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Posted at 10:03 AM ET, 02/ 7/2011

What makes Paul Ryan confident in his Medicare plan?

By Ezra Klein

PH2011012508051 (3).jpgHere's a question for Paul Ryan, or anyone who supports Paul Ryan's plan: Why are the cost savings in his bill possible, while the cost savings in the Affordable Care Act aren't?

Ryan has been warning that one of the ways the Affordable Care Act saves money in Medicare might be overstated. This was the subject of his first hearing on the legislation, in fact. You can read a wonky exploration of the question here, but the basic argument is that the bill limits how fast a particular class of doctor payments can grow. Right now, they grow as fast as Medicare grows -- which is fast. A lot faster, in fact, than the economy grows. Health-care reform limits increases in these payments to one percentage point faster than however fast GDP is growing. But if the law doesn't get Medicare's costs under control, Ryan says, simply cutting payments won't be sustainable because doctors will leave the program, seniors will complain and Congress will reverse itself. On the bright side, the law has a ton of projects and reforms meant to slow Medicare's costs. The question is whether they'll work.

But Ryan's skepticism about Medicare's ability to hit these targets is selective. As Uwe Reinhardt points out, if you look at what Ryan himself proposes to do to Medicare, it shares a crucial similarity. In the Ryan-Rivlin plan, seniors stop getting Medicare and begin getting a check to buy private insurance products that Medicare has certified. How does that save money? Well, it doesn't. Might actually cost money, for reasons I'll explain in a second. What saves money is that the check can only grow in value at GDP plus one percentage point -- that is to say, the same rate that Ryan considers implausible in the ACA.

This might make sense if Ryan and Rivlin had a much more plausible explanation of how their program would save Medicare money, but they don't. As CBO says (pdf), seniors will have to "purchase less extensive coverage or pay higher premiums" under Ryan-Rivlin. And it's actually worse than that, as Medicare is cheaper than private insurance, and so forcing seniors to buy private plans rather than Medicare will mean they pay more for the same health-care coverage. Here's CBO again:

Medicare’s current payment rates for providers are lower than those paid by commercial insurers, and the program’s administrative costs are lower than those for individually purchased insurance. Beneficiaries would therefore face higher premiums in the private market for a package of benefits similar to that currently provided by Medicare.

So Ryan's plan is to hold down costs in Medicare by giving seniors less money to purchase more expensive private insurance. If you could make that stick, it would indeed hold down costs. But it's a lot more painful, and it includes many fewer mechanisms for cost control, than the Affordable Care Act. And yet when it comes to the ACA, Ryan firmly believes that seniors will quickly and successfully force Congress to reverse any reforms that degrade their Medicare experience. That's a fair enough concern, of course. What's confusing is why it isn't doubly devastating when applied to Ryan-Rivlin.

Correction: Austin Frakt had some trouble finding the Medicare cut I mentioned that would hold the growth of a certain class of payments to medical providers to GDP plus one percentage point. That's because I made a mistake. The class of payments I was talking about -- the annual productivity adjustments -- are not held to GDP+1. They're held to "a 10-year moving average of economy-wide private, non-farm productivity." I got their growth rate mixed up with something else in the bill. The underlying point of this post still holds, but it's obviously important that I get my numbers right. Apologies.

Photo credit: Harry Hamburg.

By Ezra Klein  | February 7, 2011; 10:03 AM ET
Categories:  Health Reform, Medicare  
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Comments

Both approaches - ACA and Ryan - seem to hope demand side changes will force changes on the delivery/supply side. Ryan presumably believes his way is better because it gives more flexibility to the insurance market? Rather than simply decreasing payments to providers, maybe they'll work with providers to develop new delivery systems, and do so more effectively than the government. But this may be a bit of magical thinking on Ryan's part.

Posted by: jduptonma | February 7, 2011 10:21 AM | Report abuse

The answer of course is they are both wrong. There is nothing in the ACA to control costs other than wishful thinking that someone somewhere in the future will make the harsh cuts needed that no one is willing to do today while the Ryan plan just assumes seniors will accept less care b/c they are paying for it with subsidized insurance (as if most seniors over age 79 have the faculties to compare and contrast insurance policies to get the best price). It is magical thinking on both sides. The reality which no one on the left or right wants to face is that to control costs to a sustainable level, seniors are going to have to get (a lot) less. I've always thought you really need a crisis to reach that point and don't think we're there yet, and think both Ryan and Obama are whistling past the graveyard and staking unsustainable positions (that no one's health care will be cut ever) either through the magic of government or the magic of the market. Soon, (5-10 years) both sides will have to face the reality which means real cuts for healthcare for seniors. Until then, this is all a game of charades.

