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Henry Aaron, Inventor Of Paul Ryan's Medicare Reform Concept, Explains Why It's Wrong

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WASHINGTON -- The co-creator of the concept that Rep. Paul Ryan (R-Wis.) is relying upon to reform Medicare no longer thinks it will work. Henry Aaron, now of the Brookings Institution, got the chance to tell Ryan exactly why at a recent Capitol Hill hearing.

Aaron and former Urban Institute president Robert Reischauer came up with the idea of "premium support" in 1995, after the failure of then-First Lady Hillary Clinton's bid to reform the health care system.

The basic idea is simple: let people pick their health insurers in the private market, subsidize the premiums, and competition will drive down costs. That's the theory behind Ryan's plan, recently endorsed by Sen. Ron Wyden (D-Ore.) in a white paper the two wrote.

It differs from Aaron's original vision -- in part because it has fewer protections for beneficiaries -- but the essential concept is the same. Aaron said this isn't the time to test it out.

"In the years since Bob Reischauer and I put this Idea forward, I've changed my mind," Aaron said at a hearing of the House Ways and Means Committee last week.

The big reason is that Aaron has seen no evidence since the two men came up with the idea that their assumptions have been borne out.

A key assumption was that the insurance industry or government would figure out how better to adjust risk among companies so that if one insurer suddenly was saddled with an unusually expensive population, it would share the costs with other insurers or the government. That would keep costs down because it removes some of the incentive to cherry-pick healthier customers or shun sicker ones.

But in the case of Medicare Advantage, similar to premium support in that Medicare pays a private insurer to cover someone, the attempts at risk adjustment have raised costs by about 8 percent, Aaron noted. On top of that, although there are many Medicare Advantage plans in existence, they are not cheaper than traditional Medicare, and there's little to suggest they will get cheaper.

"The evidence to date is not encouraging," Aaron said, noting a recent study that isolated the effects of competition on Medicare Advantage costs from government-related influences. "After controlling for all those factors, Medicare Advantage plans are more expensive than is traditional Medicare."

Aaron has not abandoned the idea of premium support for Medicare, if it can be figured out. He argued that rather than trying to do it right away, as Ryan and other proponents insist, policymakers should first see how it works for younger people -- as it is beginning to be applied in the health care reform law.

"The passage of the Affordable Care Act means we have put in place a key element of the premium support idea for the rest of the population, namely health insurance exchanges," Aaron said. "The Medicare population is vastly more difficult to deal with than the population under the Affordable Care Act. We should prove that the health insurance exchanges work, get them up and running before we take seriously, in my view, calls to put the Medicare population through a similar system."

Aaron also has a major problem with the way Ryan's plan contains costs -- by mandating that Medicare inflation be capped at no more than the growth of the Gross Domestic Product, plus 0.5 percent or 1 percent. Health care costs have escalated much faster than that, so premium support plans capped at a little more than GDP growth would buy smaller and smaller benefits.

Aaron also argued that there's another problem with trying to ensure a premium support model works -- it requires stringent regulation to make sure companies don't game the system. Aaron said he can't see that happening with a Congress fired by anti-regulatory zeal.

"The regulatory climate has changed," Aaron said. "It is far more hostile to the kinds of regulatory intervention that Bob Reischauer and I thought were essential."

Ryan, chairman of the House Budget Committee, did not engage Aaron in debate at last week's hearing, instead relying on one of Aaron's Brookings Institution colleagues, former White House Office of Management and Budget head Alice Rivlin to argue why premium support can work. (She said she believes strict oversight and risk adjustment can be done.) Ryan's office did not answer a request for comment.

Aaron's full testimony is
here. Below, he can bee seen detailing his change of heart.

Michael McAuliff covers politics and Congress for The Huffington Post. Talk to him on Facebook.

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