In his new budget proposal, Representative Paul Ryan revises his approach to transition Medicare from an open-ended, fee-for-service plan into a premium support plan like the one he created with Senator Ron Wyden. Now, there is nothing particularly radical about this idea of using Medicare dollars to choose among private plans or, in this case, private plans plus a traditional Medicare option. Democrats, both in the past and present, have supported just such an idea. And Obamacare would subsidizes individuals to choose among private plans in its exchanges.
But one common liberal gripe about Ryancare is that it’s too stingy on the federal Medicare subsidy. As Yuval Levin wrote about Ryancare 1.0:
But the most politically potent critique of the plan has also been the most substantively serious. It has focused on the rate at which the premium-support payment would grow, and on seniors’ fears that their costs would rise. The concern, voiced by some congressional Democrats and by liberal health care experts like former Clinton budget director Alice Rivlin, has been that the competitive pressures unleashed by the Ryan plan would not be sufficient to cause health care costs to grow only at the rate of inflation—which is far lower than their growth rate in recent years—so that the premium-support payment would not keep up with the cost of insurance, and seniors would face a steady increase in out-of-pocket costs over time to cover the gap.
So Ryancare 2.0 switches to a competitive bidding process. Avik Roy:
The basic idea behind competitive bidding is that, say, on a county-by-county basis, you let private plans and traditional Medicare offer plans with the same actuarial value compete, to see who can offer the same package of benefits the most efficiently. Each plan in a given county will name a price for which they are willing to offer these services, and seniors are free to pick whichever plan they want. However, the government will only subsidize an amount equal to the bid proposed by the second-cheapest plan. If you want a more expensive plan, you have to pay the difference yourself.
So the bet here is that competition works — indeed, Yuval calls it the “confident market solution” — though Ryan does include a backstop, putting a cap on Medicare spending growth at nominal GDP plus 0.5%. But there is a good chance that competitive bidding would be successful. A GAO study on competitive bidding is encouraging. And as a recent AEI study found:
Our research shows that competitive bidding—a key feature of the Wyden-Ryan plan—could save Medicare $339 billion over ten years while maintaining basic benefits and without raising taxes. Crucially, the elderly would not be exposed to the risk of higher health care costs, as in approaches that would set fixed voucher payments toward the purchase of medical insurance. … Competitive bidding would save a substantial amount of money, helping solve Medicare’s fiscal crisis. We estimate the savings at 5.6 percent of Medicare costs, compared with the fully implemented PPACA. This estimate is likely to be conservative because it is based on the second-lowest bid, not the lowest bid that we prefer. In addition, we assume that competitive bidding will not create incentives for health plans to be more efficient; factoring in the increased efficiency likely to result makes our estimates even more conservative.