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 Let’s Make a Deal:

A New Series

This is the third installment in a series about the two keys – Medicare reform and tax reform – to a comprehensive agreement to solve the budget problem.  These commentaries will explain the details of the two issues, and show where it is that each political party – the Democrats and the Republicans – must give ground to resolve this crucial issue.

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In CED’s 2007 policy statement, Quality, Affordable Health Care for All , we advocated consumer cost-responsible choice among competing private health-insurance plans.  Although we did not go into detail on the implications of that program for Medicare, we stated that we believed that the same model would both improve quality and reduce cost for that program.  We then went on to elaborate on that vision for Medicare in a paper by Alain C. Enthoven, To Reform Medicare, Reform Incentives And Organization .  That Medicare model has come to be referred to as “premium support.”

Now, there is a similar congressional proposal with bipartisan co-sponsors: Senator Ron Wyden (D-OR) and House Budget Committee Chairman Paul Ryan (R-WI).  That proposal has attracted a great deal of attention, and it has proven highly controversial.

Senator Wyden has defended that proposal in the following terms:  “I believe the most important aspect of Medicare is not the structure of the program but the guarantee to all Americans that they will have high quality health care as they get older… Wyden-Ryan doesn’t eliminate the traditional Medicare plan, instead it guarantees that seniors who want to enroll in Medicare’s traditional fee for service plan will always have that option.”

However, it probably is fair to say that the bulk of Democratic opinion is contrary.  The clearest statement of which I am aware came from former House Speaker Nancy Pelosi (D-CA):  “What they’re trying to do is put lipstick on a pig — that would be Ryan — and call it Monique — that would be Wyden… But it’s still a pig… [Medicare will] wither on the vine.  The Republican plan would break the Medicare guarantee.”  A frequent refrain from many Democrats is that the Wyden-Ryan bill would “end Medicare as we know it.”

Clearly, these two interpretations of the effect of the same proposal differ by 180 degrees.  So what gives?  And what precisely is the “Medicare Guarantee?”

Some background:  Two years ago, Chairman Ryan and Alice Rivlin (founding Director of the Congressional Budget Office, former Director of the Office of Management and Budget under President Clinton, and lots of other cool stuff) collaborated on a bipartisan approach to Medicare premium support.  Then last year, when Republicans took control of the House and Chairman Ryan was called upon to submit a budget resolution, he included that basic idea but modified it substantially.  The key difference was that where Rivlin-Ryan would have imposed a modest cap on Medicare cost growth to ensure future budget savings, Chairman Ryan substituted a draconian cap that would be sure to reduce the public contribution to the program, leaving even modest-income Medicare beneficiaries with much-increased out-of-pocket costs.  (The savings from this tight cap were needed to “pay for” a substantial tax cut also included in the House budget resolution.)  The 2011 Ryan proposal would have “ended Medicare as we know it.”

Democrats pounced on this proposal, and by all accounts made much political hay.  An apparently spontaneous television reference by Chairman Ryan to Rivlin as a co-creator of the new much-modified proposal earned a stern rebuke from her.  So at the end of 2011, the Ryan proposal was something of a political dead weight.

At the beginning of this year, the questionable 2011 launch left Chairman Ryan with imperfect options.  With the House Republicans indelibly identified with last year’s proposal, a strategic retreat would have admitted that the plan for which they already had voted was seriously flawed.  But doubling down on the same unattractive proposal would provide no exit.

So instead, Chairman Ryan tried to execute a squeeze play between those two flawed options.  He already had worked with Democratic Senator Wyden to formulate a bipartisan approach much more in the spirit of Rivlin-Ryan.  However, he admitted no error in his original proposal; the changes from the original plan were not highlighted, but rather mentioned only when necessary and convenient.

The Democrats responded in a way reminiscent, for those old enough to remember it, of the Kennedy Administration’s Cuban missile crisis team’s reaction to the receipt of two contradictory messages from Soviet Premier Nikita S. Khrushchev (C-Moscow).  In 1962, the White House chose to respond to the more-conciliatory first message, and ignore the bellicose second message, in the interest of avoiding nuclear war.  This year, the Democrats chose to respond to the more-bellicose first proposal and ignore the conciliatory second proposal, to (in analogous terms) obtain the upper hand in the inevitable missile volley to follow.

This point and counterpoint is perhaps emblematic of the deterioration of the policymaking process inWashington.  If Chairman Ryan had been willing to highlight the changes in his proposal, or if the Democrats had been willing to applaud them, or ideally both, there could have been the beginning of significant progress on one of the two major sticking points (the other being tax reform) in the budget crisis.  Instead, the two sides continue to fight over interpretations of an obsolete proposal while the world economic and financial environment worsens by the moment.

This political posturing behind the rhetoric is sad, though fairly easy to understand.  The substance is more complex.  Is there still a “Medicare guarantee” under Wyden-Ryan, or not?

