The Ultimate Solution

I’ve discussed many ideas proposed to reduce the unsustainable growth in our health care costs.  Most involve changes in the way providers are paid — e.g., eliminating fee-for-service, Accountable Care Organizations (ACO), bundled payments, HMO’s, and Coordinating Care Organizations.  Will these reforms be accepted and work?  No one knows.  The results of most past reforms have been disappointing.

The U.S. spends twice as much as other advanced countries on health care.  I believe the ultimate reason can be traced to one unique characteristic of our system.  Everyone thinks someone else is paying the bill.  The government pays for half of our health care and higher costs are either tacked onto the federal deficit or taken from the Medicare Trust Fund.  Since taxes aren’t increased, taxpayers have little reason to demand (or even accept) reforms.  Much of the rest of our healthcare costs are paid by business.  Employees think health insurance is a free benefit and don’t realize they’re paying premium increases with lower wage growth.

The best (and maybe the only) way to generate support for actually implementing reforms is through a dedicated tax that would provide health care vouchers to all Americans.  The tax could be used only for health care, would eliminate the need for Medicare, Medicaid, and employer-provided insurance, and would automatically increase as costs increase.  Victor Fuchs, the dean of American health care economists, and John Shoven recently published an article outlining how a dedicated VAT tax would work.  Read their six-page plan.  For a good discussion of our cost problem and shorter discussion of the solution, see a recent interview with Fuchs.  You can also watch Fuchs and Shoven discussing their plan in a short video.

Volcker Biography

If you’re interested in a very readable economic history of the U.S. over the last fifty years, I recommend William Silber’s new biography of Paul Volcker.  Volcker is one of my heroes and was deeply involved in solving many of our economic problems — including the collapse of the Bretton-Woods fixed exchange rate system in the late 1960’s and early 1970’s and in reducing the high inflation at the end of the 1970’s.

Why I Support Wyden/Ryan Vouchers to Reform Medicare

Last December, our Senator Ron Wyden and Representative Paul Ryan released a plan to reform Medicare that featured vouchers for Medicare enrollees.  The document describing their plan uses the terms “premium support” and “coverage support,” but their plan is a voucher plan similar in many ways to the plan that my AFBF Deficit Task Force endorsed.  Each senior would be given the option of continuing in traditional Medicare or using their voucher to purchase a health insurance policy from a private company.  Private plans would be required to offer at least the basic benefits Medicare now provides.  Each year, both participating private insurance companies and traditional Medicare would announce the cost of their coverage for each region of the country.  The size of the voucher would be set to equal the cost of the second least expensive plan.  After 2022, the growth in the total cost of Medicare would be capped at the growth of GDP plus 1% and it’s possible this cap will limit the growth in the size of the vouchers in future years.

I’m an enthusiastic supporter of the Wyden/Ryan Plan for three main reasons.  First, switching Medicare to vouchers would finally give Congress direct control over Medicare spending and establish a reasonable limit on the future growth of the program.  Under our current fee-for-service Medicare, the government is obligated to pay seniors’ medical bills no matter how rapidly costs increase, and the Congressional Budget Office (CBO) is projecting costs will increase from 3.7% of GDP now to 6.0% in 2037.  Even with the retirement of the baby-boomers, Social Security is projected to have a much smaller increase—going from 5.0 % to 6.2% of GDP over the same period.  Allowing expenses for senior health care to continue on automatic pilot will cause Medicare to take a steadily increasing share of the federal budget—causing either dangerous federal deficits, higher taxes, and/or the crowding out of defense spending, infrastructure investment, education and other important programs.  Like everything else, Medicare needs a budget and the Wyden/Ryan Plan provides one.

Second, vouchers will provide seniors with a new powerful incentive to seek out lower cost plans. If they select a plan costing less than their voucher, they keep the difference.  If more, the senior will pay the extra out-of-pocket.  To gain customers, both traditional Medicare and private insurance companies will be under new pressure to make changes in the way care is delivered to lower costs and improve quality.  I believe seniors will accept the needed changes in our current fee-for-service Medicare only if they are given a financial incentive to do so.  The Wyden/Ryan Plan provides that incentive.

Conservatives argue that allowing competition among private insurance companies will be enough to rein in costs.  Liberals base their hopes on government price controls and on panels of experts who will mandate “best practices” and hence reduce ineffective treatments.  Both the conservative and liberal approaches have merit.  However, I doubt either will be adequate without the new incentives provided by vouchers.

Insurance companies have spent many years competing for the business of private companies—with little success in controlling costs.  Over the last decade, the cost of private plans has been growing slightly faster than the cost of traditional Medicare.  Top-down government price controls and the restrictions in choice that come with “best practices” guidelines will be strongly resisted by both providers and seniors who have become accustomed to getting what they want from fee-for-service medicine.  Once the Wyden/Ryan Plan has been implemented, seniors will, for the first time, have a financial incentive to accept a low-cost plan that focuses on effective care and pays doctors for quality, not more procedures.

Third, the Wyden/Ryan Plan is a bipartisan plan— something that’s much too rare these days.  The urgently needed reforms in Medicare won’t happen without support from both Republicans and Democrats.  Senator Wyden and Congressman Ryan deserve our thanks for incorporating good ideas from both the right and the left into a plan that has a chance of eventually being enacted. I’m not surprised this plan came from Senator Wyden and Congressman Ryan since both have a history of working with members of the other party on health care reform—see Wyden/Bennett and Ryan/Rivlin.  Another big attraction of the Wyden/Ryan Plan is that it allows both traditional, single-payer Medicare and private insurance companies to compete for seniors’ vouchers in the same market place.  Performance, rather than ideology, will then decide the best way to rein in costs.