The Policy Verdict I

By David Brooks

In Thursday night’s debate, Vice President Joe Biden will almost certainly go after Representative Paul Ryan’s Medicare plan. And why shouldn’t he? It’s unpopular. But I’d like to make a case for that plan. It’s the best thing the Romney-Ryan campaign has going for it.

First, let’s define the problem. Today,Medicare costs about $550 billion. By 2020, according to the Congressional Budget Office, it will cost more than $1 trillion, sucking money away from every other government program.

According to the Urban Institute, the average couple in 2010 had paid $109,000 in Medicare taxes during their working years but would be able to receive about $343,000 in benefits. A chunk of that $234,000 gap will be paid for by their grandkids. That should weigh on the conscience of every American over 55. You’re supposed to help your grandkids, not take from them.

Basically, there are two ways to reduce Medicare inflation, through the political system or through a market system. Obamacare tries the former. The current budget projections are so bad because almost no one outside the employ of the president believes this approach will reduce Medicare costs. Obama’s primary cost-control instrument is an independent board of experts that Mitt Romney mentioned often in last week’s debate. It’s supposed to lower payment levels.

There are problems. It’s hard for a few people in Washington to centrally rejigger something that complex. Second, the board is not really out of political control. Congress has already restricted its power and has devised gimmicky ways to overrule an unpopular decision. (All decisions to restrict benefits are unpopular.)

The history of Medicare is strewed with efforts to control costs by controlling prices. The results are terrible. Providers just increase the number of services, redefine the classification of services or find other ways to get their money back. A study by the Congressional Budget Office found that, between 1997 and 2005, Medicare payments for individual treatments fell by 5 percent, but the total spent on these services skyrocketed by 35 percent. Doctors made up in volume what they lost in reimbursement levels.

The second approach is to replace the fee-for-service system with more normal market incentives. Give recipients a choice among insurance options and have providers compete to offer comprehensive coverage like today’s Medicare.

This idea has been floating around for a while, and it used to be popular in parts of the Democratic Party until the party swung left. Senator John Breaux, a Democrat, co-led a commission that promoted this idea in 1997. Bill Clinton floated a “managed competition” plan for Medicare late in his presidency. Democrat Alice Rivlin and Republican Pete Domenici have co-authored a premium support plan for the Bipartisan Policy Center.

Paul Ryan wrote his own version a few years ago and has come up with a more moderate version with Senator Ron Wyden, a Democrat. Whenever you hear a Democrat say that Romney and Ryan would end Medicare or cost seniors $6,000, that is a misleading reference to the original Ryan plan, not anything on offer today. Today’s Romney plan would not shift costs to seniors.

Would a market-based approach reduce costs? There are some reasons to think so. A study published in the Journal of the American Medical Association found that if Ryan-Wyden had been in place between 2006 and 2009, costs might have come down by around 9 percent with no reduction in benefits. Under a demonstration project in Denver in the 1990s, private plans bid 25 percent to 38 percent less than government-determined payment rates.

The Medicare drug benefit began in 2006 with a voucher approach. Costs have been about 30 percent below early estimates. A RAND Corporation study of consumer-directed high deductible plans found that when families had an incentive to monitor costs, they spent about 14 percent less.

Do these and other studies prove that market-based approaches would work? Absolutely not. In each case, the situation is complicated. Voucher plans may save money, but perhaps by shedding the sickest customers.

There are serious health economists who scoff at market-based strategies. Others just don’t know. The leader of the Congressional Budget Office, Doug Elmendorf, candidly admitted at a Congressional hearing that his agency doesn’t know how behavior would change under this sort of competition.

My bottom line is this: The status quo is cataclysmic. The national debt problem is a Medicare problem. The Democrats’ price-control approach has little chance of working.

The Romney-Ryan approach might work. If it doesn’t, the federal budget would suffer but seniors wouldn’t. Today’s seniors would be left untouched anyway, and tomorrow’s would have the option of private plans or traditional Medicare. At worst, if the market approach flopped, we’d be back to where we started.

If we don’t get Medicare right, there’s no money for anything else. On this particular policy issue, the Republicans have the edge.

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