Opinion: The Ryan plan — better medicine at a lower price

By Linda Gorman

The selection of Paul Ryan as Mitt Romneys running mate holds out hope that people in public life are finally beginning to appreciate the fact that market-oriented health care reforms offer the best potential for finally giving elderly Americans the ability to get better medical care at a lower cost. They do this by giving people an incentive to use health care more wisely.

Individuals and their physicians know more about the health care that they need and what adds value to it than any number of officials in Washington, D.C., and various state capitols workingon value-based health care plans. Because individuals know more, they can economize in a multitude of small ways that outsiders would never dream of.

The essence of market-oriented reform is making people feel like they are spending their own money on health care, letting them choose where to reduce expenditures, and providing real accountability by allowing the development of real choices.

Ryan proposes to reform Medicare by giving people a choice of plans. Only those under 55 would be required to participate. In a scheme similar to that used by the Federal Employees Health Benefits Plan, insurers would be invited to provide annual bids for guaranteed issue policies covering a specific set of conditions with a given actuarial value. The cost of the services, another bid, would also be calculated using fee-for-service Medicare. The government would set the Medicare subsidy rate equal to the second highest bid.

People covered by Medicare would be able to choose a plan with the second-highest price and have all costs paid for by the federal government. They would be able to choose a plan with a lower price and receive a rebate for the difference between the second highest bid and their plan.

They would be able to choose a more expensive plan if they were willing to use their own money to make up the difference, or stay in fee-for-service Medicare if none of the plans suited their needs.

As is currently the case, the amount of individual support provided would vary by income, health status and geographic location. While there is no predetermined formula for calculating payments, taxpayers are protected by limiting the growth in the accepted bid price to nominal GDP growth plus 0.5 percent.

Ryans Medicare reform plan has a program design that is similar to that of Medicares Part D prescription drug program.

Part D may be unique among long-functioning government programs in that it was designed to be consumer-directed from the outset. It is also unique in that its current annual expenditures are about 30 percent less than were projected by the Congressional Budget Office in 2003.

For comparison, Medicares Part A, a centrally-planned program that anything but consumer directed, was about 7.5 times more expensive than projected. The bureaucratically controlled Medicare home health care benefit and end-stage renal disease programs were more than twice as expensive as projected, and Medicaids disproportionate share program was 17 times more expensive than projected.

Ryans plan stands a good chance of success because, like Part D, it lets people who need health care control the funds used to purchase it. They can communicate with people in the business of selling medical care by buying or not buying various benefit selections at various prices.

Unlike Obamacare, Ryans plan does not waste enormous resources dictating exactly how doctors, hospitals, insurers and patients must behave by spewing forth tens of thousands of pages of incomprehensible regulations designed by well-meaning bureaucrats and academics who have never managed any kind of health care business. It does not foist new and untested organizations, like Accountable Care Organizations, health insurance exchanges and Navigator Programs on people unable to signal that they neither want them nor are willing to pay for them.

More importantly, Ryans plan does not include Obamas price controls, the ones that the Medicare Trustees say will bankrupt 15 percent of hospitals, skilled nursing facilities and home health agencies by 2019. Nor does it cut physician reimbursements by approximately 31 percent in 2013.

Although the Obama Administration says that these reimbursement cuts have strengthened Medicare, the trustees note that Medicare payment rates for inpatient hospital services are about 67 percent of those paid by private health insurance and that providers could not sustain continuing negative margins and would have to withdraw from serving Medicare beneficiaries.

The Obama plan turns Medicare into a plan that will pretend to pay for the medical care that it will pretend to provide. The Ryan plan builds on prior successes. It offers a realistic alternative to the Obama plan, one that is likely to provide better care.

Linda Gorman is the Director of the Health Care Policy Center at the Independence Institute in Denver.

Opinions communicated in Solutions represent the view of individual authors, and may not reflect the position of the University of Colorado Denver or the University of Colorado system.