At the time of its enactment in 2003, the Medicare drug benefit — known as Medicare Part D — had many critics. Some said the program, which is built on consumer choice and vigorous competition among private plans, wouldn’t work, because the private plans would decline to participate without a guaranteed share of the market. Others said the beneficiaries wouldn’t sign up for the voluntary benefit, because the competitive structure would be too complex to navigate. Still others said the program would explode in costs without government-imposed price controls.
All these predictions were dead wrong. The program is now in its sixth year of operation, and it has exceeded all expectations. Some 90 percent of Medicare participants are now in secure drug coverage of some sort, and public-opinion surveys continue to show that seniors are very satisfied with the new program. Most important, the drug benefit’s costs for the first decade are coming in 42 percent below what was predicted at the time of enactment.
As this evidence of success has piled up, the critics largely and wisely went silent, realizing they had little ground to stand on.
But that began to change when Rep. Paul Ryan proposed a broader reform of Medicare that is modeled on the Part D success story. Now the critics have little choice but to try to discredit Part D lest they lose the battle over the future of Medicare. And so the attacks have resumed.
The only problem is that the critics’ arguments still have no basis in fact.
Take the latest attack from Washington Post blogger Ezra Klein. He recently argued: (a) that spending on prescription drugs throughout the health-care system (that is, not just in Medicare) is also far below previous expectations, which proves that Part D’s market-based design had nothing to do with costs’ coming in under budget; (b) that, regardless of what has happened to date, future Part D spending is expected to rise rapidly, thus undermining claims of cost discipline; and (c) that Part D premiums are 57 percent higher in 2011 than in 2006.
Unfortunately for Klein, each of these criticisms is easily dismissed.
Let’s start with the drop in projected drug spending systemwide. In early 2004, the actuaries at the Centers for Medicare & Medicaid Services (CMS) issued national health-expenditure projections indicating that total retail prescription-drug spending for the ensuing decade would reach about $3.5 trillion. In early 2010, the actuaries released new projections estimating drug spending for the same ten-year period at about $2.4 trillion, or 31 percent below the previous projection. But these projections include prescription-drug spending for both the elderly and the non-elderly. What would the numbers look like if the drop in drug spending for the elderly (about one-third of all spending) were removed from the estimates? When that is done, the drop in projected spending for everyone else is shown to be less pronounced — just about 27 percent. So, despite the impression that Klein tries to leave, the fall in projected spending for the elderly exceeds the fall in spending for the rest of the population.
Moreover, there’s a real question about what precipitated the fall in projected spending systemwide in the first place. Obamacare apologists are constantly arguing that changes in Medicare have the potential to influence the entire health-care market. Well, if that’s the case, it would apply to Part D as well. For instance, Part D plans have aggressively pushed generic substitution as a way to lower premiums — and they have had considerable success. Isn’t it likely that this trend among the elderly has influenced how physicians and pharmacists behave with all their patients?
In sum, the drop in drug spending systemwide is not evidence of Part D’s irrelevance. Indeed, it reinforces the point that Part D has been effective.
Next, Klein cites estimates from the CMS actuaries to argue that, even if Part D cost escalation has been moderate in the past, it is set to rise sharply in the future. But he fails to mention that a main reason for projected cost growth going forward is that Obamacare expanded the drug benefit by closing the so-called “doughnut hole.” Moreover, the actuaries have noted that these projections come with great uncertainty. What we do know with certainty is that costs in the program’s first five years have come in remarkably low.
Finally, Klein argues that Medicare beneficiaries are paying premiums in 2011 that are 57 percent higher than they were in 2006. This is demonstrably false. The data Klein cites are based on a subset of the program — the stand-alone drug plans — which means Medicare Advantage enrollees and those with employer-sponsored drug coverage are excluded from the calculation. Moreover, it assumes that seniors in 2011 will remain in the same plans they were in in 2010. But the whole point of Part D’s consumer-choice structure is that it allows enrollees to migrate out of plans with high costs to those with lower costs. And, not surprisingly, that has happened every year of the program’s operation. The actual premiums paid by enrollees in 2011 are expected to be well below those cited by Klein.
The truth that Klein and others seem unwilling to face is that, on an “all in” basis, Part D has been a phenomenal success story, as shown in the graph below. From 2006 to 2010, per capita Part D costs across all settings have risen by an average of just 1.2 percent annually, which is well below the per capita rise in costs for the rest of Medicare.
