We Must End Medicare 'As We Know It'

Saul Loeb / AFP-Getty Images

Almost everyone agrees that America's health-care system has the incentives all wrong. Under the fee-for-service system, doctors and hospitals get paid for doing more, even if added tests, operations and procedures have little chance of improving patients' health. So what happens when someone proposes that we alter the incentives to reward better care, not more care? Well, Rep. Paul Ryan and Republicans found out. No surprise: Democrats slammed them for "ending Medicare as we know it."

This predictably partisan reaction — preying upon the anxieties of retirees — must depress anyone who cares about the country's future. It is only a slight exaggeration to say that unless we end Medicare "as we know it," America "as we know it" will end. Spiraling health spending is the crux of our federal budget problem. In 1965 — the year Congress created Medicare and Medicaid — health spending was 2.6 percent of the budget. In 2010, it was 26.5 percent. The Obama administration estimates it will be 30.3 percent in 2016. By contrast, defense spending is about 20 percent; scientific research and development is 4 percent.

Uncontrolled health spending isn't simply crowding out other government programs; it's also dampening overall living standards. Health economists Michael Chernew, Richard Hirth and David Cutler recently reported that higher health costs consumed 35.7 percent of the increase in per capita income from 1999 to 2007. They also project, that under reasonable assumptions, it could absorb half or more of the gain between now and 2083.

Ryan proposes to change that. Beginning in 2022, new (not existing) Medicare beneficiaries would receive a voucher, valued initially at about $8,000. The theory is simple. Suddenly empowered, Medicare beneficiaries would shop for lowest-cost, highest-quality insurance plans providing a required package of benefits. The health-care delivery system would be forced to restructure by reducing costs and improving quality. Doctors, hospitals and clinics would form networks; there would be more "coordination" of care, helped by more investment in information technology; better use of deductibles and co-payments would reduce unnecessary trips to doctors' offices or clinics.

It's shock therapy. Would it work? No one knows, but two things are clear.

First, as Medicare goes, so goes the entire health-care system. Medicare is the nation's largest insurance program, with 48 million recipients and spending last year of $520 billion. About 75 percent of beneficiaries have fee-for-service coverage. If Medicare remains largely fee-for-service, the rest of the system will, too.

Second, few doubt that today's health-care system has much waste: medical care that does no good; high overhead costs. In a paper, Cutler documented some evidence. In one survey, 20 percent of patients reported that doctors repeated tests because records were unavailable; the health-care sector has twice as many clerical workers as nurses and nine times as many as doctors; care of patients with chronic conditions is often slapdash, so that, for example, only 43 percent of diabetics receive recommended treatment.

Fee-for-service is open-ended reimbursement; the government's main tool to control Medicare's costs is to hold down reimbursement rates. Doctors and hospitals respond by ordering more services to offset the rate limits. For all its flaws, say Ryan's critics, this system beats his. Indeed, the Congressional Budget Office has estimated that in 2022, Ryan's plan would be more than a third costlier than the status quo, because Medicare's size makes it more effective at restraining reimbursement rates.

If the CBO is correct, Ryan's plan fails; beneficiaries' out-of-pocket costs would roughly double to cover the added expense. But the CBO may be wrong. When a voucher system was adopted for Medicare's new drug benefit, the CBO overestimated its costs by a third; the Centers for Medicare and Medicaid Services' overestimate was 42 percent. When fundamental changes are made to a program, the green-eyeshade types can't easily predict the results. Moreover, as health expert James Capretta notes, "managed care" plans in the Medicare Advantage program in 2010 did not have higher costs than Medicare's fee-for-service for similar coverage.

Under Ryan's plan, incentives would shift. Medicare would no longer be an open ATM; the vouchers would limit total spending. Providers would face pressures to do more with less; there would certainly be charges that essential care was being denied. The Obama administration argues that better results can be achieved by modifying incentives within the existing system. Perhaps. But history suggests skepticism. Presidents since Jimmy Carter have made proposals to control spending, with meager results. From 1970 to 2008, Medicare spending per beneficiary increased an average of 9 percent annually.

It's Ryan's radicalism vs. President Obama's tinkering. Which is realistic and which is wishful thinking? This important debate should rise above cheap political rhetoric. Burdened by runaway spending, Medicare "as we know it" is going to end. The only questions are when and on whose terms.