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The U.S. Needs a Vigorous Medicare Debate

August 28, 2012

By Diana Furchtgott-Roth

For the past two years leading Republican politicians, including vice presidential candidate Paul Ryan, have developed proposals to reform Medicare. As the Republican convention kicks off in Tampa today, Democrats are busy demonizing these proposals.

On Saturday, speaking of Republicans in his weekly radio address, President Obama said, "They want to turn Medicare into a voucher program. That means that instead of being guaranteed Medicare, seniors would get a voucher to buy insurance, but it wouldn’t keep up with costs."

Clearly Mr. Obama has read the wrong document. The word "voucher" does not appear in the Republican plan. And future seniors would continue to have a choice of traditional Medicare. They would just have other choices, too.

Medicare is in trouble. The nonpartisan Congressional Budget Office’s new cost estimates for Medicare, released last week in its new update to its Budget and Economic Outlook, raise projected Medicare spending by $136 billion over the next decade due to lower than expected productivity and higher than expected costs for goods and services.

This is not the first time that Medicare cost estimates have increased. Since it was established more than 40 years ago, projections have gone in one direction: up. No rational person thinks that Medicare cost estimates will not be revised up in the future

Yet the House Republican plan to reform Medicare is routinely vilified. Replacing Medicare with vouchers does not describe Mr. Ryan’s Medicare proposals in the 2013 budget resolution, passed in the 112th Congress by the House of Representatives.

In his 2010 Roadmap for America’s Future, in the 111th Congress, Mr. Ryan proposed replacing Medicare with vouchers. The 2010 proposal is not the same as the 2012 version.

A voucher program gives beneficiaries a set amount of money to use for a particular purpose-education, groceries, health insurance-and to spend for any permitted school, plan, or product they prefer.

The most common use is for the Supplemental Nutritional Assistance Program, formerly known as food stamps, which confers a debit card for certain types of food from any grocery store.

Mr. Ryan’s new plan is known as "premium support." Modeled after the Federal Employees Health Benefits Program, Ryan would let seniors who retire in 2023 and later choose from a variety of government-approved, competing and comprehensive health insurance plans, at different prices with different levels of service, including traditional fee-for-service Medicare

Unlike vouchers, seniors could only pick a pre-approved plan.

The distinction between vouchers and premium support matters because premium support offers more protection for the consumer. With a voucher, consumers can purchase any health insurance plan, and some critics are concerned that insurance companies will take advantage of seniors, or that seniors won’t choose enough protection and will end up imposing costs on taxpayers. With premium support, the government has pre-approved the permitted plans.

A voucher program could potentially offer options that are lower in cost than premium support. Perhaps because of this, vouchers have been criticized for not offering seniors enough funds to purchase a plan that is adequate to meet their needs. With premium support, seniors can be sure that one of the plans will be the actuarial equivalent of today’s Medicare plan, and they are not permitted to purchase a plan with less protection.

Mr. Ryan’s Medicare proposals are presented in the House of Representatives Fiscal Year 2013 Budget Resolution, on the Web site of the House Budget Committee. It can be found here.

The amount of premium support would be determined by the second least-expensive approved plan, or traditional Medicare, whichever is less costly. According to the budget proposal, "Private health plans would be required to cover at least the actuarial equivalent of the benefit package provided by fee-for-service Medicare."

This is similar to the Federal Employee Health Benefits program, which remains popular with government workers, even as health costs have risen over the past two decades. Many federal employees value their ability to keep the health plan during their retirement.

The advantage of premium support plans such as the FEHB is the variety of plans at different prices, ranging from traditional fee-for-service to managed care to health savings accounts combined with insurance for catastrophic care.

With more choice, plans have to compete for customers, and this translates into lower costs than would be the case otherwise. Competition is fierce among government plans during reenrollment season for the federal plan, and Washington D.C.’s citizens are deluged with radio, TV, and bus advertising with pictures of beautiful healthy people promoting different plans.

Medicare Part D, the prescription drug benefit, charges lower premiums than had been forecast because seniors have a choice of plans, and insurers compete for their business. Similarly, but outside of Medicare, prices for Lasik eye surgery and cosmetic surgery have declined steadily. These services are usually not covered by insurance and so patients shop around.

The inescapable problem that requires changes in Medicare is that the current format, basically federal support for fee-for-service medicine, is unsustainable financially. The Congressional Budget Office projects the tab to rise from 3.7 percent of GDP in 2013 to 4.3 percent in 2022, and to 14 percent in 2085. Something needs to be done to constrain the growth of Medicare spending.

Mr. Obama on Saturday said that he has "proposed reforms that will save Medicare money by getting rid of wasteful spending in the health care system."

But the Affordable Care Act transfers $716 billion from Medicare to the new health care plan. This is not saving Medicare. Medicare spending will be subject to decisions of the Independent Payment Advisory Board, a group of 15 unelected bureaucrats who will have the right to disallow devices, treatments, and drugs that they deem ineffective, reducing seniors’ choices.

America needs a thorough, vigorous debate about how to reform Medicare. A meaningful discussion begins with an accurate characterization of competing proposals.

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