The Three Ryan Plans

In the beginning, there was “The Path To Prosperity . . .” (PTP I), Rep. Paul Ryan’s proposed 2012 budget presented in April 2011, which contained the congressman’s controversial approach to US-healthcare reform.   Months of public discussion and private negotiations, and a critical capitulation by Rep. Ryan to a demand by Sen. Ron Wyden, then led to a combined Left-Right proposal:  “Bipartisan Options For The Future” (the Wyden Ryan Plan), presented in December 2012.  Three months later, in March 2012, Rep. Ryan presented a proposed 2013 budget, also entitled “The Path To Prosperity . . . “(PTP II), which was similar to PTP I except that it incorporated the major modification that Sen. Wyden had demanded.

In PTP I, “Medicare as we know it,” meaning the present fee-for-service model, would have continued for people presently enrolled in Medicare and would have become available, for those now 55-and-older, when they reached retirement age, but it would never have become an option for anyone not yet 55; the under-55 crowd, instead of getting to enroll in Medicare, would have gotten to purchase a healthcare-insurance policy from any one of an array of commercial (private-sector, non-governmental) insurance companies through an “insurance exchange,” and would have received a government cash-stipend (“premium support”) which they could apply toward the purchase of such insurance.  The Wyden Ryan Plan, and then PTP II as well, introduce a critical alteration of the PTP I model:  the insurance exchanges would include not only commercial carriers but also the government itself (a re-constituted Medicare), and therein lies the problem.

The problem, with both Wyden Ryan and PTP II, is that there is good reason to expect that Medicare, through its presence in the various exchanges, would undermine, and probably thwart, the fundamental objective of each of the three Ryan plans, which is to create a competitive market for healthcare insurance, which supposedly would lead to greater competition – and lower prices – for healthcare services.

What Is Good About PTP II?

PTP II, though it focuses mainly upon Medicare and healthcare for seniors rather than commercial insurance and healthcare for non-Medicare enrollees, does many good things for healthcare in general.  The best of those is presented in a terse and innocuous fashion:  “Payments to plans would be risk-adjusted and geographically rated.”  In English, this means healthcare-insurance policies would be structured so that the premiums charged to the insured would be free of subsidies and cross-subsidies and financial support and other expressions of social policy; any financial assistance offered by government would be provided separately as a cash stipend (such as “premium support”) rather than being built into the premium structure and other terms of the insurance policy.  The effect is to break down Medicare into an insurance function and a governmental subsidy/financial-support function, and to turn the insurance function over to the insurance exchanges.   This opens up a lot of practical and analytical possibilities.

• The insurance function for Medicare enrollees is turned over to insurance-providers who offer policies through governmentally-managed insurance exchanges, and these providers charge risk-adjusted premiums – e.g., premiums are higher for those who are older or less-healthy, or otherwise present an inferior risk-profile, or live in an area where healthcare costs are higher.  Medicare, on the other hand, becomes primarily a funding agency:  it provides “premium support” for Medicare enrollees in the form of cash subsidies that make it cheaper (if not totally free) for people to buy insurance, with higher levels of premium support to offset the higher premiums charged to those who have inferior risk-profiles (or who live in higher-cost areas) and with a separate calculation of support for those with financial needs. In this way, PTP II does something revolutionary:  it makes the entire system transparent – it reveals the true cost of insurance on an un-subsidized, actuarially-sound basis, and thus it also shows us exactly who is being subsidized, and by how much.  It does not prevent us from being generous in assisting those who, because of factors within or beyond their control, are more expensive to insure and care for, but our generosity becomes visible, and thus conscious and voluntary.   In that context, it opens the way for Medicaid, too, to function and be seen as merely a funding agency – representing an outsourcing to the states of a portion of the premium-support function of a re-constituted Medicare.
• By capping the annual growth in premium support, PTP II gets the government off the hook in the event that the growth in healthcare and insurance costs is greater than the capped-growth in premium support – the financial burden of covering any shortfall lies with the citizens, not the government.  If healthcare costs go up too much or too fast, the public gets a clear look at the nature and size of the problem on a regular basis, in which event the government might be pressured to reconsider the question of just exactly how generous it wants to be in footing the bill for continuing subsidies toward the old, the sick, the poor, and the residents of high-cost areas.
• Perhaps inadvertently, PTP II puts into bold relief the fact that there are dozens of scarcely-visible federal, state, and private-sector subsidies throughout our healthcare system, and most are so well-disguised that the public is scarcely aware of them.  For example, there are subsidies of the old by the young, the sick by the well, the men by the women, the poor by the not-poor.  There is the 2.9% un-capped Medicare tax, which has a $250,000 per year “rich person” paying five times as much into the funding of Medicare as a $50,000 per year non-rich person, even though the two get only the same level of healthcare services for their money.  There is the poor person’s free medical clinic:  the Emergency Room.  There is the drive for the biggest subsidy of all:  compelling carriers to ignore pre-existing conditions.  But PTP II enables us to confront the issue:  Do we want to further degrade our currency by annually borrowing or printing another trillion dollars of deficit-coverage in order to continue paying the same levels of premium-support and other direct or indirect healthcare-subsidies to some, but not all, of our citizens?

