Health Care Rationing for Beginners

“Obama-care kills Medicare as we know it. Obama-care raids $500 billion from Medicare to spend on Obama-care, puts in place a 15-panel board to ration Medicare by unelected bureaucrats.

“Our budget, repeals the raiding, gets rid of the rationing board, preserves this program, makes no changes for a person 55 years of age or older and saves Medicare, by reforming it for our generation, so it’s solvent. The president’s plan does not save Medicare, it allows it to go bankrupt, rations the program and raids the program. We get rid of the rationing, we stop the raiding and we save the program from bankruptcy.”

That was Paul Ryan on Fox News recently.

Ordinarily this wouldn’t be worth responding to, except to point out, as Sam Stein did, that Ryan’s proposed budget also ”raids $500 billion from Medicare,” so the statement that “we stop the raiding” is, um, a lie. But it isn’t news that Paul Ryan has an issue with honesty, except perhaps for David Brooks.

But there’s a theme that is surfacing that goes something like this: OK, Ryan’s plan is extreme and has no chance. But we all know we spend too much on health care, and we have to spend less, which means that we have to ration care one way or another. Ryan does it by scrapping Medicare in favor of indexed vouchers; Obama does it by reducing Medicare payment rates and, more ominously, with “a 15-panel board to ration Medicare by unelected bureaucrats.”

On one level this seems true. We are projected to spend too much on health care, and we need to reduce those projections. And in one sense, we can call that “rationing.” As you learn in Economics 101, economics is about the allocation of scarce goods and primarily about using markets to allocate scarce goods. If you define rationing as the allocation of scarce goods (where everyone can’t get everything she wants), then obviously we have to ration health care. But just as obviously, we ration it already: we ration health care by denying most of it (except emergency care) to poor people, people without good jobs, people with preexisting conditions, and so on. So the statement that we have to ration care is unexceptional to the point of being meaningless.

But let’s move on to the issue of “we have to spend less on health care.” I’m going to get to the Affordable Care Act (“Obama-care”) and the Ryan budget, but first we need to take a detour through free market fantasy land.

The question is, if we accept the principle that markets are generally the best way to allocate scarce resources, how should this work for health care? The theoretical answer is pretty simple. People who buy health insurance (mainly employers, but also individuals) want decent health care at a reasonable price. They shop among health insurers. Health insurers compete by figuring out how to offer better health care at lower prices. A traditional indemnity plan, where the insurer pays for 80 percent of whatever the provider charges for anything the insured wants, is a lousy way to compete: you end up with not-so-good outcomes at extremely high prices. That’s why most of the private health insurance market today is HMOs (access to procedures is controlled) and especially PPOs (negotiated prices with select providers, low payments to out-of-network providers). In theory, insurers should be figuring out how to get the best health outcomes at the lowest possible price. To do that, they should be figuring out what procedures are most likely to lead to good outcomes and setting payment schedules to motivate patients and doctors to select those procedures; they should also be figuring out what procedures are a waste of money and motivating patients and doctors to avoid those. They motivate patients and doctors by setting low payment rates for worthless procedures or simply refusing to pay for them. That will scare away some health insurance buyers, but in the long run, the good insurers will have better outcomes at lower prices, and they will attract customers on that basis.

Of course, this is all in free market fantasy land. The private health insurance market does not work that way; if it did, we wouldn’t have a health care cost crisis in this country. Why it doesn’t work that way is a subject of much debate. It could be because providers have too much market power relative to insurers; it could be because the main buyers of health insurance (employers) don’t actually care about outcomes, just about offering a decent-looking plan at the lowest possible cost.* But the key point is that competition is supposed to be driving insurers to become more efficient: creating health plans that produce better outcomes and lower costs.

Is this rationing? Yes, in the uninteresting sense that people do not have unlimited access to health care for free. But is it rationing in the commonly understood sense of “something bad where someone unfairly decides you can’t have something you need”? No, almost by definition: when markets allocate scarce resources, we generally don’t call that rationing.**

Now, back to reality. What is that “15-panel board to ration Medicare by unelected bureaucrats” that Ryan is talking about? It’s the Independent Payment Advisory Board (IPAB), which was created by the Affordable Care Act (ACA). IPAB is charged with coming up with plans to reduce the growth rate of Medicare spending without restricting benefits or eligibility. One way IPAB is expected to do this is by analyzing the various pilot programs for new ways of delivering or paying for health care established by the ACA. Using evidence, IPAB should be able to change the way Medicare pays for services to affect provider incentives in ways that provide better outcomes at lower costs — or, at least, ensure lower costs with minimal adverse affects to outcomes. Importantly, IPAB’s recommendations become binding unless overridden by a supermajority in Congress, making it more likely that cost-saving measures will actually become law.

Does this sound familiar? It’s exactly what private-sector health insurers should be doing (four paragraphs up), but aren’t. It’s using research and analysis to make Medicare a more efficient health insurance plan, one that spends less money while maintaining outcomes for participants. Is it rationing? It’s only rationing to the extent that the pursuit of efficiency is rationing. You can call it rationing if you want, but then you have to concede that rationing is exactly what all health insurance companies do, even though they’re not doing it very well at the moment.