Posted by: sgaliger | February 7, 2011 10:26 AM | Report abuse

I surmise Ryan's plan to cut costs, is to cut costs for the gvmt, not the prices people pay for heath care.

Ryan could care less how much health care/insurance costs average people. He has his.

Posted by: lauren2010 | February 7, 2011 10:31 AM | Report abuse

sgalier is right that they're both wrong. ACA will lean on the taxpayer, Ryan's plan will lean on the individual but neither will work to actually reduce costs.

Again look to MA where they're reinstituting capitation with bonuses for outcomes to see real cost reform.

Posted by: visionbrkr | February 7, 2011 10:36 AM | Report abuse

*****The reality which no one on the left or right wants to face is that to control costs to a sustainable level, seniors are going to have to get (a lot) less.*****

Less? Maybe. A lot less? That remains to be seen. All rich countries struggle with healthcare costs but some of them seem to be able to do a lot more with a lot less than what the US spends, without having to throw old people to the wolves. What do the Dutch do? What about the Germans? Or the Swiss? Or the Taiwanese? Or the Danes?

Notice I've deliberately left out Canada and UK because, according to right wing haters of social insurance, those are the only two models available for comparison...

My own view is that a separate, shiny government healthcare program solely for old people isn't a very sustainable model, and I suspect in the fullness of time we'll eventually have a single, national system for everybody.

Anyway, it's clearly not impossible to provide a decent level of care to EVERYBODY while running a cheaper system than the US status quo, and there a number of real world examples proving this. It's not going to happen overnight, but eventually we'll get there, because over the long term there are a lot more votes in healthcare security than in healthcare insecurity.

Posted by: Jasper999 | February 7, 2011 10:47 AM | Report abuse

I was gonna go with chutzpah, but your answer also works

@Chris_Gaun
chrisgaun@gmail.com

Posted by: chrisgaun | February 7, 2011 11:11 AM | Report abuse

sgaliger observes above that "The answer of course is they are both wrong. ... It is magical thinking on both sides."

First, Johnson's Medicare is a problem, but so is Johnson's Medicaid program. As economists (Cowen and others) have recently noted, real growth of quality of life has stagnated: largely unspoken is the truth that such stagnation has grown in direct proportion to massive expansion of the social safety hammock -- Medicaid, TANF, Food Stamps, etc. As the federal government built sloth among its citizens, it built similar sloth into its own operations: Medicaid, itself exceeding cost estimates by more than 400% per year since inception, is responsible for most health care cost growth, yet the federal bureaucracy is too lazy to monitor waste, fraud, and abuse.

Second, there IS magical thinking coming from Washington, but the lack of leadership and foresight seems to stop at the beltway, oozing only into a handful of states, such as Massachusetts, susceptible to its seepage. Most are now all too keenly aware of the magical thinking and are taking realistic steps: why, just this morning Wonkbook quoted a line from Conor Dougherty's WSJ article which read "A Democratic governor, John Kitzhaber of Oregon, has proposed a two-year budget that would make cuts to mental-health institutions and reduce state Medicaid reimbursements to doctors and hospitals. Cuts to Medicaid, a joint state-federal program, are some of governors' largest proposed reductions."

Posted by: rmgregory | February 7, 2011 11:19 AM | Report abuse

"What's confusing is why it isn't doubly devastating when applied to Ryan-Rivlin."

That's a fair point.

And his plan won't do much to the cost of higher end treatments, because going from a deductible of, say $2,000 to $5,000 still means the marginal cost of the most expensive treatments is zero.

Posted by: justin84 | February 7, 2011 11:45 AM | Report abuse

Typical of other Republican health care measures, Ryan's plan will put more money into the pockets of the for-profit insurance companies at the expense of citizens. That is exactly what the Republicans did with Medicare Advantage when they gave subsidies to insurance companies to help them "compete" with Medicare. The hypocrisy is staggering.

Posted by: BernieO | February 7, 2011 12:33 PM | Report abuse

It appears Ryan's giving a cash incentive to seniors to reduce consumption and shop competitively.

