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Richard Kirsch

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The Last Thing Medicare Needs Is More Privatization

Posted: 12/20/11 02:43 PM ET

Americans United for Change said it best in a recent e-mail: "You can't put lipstick on a pig," even if a Republican and Democrat are applying the red gloss together. The big hype in federal health care politics last week was the announcement of a joint proposal to mostly-privatize Medicare from Republican House Budget Committee Chair Paul Ryan and Democratic Senator Ron Wyden. But all the hubbub about bipartisanship won't mask the truth: the plan takes Medicare in the wrong direction, building on the program's failures and undercutting its most promising reforms.

The Ryan-Wyden plan is the latest variation on plans, known as "premium support," that dramatically increase the role private insurers play in providing Medicare coverage. The ostensible motivation for the premium support proposals is to control Medicare costs, but all the evidence is that Medicare delivered by private insurance is more costly than traditional Medicare delivered by the government. The real motivation is to control the government's costs, as opposed to health care costs, and to reduce the role of government in the health care system.

The Ryan-Wyden plan would give Medicare enrollees a fixed amount of money to buy an insurance policy from private insurance plans or the traditional Medicare program. It would limit the growth of the premiums to the grown rate of GDP plus 1 percent, less than the traditional growth rate of Medicare and much less than the growth of overall medical costs. Yes, that's right: Medicare does a better job of controlling health care costs than private insurance.

Health care costs have increased at a significantly lower rate under Medicare than in private insurance plans, chiefly because Medicare is much better able to limit how much it pays to doctors and hospitals. The private insurance plans that now cover about one out of five Medicare patients do so at a cost that is 13 percent greater than Medicare pays for the same benefits (cost overruns that are being significantly reduced by the Affordable Care Act). Insurers reap substantial profits from these private Medicare plans, profits that would soar if most of the Medicare population were handed over to the health insurance industry. And because private insurance has failed to rein in doctor and hospital costs as effectively as Medicare, health care providers would be enriched too.

Capping the premiums would not result in lower health care costs, but in shifting costs to people on Medicare, which would result in seniors forgoing the care they need, ending up in the hospital with more serious illnesses, and dying sooner.

The lipstick on the Ryan-Wyden plan is giving people the option of keeping traditional Medicare. But what we've learned after two decades of private insurance being offered in Medicare is that the insurance companies are very clever at cherry-picking healthier seniors. And the "risk-adjustment" provisions aimed at correcting for this -- paying lower premiums to plans with healthier patients -- have not worked to compensate for insurance company gaming. Under the Ryan-Wyden plan, traditional Medicare, which offers access to hospitals and doctors without the closed panels, pre-approval process, and other obstacles consumers must jump in private insurance, would attract those seniors who are sicker and more expensive. Over time, the burden of serving the seniors who need the most health care would threaten to undermine the public Medicare program.

Controlling health care costs in Medicare -- and in society more broadly -- requires three major strategies. One is not overpaying health care providers, which we continue to do in this country. As Uwe Reinhardt and three other health economists put it succinctly, after comparing the prices we pay and the amount of health care we use in the United States with other developed countries, "It's the prices, stupid."

The reason that Medicare costs less than private insurance is that it already does a better job of limiting what it pays to providers. It would gain new powers to do that under the Affordable Care Act (ACA). The ACA established a new body called the Independent Payment Advisory Board (IPAB), which will function as a kind of military base closing commission for Medicare. If the growth in Medicare costs exceeds the same target amount as in the Ryan-Wyden plan, then it would institute cost control measures that would go into effect unless Congress intervened. Since cutting eligibility and benefits are not part of the IPAB mandate, cost savings would have to come from the actual drivers of cost: the prices paid for services and the way health care services are delivered.

Which brings us to the second major strategy is reorganizing health care delivery: focus on quality, not quantity. In addition to increasing the authority of the IPAB, the ACA invests in new health care delivery systems, called Accountable Care Organizations, which are modeled after the health care systems in the United States that do the best job of providing quality care at a lower cost.

The third major strategy to control overall health care costs inside the health care system is to provide health care to all, including access to affordable prevention and primary care. That, of course, is the thrust of the major provisions of the ACA, which when implemented in 2014 will provide access to basic health coverage, including free prevention, at a price that is affordable to almost all Americans. This year, under the ACA, Medicare started providing free preventive care; millions of beneficiaries have already taken advantage of it.

If there is any place where the idea that free markets are always the most efficient runs into a insurmountable wall of facts it is health care. The overwhelming evidence both within the United States and around the world is that free market health care costs more and reduces access to care. That may not stop anti-government ideologues in the United States, backed by the medical insurance industry, from pushing for privatization of Medicare. But finding a Democrat willing to go along doesn't make that pig any prettier.

Cross-posted from New Deal 2.0.