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Problems with Ryan’s Medicare plan

Adam Newman | Tuesday, September 18, 2012

Mitt Romney’s choice of Paul Ryan has changed the course of the 2012 presidential campaign. The petty campaign issues, like private equity and Solyndra, have been replaced with substantive policy issues, most significantly the future of Medicare, the government run insurance program that covers 50 million seniors.

Medicare was created in 1965 and covers much of, but not all, hospital costs, doctor visits and prescription drug coverage for Americans 65 and older. The importance of Medicare for seniors can easily be understood. The elderly have more diseases and become sick more easily, requiring them to see more physicians, take more prescription drugs, undergo more procedures and use more expensive technology. Before Medicare, retirement and poverty were synonymous, largely due to rising health care costs. Today, Medicare provides seniors with both economic and personal security. I remember my grandparents telling me about leaving the doctor’s office and saying to themselves, “Thank God for Medicare.”

While Medicare represents the best of America, it also represents the worst of America. Rising health care costs and an older population (the population of the program will grow from 50 million in 2010 to 90 million in 2040) has made Medicare the driver of future deficits. Nothing else even comes close. Unfortunately, very little is done to reform the program by Congress, partially due to the need to avoid seniors’ distrust of reform (the statement in 2009 by one senior at a town hall to his local Congressman: “Keep your government hands off my Medicare” symbolizes this distrust perfectly) and a fear of the opposing party unifying and attacking the proposal to score short term political points. This has made Medicare reform political suicide, which makes Ryan very unique for proposing one.

Under Ryan’s plan, called “Premium Support,” the government would give seniors a payment to buy health care insurance instead of acting as a single insurance company. The payments would grow at a rate less than health care cost inflation, leading seniors to become more cautious consumers of health care and lead them to choose more cost-effective plans. They could choose from a number of private plans or choose to stay in the traditional, government-run Medicare program but would most likely have to pay more to stay in it. Sicker and poorer seniors would receive higher payments, and richer and healthier seniors would receive lower payments. Insurance companies would need to provide a minimum set of health benefits and could not deny any senior from choosing their plans. Any person under 55 would be forced into this plan. Anyone above 55 could stay in the current system.

However, major issues exist with Paul Ryan’s plan. The most notable being, because Medicare has more bargaining power to negotiate rates down with physicians and hospitals and lower administrative costs than private plans, seniors will be forced to pay more for health care. The Kaiser Family Foundation, using CBO numbers, found in 2022, when the Ryan Medicare plan would go into effect, overall health care costs would be $5470 higher and seniors would be forced to pay $6240 more, an amount that will increase with time. (Note: This analysis was for Ryan’s 2011 Medicare plan, not his 2012 plan which has some slight changes, but for which no reliable projections exist.)

Also, there is little evidence that private insurers competing amongst one another can drive down health care costs. The best empirical evidence is the Medicare Advantage program, created in 2003, which allows Medicare beneficiaries to have their Medicare benefits administered by a private insurance company.

According to CBO, the average Medicare Advantage beneficiary costs the government 12 percent more than the average beneficiary in the traditional, government run plan, with little evidence as to a difference in quality outcomes.

Perhaps the biggest issue with Ryan’s plan is it may not change how health care is delivered. This is critical, because 30-40 percent of total health care spending is waste that does not make people any better (and often leads to worse outcomes.) Forcing autonomous health care providers to better deliver care in teams, reimbursing based on the quality of care and not the number of services administered and standardizing best practices can help lead to drastically lower costs and higher quality care for seniors.

If Paul Ryan’s reforms cannot lead these changes to occur, then seniors will be forced to pay more and more for their health care, which could make “retirement” and “poverty” synonymous again.

Ryan deserves a profile in courage for working to tackle the Medicare issue that threatens America’s fiscal future. But his plan, driven by his inherent distrust of government, promotes a vision for Medicare that probably will not work.
Regardless, Ryan has started a debate in America of critical importance that is long from over.

Adam Newman is a senior finance major. He can be reached at [email protected]

The views expressed in this column are those of the author and not necessarily those of The Observer.