Plus, when you say:
"Medicare is cheaper than private insurance, and so forcing seniors to buy private plans rather than Medicare will mean they pay more for the same health-care coverage"

you forget that a significant portion of the current difference is cost-shifting, which would be reduced. So while Medicare dollars would no longer have the unrealistically low price advantage they currently enjoy, the new price would also not be as unrealistically high as the private market currently pays.

Posted by: whoisjohngaltcom | February 7, 2011 12:46 PM | Report abuse

"In the Ryan-Rivlin plan, seniors stop getting Medicare and begin getting a check to buy private insurance products that Medicare has certified. How does that save money? Well, it doesn't."

It will save money as defined by what's spent in the Federal government budget. Rather than being an open ended commitment, Medicare will be subject to budget constraints and will have to justify what it is spending in comparison with other demands for Federal dollars.

The issue here is who should be expected to pay for seniors health insurance. The Ryan-Rivlin plan will hold down the Federal government's costs by picking up some, but not all of the tab for seniors health insurance. Given the current budget situation, it's not unreasonable to ask more affluent seniors to shoulder a larger burden of the cost of their health insurance rather than taxing the rest of us to provide them with unlimited health care.

The other significant aspect of this approach is you either believe that market forces can work in health care/health insurance like all other markets (see auto and home owners insurance) or you don't and we have to rely on centralized cost control. I'll take market forces as centralized bureaucracy is quite vulnerable to lobbying from affected parties (see the yearly Doc Fix).

Paul Ryan spelled it out quite clearly in his interview with you last year:

"EK: The Lasik thing is interesting because it gets to the question of whether health care is a market. When I think of getting Lasik, or buying a television, I can walk out of the store. That’s what gives me as a consumer my power in the market. But if I have chest pains and my doctor prescribes a bypass, how do I walk out of the store?

PR: In Milwaukee, the price of bypass ranges from $47,000 to $100,000. Nobody knows where to go for quality, or the prices. So wouldn’t it be good for the prices and quality metrics to be publicized? And let people make a decision. There’ll always be some level of co-pay or deductible or co-insurance that’s going to push people towards the best value. Then, when you have those chest pains and you’re being rushed in the ambulance, you’ll be rushed to a hospital that’s all along been competing for business and has been improved by that process. You’ll get better health care than you otherwise would. That’s how you improve the system."

http://voices.washingtonpost.com/ezra-klein/2010/02/rep_paul_ryan_rationing_happen.html

Posted by: jnc4p | February 7, 2011 1:29 PM | Report abuse

Also worth rereading:

"PR: Look, I believe we need to do health-care reform. And the employer-tax exclusion is the place to go. That is a huge driver of health inflation, no one has the guts to take it on, and what's a crime in my mind is that I think people in the administration would agree with this. I think economists would agree with it. That's where we should go to fund health-care reform. But we're not. Because of politics. And unfortunately, we're creating a fiscal house of cards instead. We're not dealing with the entitlements that are unfunded right now. We're creating a new one.

EK: But on the exclusion, Max Baucus wanted to fund reform through the exclusion. And the administration, which had attacked John McCain on his attempt to repeal the exclusion, were ready to go with him. They didn't get any Republican support on that, though. If Bob Bennett and four Republicans had come to them and said, look, if you go hard at the exclusion, you have my vote, they could've gone hard at the exclusion.

PR: There's a distinction though. The Patient's Choice Act that I have doesn't repeal the exclusion and put the money in a new government spending program. It takes the money and gives it to the individual. There's a very big difference of opinion here. You don't end the exclusion and have the government spend it on a program. You give it to every individual. But the point I'm trying to make is we spend enough on health care. We don't need to do more. We need to do what we do more efficiently and effectively."

http://voices.washingtonpost.com/ezra-klein/2010/03/the_true_cost_of_the_health-ca.html

Posted by: jnc4p | February 7, 2011 1:37 PM | Report abuse

jnc4p - This gets back to the age-old argument that if consumers were only better informed, that medical costs could be contained. But when you're dealing with health care, you're dealing with a fundamentally unequal transaction. You don't really have good standing to disagree with your doctor when they say you need a bypass. And just publishing the costs does little for at least two reasons. The first is a matter of vocabulary. Look at your explanation of benefits sometime and try to discern where the hospital was charging "too much". It's very difficult. Even if you're in the field of medicine, it is difficult to know what the worth or cost of a procedure may be. Second, as long as there is this entirely opaque funny-money insurance scheme going on, costs are entirely irrelevant.

