The key difference between exchanges and the Ryan-Rivlin plan

Ezra Klein and Reihan Salam are having an interesting blog-to-blog discussion about how the ACA’s exchanges are and are not like the Ryan-Rivlin plan for Medicare. I’ll let you click through to catch up on their arguments. Stay here, or come back, for a very important distinction, something Klein and Salam may consider a minuscule, wonky detail but that I think is the whole ballgame.

Before I get into it, I’ll note that Klein and Salam both raise issues about the context in which the exchanges will work (e.g., along side the employer-based health insurance system) and contrast the ACA exchange model and Ryan-Rivlin’s ideas with those of other proposals. As important and interesting as those arguments are, I am going to ignore all the ancillary issues and ideas and simply focus on one aspect of the ACA exchange model and the Ryan-Rivlin plan. It’s a crucial one.

A key difference between the exchanges and the Ryan-Rivlin Medicare plan is how vouchers or subsidies would be set. One would use the market, the other would put its faith in a political process. If you don’t know, can you guess which takes which approach? The answer is not what one might guess based on who supports exchanges and who supports the Ryan-Rivlin plan. With respect to setting subsidy levels, the ACA’s exchanges would be more market-based than Ryan-Rivlin voucherized Medicare.

In the exchanges, subsidies will be tied to plans’ market prices. Subsidy levels in an exchange will be based on the premium of the second cheapest “silver” plan. That’s, essentially, competitive bidding. Plans will compete within an exchange, trying to outbid each other to attract enrollees. Subsidies will be tied to those bids, as just explained, and, crucially, to one of the lowest bids. (A “stronger” bidding arrangement would tie subsidies to the absolute lowest, but one could argue that that would leave low-income individuals and families with too few affordable options.)

So, in an exchange, anyone who wants a more expensive or generous plan would pay the marginal cost. Subsidies are only guaranteed to a certain level, and that level is set by the market. Translation: it’s a very market-based approach, one that builds in protections for consumers (it puts a health care cost-adjusting floor under their out-of-pocket costs) and for taxpayers (subsidies can’t grow any faster than the market dictates).

Now, consider the Ryan-Rivlin plan. As I’ve written before, vouchers in that plan would not be tied to the market. They would not be set by a competitive process. According to my conversation with Rep. Ryan’s staff, they would be controlled by the Secretary of HHS. Translation: it’s an administrative pricing approach. Now, in principle, vouchers are not supposed to rise faster than GDP + 1 percentage point. But, we know from Medicare Advantage (MA) that pledges to keep private plan subsidies to a certain level are hard for politicians to keep. MA subsidies grew to about 14% above FFS Medicare costs. The ACA is supposed to pull them back, but, predictably, there has already been some monkeying with the formula.

To be sure, Congress could monkey with competitive bidding too, but at least the concept is market-based, hence in principle apolitical. If the whole subsidy system were put in the hands of an IPAB-like entity, that would further insulate it from politics. Now that would be a very robust system!

Why is this competitive bidding vs. administrative pricing difference between the ACA’s exchanges and the Ryan-Rivlin plan the whole ballgame? Well, it pertains to precisely the extent to which taxpayers are on the hook for health care costs and the extent to which consumers are protected from increases in them. Those two are at odds and competitive and administrative pricing balance them differently. Administrative pricing has weak protections for consumers and puts taxpayers at political risk for costs. As we’ve seen in the Medicare Advantage program, that political risk is a real one. Costs have not been controlled in that program.

Competitive pricing provides greater protection for consumers from health care cost risk and puts taxpayers at market risk. It depends on price competition to control health care costs. In so doing, it ties taxpayers, through the government, to the performance of the market with respect to health care cost control. In other words, it aligns the government with the market in terms of incentives to keep costs down. Recent experience both within Medicare and outside it suggests that neither the market nor the government alone has done a good job of health care cost control. Perhaps focusing on the problem together — as competitive bidding forces them to do — is an experiment worth trying.

Maybe Rep. Ryan doesn’t think so, which is one possible reason he supports his own plan but not the ACA’s model for exchanges. He has not said as much, and I’m only speculating.

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