Thursday, May 19, 2011
The $6,400 Question
The ongoing delusion of the price-control solution
When President Obama decided to take the political low road and demonize House Budget Committee Chairman Paul Ryan’s Medicare reform plan in his budget speech last month, it wasn’t really surprising. President Obama demonstrated in the 2008 campaign that he is a world-class practitioner of shamelessly dishonest political attacks when he went after Senator John McCain for proposing a change in the tax treatment of health insurance, and then pushed for a change himself once he was elected. Given this track record, there was every reason to believe he would jump on the chance to demagogue on health care again if the opportunity presented itself. And boy has he. It’s now clear based on four weeks of a relentless barrage that his reelection effort will be based heavily on creating fear in the electorate, and specifically among seniors, about the supposed negative consequences of the Ryan Medicare plan. So much for an administration devoted to hope and change.
But what exactly is the substantive basis for the president’s attack on Ryan’s proposal? Here’s the key paragraph from the speech:
[The Ryan plan is] a vision that says America can’t afford to keep the promise we’ve made to care for our seniors. It says that 10 years from now, if you’re a 65-year-old who’s eligible for Medicare, you should have to pay nearly $6,400 more than you would today.
Where did the $6,400 figure come from?
Best as anyone can tell (the president didn’t cite a source), it seems to have been derived from the Congressional Budget Office’s April 5 analysis of the Ryan budget. On page 22 of that report, CBO (always so helpful!) provided its assessment of what it would cost an average 65-year-old to enroll in a private health plan compared to what it would cost that same average 65-year-old to stay in traditional Medicare. It’s an illuminating piece of work on the part of CBO, but perhaps not for the reasons CBO intended.
The mechanics appear to be as follows: CBO says the Ryan plan would provide an $8,000 “premium support credit” for average-health 65-year-olds in 2022, which would only cover 39 percent of the total cost of providing a standard Medicare package of services to such beneficiaries. That puts the total cost of the private plan at $20,500, of which the beneficiaries would be required to cover $12,500 out of their own pockets.
By contrast, CBO says the traditional Medicare program could provide the same standard package of services for just $14,800 in 2022 (in what’s called the “alternative fiscal scenario”). Under current law, the government would cover about $8,600 of the total cost, leaving a little under $6,200 for the beneficiaries to cover themselves. With rounding, the difference between what it would cost the average 65-year-old under the Ryan plan compared to what it would cost under current law is “nearly $6,400” in 2022, or so it would seem from CBO’s numbers.
Ironically, this analysis from CBO actually tells us much more about CBO than it does about what the Ryan plan will mean for seniors in 2022.
There are two key assumptions underlying the numbers that are highly implausible and reveal a systematic tilt toward government-run health care.
First, CBO says that in 2022 government-run Medicare could provide the standard package of health coverage for just 72 percent of what it would cost a private plan to do so. How could that possibly be? Simple: Price controls, and especially the deep cuts in Medicare’s fixed prices imposed under Obamacare. If one assumes that there are no consequences whatsoever to paying ever-lower rates of reimbursement for medical services, then, sure, government-run Medicare, and for that matter government-run health care more generally, would look cheaper on paper than private health insurance.
And, in fact, this is not a new development. Health care price controls have always looked good on CBO tables, which is a huge problem in the policymaking process. But they never look quite so good in the real world. Consider Medicaid. State governments have imposed extremely low rates for most medical services, and the program’s participants often have a difficult time securing access to needed care. Far too often, it’s insurance on paper and not in practice. Moreover, because the rates are so low, the quality of care provided to the Medicaid population is well below what most Americans would find acceptable.
CBO’s analysis makes none of these quality distinctions. Price-controlled Medicare, with payment rates as low as Medicaid’s today relative to private insurance, is assumed to provide the same quality care as private coverage. It’s absurd.
Incidentally, it should be noted that in Medicare Advantage, private-sector HMOs were able in 2010 to provide the standard package of Medicare services for less than what government-run Medicare costs (according to MedPAC data). And that’s in spite of the price controls imposed by government-run Medicare. The reason is that government-run Medicare is a massively inefficient operation. Yes, it pays very little per service, but the volume of services provided has been soaring on an annual basis for years and years.
The other crucial assumption is that competition in Medicare has no effect whatsoever on the efficiency or cost of the options offered to Medicare participants. The whole point of the Ryan plan is to build a functioning marketplace, in which plans have to compete for the business of cost-conscious consumers. Ryan rightly believes that this is the key to genuine “delivery-system reform,” by which those delivering the services to patients find new, better, and more efficient ways of providing needed services at less cost. But CBO’s assessment assumes nothing will change at all.
Those who have been pushing for a market-based solution for health care have long complained that CBO’s analyses inevitably favor a command-and-control approach. This latest analysis only confirms that point of view. Unfortunately, it’s a sad reality that genuine reform of the nation’s health entitlements and broader health system are likely to be enacted in spite of analyses from CBO, not because of them.