Posted by: willows1 | February 7, 2011 3:00 PM | Report abuse

jnc4p writes
"Medicare will be subject to budget constraints and will have to justify what it is spending in comparison with other demands for Federal dollars."

Sounds a lot like a death panel to me.

Posted by: willows1 | February 7, 2011 3:03 PM | Report abuse

"You don't really have good standing to disagree with your doctor when they say you need a bypass."

Second opinion?

I wouldn't have good standing to disagree with a mechanic if he said I needed a new engine, but I would have it checked out with another shop before getting the replacement - after all, that would cost me thousands so it had better be worth it.

Some people might not want "go cheap" on the bypass, but some others wouldn't be bothered by going with the cheaper doctor, especially if the cheaper doctor had a decent enough reputation.

"And just publishing the costs does little for at least two reasons. The first is a matter of vocabulary. Look at your explanation of benefits sometime and try to discern where the hospital was charging "too much". It's very difficult."

I'm not sure it's really that difficult, and at worst you can always call and ask about specific charges. At any rate, the insurance company is the customer, not the patient - it's not surprising that bills are tailored towards the paying customer.

Even if bills remain somewhat opague, people will understand how much they ended up being charged as a whole and who charged them that amount. That's very important information when it comes to shopping.

"Even if you're in the field of medicine, it is difficult to know what the worth or cost of a procedure may be."

The consumer only needs to know prices in the relative sense - relative to his own resources, and relative to other providers.

The tough part about Ryan's plan is that the more expensive treatments will still be heavily cost insulated even with high deductible plans, and the price mechanism won't do much.

Posted by: justin84 | February 7, 2011 3:55 PM | Report abuse

Point one: One commenter asks, "All rich countries struggle with healthcare costs but some of them seem to be able to do a lot more with a lot less than what the US spends, without having to throw old people to the wolves. What do the Dutch do? What about the Germans? Or the Swiss? Or the Taiwanese? Or the Danes?"

Answer: These countries, as do all other wealthy countries, hold down health-care costs by setting prices for health-care goods and services. Simple. Obviously effective. In the U.S.? Politically fraught, given the financial and therefore political power of health-care providers.

Point two: The Ryan-Rivlin plan is not about holding down ever-rising health-care costs. It's about privatization. It's about shifting costs from the federal budget onto the personal budgets of seniors. That's okay for those in the upper middle-class and above. It's terrible for those below that socio-economic point.

Point three: Ryan-Rivlin has zero chance of becoming law. The politics of messin' with Medicare preclude privatization. Ask George W. about his plan to partially privatize Social Security.

Point four: Until and unless the media force the policy discussion about budget deficits into the narrow channel where it belongs (setting health-care prices), we will never attain long-term budget stability. Health-care costs that continue to rise much faster than the economy grows are the whole ballgame. Controlling those costs can mean a lot of things around the margins. But the core problem is provider prices.

Rising health-care costs are not simply driving budget deficits. They're slowly but inexorably impoverishing everyone from the middle-class on down.

Posted by: fredbrack | February 7, 2011 3:57 PM | Report abuse

@willows1 "jnc4p writes
"Medicare will be subject to budget constraints and will have to justify what it is spending in comparison with other demands for Federal dollars."

Sounds a lot like a death panel to me."

No, it's just a fixed subsidy instead of a blank check.

Posted by: jnc4p | February 7, 2011 4:06 PM | Report abuse

Shorter Paul Ryan:
Our magical thinking is better than their magical thinking!

Posted by: karenfink | February 7, 2011 6:09 PM | Report abuse

Shorter Paul Ryan:
Our magical thinking is better than their magical thinking!

Posted by: karenfink | February 7, 2011 6:11 PM | Report abuse

@justin84

It's fine to throw around the second opinion argument for a primary care check-up or small outpatient procedure, but the real problem is acute hospitalization and intervention, where you don't have time to seek a second opinion. Or chronic illness, where you have to look at the disease over many years, and not a particular procedure or visit. You don't choose what hospital you go to when you collapse after chest pain - they take you to the nearest center with the facilities necessary to treat you - as it should be.