The key to the drug benefit’s early success is engaged consumers. Seniors want to get the best value for their Part D premium, and that means looking for low-premium plans with good coverage for the drugs they need. The result has been a record of cost control that has never been matched by government micromanagement — and never will be.
Slowing the pace of rising health care costs is the holy grail of domestic and economic policy. It’s pretty much the key to everything that’s desirable. For starters, it’s central to heading off the debt-induced economic calamity that is fast approaching. If health care costs in the future were to rise at something close to the rate of growth of wages (instead of a couple of percentage points more, as they have for most of the past half century), trillions in unfunded government liabilities now on the federal books would vanish altogether. The massive deficits now projected for coming decades wouldn’t necessarily go to zero overnight, but they would be in a range that is politically solvable, not hopeless. And if premiums for private health insurance rose moderately, it would be much easier to expand coverage to more people, even as employers could pay workers more with cash instead of health benefits. Our collective future would look far, far brighter under such a scenario.
So, yes, “bending the cost-curve,” as the president famously put it, is the right objective. But what will actually do it?
To answer the question, it’s useful to start with a recent post from the Washington Post’s Ezra Klein, who himself approached the issue in the form of a question. He asks what makes Congressman Paul Ryan so confident that the Ryan plan for Medicare reform (offered with former Clinton administration budget director Alice Rivlin, and so now called the Ryan-Rivlin plan) will work to control cost growth while Obamacare won’t.
From Klein’s perspective, it seems like Ryan is applying a double standard. In Obamacare, Congress cut Medicare payment rates for hospitals and other providers of services quite dramatically — to the tune of about $0.5 trillion over a decade. Ryan and others — yours truly most definitely included — have argued that these cuts are illusory because they are politically unsustainable. Klein wonders why that same argument doesn’t also apply to cuts under Ryan-Rivlin. After all, Ryan-Rivlin would bring Medicare spending well below baseline projections in the future by converting the Medicare entitlement into a defined contribution payment from the government. Isn’t Congress just as likely to get cold feet about those cuts as it would about Obamacare’s payment-rate reductions? In fact, aren’t the Ryan-Rivlin cuts even more vulnerable, as they would seem to more transparently fall on the shoulders of the beneficiaries?
But that’s not how to look at this problem at all. Bending the cost curve is not a matter of simply paying less for a service. What’s needed is real and continuous productivity improvement in the health sector. Doctors, hospitals, nursing homes, labs, clinics and others finding better ways to deliver higher quality care at less cost. Because if productivity in the health sector does not rise, then payment-rate reductions will simply drive willing suppliers of services out of the marketplace.
And that’s exactly what would happen under Obamacare. Providers of medical services aren’t going to take payments for services that don’t cover what it costs to care for patients. As Richard Foster, the chief actuary of the Medicare program has repeatedly warned, Obamacare’s cuts would drive Medicare’s average payment rates so low that they would fall below those of Medicaid by the end of the decade. And Medicaid’s rates are already so low that the network of physicians and hospitals willing to take care of large numbers of Medicaid patients is notoriously constrained.
The Ryan-Rivlin plan is entirely different because it is based on empowering consumers to find the best value possible for their defined contribution payment. This is the way to unleash a productivity revolution in health care. The administration says it wants everyone to have access to low-cost, high-quality models, such as the Geisinger Health Plan. The way to bring that about is with a dynamic consumer marketplace in which those kinds of plans are rewarded financially for being more efficient and higher quality. And the way to bring that about is by giving people the control and financial incentive to become active, cost-conscious consumers both of the insurance they select and the delivery system by which they get their care. And that’s exactly what would happen under Ryan-Rivlin, which is why it would work and Obamacare wouldn’t.
Klein and others continue to tout the supposed cost-cutting potential of the various Medicare demonstrations and pilots created in Obamacare. To assume that these are the answer to the cost problem is really wishful thinking in the extreme. Medicare’s administrators have been trying for years to use the levers of payment to bring about more efficient health care delivery. The problem is that building a high-quality, low-cost network requires making distinctions among physicians and hospitals that Medicare has never been able to do. To cut costs, the government always resorts to blunt, across-the-board payment cuts that actually induce more inefficient behavior, not less.
That’s almost certainly why Foster, recently testifying before the House Budget Committee, quite plainly disagreed with Klein’s premise. Under questioning about what would work to bend the cost curve, he was, as usual, quite cautious. Nonetheless, he made it clear that he had more confidence in Ryan-Rivlin than Obamacare to bend the cost curve, because Ryan-Rivlin has the potential to unlock productivity improvements in a way Obamacare does not. I’m with Foster.
