Congressman Paul Ryan’s budget proposal has made significant waves. Many will fear that the Ryan proposal means the end of Medicare and Medicaid. Although these programs will not end, there will be significant changes.
One can think of many of these changes as a transfer of risk. Consider the Medicare program. Although Medicare will not change for currently those 55 and older, for those currently younger than 55, however, individuals will receive vouchers (i.e., a standardized payment) to cover health insurance premiums to be provided by private insurance. The individual will bear the cost from choosing more generous plans. Further, although risk adjusting the standardized payment will provide sicker patient with a higher premium subsidy, beneficiaries will also bear the risk of higher premiums due to non-risk adjusted factors (unless the premiums are community rated). Medicare will have more predictable spending levels since they will basically know the how much money they will be spending in vouchers each year.
The proposal, however, will only save money if Medicare can control the amount of money its spends on these vouchers. If beneficiaries complain that the vouchers are too low, the government could raise the voucher amount so that it covers all but the most generous plans. The proposal does say that vouchers will increase by inflation and the Medicare Economic index (MEI). However, if the MEI grows significantly, there may be little savings to Medicare for adopting the voucher program.
In the Medicaid program, the proposal shifts the risk to states. Because the Ryan proposal changes the Medicaid program from a cost matching to a block grant program, states who provide more generous benefits must cover the additional costs from state coffers. Those with less generous Medicaid programs can pocket the difference. Although the block grant will be adjusted for population growth and the number of Medicaid-eligible individuals, areas with unpredicted population growth will be on the hook for covering these extra individuals out of their coffers.
The Medicaid block grant program, however, could produce a race to the bottom. States want to attract top talent (i.e., rich people) with low taxes and lots of business opportunities. Providing generous Medicaid benefits increases taxes and increases the likelihood poor people (i.e., those who pay little tax) move into the state. The status quo, however, is the opposite, (a race to the top?) where states try to spend as much as possible to maximize their federal matching dollars. In this economic climate, forcing states to economize is needed.
The voucher system Ryan proposes is similar to both the Purple Health Plan and the current Swiss system.
Note that Ryan’s plan does have some similarities to the Obama Health Reform. He plans to allow small business to pool together to offer coverage to their employees through association health plans (AHPs). He plans to set up State-Based Health Exchanges. And Ryan also plans to create a reinsurance mechanisms to insure pools of high risk individuals. Creating the high risk pool would transfer the risk of the outlier health care expenses to the pool and make the standard benefit health insurance premium more affordable. Funding these high risk pools, historically, has been prohibitively expensive.
Conceptually, I support the Ryan proposal. It moves towards less regulation, more choice, and–most importantly–reduced cost. Right now, health care is too expensive and with the baby boomers retiring, cutting costs must be the number one priority. By letting Medicare beneficiaries have some skin in the game, it will incentivize them to choose lower cost health plans and reduce the growth rate of medical utilization in the near term. Some analysis, however, has found that switching to vouchers will not in fact reduce cost.
Further details on the Ryan plan are below:
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Bring Market Prices to Medicare
December 16, 2011 in Books, Health Insurance, Managed Care, Medicare, Medicare Advantage | 4 comments
Medicare is a government-run insurance program. Can policy changes be made to add competition to Medicare, maintain quality and reduce cost? A book titled Bring Market Prices to Medicare argues that it can through a competitive bidding process. This book makes a number of sensible arguments which I review today.
The main proposal of the book is a competitive bidding process for all Medicare plans. Currently, there is a form of competitive bidding only for Medicare Advantage (MA) managed care plans. The authors also argues for competitive bidding for fee-for-service (FFS) Medicare (i.e., Parts A and B). There is already a competitive bidding process for Medicare’s prescription drug program (Part D) which has worked well.
One of the main advantages of Medicare FFS is that beneficiaries do not need a referral for any services and are not limited to certain provider networks. However, Medicare beneficiaries do not pay for these added benefits. In addition, even if HMOs are more efficient than Medicare FFS, Medicare FFS beneficiaries still pay the same Part B premiums.
The authors want beneficiaries to face the true price differentials between the lowest cost plans and less efficient plans., regardless if the plan is Medicare FFS or an MA plan. Thus, beneficiaries would be responsible for any premium differences due to choosing a more expensive plan.
Currently, MA plans receive a variant of the average bid in their service area. The authors propose that Medicare would only pay for the lowest cost plan. This proposal would in essence be a transfer from plans and beneficiaries (who would have to pay the cost differential between the plan they choose and the lowest cost plan) to the government. Given the fiscal hole the federal government is facing, this is a good idea.
Authors also propose to eliminate the 25% tax on premiums. According to MedPAC, “Plans that bid below the benchmark also receive payment from Medicare in the form of a “rebate.” The law defines the rebate as 75 percent of the difference between the plan’s actual bid (not standardized) and its case mix-adjusted benchmark. The plan must then return the rebate to its enrollees in the form of supplemental benefits or lower premiums” The rebate structure gives plans a disincentive from lowering their bids since they only recover a share of the cost decreases.
Another issue focuses on regional adjustments. Living in New York is expensive and health care is more expensive in New York than in rural Mississippi. However, should Medicare subsidize New Yorkers because their health care is more expensive. The authors argue no, but poor individuals in high cost areas will be adversely affected by this policy choice.
A major issue is controlling quality. Plans could create low cost plans by providing low-quality care or failing to provide mandated services. Thus, CMS will need to regulate the plans. Plans with quality levels below a specific level would be barred from enrolling individuals or the government could force beneficiaries to pay additional premiums to enroll in these low quality plans. Public reporting of plan quality is also needed.
Strategic bidding is also a problem. Plans could collude to raise the bid price. However, by having Medicare FFS as an option will cap the amount colluding firms could increase prices. Further, a small firm could bid a very low amount and set the market. Medicare could set the benchmark at the lowest cost plan which meets a minimum size requirement.
Source:
Another Review of the Book:
Tags: AEI, Auction, Books, Competitive Bidding, HMO, Managed Care, Medicare