Political questions emerge:  Are we sufficiently confident that PTP II would significantly slow the runaway growth in the costs of healthcare, that we are willing to accept PTP II’s cap on Medicare’s built-in subsidies of the poor/old/sick/wrong-neighborhood citizens and let the government off the hook for any shortfall?  Are we willing to reform our healthcare system so radically without a high level of confidence that the reforms will work?

Would PT I Have Been Better Than PT II?

The essence of the case against Medicare is that it has compelled healthcare providers to charge less and less for individual services, and that providers have developed an effective and profitable work-around by performing more and more of those lower-priced services, so that the net effect is that overall healthcare-costs are way more than they would have been if services and charges had been negotiated in a competitive market.  (Sometimes these practices are rationalized – or criticized – as “defensive medicine;” sometimes no excuse is offered.)  Under PTP I, a plausible case could have been made that breaking-up traditional Medicare, and replacing it with healthcare insurance provided by commercial carriers whose customers get government money (“premium support”) to help them pay the premiums, would cause enough competition in the insurance market to lead to significant reductions in the rate of increase in the pricing of healthcare services.  The theory is that the government (Medicare), as the biggest “purchaser” of healthcare services (because Medicare approves treatments and negotiates providers’ charges and writes the check directly to the doctor or hospital), has been able – and willing – to exercise virtually total control over the authorizing and pricing of healthcare services in the US, and that the government does a lousy job at it.  The promise of PTP I was that the commercial carriers who participate in the insurance exchanges, having replaced Medicare as the nominal buyer of the healthcare services and the de facto negotiator with the service-providers, would have enough leverage to negotiate better prices and terms with the providers than Medicare did and would be incented to exercise that leverage, because lower charges by the service-providers would allow the commercial carriers to offer lower premiums to the public as a way of competing more effectively against each other.

Would PTP II, With Medicare Admitted To The Insurance Exchanges, Be As Effective As PTP I Would Have Been?

PT II allows Medicare to join each of the exchanges as a competing member, offering old-style fee-for-service Medicare rather than employing the structure of the commercial carriers it would be competing against.  The problem with PTP II is that once Medicare is a member of the exchanges, all bets are off, as to how effectively the other exchange-members would succeed in holding down the growth in the cost of healthcare.  Here are some of the possible problems:

• Medicare gets another 10 years to continue to function in its present version – because everyone 55 and older (not just 65 and older) has the option to obtain (or keep) keep the present version of Medicare (“Old Medicare”).  Old people are the biggest consumers of healthcare services and insurance, and 10 years represent a lot of time for Old Medicare to continue to be the biggest health insurance provider in the US, meaning a lot of time for it to continue to exercise its enormous bargaining leverage in the same old counter-productive way, authorizing and pricing services in ways that cause healthcare costs to skyrocket and doing other unfortunate things, like causing GPs and internists to continue their revolt against  treating patients who enroll in Old Medicare.   Even if a commercial carrier on an exchange were to offer a policy that was the actuarial equivalent of the policy offered by the new version of Medicare (“New Medicare”), how many old folks are likely to drop what most regard as a sure thing (Medicare, Old or New) in order to switch to a private policy that appeared to offer a better deal?  It might take years for consumer confidence to build up to that point.
• Even if some of the commercial carriers offered terrific initial deals, based upon internal projections of success in low-balling the healthcare providers, how long would they last, if the planned savings did not materialize?  (It would be helpful to the commercial carriers if Medicare were required by law to take back ((at the same rates and terms as though the enrollee had never left)) any enrollee who switched to a commercial carrier and later became dissatisfied, though that is not mentioned in PTP II; more people might give the commercial carriers a try, if there were a painless way of going back to Medicare if things did not work out.)
• How realistic is it to assume that the commercial carriers would be more effective at negotiating with the providers than Old Medicare has been?  Where is it written that New Medicare could not temporarily low-ball its own current and prospective customers, and continue to operate in the ineffective style of Old Medicare, long enough to drive all the other exchange members out of the business?  Why should a commercial carrier work like the dickens to drive healthcare costs down, only to see New Medicare piggyback the carrier’s successful practices by low-balling  on premiums and terms?  How on earth, short of absolute exclusion of the government from the exchanges, can you create enough potential upside to entice a commercial carrier to gear up to commit to the new model, knowing that the government always has the resources and authority to drive you out?  Various commentators have talked about the concept of “leveling the playing field” between the government and the commercial carriers in the exchanges, but, easier said than done; that concept seems pretty far-fetched (and short on details).  Theoretically, the commercial carriers want to drive the providers’ prices down, but if the government can always come in and match the carriers’ best prices (and has the financial backing with which to outlast any competitor in a prolonged price-war), why would the carriers even bother to take on the government in the first place?  Even if they initially took on the government, how long would they last – especially, in view of Old Medicare’s having a 10-year grace period in which its misguided model would continue to be the dominant pricing model in the healthcare-services marketplace?  Once Medicare was admitted to the insurance exchanges, would Congress resist the temptation to periodically tinker and make the playing field less level?
• Premium support cannot, in and of itself, bring competition to the market for healthcare services; at best, it can only bring competition to the market for insurance, not the market for services.  If the government is allowed to compete in the market for insurance, the only way to keep the feds from metastasizing and dominating that market is to write a set of rules so strict that, for all practical purposes, they would not really be a participant at all.

