So the Republicans have a deficit reduction and a health care plan, all wrapped into one, the “Roadmap for America’s Future.” It’s being pushed by Paul Ryan, in part because he’s the ranking member of the House Budget Committee, in part because he’s good-looking and articulate, in part to provide the party plausible deniability if it flops (like Bobby Jindal a year ago). The CBO says that it will balance the budget and even eliminate the national debt by 2080. Ezra Klein and Matt Yglesias have commented on it. Klein says, “I wouldn’t balance the budget in anything like the way Ryan proposes. His solution works by making care less affordable for seniors. . . . But his proposal is among the few I’ve seen that’s willing to propose solutions in proportion to the problem.” Yglesias says “it’s totally unworkable.” But they’re both being much too kind.
Ryan realizes that “the deficit problem is a health-care problem,” which he agreed to in an interview with Klein. That’s good. He realizes that to solve the deficit you have to do something about Medicare. That’s good. He also puts forward a logically coherent conservative position. That’s good in itself and especially refreshing after the Bush era (and the unfunded Medicare prescription drug benefit) and all the recent posturing of the Republicans as defenders of Medicare (Mitch McConnell: “Cutting Medicare is not what Americans want.“) Ryan’s plan is basically to cut Medicare like never imagined before.
But everything else about the plan is such an unmitigated disaster I’m going to devote a whole paragraph at some point to thinking about how to label this plan. It will be a long time before we get there, though, broken into a couple of blog posts, because there are so many problems to go over.
This is the key picture, from the CBO opinion letter, which Klein also focused on:
The dark blue solid line is the current projection for Medicare. The dark blue dashed line is Medicare spending under the Roadmap. How does he do it? This will require a bit of context.
The problem with Medicare isn’t that Medicare is particularly generous (with its 20% copays, Medicare is worse than many of the PPOs working people get through their employers), or that it’s getting more generous. The problem is that per-person health care costs are growing faster than government revenues, and to a lesser extent that the ratio of beneficiaries to workers is going up in the medium term. The Obama administration’s approach to the Medicare problem is to try to reduce the growth of health care spending–“Cadillac tax,” Independent Medicare Advisory Commission, experiments in pay-for-performance, cost effectiveness research, etc.–so that cost growth can be reduced while preserving the basic existing level of insurance. A reasonable argument against this plan is that we can’t be sure that the cost reduction measures will work, so the government still bears the risk that the deficit will continue to grow. Fair point, but Peter Orszag would respond that they are trying almost everything that any sensible health economist has proposed.
The Roadmap takes the opposite approach: it puts all the risk of rising health care costs on beneficiaries. In concept, it takes the current amount that the government spends on Medicare and turns that into vouchers that are distributed to individual beneficiaries, who are then free to buy whatever health insurance they can in the free market.
The vouchers are designed to grow slower than equivalent insurance would cost
The trick is that the vouchers are indexed to “a blended rate of the CPI and the medical care component of the CPI.” The plan is to have vouchers grow slower than health care cost inflation. According to the CBO (p. 21), vouchers would grow at an annual rate of 2.7% over the next seventy-five years, while Medicare spending would otherwise grow at an annual rate of 5.0%. (Those are actually nominal numbers; see page 10). This means that over about twenty-eight years, vouchers will double while the value of current Medicare would have quadrupled.
Let’s use some real numbers. When the plan kicks in in 2021, vouchers will average $11,000 per beneficiary (in 2010 dollars). (65-year-olds will only get $5,900 vouchers; $11,000 is the average across the Medicare population. More on that later.) According to the Census, 2008 median household income for households (where the householder is) over sixty-five was about $30,000. Assume median household income grows at about 1% per year (in real terms). By 2021, when the shift starts, median income will be $34,000 and an average two-person household will get $22,000 in vouchers. Assume (and this is a huge assumption, on which more later) that the average household will be able to buy a policy as good as Medicare for $22,000.
By 2049, median income will be $50,000; the vouchers (growing at 0.7% in real terms, after subtracting 2 percentage points for inflation) will be $29,000; and health insurance premiums (for equivalent coverage, assuming 3.0% annual growth) will be $72,000. So after buying Medicare-equivalent coverage, the household will be left with $7,000 for all other expenses. Under current law, by contrast, the household would have $50,000 for all other expenses (since current Medicare is picked up by the government).
What will happen? People won’t be able to afford coverage as good as Medicare is today. People will die.
