The Medicare Debate

Is the program the solution, or the problem?

James C. Capretta
Tuesday, December 27, 2011

There are many reasons to be grateful for the introduction of the Medicare “premium support” plan by Democratic senator Ron Wyden and Republican House Budget Committee chairman Paul Ryan.

In some respects, it represents an improvement over the design of previous versions of premium support. Whereas the original Ryan plan offered seniors a subsidy based on a predetermined formula, the Wyden-Ryan plan relies on competitive bidding for setting the government’s contribution rate. Competitive bidding has the potential to cut costs even more than a predetermined index, because an index tends to lock in today’s wasteful spending. Of course, Wyden-Ryan also very usefully shook up the political debate over premium support, making it much more difficult for Democrats to demonize the concept.

But perhaps the most useful byproduct of the Wyden-Ryan plan has been the clarifying effect it has had on the debate over how to slow the rise of health-care costs.

For some time, it has been easy to get confused over where Obamacare’s apologists actually stand on that question. When it has been useful for them, Obamacare’s apologists have sometimes left the impression that they aren’t averse to competition and choice in health care, and they have pointed to the state-based “exchanges” in Obamacare as evidence of their open-mindedness to a form of competition for the under-65 population. But at other times, their distrust of competition has been on display: They have signaled on numerous occasions that they plan to use the exchanges for regulatory control, not competition. For instance, they have threatened to bar some insurers from participating in the exchanges based on any number of subjective judgments from federal and state regulators.

The reason they sent mixed signals in this regard is that they wanted to get the legislation through Congress, and they concluded, perhaps accurately, that feigned support for competition might help them get the needed votes. Also, for some time, their real plan for cost cutting has been based on extending Medicare’s regulatory reach even further into the health system.

The consistent opposition of most Democrats to premium support is yet more evidence that they aren’t really for competition at all, and never have been. Ever since the news began to spread that Senator Wyden was joining forces with Representative Ryan, liberal commentators of all stripes have denounced the plan in the same apocalyptic terms that the president used to attack the Ryan version of premium support last April. The reaction has been fast and furious for a reason: Wyden-Ryan is the antithesis of their vision for American health care. Indeed, as the debate over the past several weeks has demonstrated, the liberal vision for American health care is embodied in traditional Medicare. They don’t want to move Medicare away from today’s uber-regulatory model. Quite the contrary. They want to drag the rest of American health care toward the way Medicare is micromanaged today.

But are they right? Can we fix American health care by applying Medicare-style regulation to the rest of the health-care sector? Or is Medicare actually the source of today’s dysfunction, and most especially rapidly rising costs?

Dr. Donald Berwick, who recently left his position as administrator of the Centers for Medicare and Medicaid Services (CMS), answered that question this way in a recent interview:

I don’t think Medicare is broken. I don’t think Medicaid is broken. They’re very important social programs of good intent that are accomplishing largely what they intend to accomplish. Health care is broken. The delivery system isn’t working. That’s the problem.

We set up a delivery system which is fragmented, unsafe, not sufficiently patient-centered, full of waste, unreliable, despite . . . great efforts of the work force. We built it wrong. It isn’t built for modern times.

Medicare doesn’t need fixing. Health care needs fixing.

This is exactly the wrong way to think about the problem. Yes, the manner in which health care is delivered to patients in this country is fragmented, uncoordinated, full of waste and excess, and not responsive enough to patient concerns and wishes. But what’s the primary cause of all of these problems? As research has shown, it’s Medicare, and most especially Medicare’s dominant “fee-for-service” insurance model. In Medicare fee-for-service, those providing the services get paid for every procedure or test that is performed, regardless of whether it helps the patient. And the government sends reimbursement for all claims submitted by any licensed provider, with no questions asked.

In most markets, Medicare fee-for-service is the largest purchaser of medical care. The entire delivery system has been built up around the program’s distorted incentives. Every type of provider has its own payment system. This fosters extreme fragmentation, as every lab, clinic, physician’s office, and hospital can bill the Medicare program separately. Moreover, 90 percent of Medicare fee-for-service enrollees have supplemental insurance that pays for all of the costs that Medicare does not cover. That means these beneficiaries pay nothing at the point of service, and therefore have no incentive to limit the amount of care they receive, regardless of how tentative the potential benefits. Of course, those providing the services are able to increase their incomes from Medicare only by increasing the volume of services consumed by their Medicare patients. The result is a quite predictable and longstanding trend toward rapidly rising use of services.

The response of the political system to this inefficiency and high cost is counterproductive price controls. To hit budget targets (at least on paper), Congress and Medicare’s regulatory apparatus have reduced the amounts that the program pays for medical procedures. This kind of cost cutting makes no distinction based on the quality or efficiency of care provided. Rather, it is across-the-board, hitting good actors and bad alike. Some liberals say that the government is merely using its “market leverage.” But the truth is that private-insurance enrollees are paying hundreds of billions of dollars in higher premiums because the federal government forces doctors and hospitals to provide services to Medicare and Medicaid recipients at artificially low rates. This cost-shifting from private- to public-insurance enrollees is far greater than the frequently lamented cost-shifting from the uninsured to the insured.

Dr. Berwick and his allies now argue that we shouldn’t dwell too much on Medicare’s role in creating the mess we are in today because, in the future, the cost-cutting will be more rational, through such ideas as “Accountable Care Organizations,” which are essentially government-organized HMOs. But this is just more wishful thinking. For ACOs or any other model to work, the government must build a high-quality, low-cost network of providers. The government has shown absolutely no capacity for doing this, despite 30 years of trying.

Which brings us back to Wyden-Ryan. Premium support is a critical policy initiative, because it would get at the heart of what is wrong in the broader American health system. What is needed more than anything else is higher productivity in the health sector. How can that be brought about? The only answer is through a functioning marketplace in which the key actors have strong incentives to improve the way they do business. That’s exactly what would happen under Wyden-Ryan, as plans would be competing for the business of cost-conscious program enrollees.

The key issue at the heart of the health-care debate continues to be what will be done about costs. The opponents of Wyden-Ryan have come down clearly on the side of a governmental solution, with price controls leading to supply restrictions, eroding quality, and longer waits for care. The alternative is real consumer choice in a competitive marketplace, which would result in resources’ being allocated to the plans that can deliver the best value for the money spent. When the debate over the future of American health care is framed this way, as it should be, there’s little question where the electorate will come down.