And so we have finally arrived at the heart of the matter.
In recent days, Peter Orszag, the now-former Director of the Office of Management and Budget (he left the position at the end of last week), and Ezra Klein, the like-minded liberal blogger for the Washington Post, have weighed in — again — on Rep. Paul Ryan’s “Roadmap.” Orszag did so in a farewell speech at the Brookings Institution, and Klein in a blog post that went up yesterday.
Their take on the “Roadmap,” and specifically how it would reform Medicare and health care, is similar and unsurprising. They both give Ryan credit for laying out a coherent and robust alternative to Obamacare. But they, as well as many other liberal commentators, also completely mischaracterize what would occur if the Ryan plan were adopted, even as they gloss over the glaring deficiencies of the reform program they favor. Indeed, the irony is that the primary criticism they level against the Ryan plan is actually the reason to oppose Obamacare.
The great divide in American health care policy is over what to do about costs. On one side are those who believe the answer is to put the federal government in the cost-control driver’s seat. That’s the fundamental premise of Obamacare. On the other side are those who believe the answer is vigorous price and quality competition in a reformed health-care marketplace. That’s the vision that animates the Ryan Roadmap.
Orszag and Klein argue that a key provision of the Ryan plan — the conversion of the Medicare defined benefit entitlement into a defined-contribution payment (for those under age 55) — would amount to nothing more than a cost shift from the government to beneficiaries because they expect the defined-contribution payment would grow at a rate below health-care inflation.
But why is that necessarily the case? Orszag himself has spent the better part of three years telling everybody he could that health care delivery today is highly inefficient. He’s right. There’s tremendous duplication and waste in American health care, much of it directly the result of the perverse incentives embedded in today’s Medicare structure. The question is, what can be done about it?
As I argued in a Galen Institute white paper released last month, the Ryan Roadmap is the answer. What’s desperately needed in health care today is a new dynamic in which efficiency and productivity are rewarded rather than punished. The Ryan program would do just that by converting millions of passive insurance enrollees (both in Medicare and in employer plans) into active, cost-conscious consumers. As more and more of these consumers received their federal support in the form of a defined-contribution payment, they would have strong incentives to get the best value possible from both the insurance they select as well as the “delivery system” they use to access services.
Orszag contends that the Ryan plan is based on a flawed premise — the notion that consumers facing more cost-sharing for services can do something about the high cost of care. He points out that most Medicare spending is concentrated in a relatively small number of high-cost cases with expenses that far exceed the up-front costs of even a high deductible plan. But the benefits of the Ryan plan would extend well beyond moving people into high-deductible insurance products. In a vibrant health care marketplace, consumers would be able to pick from among competing delivery systems too, and well in advance of needing expensive care. Hospitals and physicians would have strong incentives to reorganize and offer their services in ways that are less costly and more patient-focused in order to maximize enrollment in their networks. That’s the way to bring about genuine “delivery-system reform.”
The alternative to a reformed medical marketplace is government-driven cost control. Orszag is of course a true believer in the capacity of the federal government to engineer a more efficient health sector from Washington, D.C. — despite decades of actual experience indicating otherwise. The federal government has been running the Medicare program since 1965, and has been actively trying to use the purchasing power of that program since at least the mid-1980s to get better value for what is spent. There have been scores of demonstration projects and payment initiatives aimed at getting hospitals and doctors to change their business practices and increase their productivity. They haven’t worked. And the reason is that politicians and regulators have always found it much easier to cut costs in Medicare with across-the-board payment-rate reductions rather than reforms that single out some hospitals and physicians as low-quality providers.
Klein admits in his post that the real alternative to the Ryan program is a different sort of “cap” on spending, one that is placed on aggregate outlays, instead of entitlement payments to individuals, and enforced by governmental cost-cutting efforts instead of the marketplace. What he fails to note is that this kind of “cap” poses very real — and costly — risks to the beneficiaries, as can be seen in the provisions that were passed as part of Obamacare. Despite all of the talk of “delivery-system reform,” the real savings in Medicare from the new health law come from across-the-board payment-rate reductions which hit all providers of services the same, regardless of how well or badly they treat their patients. The predictable result of these kinds of price cuts — confirmed by the chief actuary of the program — is that many willing suppliers of services will drop out of the program, which in turn will mean restricted access to care for the beneficiaries. So much for painless cost-cutting.
