The Ryan Medicare plan: A critical look

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(MoneyWatch) COMMENTARY By now, most people have heard about Rep. Paul Ryan's plan to convert Medicare into a "voucher" program for citizens currently under age 55. A draft of the Republican platform at the party's national convention in Tampa, Fla., recommends adopting some form of the Wisconsin lawmaker's proposals, and Ryan mentioned it again in his Wednesday night speech at the event. 

Under Ryan's plan, people who are now age 55 and older would continue to buy traditional Medicare insurance. Those who didn't meet the age threshold would be given "premium support" from the government when they attain the retirement eligibility age. They would then be free to buy their own insurance coverage from for-profit insurance companies. They would pay any difference between the voucher amount and premiums charged by insurance companies out of their own pocket.

Ryan's original proposal called for capping annual increases in the premium support amount to no more than half a percent higher than the growth in the overall economy. As a result, if medical premium costs continued to rise much faster than the overall economy, seniors would need to kick in more of their own money to pay for medical insurance. To counter criticism that over time the value of the voucher support would be eroded and would hurt lower- and middle-income seniors, Ryan modified his proposal to allow for increases in the premium support amount that would track increases in total premium costs.

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Let's examine this program through the lens of my recent post, where I described six different levers that any sponsor of medical insurance programs can pull to manage medical insurance plan costs. To summarize, these levers are:

1. Restricting eligibility by raising the retirement age
2. Making participants pay more by increasing premiums, copayments or deductibles.
3. Reducing demand for medical care by improving the health of participants by encouraging preventive care (with no deductible or copayment on these services)
4. Paying less to hospitals, physicians and other medical providers by reducing reimbursement rates
5. Providing incentives to medical providers to improve efficiency
6. Reducing or eliminating unnecessary costs by restricting malpractice awards, reducing fraud and encouraging the use of electronic records

Ryan would try to save costs by pulling the first lever: The retirement age would gradually increase from age 65 to age 67 to match the full retirement age under Social Security.

But the heart of his proposal is to turn free enterprise loose to pull all the other levers, while limiting government involvement in Medicare. In theory, insurance companies would compete by offering plans with different premium amounts, deductibles and copayments. Proponents of the plan also say that insurers would design clever ways to induce Medicare participants to improve their health and negotiate rates with health care providers, favoring the most efficient ones. Insurance companies also would reduce waste and fraud and would encourage more efficient delivery of medical care, the thinking goes.

Also in theory, people would make informed, economically smart choices among a variety of distinct medical plans. The invisible hand of capitalism would then reward innovative medical insurance providers and punish inefficient providers that don't meet Americans' needs.

I call the Ryan plan "faith-based" because it operates on the faith that there will be real competition among insurance companies and on the faith that consumers will make informed choices about their medical plan. But based on what I know about insurance companies and consumers, this is a gigantic leap of faith on Ryan's part.

In most geographic areas, there are only handful of insurance companies that offer medical insurance plans. There isn't the kind of intense market competition that relentlessly drives down costs and rewards innovation.

And can consumers really make informed decisions about something as complicated as medical insurance? If consumers are so wise when it comes to key spending decisions, then how do you explain the popularity of, say, McMansions just before the housing crash, hedge funds and gas-guzzling Hummers and SUVs? How do you explain why most people elect Social Security benefits to start at less-than-optimal ages? How do you explain why many people mismanage their 401(k) investments and retirement savings, and panic during market downturns?

And what happens to these consumers when they reach age 85 or 90? Will they still be able to make smart and informed choices on medical plan coverage? When I think about older relatives that I know, I'm not so sure they will.

Medical costs are driven by a number of complex factors. As a nation, our collective poor health is due to obesity, smoking, drug and alcohol abuse, and other self-inflicted behaviors that raise medical costs. Expensive malpractice awards are granted when mistakes are made, a phenomenon that incents physicians to order extensive and often unnecessary tests. We rely on prescription drugs and other expensive technology to overcome our unhealthy lifestyles and keep us alive. Did you know that about one-quarter of Medicare's outlays are for the last year of life? This dynamic is driven by the widely held cultural belief that death represents a medical failure and is to be avoided or postponed at all costs.

When you think about it, somebody has to tell us that we need to lose weight, eat more nutritious foods, stop smoking and abusing alcohol, and eliminate other unhealthy habits. Somebody has to tell us that we won't become millionaires just because a well-meaning hospital or doctor made what an aggressive lawyer might paint as a mistake, or occasionally even a real medical error. Somebody has to tell us that there's a limit to the amount of care that's reasonable to prolong life.

Do you want these critical decisions to be made by representatives of an elected government, by our employer (as is currently the case for most citizens), or by for-profit, publicly traded insurance companies? Remember that with the latter, executives' first priority is to their shareholders, not to their customers. A few years ago many commentators criticized the use of medical review boards as "pulling the plug on Granny," which was a sad example of fear-mongering. If you're really worried about Granny, do you want executives who earn millions of dollars on stock options making decisions that affect our lives?

And if you really want free enterprise with insurance products, are you ready for medical plans that offer reduced premiums for people who keep their weight, blood pressure and cholesterol levels at healthy levels? Are we ready to pay doctors to keep us healthy, instead of paying them by the procedure when we're unhealthy? Are we ready to charge higher premiums for smokers?

I'm not a communist or a socialist, a conclusion you might jump to by reading this post. I fully believe in capitalism and free enterprise to efficiently deliver most goods and services. I'm just not convinced that free enterprise is the answer for delivering all goods and services, including medical care. It's a leap of faith to assume that capitalism is the answer to all of society's problems.

Most of my posts deliver practical guidance on retirement planning issues. And I've often said that an important part of retirement planning is to keep abreast of proposed changes to important government programs such as Social Security and Medicare. But I'm scared by the proposals I see coming down the road with regard to Medicare and with other general trends in health care.

Still, I'm not just going to sit and worry; instead, I'm channeling this fear into motivation to do anything within my power to keep my weight at healthy levels, eat better, get plenty of exercise, schedule regular checkups, get sufficient sleep, manage my stress, and learn everything I can about the smart choices I need to make when it comes to medical care. I encourage you to do the same.

  • Steve Vernon On Twitter»

    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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