A Conservative Medicare Plan Liberals Could Love

| Mon Sep. 19, 2011 9:51 PM EDT

Paul Ryan's Medicare plan has attracted nothing but scorn from liberals. Its basic problem is simple: it provides vouchers to Medicare beneficiaries to buy private coverage — which is basically OK — but it mandates that the value of the voucher will grow only at the rate of inflation. However, the cost of healthcare is almost certain to grow much faster than that over the coming years, which means that a couple of decades from now seniors would receive vouchers that paid for only a fraction of their coverage. They'd have to pay the balance out of their own pockets, and that payment would rise inexorably.

Now, Ryan says that competition between providers would bring down prices, so seniors would come out OK, but he doesn't seem to be willing to put his money where his mouth is. Despite his free-market convictions, his plan sets the value of the voucher by administrative fiat. Not only is this not a market-based solution, but it's a non-market solution we've been experimenting with for years in the form of Medicare Advantage, which allows private plans to compete with traditional Medicare coverage. So far, it's worked miserably: MA plans cost more than traditional Medicare, require higher government subsidies, and don't seem to have spurred any kind of innovation or productivity gains.

What to do? Via Reihan Salam, Yuval Levin proposes a revised version of Ryan's plan that's based on a genuine conviction that market forces can work. Each year, Medicare would define a minimum benefit level, and then providers in each Medicare region (there are four) would bid for business:

The level of the premium-support payment in each region for that year would be set at, for instance, the level of the second-lowest of the bids. Seniors would then be able to apply that amount toward the purchase of any of the plans on offer in their area. Thus, in each region, there would be at least one option that would cost less than the Medicare benefit, and seniors choosing that option would get the difference back as cash in their pockets; there would be at least one plan that cost the same as the benefit, so that seniors could obtain it with only the same out-of-pocket costs they have today; and there would be other plans that cost more (perhaps because they offered more, or because they failed to find ways to drive greater efficiency in their networks of doctors and hospitals) and for which seniors would pay an additional premium if they chose.

....In such a system, the premium-support benefit would grow exactly as quickly as required to provide a comprehensive insurance benefit, since the growth rate would be determined by a market process rather than a preset formula.... If market forces did drive costs down, as conservative health care experts expect, the reform would save the government an enormous amount of money....If market forces did not drive costs down, then we would have to find another way to address our entitlement costs. We would be back where we started, which is where Democrats want to end up anyway. Whether the reform succeeded or failed, seniors would have a guaranteed benefit and essentially no added financial risk.

Generally speaking, there's no reason this idea should offend liberals. In fact, Levin's proposal is ironic: it is, in essence, exactly the way Obamacare works. Within the insurance exchanges set up by PPACA, providers engage in competitive bidding based on a minimum coverage package defined by the government. The size of the federal subsidy for low-income families is set at the value of the second-lowest bid.

And that's not all that's ironic. Levin says that the one thing his proposal lacks is a Republican champion to fight for it. But Democrats actually proposed something very much like this for Medicare Advantage as part of PPACA. Why did it never see the light of day? Because Republican senator Jon Kyl, among others, looked at the estimated cost savings and "used it to argue that Obama was cutting Medicare benefits. The final reconciliation bill substituted administrative pricing methods for competitive pricing and introduced bonus payments for plans that achieved high quality ratings, thereby significantly reducing the size of the cuts to MA plans." In other words, Republicans not only didn't support the idea of competitive bidding, they demagogued it.

But why did they demagogue it? Two reasons, I assume. First, it was politically handy since Democrats had proposed it. Second, it probably would have reduced payments to big healthcare providers, and Republicans routinely support government handouts to big corporations. Both of these varieties of cynicism seem to me to be core parts of the Republican Party, so I have little confidence that we can ever get around either of them. Levin is probably more optimistic on this score than me. But in any case, on the off chance that Republicans actually do adopt a plan like this, one that demonstrates a genuine desire to fairly test whether competition works in the healthcare sector, I'd be on board.

More here on competitive bidding from Austin Frakt, who you should already be reading anyway if you care about healthcare. And yet more here on the basis of all this, the competitive bidding plan proposed by Robert Coulam, Roger Feldman, and Bryan Dowd. It includes a discussion of the massive political difficulties in ever getting this done.

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