In terms of the concerns as of its creation, Medicare is an extraordinary success.  Millions of elderly persons had been losing their health-insurance coverage (based, as it was, on employment).  With Medicare, all of the elderly are guaranteed the right to traditional coverage – basically a “fee-for-service” system (with reform patches that are designed to limit the perverse incentive to collect fees by providing all possible services, however limited their value).

That is the good news.  The bad news is that the costs of this coverage already are large and are growing faster than the economy that must pay for them, and so this system clearly is unsustainable.  (A recent slowdown of cost growth helps, but it is not sufficient, and health experts struggle to understand why it has occurred and whether it is likely to continue.)  A guarantee is wonderful.  However, a guarantee is only as good as the resources that back it up.

So what happens to the Medicare guarantee under Wyden-Ryan, or under Domenici-Rivlin (a similar proposal which is an improved version of the original Rivlin plan, developed with former Senator Pete Domenici (R-NM))?  Unfortunately, there is no definitive answer; it depends.  In this uncertain world, that should not be surprising.

Each of these plans for Medicare imposes a cap on cost growth; if costs grow faster and exceed the cap, then the federal contribution toward coverage is limited, and beneficiaries have to pay more.  In that sense, the “guarantee” is no longer guaranteed.  Even if costs grow faster than the cap rate, however, the Congress and the President could choose to intervene by changing the law to stay below the cap by some other means, including borrowing.

But advocates of competition are often more optimistic.  Although true competition has never been tried broadly in health care, there is evidence that even isolated systems have had some success in limiting cost growth without reducing quality.  (See http://www.ced.org/component/blog/entry/1/355 and http://www.ced.org/images/library/reports/health_care/CED_CA_HC_2010.pdf about competitive systems that have been successful in Wisconsin and California, respectively.)  So suppose that competition holds costs down.  Then the Medicare guarantee could be alive and well.  Could.

The question is whether competition holds costs down in traditional Medicare, or only in competing private plans, with traditional Medicare costs growing faster.  If that should occur, then beneficiaries would continue to have guaranteed zero out-of-pocket cost access to insurance coverage that is fully the equal of today’s traditional Medicare coverage.  But it would be private insurance, not Medicare itself.

Is that the “Medicare guarantee?”  If the elderly unconditionally can get coverage at the value of today’s Medicare, with zero out-of-pocket cost – but that coverage is private insurance – has the Medicare guarantee been maintained?  That certainly is in the eye of the beholder.  From CED’s position in favor of cost-responsible choice, this outcome is a valid guarantee that is fulfilled by the most efficient means – which in the long run is the inevitable and justifiable outcome.

But is the other contingency – under which overall Medicare costs continue to grow out of control, and so the federal government contribution is capped, and seniors with incomes above eligibility for Medicaid must pay part of their premiums out of pocket for either traditional Medicare or a private plan – a violation of the Medicare guarantee?  Arguably, it is; but in that instance society cannot afford to make good on the guarantee.  Congress could choose to short-circuit the increase in beneficiary premiums by raising taxes or cutting other spending – for a time.  But if Medicare costs continue to grow faster than the GDP indefinitely, those options will not be feasible.  This is just one more way of making the point that budget watchers have repeated for years:  We must solve the problem of Medicare cost growth, or suffer the consequences.

Although many Democrats decry the cost-responsible choice of competing plans in Ryan-Wyden, they have not presented an alternative.  Even the highly regarded National Commission on Fiscal Responsibility and Reform (more commonly called “Bowles-Simpson,” after Erskine Bowles and former Senator Alan Simpson (R-MT), its two co-chairs) essentially punted on long-term reforms (recommending “targets” and “requiring further structural reforms” if necessary).

The truth of the matter is that there is no viable alternative to cost-responsible choice – at least none that has yet been revealed to man.  Simply cutting physician and hospital reimbursement rates will eventually leave Medicare as a distinctly second-class healthcare system.  We cannot replace Medicare with a single-payer system – because Medicare is a single-payer system.  We simply must put the invisible hand of market competition to work on our side of the fight to keep healthcare costs affordable.

But we cannot know in advance whether the invisible hand will solve the problem.  We cannot measure the invisible hand – because it is invisible.  No one knows what market competition will do to reduce costs and improve quality in the markets for automobiles, computers, haircuts, or any other goods or services over the next 20 years; and the same certainly goes for health care.  The one thing that we do know is that we want the invisible hand on our side.

There is no alternative to cost-responsible Medicare beneficiary choice among competing health-insurance plans – including private plans.  Democrats must recognize and accept that reality, as part of a bargain that is balanced with higher tax revenues collected on the basis of the ability to pay.  If the two political parties do not wake up, smell the coffee, and cut that deal, we will have problems even more serious than the demise of the Medicare guarantee – which itself will be a part of the explosion.

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