Is There A Better Solution?

The best way to permanently level the playing field with the government is to keep it off the field in the first place.   The correct solution would be a slimmed-down version of PTP II – with Medicare relegated to a mop-up role for over-55s and current enrollees who are not attracted to the new system, and with Medicare forbidden (as in PTP I) to participate in the insurance exchanges.  For that matter, and with  regard to citizens of all ages, if Medicare were kept out of the insurance business (except for any over-55s who chose to keep Old Medicare), there would be no need for the exchanges at all.

To accomplish the preferred solution, the following rules would be needed:

• The true-insurance function of the commercial carriers would be separated from the premium-support function of the government – the carriers would be required to determine the premiums on their policies solely and completely on the basis of actuarial principles (“risk-adjusted and geographically rated”) – i.e., the cheapest premiums go to those with the best risk-profiles (young, female, healthy, living outside the higher-cost areas, etc.) on a totally discriminatory (yes, discriminatory), actuarially-correct basis.  No more indirect subsidies, such as ignoring pre-existing conditions, and no more group policies.   Just as with life insurance, all policies would be individual policies.
• The rule would be, you can always buy a policy, but, as with life insurance, the longer you wait, the more it costs and the greater your risk of experiencing a serious event or condition that would raise the cost of a new insurance policy to where it could destroy your savings and make you dependent upon the government for “premium support.”  This would essentially eliminate the problem of people going uninsured until they are injured or sick, and then buying a policy on the way to the hospital and paying no penalty for their suddenly-pre-existing condition.
• The only substantive role of government (including Medicaid, at the state level) would be to implement social policy by doling-out premium support and other subsidies to the needy and those with inferior risk-profiles.
• Healthcare services providers would be permitted to require of any applicant for healthcare services, as a condition of the applicant’s receiving the requested services, that the applicant provide: (a) pre-payment for the services, or other financial provisions reasonably sufficient to ensure full payment of the requested services; or (b) proof that the applicant already owns, or has made satisfactory arrangements to obtain, adequate healthcare insurance.  Emergency Room facilities, in particular, could deny services to any patient who lacked sufficient financial and/or insurance resources and who refused to sign up for a purchase of healthcare insurance on forms provided by the Emergency Room.  In other words, no citizen would ever be subject to a mandate (such as the notorious “Individual Mandate” under ObamaCare or RomneyCare)  to purchase a healthcare insurance policy, but any healthcare services provider could require the patient to either pay cash or sign up to purchase healthcare insurance and could refuse to perform healthcare services until the patient complied.
• The government would monitor the commercial carriers to verify that all healthcare-insurance policies are properly discriminatory as to premiums and other terms – i.e., based entirely upon Risk-Profile-Ratings (RPRs) of the insured as determined on the basis of generally accepted actuarial principles – and contain no financial or other terms that would represent any kinds of cross-subsidies by holders of better RPRs or any financial assistance to those with lower RPRs or greater financial need.  (Financial assistance would be provided by government, not by the commercial carriers.)
• To enable it to perform its role of providing financial assistance, the government would monitor Financial-Risk Profiles of all persons who seek premium support, and would offer such support based upon budgetary limits and guidelines provided, and annually updated, by Congress.
• It would also be helpful to follow the PTP II recommendations for tort reform and the removal of the bans on interstate offerings of insurance.   The tax reform suggested by PTP II would be unnecessary, as there would be no further employer-sponsored policies (or any other types of group policies, for that matter) if each individual policy had to be priced on the basis of the risk profile of the insured and the benefits (for some) of the inherent cross-subsidies of all group policies were thereby eliminated.   Non-portability of employer plans would no longer be an issue.
• All existing  federal laws and regulations regarding Medicare or healthcare insurance (including the Patient Protection and Affordable Care Act) would be repealed and superseded by these reforms (except for the wind-down of Old Medicare), and state laws inconsistent with the reforms would be pre-empted.

In such a model, there would be true competition for healthcare services as well as for healthcare insurance, and Medicare’s ability to distort and undermine the market for healthcare and insurance would be wound down.   Ideally, the wind-down would be quick enough to eliminate Medicare’s domination of healthcare before people had time to become disillusioned with the reforms, which might require that the minimum age for one’s being allowed to keep Old Medicare be raised from age 55 to, say, age 60.

In all events, the key to successful reform is the speedy elimination of Medicare’s domination of the American healthcare system and the conversion of healthcare insurance into true, actuarially-based insurance, with all financial support coming in the transparent form of direct assistance from the government rather than being built-into the terms of the insurance itself.   PTP I was a good, though incomplete, step toward successful reform; Wyden Ryan and PTP II, while preferable to ObamaCare, are inferior to PTP because they are likely to fail and thus are not worth the effort (and the necessary concessions) of trying to assemble a bi-partisan coalition of support prior to the November elections.