The country is at a crossroads on health care. We can either stick with the Obamacare program and rely on the federal government to control costs, with all that would mean for reduced quality and waiting lists, or we can empower consumers in a reformed marketplace, as proposed in the Ryan Roadmap. This is a debate Republicans should welcome — because presented with the arguments from both sides, commonsense voters are sure to recognize that the Ryan plan is better both economically and for the future of American health care.
For months, one of the primary talking points pushed by the president and his allies in Congress is that their health-care plan would reduce the federal budget deficit substantially, especially during the second decade of the program’s implementation.
This claim has always rested on completely implausible assumptions, gimmicks, and sleight of hand, all of which has already been well exposed by Congressman Paul Ryan and others.
Still, some myths persist and require repeated debunking.
For instance, Ezra Klein and others say the health-care bill shouldn’t be assessed the $371 billion in ten-year costs associated with the so-called “doc fix” because everyone knows the money is going to be spent anyway. Under current law, Medicare physician fees are being cut 21 percent from last year’s level, which neither party supports. Of course, there are more and less expensive ways to reform the Medicare physician fee schedule; there is some discretion there. But the real point is that the Democrats want to spend the money on physician fees without an offset, on a permanent basis. That is new. That’s not how the Bush administration and Congress approached the problem in the past. In previous years, Congress struggled to find the offsets to pay for year-by-year fixes, and not always successfully. But because they could never agree on acceptable offsets for a longer-term plan, they never attempted to pass one. They weren’t going to simply add all of the costs of higher physician fees to the annual federal budget deficit in perpetuity.
But that’s exactly what the Obama administration and its congressional allies want to do. They are increasing the cost of Medicare (through the doc fix) at the same time that they are cutting Medicare (reducing the payment-rate increases and cutting Medicare Advantage), but since they are just adding the cost of the doc fix to the budget deficit, they can claim all the Medicare cuts as savings scraped together to pay for the massive entitlement expansion included in the health bill. If they succeed with this approach, the effect will be to dramatically increase the nation’s budget deficits and debt. Indeed, the increase in deficit spending from higher Medicare physician fees is more than three times the claimed deficit reduction from the entire health bill over the next decade.
Beyond ten years, Democratic claims of substantial deficit reduction from the health bill have rested entirely on two provisions.
First, there’s the “Cadillac tax.” In the Senate-passed bill, the tax takes effect in 2014, and the threshold used to determine what constitutes “high-cost” would rise annually at a rate well below expected medical inflation. Consequently, as the years passed, more and more Americans would find themselves in plans considered “high-cost.” In time, virtually the entire middle class would get hit by the tax.
But, as we now know, the president and his Democratic allies never really had the stomach to impose this tax themselves. Under union pressure, they have promised to delay it until at least 2018, well beyond the point when the president will have left office. But the White House and congressional leaders still want to claim credit for all of the revenue that would occur beyond 2019 if by some chance a future president and a future Congress are more willing than they are to impose this tax.
The other key provision for claims of long-term deficit cutting is the permanent annual reduction in the payment-rate increase for hospitals and other facilities from the Medicare program. Under current law, hospitals get an increase each year in what they are paid for certain services based on rising input costs. The Democrats are planning to cut the inflation increase every year by half a percentage point. Over time, the compounding effect of an annual cut of this size would be very large. But the chief actuary of the program has warned repeatedly that it is unrealistic. Despite all of the claims of “delivery system reform” and painless weeding out of inefficient care, this arbitrary cut is business-as-usual. There’s no effort to calibrate payments based on performance or how well patients are treated. Its across-the-board cuts for everybody. And the chief actuary says, if implemented, one in five facilities would be pushed into serious financial distress.
The hypocrisy is stunning. Even as the Democrats want to wave a magic wand and pass a $371 billion “doc fix” to undo a previously-enacted arbitrary cut in payment rates, they now want to impose another one and use the supposed savings to grease the way for the largest entitlement expansion in a generation.
All of this scheming and maneuvering is catching up with them. The Washington Post reports today that CBO now says the latest version of the Democratic plan will no longer cut the deficit as the Democrats have claimed. That’s not surprising. To buy votes, they are upping the subsidies in the exchanges, expanding the Medicare prescription-drug benefit, delaying the Cadillac tax, and buying off countless members with other assorted and unseen deals (where are the C-SPAN cameras when you really need them?). Little wonder that even their phony deficit-reduction claims have now evaporated.
