• Ryan/Wyden premium support saves the most when the ACA succeeds

    In a post last week, I came to the conclusion that the GDP+1 growth cap in the Ryan/Wyden premium support proposal makes sense if it applies only to that program, not to Medicare as a whole. That is, the voucher level would evolve so the total cost of premium support would grow no more quickly than nominal GDP plus one percentage point. Meanwhile, under the Ryan/Wyden proposal, traditional Medicare, which would only be available to anyone currently at least 55 years old at current law levels of subsidization, would not be subject to that growth rate cap.

    Except, actually, Medicare is subject to a GDP+1 growth cap. It’s in the Affordable Care Act, and it’s the job of the Independent Payment Advisory Board (IPAB) to keep Medicare within that fiscal boundary. This raises an interesting question: If Medicare is already subject to a GDP+1 growth rate cap, how much could be saved by a premium support program that is itself subject to such a cap? At first blush it seems like the answer is, “nothing.” But that’s not right.

    The way the Ryan/Wyden plan works, on a market-by-market basis, voucher levels are tied to the premium of the second cheapest plan or traditional Medicare, whichever is cheaper.* In some markets the second cheapest plan will be lower cost than traditional Medicare. In such cases, premium support saves money. How much? The best estimate I’m aware of is that it would save about 5.6%, relative to current law. However, that’s a snap-shot, an estimate of the one-time savings of premium support. It doesn’t tell us anything about how the cost of premium support evolves over time, relative to traditional Medicare or current law.

    So, the question becomes, in how many markets will the second cheapest plan be lower cost than traditional Medicare, not right now but over time? That question is answerable in detail with some assumptions and some data, which I do not have. But I can say this much, the number of markets in which this would occur would shrink over time if the provider payment provisions of the ACA remain in place. Those payment provisions are designed to drive Medicare payments further and further below that of private plans, on average. (See this in charts here.)

    Eventually, when Medicare payments get low enough, it is not likely any private plan would be able to match Medicare costs in any market. Traditional Medicare would be the cheapest plan everywhere, and premium support would not save anything relative to traditional Medicare. On the other hand, based on the way vouchers would be set (as described above), it wouldn’t cost the government anything relative to traditional Medicare either. The extra costs of private plans would be borne by beneficiaries who enrolled in them.**

    Thus, Ryan/Wyden (or similar) premium support could save money relative to traditional Medicare in the near term, but after some time it would not. This conclusion hinges on the Medicare provider payment provisions of the ACA staying in place. Another way to credit premium support with even greater savings relative to, well, something, is to assume that current law does not hold. In particular, assuming the payment provisions of the ACA do not hold, premium support saves more money (relative to that failed-ACA world) for longer. In other words, premium support seems like an even better deal for taxpayers if one assumes the ACA fails.

    But notice what that means. If the ACA fails and traditional Medicare does not become the cheapest plan everywhere then some otherwise more expensive private plan sets voucher levels. That is, the plan that sets the voucher levels is one that would be more expensive than traditional Medicare if the ACA’s payment provisions did not fail (which we are now assuming they do). With voucher levels tied to such a plan, the taxpayer pays even more, not less, than if the ACA’s payment provisions stay in place. So, the best deal for the taxpayer (leaving beneficiaries aside for the moment) is if the ACA succeeds. That is also the circumstance in which premium support saves the least relative to current law.

    Consequently, from a taxpayer (or federal budget) perspective only, whether you are pro or anti premium support, you should want the ACA to succeed. Of course if you’re pro premium support for other reasons, it’s advantageous to argue that the ACA will fail and use that to set the baseline against which to measure the savings from premium support. But make no mistake, assuming ACA failure as a means of justifying premium support is actually an argument for a more expensive premium support proposal. Who would be for that?

    * Plans must be actuarially equivalent to traditional Medicare. See my Ryan/Wyden summary.

    ** The persnickety may notice that I’m dodging the possibility that traditional Medicare is cheaper than the second cheapest private plan but not cheaper than the first cheapest private plan. This post is complicated enough without that wrinkle. And I don’t think that wrinkle changes the overall thrust of my points. So, yeah, I’m dodging it in service to simpler exposition.


    • I am not sure whether it would affect your calculations or not but I dont see anything in Wyden’s explanation on HuffPo on March 19 or in Ryan’s budget document that says traditional Medicare in the future would only be available to those over 55 now. Wyden said:

      “Wyden-Ryan doesn’t eliminate the traditional Medicare plan, instead it guarantees that seniors who want to enroll in Medicare’s traditional fee for service plan will always have that option.”

      Combined with Ryan’s wording, I read always to mean always and all seniors but maybe there is something out there that contradicts what I’m looking at.

      The issue as I understand it and experience it as a Medicare beneficiary is that fewer and fewer people will choose traditional Medicare because it’s lousy insurance. Already (as Wyden explains)around 80% or so of seniors pay money (a few percent of this group get the money from other public assistance programs) to supplement “Medicare as you know it” and another 12% or so are dual eligible and basically depend on Medicaid, not Medicare.

      • You are correct, which is why I did not write that traditional Medicare would only be available to those over 55 now. See also my summary of the Ryan/Wyden proposal: http://theincidentaleconomist.com/wordpress/the-wyden-ryan-medicare-plan/

        Perhaps you are thrown off by my sentence, “Meanwhile, under the Ryan/Wyden proposal, traditional Medicare, which would only be available to anyone currently at least 55 years old at current law levels of subsidization, would not be subject to that growth rate cap.” The key is the modifier “at current law levels of subsidization”. Those 55 years old and older would be grandfathered into traditional Medicare as we know it, with the level of subsidization they currently “enjoy.” Everyone else could enroll in something TM-like, but it would be potentially subsidized differently, according to the competitive bidding nature of the proposal.

        I really wish we had two names for the two versions of TM that would exist under Ryan/Wyden. There’s TM as we know it (into which older folks are grandfathered, if they wish) and there is “new TM” or maybe just “the public option”, which would behave somewhat differently, or could.

        • Thanks but where in the Wyden-Ryan proposal do you see this bifurcated “Medicare as we know it” described. I still don’t see it (and I read the document to say the opposite).

          Of course I also believe it’s all moot because so few people — as a percentage of the total — depend on “Medicare as we know it” today that I think it unlikely that that percentage will rise as more options are provided seniors. Most likely, given good options like us seniors here in Massachusetts have, everyone will bail.

          In Massachusetts
          — a plurality have retiree insurance (although that percentatge is sure to drop 20 or more years out)
          — a large percentatge have “Medicare as we know it” plus a Medigap plan such as BC Medex Bronzie that covers almost all hospital/doctor co-pays (but no dental or vision or annual physical), plus a drug plan, for about $4200 a year plus OOP for the physical, dental and vision
          — around 20% of us have a Medicare Part C plan at around $2400 a year (SWAG averages given here) with higher co-pays but with physicals and vision usually included (but withouth the unrestricted netrwork of providers availalbe in the Medigap program)

          Presumably all these options will still be available in the Wyden-Ryan FEHP-like exchange but without having to deal with from two to five insurance companies. That increased simplicity will be a big win for us.