical expenses for less than it costs Medicare to do so today. If this plan fails and the anticipated cost reductions don't pan out, there's a provision to cap Medicare expenditure growth at nominal GDP growth plus 0.5 percent. This means that if insurance prices rise faster than that upper growth rate, some seniors (Medicaid-eligibles excluded) would have to cover the spillover costs. Whatever the merits, this is a more truthful way of dealing with ballooning costs than trying in vain to hide the problem from seniors by paying doctors less.

No plan will magically wipe away the underlying problem of having an increasingly strapped government provide for an aging population...but applying the tried-and-true principles of competition and personal choice/responsibility is a step in the right direction.

1. There were 183.9 million U.S. adults ages 20-64 in 2009.
2. Peter G. Peterson Foundation. "Budget Explainer: Medicare."