Ron Wyden and Paul Ryan’s Bipartisan Plan for Health Care and Medicare Reform

Forbes reports:

“This morning, Democratic Sen. Ron Wyden (Ore.) and Republican Rep. Paul Ryan (Wis.) have shaken up Capitol Hill with an intriguing, bipartisan plan for reforming Medicare, and also the private-sector employer-sponsored insurance system. Politically, the plan is a huge boost to Mitt Romney, whose own remarks on Medicare reform hew closely to Wyden-Ryan; and also to House Republicans, who now have an easy retort to Democrats who were planning to attack Medicare reformers in the 2012 campaign. Substantively, the plan has many encouraging qualities, but there are also some important blanks that Wyden and Ryan will need to fill in.

Premium support with competitive bidding

The heart of the Wyden-Ryan plan is to use competitive bidding to allow private insurers to compete with traditional, 1965-vintage fee-for-service Medicare. If you want to learn more about competitive bidding, see this piece I wrote about Mitt Romney’s proposal for Medicare reform. If that doesn’t quench your thirst, you can read the definitive book on competitive bidding: Bring Market Prices to Medicare, by Robert Coulam, Roger Feldman, and Bryan Dowd.

The basic idea behind competitive bidding is that, say, on a county-by-county basis, you let private plans and traditional Medicare offer plans with the same actuarial value compete, to see who can offer the same package of benefits the most efficiently. Each plan in a given county will name a price for which they are willing to offer these services, and seniors are free to pick whichever plan they want. However, the government will only subsidize an amount equal to the bid proposed by the second-cheapest plan. If you want a more expensive plan, you have to pay the difference yourself.

As I mentioned in the Romney post linked to above, competitive bidding has some left-of-center fans; indeed, a form of competitive bidding was part of the Senate version of Obamacare. It also has fans on the Right, most notably Yuval Levin, dean of the conservative entitlement-reform wonk set. A key concern I mentioned in the Romney post is that competitive bidding, if not structured correctly, puts private insurers at a disadvantage to the government plan. It would be important to ensure that there is a level playing field between the public and private options under such a system.

The plan would only go into effect for people aged 55 or younger today. These future seniors would buy insurance on a “Medicare Exchange,” which would require plans to guarantee coverage regardless of pre-existing conditions, and require plans to charge similar premiums to those who are healthier or sicker.

An unenforceable cap on Medicare spending growth

In the event that competitive bidding failed to bring down spending growth, Wyden-Ryan would cap the growth of Medicare spending to nominal GDP plus one percent (a calculation that includes inflation). How it would enforce this cap is largely unclear. Every Congress is sovereign; one Congress can’t bind future Congresses to due its bidding. Hence, if competitive bidding fails to bring costs down (though it should), the Wyden-Ryan approach of requiring Congress to find ways to cut spending is, effectively, toothless.

Implicitly, the Wyden-Ryan approach would repeal IPAB, Medicare’s rationing board, without putting any credible mechanism in place for future Congresses to keep costs down.

Means-testing for the wealthy, and protections for low-income retirees

Wyden-Ryan would expand means-testing throughout the Medicare system. Currently, higher-income individuals pay more for Medicare under the program’s traditional benefit for outpatient physician services (Part B), and also for the newer prescription-drug benefit (Part D). Under Wyden-Ryan, means-testing would also apply to the premium support payments offered through the Medicare Exchange.

Lower-income individuals who are eligible for both Medicaid and Medicare (the so-called “dual eligibles”) would be protected from the GDP+1 spending growth cap.

Medicare Advantage reform

Wyden-Ryan seeks to reform Medicare Advantage in order to drive further spending growth reductions. They note that Medicare Advantage is currently prevented by law from passing on cost savings. “If a private Medicare Advantage plan has lower costs than traditional Medicare, then by law, the plan may not offer a rebate to the senior. Instead, the plan must compete by offering additional benefits, which in some circumstances increases the use of services—and therefore costs.”

They’re right. And this is why Medicare Advantage has not been able to lower federal Medicare spending. Medicare Advantage plans cost about 14 percent more per person than traditional Medicare plans do, but they typically offer richer benefits than traditional plans. This drives incentives in the wrong direction, and it would appear that Wyden and Ryan aim to change that.

Cost-sharing reform

As I wrote in my big National Affairs piece on Medicare reform, the fundamental problem with Medicare is that seniors are not really required to share in the cost of their care, leading them to spend far more than they need to. Wyden-Ryan urges cost-sharing reforms, though it doesn’t make any specific suggestions. Last March, Sens. Tom Coburn (R., Okla.) and Joe Lieberman (I., Conn.) proposed cost-sharing reforms that Wyden and Ryan would do well to consider.