If IPAB is just supposed to do what private sector insurers are supposed to do, why are Republicans in such a tizzy over it? One reason is simply that the Obama administration is for it, so they’re against it; another is that they will try to spin anything they can as “Democrats slashing Medicare,” for obvious political reasons. But there is a more fundamental reason.

Republicans like Paul Ryan don’t want Medicare to become more efficient because they want the program to fail. Medicare is a very popular program in its current form; as Jonathan Oberlander details in The Political Life of Medicare, it has always been a popular program with the public. The only way to eliminate Medicare is to convince the public that it is causing some other, huge problem — namely, the national debt. So this leaves people like Paul Ryan in the position of rooting for the Medicare budget gap to be as big as possible and trying to shoot down anything that can actually close the gap. (On the left, I believe this is known as a Trotskyist position — intensifying the contradictions of Medicare. Even if the problem with Medicare is its budget deficit, Paul Ryan and his fellow travelers oppose measures that reduce the deficit because they also reduce the chances of the Revolution.)

What about Ryan’s claim that his proposal “saves Medicare, by reforming it for our generation, so it’s solvent”? As everyone knows by now, the Ryan Plan replaces current Medicare with a voucher program, where seniors get a voucher to use to by health insurance in the private market; the vouchers are set to grow in value considerably slower than GDP, let alone health care costs. This is not Medicare.

Right now, Medicare actually provides two kinds of insurance. First, it is a health insurance plan, which means that once you are a beneficiary it will pay for a lot of your health care expenses. Second, it insures you against not being able to buy health insurance. If you are over 65, it insures you against being dropped by your insurer because you get sick; more importantly (since that is already accomplished by regulation), if you are under 65, it insures that you will be able to get decent (though not particularly good) health insurance when you are 65. Without Medicare, not only would you not have that guarantee (unless you work for one of a small and declining number of employers), but you would not be able to buy that guarantee for any price.

Under the Ryan Plan, both of these kinds of insurance go away. What’s left? A forced saving and redistribution program, where you pay Medicare payroll taxes while you work, and once you retire you get some cash back. You can call that “Medicare” if you want, I guess, but it no longer provides either kind of insurance that Medicare currently provides, so Ryan’s claim to “save Medicare” is, um, a bit of a stretch. But you knew that already.

Is it rationing? Yes, in the vague sense that more people will be getting less of what they want. But the mechanism by which this happens is the same one that already operates in the individual market for people under 65: if you don’t have enough money, or you’re too sick, you just can’t buy health insurance, so you get less health care. If you call that rationing, then the Ryan Plan is just more rationing.

The more relevant question is whether the Ryan Plan will promote the more efficient allocation of health care. You can dredge up a theoretical argument that it would. In free market fantasy land, remember, employers and individuals will shop around for the most efficient health care plans, so insurers have an incentive to make their plans more efficient. The crux of the argument is that since insurers face a competitive market, they will work hard to make their plans as efficient as possible, which means they should do a better job than Medicare, which doesn’t face competition. I’m sure this argument has been advanced a hundred times by Heritage, AEI, and so on.

The problem with that argument is that it’s completely false in practice. If that market worked, then we would have a functioning health insurance market for people under 65 (where there is no Medicare);*** but if we had that, then we would not be talking about health care today.

So yes, the national challenge is spending less on health care in the future, whether or not you call it rationing. The Ryan Plan does it by eliminating Medicare (for all practical purposes) and leaving seniors to depend on their private savings and deliberately underfunded vouchers. IPAB does it by doing what the free market is supposed to do, but doesn’t. IPAB is not a complete solution, and the biggest criticism one can level at the Obama administration is that its enacted and proposed solutions aren’t enough to close the long-term Medicare deficit. (My solution is to increase Medicare payroll taxes to account for the fact that Medicare is becoming more valuable today to future beneficiaries.) But IPAB at least tries to improve Medicare and solve the cost problem. Paul Ryan simply wants to toss the elderly into the same toxic pool that tens of millions of the non-elderly are already drowning in.

* But it isn’t because individuals don’t bear enough of the marginal cost of their health care choices. All insurance markets — life insurance, auto insurance, home insurance, workers’ compensation insurance, commercial liability insurance, etc. — work by shielding people from a large portion of the consequences of their decisions. Yet competition can still work. Besides, as Paul Krugman points out, other industrialized countries have even less “consumer choice” than we do, and they all have lower costs.

** If you do call it a bad form of rationing, then I would argue that free markets are bad because they ration food, shelter, and, for that matter, all consumption goods, unfairly denying poor people of them.

*** You can’t blame all the problems with our health care system on the tax exclusion for employer-provided health care. Yes, it’s a bad thing, but it can’t arithmetically be responsible for health care costs that are twice as high as the rest of the developed world.