You run into a very dangerous game if the incentive is to produce the cheapest care possible - this should not be the primary outcome measured - it should be based on the quality of care. There are many ways to make care cheaper - many of them will not improve your stay and will likely make you worse. But cutting corners will be exactly what providers do if given incentives to. The best care is NOT the cheapest option; it is also not the most expensive option. But there needs to be other ideas to drive people to make the right decision when it actually requires more expensive care.

In the end, the problem is how to define health care quality - we know the natural progression of many diseases (hypertension if untreated, for instance, leads to loss of kidney function - this could be used as a metric once a diagnosis is made). In other cases, it's exceedingly difficult. The ACA at the very least has admitted that we don't know to do this and it's given Medicare money to experiment with different payment models and figure out what works. If you want more detail on this, you can read the following from Atul Gawande during the debate

http://www.newyorker.com/reporting/2009/12/14/091214fa_fact_gawande?currentPage=all

Posted by: kmani1 | February 7, 2011 6:47 PM | Report abuse

Fixed subsidy=death panel.

Posted by: nickthap | February 7, 2011 11:18 PM | Report abuse

"What's confusing is why it isn't doubly devastating when applied to Ryan-Rivlin."

What Ryan is saying that - GOP can give better 'shaft' to seniors than Dems and ACA.

So for GOP it is not about 'controlling' medical costs; but it is about who has best political argument to dupe seniors (which them claim they have).

Posted by: umesh409 | February 7, 2011 11:30 PM | Report abuse

I really need to ask, as a surgeon, why surgeons need, excuse me, NEED, to earn $325,000/year with a yearly inflator hooked to rises in healthcare costs, not CPI. Let's isolate oncologists and cardiologists who do stents for specific examination: average >$400,000/year.
What does any of this have to do with providing health care to the people living in the United States?
Nothing.
The discussion isn't really about providing health care. It is about income for insurance executives, hospital executives, physicians, et al.
The only "market driven" health care system in the world.

Posted by: joesolo | February 7, 2011 11:40 PM | Report abuse

justin84 -

My son was in the hospital a few years back and toward the end of his stay he developed an infection in the hospital. He was pretty much over his initial illness but then his fever spiked quickly and unexpectedly. They basically whisked us out of the room and did a series of tests - a blood culture, a chest x-ray, a urinalysis, removed all catheters and tested them. Let me ask you, when were we supposed to go online and shop for bargains? They were trying to save his life and weren't going to let our objections stand in the way. They isolated the cause of the infection to one of his catheters, so they removed it and began intravenous antibiotics. About a week later he was out of the hospital and doing well. In all, his stay at the hospital exceeded $100k and all but $3k of this was covered by insurance. What does Ryan's world look like where my wife and I pay insurance premiums and then have our insurance stop at, say $60k with us picking up the other $40k?

FWIW, after he left the hospital, we began having fights with the insurance company about what they would and would not cover. Some of this included ongoing treatments that were critical to his development. The hospital basically coached us on how to respond to the repeated calls from the insurance company so that we wouldn't have to pay this out of pocket.

Also FWIW, I have a PhD and am not the least bit intimidated by the jargon or complexity of hospitalizations. I spent most of my free time at the hospital reading up on my son's condition and the pros and cons of the recommended treatment. But in the end, I don't have the experience in the medical field that the care providers do. I can make their lives difficult by asking a series of uncomfortable questions (and did!), but I have to rely on what they believe was necessary.

Now, take a young family without the benefit of my training in biology, etc and ask them to make these kinds of decisions. It isn't right. Yes, yes, Social Darwinism and Invisible Hand and all that. But is that the world you want to live in?

Posted by: willows1 | February 8, 2011 2:31 PM | Report abuse

Private insurance costs more because Medicare pays poorly. Docs make up the reimbursement through private pay. If there was no Medicare, docs would lower their charges to private pay insurance and still get paid the same amount in total.

The largest decrease in cost will come from all people paying more for their first dollars of care. Health care is the only item we don't shop around for based on cost - that is crazy given its size in the economy. The Ryan plan would force folks to shop around and would cause insurance to compete on price and quality.

Posted by: cmac5 | February 8, 2011 3:05 PM | Report abuse

cmac5 - Okay, so the best way to reduce health care costs is to pay more for health care. Got it.

Posted by: willows1 | February 8, 2011 4:30 PM | Report abuse

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