The vouchers start out too small for equivalent coverage
Now, there is already one huge assumption built into the above: that, in 2021, $22,000 in vouchers will buy you a family policy as good as Medicare would be. This assumption is patently false. Remember that 65-year-olds will start out with $5,900 vouchers, so a household of two would get $11,800 in vouchers. The average family plan bought through an employer today costs about $13,000, and does not include anyone over the age of sixty-five (meaning that equivalent insurance for older people would cost more if there were a market for it). Furthermore, the $5,900 number is being set today, and will grow from now until 2021 according to the Roadmap formula (average of the CPI and the CPI-M for medical costs)–which means it will be growing slower than health care inflation. So even before the shift begins in 2021, seniors will already be deep in the hole; even in 2021, the vouchers will not be able to buy equivalent coverage to Medicare. (On top of this, insurance will be provided by private insurers with higher administrative costs and less buying power than Medicare, meaning that beneficiaries will get even less bang for their buck.)
People get dumped into the individual market with no protection from medical underwriting
OK, what else is wrong here? For one thing, it dumps all seniors into the individual market. The Roadmap creates state-based insurance exchanges (like the Senate bill), which helps a bit. But it doesn’t address the core problem: the ability of insurers to charge more to people who are sicker, even though it tries to make you think it does:
“Guaranteed Access to Care. The Exchange will require all participating insurers to offer coverage to any individual regardless of the patient’s age or health history.
“Affordable Premium. Under the status quo, plans offering coverage to individuals often charge exorbitant premiums. This proposal solves the problem through independent risk-adjustment among insurance companies. A non-profit, independent board will penalize insurance companies that cherry-pick healthy patients while rewarding companies that seek patients with pre-existing conditions. This solution will ensure health insurers compete based on superior products and price.”
Do you see anything in there saying that insurers can’t set prices based on medical status? Risk adjustment is a valuable tool–if you eliminate medical underwriting in the first place. In that case, insurers “compete” by cherry-picking the healthy people. But if they can price based on medical status, they’ll just charge you whatever they think you will cost them in claims. If you need $60,000 of chemotherapy and they charge you $70,000 for your insurance policy, they get to keep all that money under risk adjustment, because you really are riskier. And chances are you can’t afford a $70,000 insurance policy.
And here’s the entire section on “Protection for Those Who Need It Most”:
“Uninsured individuals with pre-existing health conditions have the most difficult time finding and affording health care coverage. As a result, many individuals with pre-existing conditions often face bankruptcy to pay for health care expenses or, worse, go without treatment. If these individuals are fortunate enough to have group health insurance, their high costs are spread among their coworkers and employers in the form of ever-higher premiums, making coverage expensive for all.
“Ensuring that “high-risk” individuals – those with the greatest medical costs – can obtain high-quality coverage is critical to the success of any plan to reform health care. High-risk individuals face an insurmountable burden in medical expenses themselves, and that burden is often transferred to taxpayers in the form of uncompensated care expenses from hospitals, or the placement of these individuals in Medicaid after having exhausted their financial resources paying for their medical costs.”
Do you see a proposal in there?
The only real backstop for sick people is this:
“Establishing High-Risk Pools. State health insurance high-risk pools will offer affordable coverage to individuals who would otherwise be denied coverage due to pre-existing medical conditions, making coverage affordable for those currently deemed ‘uninsurable.’ States may offer direct assistance with health insurance premiums and/or cost-sharing for low-income and/or high-cost families.”
This is like high-risk auto insurance pools: if you are such a bad driver that no insurer wants you, the state will give you insurance. This is better than nothing, but it’s a lousy solution. People end up in high risk pools because the actuarially fair cost of their insurance exceeds their ability to pay; if they could pay it, the free market could serve them. That means that the state ends up taking a loss on them. So the Roadmap’s solution for sick people is to dump them onto the states–who can decide if they want to let them live (which costs money from state budgets) or die.
The subsidies are insignificant
To recap so far: Median seniors won’t be able to buy Medicare-equivalent coverage when the shift begins. With every decade that passes, the problem gets much worse. Poor people are stuck in the individual market, which will dump them into state high-risk pools. People will die–unless the states step in to fill the gap, which basically means shifting the Medicare cost problem from the federal government onto the states.
The Roadmap does have some help for poor people. People below the poverty line can get about $6,000 in a subsidy to cover out-of-pocket expenses through a medical savings account. People up to 150% of the poverty line get 75% of that subsidy. The problem is that the poverty line for a two-person household with the householder over 65 is $13,030, and 150% of that is $19,545. (By contrast, the Senate bill provides some amount of subsidy to families up to 400% of the poverty line.) But even if this threshold were raised, the subsidies are insignificant compared to the gaps that open up by 2049.
In short, the Roadmap balances the budget by slashing medical benefits to seniors far, far below where they are according to existing law. So far that most seniors will have to use up virtually all their income if they want to buy Medicare-equivalent coverage. People will die. Unless, that is, health care costs can be brought down just as fast, which I’ll address in my next post.
By James Kwak