But the game is not over. Even now, they are going back to CBO with another bag full of tricks. They will never actually impose any sort of real budget discipline, of course. That would cost them votes. But no gimmick is too shameless for them; they will do anything if allows them to claim that enactment of another runaway entitlement program will actually improve our long-term budget outlook.
Fortunately, the public is not buying it. The American people see through the smokescreen. They know full well that Congress wants to put in place another unfinanced and expensive entitlement program, even as the federal government is piling up debt at a record pace. Which is why they are telling their elected representatives in every way they can to stop the madness already — and start over.
President Obama continues to argue that it is crucial for Congress to pass a health-care bill because it will help slow the pace of rising costs. Perhaps the president and his aides actually believe that to be the case. But, in recent days, it has become abundantly clear that virtually no one else does.
Today, in a column in the Wall Street Journal, the dean of the Harvard Medical School, Jeffrey Flier, says the bills under consideration in Congress are not health reform bills at all, but just access expansion proposals. As he puts it, “I find near unanimity of opinion that, whatever its shape, the final legislation that will emerge from Congress will markedly accelerate national health-care spending rather than restrain it.”
Flier is just the latest commentator to sound the alarm on costs. Robert Samuelson and David Broder made similar points in columns published in recent days in the Washington Post, as did David Leonhardt in the New York Times.
So what do Obama apologists say in response to this chorus of criticism?
Here, a friendly discussion between the Post’s Ezra Klein and MIT Economics Professor Jonathan Gruber is useful. Their counter-argument can be essentially boiled down to two points: there’s no real alternative to the kinds of government-driven cost controls favored by most Democrats, and, although the measures inserted into the House and Senate bills are perhaps weak, they’re directionally right and better than nothing.
Of course, in the current environment, with large Democratic majorities determined to pass a bill based on heavy, centralized governmental control, there is little prospect for bipartisan reforms that would rely on decentralized financial incentives and cost-conscious consumers to allocate resources in the health sector. But it is flat wrong to suggest there is no alternative to a clumsy and politicized governmental process for health-care cost control. There is. It’s just that Democrats don’t like it. They want full governmental control, not a functioning marketplace.
Indeed, that’s the debate we should be having this year. Are Klein and Gruber right? Or are their opponents? In other words, what process stands the best chance of bringing about continual improvement in the efficiency and quality of patient care? Can the federal government really root out wasteful spending in the health sector without harming the quality of American medical care?
Most Democrats seem to think so, but all of the evidence indicates otherwise. The federal government has been running the Medicare and Medicaid programs for more than four decades. There have been countless efforts to use the leverage of provider payment regulations to push doctors and hospitals to organize themselves differently and to change the way they care for patients. They haven’t worked. In fact, Medicare’s current payment systems are now rightfully seen as effectively underwriting the problems found in today’s arrangements. They encourage fragmentation and autonomy, not integration and coordination. The focus is on maximizing revenue from the government, not patient satisfaction. And yet, if the current bills in Congress were to become law, in ten years time, Medicare would look and operate pretty much just as it does today, except with even heavier reliance on fee-for-service medicine. In fact, the administration’s push for a new Medicare Commission with the authority to rewrite how providers are paid by the program is a tacit admission that neither Congress nor the executive branch can be trusted to run a governmental health insurance program efficiently. But there’s also little reason to assume a commission, accountable to its political patrons, would do any better.
The only thing the federal government can ever do well to cut costs is to impose arbitrary payment reductions. Of course, that’s exactly what the Democrats are proposing to do in the current health-care bills. These cuts aren’t calibrated based on the quality of patient care. All providers would get cut pretty much the same. If Obamacare passes, we can expect more of the same, just with worse consequences. At some point, price controls always lead to a reduction in the willing suppliers of services, which means queues and other barriers to accessing care.
There is an alternative, however. Congress could establish a decentralized approach to resource allocation — an arrangement in which consumers have strong financial incentives to pick lower-cost insurance and health delivery options, and in which insurers, hospitals, and physicians have strong incentives to reorganize for efficiency. Importantly, building such a marketplace would require converting today’s open-ended federal tax and entitlement arrangements into fixed contributions which the consumers, not the government, would control. That was the basic design of the prescription-drug benefit in Medicare, and it has worked far better to hold down costs than any other health program introduced in recent years.
The real debate in health care has always been the same: should the country adopt full governmental control, or can a market deliver better value at lower cost? There is a choice, even if those currently in power don’t want to admit it.