The Problems with Rivlin-Ryan

By James Kwak
Uwe Reinhardt has a post about the Rivlin-Ryan Medicare Plan, which would convert Medicare into a voucher program for people currently under 55 and also fix the growth rate of the value of the vouchers at GDP growth plus one percentage point. The issue Reinhardt focuses on, and which I also blogged about a while back, is that health care costs have been climbing considerably faster than that, so over time the value of the vouchers will fall relative to real health care costs.
But another problem is that, at least according to the CBO’s summary, the Rivlin-Ryan plan doesn’t say anything about how elderly people will buy insurance. Today, the cost of Medicare is reduced by the program’s bargaining power with providers. which means the total amount spent by Medicare is less than the total amount that would be spent by all Medicare beneficiaries if they had to buy insurance on the individual market. A voucher system would push them into the individual market, which means that the amount they would have to spend would go up dramatically.
Now, it’s possible that the Rivlin-Ryan plan takes the Obama health care reform and its reforms to the individual market (including a prohibition on medical underwriting and the creation of exchanges for buying insurance) as a starting point. But that would be interesting, since Paul Ryan voted to repeal the Obama health care reform.
The Rivlin-Ryan proposal leaves the payroll tax unchanged, so it doesn’t change the amount people are forced to spend on health insurance up front. If you don’t like the idea of forced saving, Rivlin-Ryan doesn’t do anything for you.
It does two main things. First, it reduces the dollar value of the benefits people get, which is unequivocally bad for beneficiaries. That is, for every dollar by which it reduces the deficit, it takes one dollar out of someone’s pocket. In this sense, it’s exactly the same as a tax increase – in this case, a tax increase levied on the elderly.
Second, it gives people more choice over how they spend their benefits. It’s theoretically possible that this could compensate for the fact that those benefits are now lower. It’s theoretically possible for two reasons. One is that people can now buy the plan that they want, instead of the one-size-fits-all Medicare plan. But that’s not much of an advantage here, since if you’re sick you’ll want to buy at least what Medicare provides already, and if you’re healthy you can’t buy a really cheap plan and cash in the unused part of your voucher. The other reason is that, theoretically, the operation of the free market could lead to general efficiencies in the system. In practice, however, we’re talking about the market for health insurance, which is already terribly inefficient and, as Reinhardt shows anecdotally, has been completely unable to keep the cost of healthcare in check. So while government provision of services introduces inefficiencies, you have to compare those inefficiencies to the ones in the private sector — you can’t hypothesize a private sector that always produces optimal results.