Employer-sponsored insurance reform

One of the most intriguing aspects of the Wyden-Ryan plan is its drive to gradually migrate our inefficient, employer-sponsored private insurance system to a true individual market where people buy health insurance on their own.

Here, Wyden and Ryan are borrowing from Wyden’s proposed Free Choice Act, in which employees could choose to opt out of their employer-sponsored plan, and take the money to buy a plan of their own choosing on the private market. The opt-out only applies to workers at firms with 100 or fewer employees. If these workers buy a plan on the open market that costs less than what their employers would have paid for, they can pocket the difference as taxable income.

In the absence of Obamacare, this is a very attractive idea. Instead of simply ending the $300 billion-a-year employer tax exclusion, creating a massive disruption of the private insurance market, the opt-out idea allows for a voluntary, gradual transition to an individual health-insurance market. When people buy insurance for themselves, they are more likely to shop for value, instead of overspending on overly comprehensive benefit packages. That, in turn, brings down costs for the overall system.

Likely what would happen is that healthier individuals would opt out of the system and choose cheaper, consumer-driven health plans that pair high-deductible insurance with health savings accounts. Sicker individuals would stay in the conventional employer-sponsored system. This could, in theory, drive a form of adverse selection, driving up costs for the shrinking pool of sicker beneficiaries. However, the savings from the opt-outs might be worth it.

If Obamacare stays on the books, the opt-out idea could actually cause problems if it wasn’t structured the right way. A poorly conceived opt-out, combined with Obamacare’s exchanges, could increase the incentives for employers to dump workers onto the subsidized Obamacare exchanges.

Some liberals and conservatives dislike the compromise

As I mentioned in the opening paragraph, Wyden-Ryan means that premium support has now been embraced by a prominent Democrat. This helps inoculate Republicans from the fact-free, demagogic criticism that they are trying to throw granny off of a cliff.

This fact already has Democrats grumbling. “Why in the world [Wyden] agreed to help Ryan get out of the rock he was under is beyond me,” a former senior Democratic staffer told Kaiser Health News. “This is a bad move on a couple different levels, and has the potential to take away a key argument for Democrats that are trying to retake the House.”

Rep. Pete Stark (D., Calif.) sent out a statement insisting that that the demagoguery would continue. “Despite Wyden’s claims otherwise, the Wyden-Ryan plan ends Medicare as we know it, plain and simple.”

Some conservatives are unhappy with Paul Ryan, too. Ben Domenech says that Ryan “gave up a lot more to do this [compromise]…My concern is that Ryan’s timing and the nature of this plan will be viewed as a walkback, one that weakens the hand of Republicans going into the presidential [election], and creates conflict for his fellow House and Senate members who stuck their necks out to support his budget and now will be confronted by more questions.” (Ryan’s office responds to Ben’s critiques here.)

Ben is right to raise the concern, but I think it’s unlikely to play out that way. Left-wing Democrats are far more likely to take the Pete Stark approach of arguing that there isn’t much difference between Ryan’s old Path to Prosperity plan and the new Wyden-Ryan one. From the Left’s standpoint, anything that moves away from single-payer Medicare is anathema.

Bottom line: A promising plan, but more specifics are needed

While I continue to favor the old Ryan plan (indeed, I’d rather see a true Swiss-style voucher system), I do agree that competitive bidding has certain advantages. Most importantly, it has support on the other side of the aisle. In addition, competitive bidding could drive costs lower in areas where hospital monopolies currently hold sway. This makes it the most plausible, bipartisan approach to Medicare reform that’s out there.

On the other hand, it will be important for Wyden and Ryan to help us understand how they will enforce the global spending growth cap. In addition, they will need to explain how their employer insurance opt-out won’t explode the Obamacare exchanges (more than they already will be).

One other deficiency in the plan is that it takes too long to work. In order to honor the promise that there will be no Medicare changes for those older than 55, the plan kicks in in 2023. However, Medicare is slated to go bankrupt in 2020 (if you believe the Congressional Budget Office) or 2016 (if you believe the Medicare actuary).

Overall, I’m very encouraged by this plan. It appears that between Ron Wyden, Paul Ryan, and Mitt Romney, a group of prominent political figures is coalescing around a bipartisan approach to Medicare reform. No doubt that the hard-core will find fault with it. And there are technical problems with the proposal that need to be worked out. But we can say that Wyden and Ryan have moved us forward, on the long road to bringing our runaway fiscal problems under control.”