Paul Ryan's Medicare defense: Draw your own conclusions

Representative Paul Ryan (R-WI) has branded himself as a politician who is honest and wonky. On the first page of a Time Magazine story about him, Ryan told TIME, "For too long, Washington has not been honest with the American people. We owe it to the country to give them an honest debate." Ryan also shares that, "I love the field of economics. I have a knack for numbers."

With the release of his "Path to Prosperity" budget plan and its proposed overhaul of Medicare, Ryan has catapulted himself to the center of the D.C. policy discussion. Under the Ryan Medicare proposal, Americans 55 and under would be forced to leave traditional Medicare (Medicare "fee-for service") and instead receive a voucher payment to purchase private insurance.  According to the Congressional Budget Office, the vouchers will only cover 32% of seniors' health care costs by 2030. The CBO explains that the voucher payments will be unable to cover seniors' health care costs for three reasons. First, the voucher payments will be indexed to the consumer price index, which has risen much slower than the cost of health care insurance over the last thirty years, and thus will decrease in real value. Second, private insurance plans spend more money on administrative costs (and profits) than Medicare. Third, Medicare has lower payment rates to providers than private insurance because Medicare is larger and thus has more leverage with providers than any private insurer.  


Given his reputation as a policy wonk and the controversy generated by his Medicare proposal, I was excited to see that Paul Ryan had created a video to defend his plan. 

Ryan begins the video with one of his favorite themes: honesty.

Washington has not been honest with you about Medicare. Medicare is a critical program which helps seniors achieve health security. But the truth is it’s headed for a painful collapse.

Ryan then lays out the case for his Medicare proposal with a series of statistics, charts, and economic terminology (supply, demand, etc.). Ryan's intended message is that he is wonky and has a series plan.

Here’s why: More than 75 percent of Medicare recipients, which is 35 million people, receive what’s called the fee-for-service insurance plan.

Here’s how it works: A Medicare patient goes to the doctor and receives health care services.  The doctor sends the bill for these services to Medicare, and Medicare reimburses the doctor -- with your tax dollars and borrowed money -- no questions asked.

Ryan begins with his diagnosis of what's ailing Medicare: the fee-for-service reimbursement system. Under fee-for-service, providers (doctors, hospitals, etc.) are reimbursed for each service that they provide. The usual criticism of fee-for service is that it does not take into account the quality of the service provided and that it incentivizes doctors to perform extraneous diagnostic tests for which they can get reimbursed, thus increasing costs.

It is important to note that the fee-for-service reimbursement system is the dominant system not only for Medicare but also for private insurance companies. There are a few private insurers (e.g., Kaiser Permanante) that incorporate quality metrics into their reimbursement system for providers. However, there was a law passed recently that will begin to move Medicare away from the pure fee-for-service system and  incorporate quality metrics. That law is the Patient Protection and Affordable Care Act of 2010, a.k.a Obama-care. Representative Ryan omits this fact, and I'll let readers draw their own conclusions about why he does so.

Next, Ryan explains why the fee-for-service system is detrimental.

First, as you can see, the patient is very disconnected from the cost. We all pay for Medicare, through taxes or, if you’re a Medicare patient, through premiums.  But the true cost is hidden from the Medicare patient because someone else pays the actual bill.  When we pay directly for something, and we know how much it costs, we have a strong incentive to demand the best value.  In health care, we don’t.

Ryan's first critique of fee-for-service Medicare is actually not unique to fee-for-service Medicare at all and is a criticism of all health insurance. If an individual has health care insurance, then they are going to be insulated from much of the direct cost of the health care services they purchase. Once they have paid their premium, the individual has no incentive, other they have high co-pays or deductibles, to worry about the cost of their health care consumption.

The second reason costs are going up and quality is going down is that fee-for-service Medicare insurance has no competition -- so it reimburses all doctors and hospitals the same, even if the quality of the care they provide is poor, and the cost of their care is high.  Meaning that there is little financial incentive for doctors and hospitals to deliver the best care at the lowest price.

This statements contains both factual and logical errors.

1. Fee-for-service Medicare HAS competition. Does Representative Ryan not remember when he said just a minute ago that "more than 75 percent of Medicare recipients" have fee-for-service Medicare?

