Wednesday, February 1, 2012

The Wyden-Ryan Plan Will Be the Foundation for Serious Medicare Reform—and Maybe More

In two companion articles in January’s New England Journal of Medicine, Henry Aaron with Austin Frakt, and Joe Antos critique the Wyden-Ryan Medicare reform proposal.

Senator Ron Wyden (D-OR) and Representative Paul Ryan (R-WI) are proposing a hybrid Medicare reform proposal combing both Republican defined contribution free market principles—a premium support scheme—with Democratic defined benefit principles—a baseline guaranteed plan and premium support.

In, “Now is Not the Time for Premium Support,” Aaron and Frakt argue that there is a market history of Medicare experimentation that hasn’t accomplished much and that a premium support scheme could well leave beneficiaries the victims of cost shifting:
Advocates of premium support claim that Medicare Part D, which has a premium-support structure, shows that competition holds down spending and that beneficiaries make wise choices. Their claims are unjustified. Although Part D drug spending per enrollee is lower than was initially forecast, non-Medicare drug spending is even further below past projections. Furthermore, enrollees have, on average, chosen plans that exposed them to greater financial risk than the best options available to them. Most important, because Part D has no public option, it cannot provide evidence on whether private plans are better or worse than a government plan would be.

So, although it's true that Medicare is a key driver of long-term federal spending, we don't believe that recently proposed premium-support reforms are the solution. They lack safeguards for beneficiaries. They threaten to shift costs to the elderly and disabled and force them to shop for coverage in a confusing insurance market. And the ability to run health exchanges for the Medicare population is currently in doubt.
Even the more pro-market Antos, in an article titled, “The Wyden-Ryan Proposal--A Foundation for Realistic Medicare Reform,” offers only limited praise for the plan:
Ryan and Wyden hint at the need for commonsense reforms to traditional Medicare, including a new structure of deductibles and copayments, a cap on catastrophic costs, and a new physician-payment system. They skirt the central problem: a disorganized fee-for-service system and top-down limits on prices paid for services drive the use of more, and more complicated, services. The program's survival depends on our willingness to make substantial changes over the next few years — before the major reform is implemented — so that traditional Medicare can provide cost-effective care without draining the Treasury.

The current proposal also offers a more politically palatable fiscal target at the cost of achieving fewer “scoreable” savings. Under Ryan's earlier proposal, the federal subsidy would grow only with general inflation (1.5% in 2012, according to the CBO) instead of the more generous target of GDP plus 1% (a rate projected to total 4.8% in 2012). Not coincidentally, that is the same fiscal target established for the Independent Payment Advisory Board (IPAB) under the ACA.

A 3.3-percentage-point difference in fiscal targets translates to a 1-year increase in program spending of about $20 billion, or about $300 billion over 10 years. Adopting the weaker target means a substantial loss of budget savings, but only if Congress would actually enforce the stricter limits. That may be unlikely given recent history. Over the past 8 years, Congress has overridden even relatively small reductions in physician payments called for by the sustainable growth rate formula. Clearly, a favorable score from the CBO does not guarantee lower program spending.
But then Antos suggests Wyden-Ryan could be the basis of real reform:
Given the serious fiscal problems facing this country, slowing the growth of Medicare spending is no longer optional. The only question is how to do it. The Wyden–Ryan proposal outlines a strategy for Medicare reform that harnesses market forces to control costs. It provides a real alternative to the top-down controls favored in the ACA. Paul Ryan and Ron Wyden have defined the policy parameters that could be the basis for real Medicare reform in 2013.
I will suggest that the last point is key.

Wyden-Ryan is now little more than a policy outline. It does fall short on real reform because it offers only a bare outline for how it will contain costs—there will be a still undefined fallback mechanism if costs exceed targets.

But what Wyden-Ryan does do is offer a political roadmap for how we could well see Medicare reform addressed after the election—particularly if Republicans gain control of the Congress.

Any successful reform has to achieve two things:
  1. It has to be politically feasible in the first place.
  2. Then it has to work—in this case it has to control costs and provide quality health care.
What Wyden and Ryan have given us is a very well developed political strategy for reform and only the outline for policy reform.

As I said in an earlier blog post:
What is elegant about the Wyden-Ryan compromise is that they have proposed a hybrid plan—it contains significant elements of both a Republican defined contribution and a Democratic defined benefit approach.

Republicans get an affordable cap on what the federal government would spend on Medicare—that growth would be no more than GDP+1%—and they would get a program built on a free market platform where consumers would have the incentive to maximize their premium support by shopping for the plan that best met their needs.

Democrats would get a plan that still contained the traditional government-run Medicare plan as one of the options and they would have a plan where all seniors were guaranteed a federal premium support level good enough to buy at least the two lowest cost Medicare plans available in their community—albeit maybe not the traditional Medicare option.

If there was ever a place for Republicans and Democrats to compromise on Medicare reform this is it. It is an elegant compromise—a hybrid—of both defined benefit and defined contribution principles.
Sooner or later all of this partisan bickering has to end. A Republican sweep in the November elections would do it. Wyden-Ryan would be on top of the health care agenda if that happened.

Even if we faced a divided government in 2013, the imperative for entitlement reform makes addressing Medicare costs unavoidable. In that case a basis for ideological compromise will be necessary. Wyden-Ryan presents that opportunity.

It will be the next part of the plan that is still too vaguely defined—how costs would be controlled and beneficiaries therefore protected—that Wyden and Ryan must address. Both Antos and Aaron/Frakt are right in pointing that out.

How will we achieve the needed “scoreable” savings a future Congress can’t easily override and do it in a way that will be politically palatable in the first place? That is the big question. Wyden-Ryan is just an empty political box without answering that.

But do not underestimate how important this first bipartisan step is that Ron Wyden and Paul Ryan have taken. Unless the Democrats sweep the November elections, this is what the next debate will revolve around.

In fact, one can foresee this same bipartisan political formula as a means to eventually deal with the under-age-65 health insurance market. Remember Wyden-Bennett? Could there be another under-65 version of Wyden-Ryan?
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