GOP’s “repeal and replace”—Defined contribution

As noted in my last post, conservative health policy analysts James Capretta and Robert Moffit have now provided one of the best available roadmaps to Republican proposals to replace ObamaCare.  I noted six critical passages that deserve attention. Consider the first one:

1.  The first crucial component of any serious reform must be a “defined contribution” approach to the public financing of health care.

This section of their article shows how frustrating political materials on complicated policies really are. Capretta and Moffit provide the best explanation of the overall framework from 50,000 feet. One still needs a closer look to really understand what they are talking about. I suspect that a version of their proposal sufficiently granular to be scored by the Congressional Budget Office would include nasty surprises, once the full impacts were specified on the federal budget, on the uninsured, and on the actuarial value of what their preferred defined contribution system would actually provide to millions of Medicare recipients.

On the one hand, Capretta and Moffit’s brief discussion suggests a fundamental revision (and weakening) of American social insurance through the shifting of current and future financial risks from the federal government onto individuals and state governments. On the other hand, Capretta and Moffit are silent regarding critical details of how this defined contribution approach would actually work.

Here is the key passage regarding government benefits. (I’ll return to related tax issues in a later post.*):

Under this approach, health coverage would be provided through competing insurance plans; government’s involvement would come through the provision of a fixed financial contribution toward the purchase of insurance by each beneficiary. That subsidy would not vary based on a person’s insurance plan, giving Americans every incentive to shop for good value in their health coverage and to get the most for their defined-contribution dollars.


In the context of Medicare and Medicaid …  the government would similarly provide a fixed (though of course far more generous) level of support, sometimes called “premium support,” that would guarantee insurance coverage to beneficiaries but would allow them to choose among competing options and encourage them to seek out the best value for their money…

Austin Frakt fans already know the complex economic and social issues involved here. His posts on premium support are required reading here. Frakt fans also realize that Capretta and Moffit have kept silent regarding critical issues. Like Austin and Henry Aaron, I do not believe this is the moment to institute premium support.

One issue commands special attention: How would Medicaid and Medicare premium supports change over time? Would these be pegged to the general rate of medical inflation? Would these be pegged to some lower number such as per-capita increase in gross domestic product? The latter essentially ends Medicare and Medicaid as social insurance in the way we have known it.

Right now, Medicare and Medicaid are defined benefit programs. Every senior on Medicare and every low-income, elderly, or disabled Medicaid recipient is guaranteed a basic package of services to meet their medical needs. That’s the approach adopted by most peer industrial democracies, most of which also provide much greater health security to their citizens within more disciplined and economical health financing systems.

Over time, as in Paul Ryan’s proposed budgets, a shift to defined contribution health policies threatens to shift burdens and risks onto individual patients (and implicitly state and local governments) while enacting punishing budget cuts that predominantly affect low and moderate-income Americans. The Affordable Care Act includes fairly ambitious Medicare spending targets. The new Independent Payment Advisory Board is an example of a more evidence-based way to pursue these targets responsibly within a framework that protects recipients.

Capretta and Moffit–like other advocates of premium support—hope and assert that a defined contribution voucher approach will restrain health care spending by promoting competition among insurers to cover cost-conscious individuals seeking the best value for money.

This might happen, but I fear high hopes are poorly-grounded in the available record. The checkered history and the troubled political economy of Medicare Advantage suggest more troubling possibilities, both regarding cost and regarding cherry picking of recipients by participating firms. Whether patients can make informed economic decisions to discipline  our health care system is questionable, too.

*Democratic and Republican policy types have some agreement regarding taxation issues. Unfortunately most other Americans seem less sympathetic.

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