The other 25 percent have chosen a competitor to fee-for-service Medicare: Medicare Advantage. Here's the simple explanation of Medicare Advantage from wikipedia, "With the passage of the Balanced Budget Act of 1997, Medicare beneficiaries were give then option to receive their Medicare benefits through private health insurance plans, instead of through the original Medicare plan...Pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the compensation and business practices changed for insurers that offer these plans ... (the) plans became known as Medicare Advantage (MA) plans."

How could Representative Ryan say that Medicare fee-for-service has no competition when he knows that only 75% of Medicare recipients use it and two laws were passed in the past 20 years to create private sector competition? I'll let readers draw their own conclusions.

2. Even if it were true that Medicare fee-for-service had no competition, that would not be the reason why "Medicare reimburses doctors and hospitals the same." Ryans is blurring two parts of the value chain; he seems to be confused about the difference between insurance company competition and provider competition, e.g., doctors and hospitals. Hypothetically, there could be a country where there is only one insurance company and it creates an algorithm to differentiate provider pay based on health outcomes. There could also be a hypothetical country with a high-level of insurance company competition but where none of the companies differentiate their provider pay.

3. Ryan ignores the "Obama-care" provisions (reference above) that will begin to reimburse some doctors and hospitals at different rates depending on quality. Representative Ryan can send his thank-you flowers to 1600 Pennsylvania Avenue NW, Washington, DC, 20006.

Before presenting his own plan, Ryan attempts to savage Obama's plans to reduce Medicare costs. I will address these attacks after I analyze Ryan's plan.

Here are the key lines of Ryan's plan and his defense of his plan:

Rather than putting the government in charge, our plan provides financial support to help future Medicare patients pay for the insurance plan that works best for them and their families.... 

And insurance providers, competing for patients’ business, will look to lower the costs and increase quality for their services – the way it always works when the consumer is in charge.... 

Who should be making health-care decisions for you and your family?

A government monopoly and a panel of bureaucrats in Washington DC?

Or you?

What Ryan is saying here is astonishing. The entire premise of the Ryan health care plan is that competition between private insurance companies will drive down health care costs. Any casual observer of US health care costs over the last 30 years could tell you that they had skyrocketed and that private insurance companies had failed to keep down health care costs. If I were talking to someone who had lived under a rock for the last 30 years, and thus felt compelled to prove that private health care insurance will not drive down costs, I would point out the following:


1. The CBO analysis of Ryan's plan projects that private insurers will do a worse job than status quo Medicare of driving down costs both because of their higher administrative costs and their smaller leverage with providers.


2. Private health insurance costs have risen faster than Medicare over the last 40 years (9.3% vs. 8.3% annually).

3. Medicare Advantage's private insurers were unable to contain costs as well as Medicare. Remember the 2003 changes to Medicare Advantage's "compensation and business practices?" In 1997, the government planned to pay private insurers the same amount (or slightly less) than the cost of Medicare. The private insurers were having difficulty competing with Medicare because they are less efficient. In response, President Bush put a provision into the 2003 Medicare Prescription Drug, Improvement, and Modernization Act that provided additional subsidies to Medicare Advantage. Thus, the federal government pays 9% more for Medicare Advantage plans than Medicare fee-for-service.

This strikes me as wrong. If private insurers want to provide Medicare services, they should have to compete equally. If the whole conversation is about cutting Medicare costs, then the 9% extra subsidy for Medicare is a logical first step.

Fortunately, President Obama felt the same way and passed a bill (yes, "Obamacare") that will phase-out the 9% subsidy. The second method through which Obama will be decreasing Medicare costs is by altering the fee-for-service reimbursement system (a method that Ryan apparently advocates as well). The independent board that has been created to alter the reimbursement system and harness the new reimbursement system to drive down costs is the Independent Payment Advisory Board, the board of "bureaucrats" which Ryan bashes for a minute of his video. The IPAB can be over-ruled by Congress, but it is true that the IPAB recommendations will be the default compensation system. 

There will be those who will agree with Ryan's argument that they do not want government bureaucrats making health care decisions. However, they should remember that they already have that choice - they can still enroll in Medicare Advantage and go with the private health insurance bureaucrats. However, if Ryan's plan passes, those who prefer the government option will have that choice taken away. Through a sleight of hand, Representative Ryan is taking away choices while claiming to do just the opposite. 

Is Representative Ryan really an honest policy wonk? I'll let readers draw their own conclusions.