• 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.

    • Frankly, I find this whole x-change nonsensical.

      Market vs administrative? Oy..

      Congress will do what congress will do, and while you (plural) can make the case that because of preference of “market purity” Congress is less apt to meddle because its the American way, or due to ideological pragmatism…just silly.

      I have been utterly surprised at the fixes and workarounds folks on the HIll have synthesized in order to dot the i’s and cross the t’s to propel the bill/law.

      –Think about the Senate solution to employer penalties for x-change leakage?

      –The clawback for 10099s

      –Modified quality bonus in MA plans

      –The “dumbing down” of the IPAB (where it started from, and what it evolved too).

      I could go on, and am i sounding cynical. Yup.

      You (plural) can debate what a market vs administrative driven solution produces, and i know you always add a caveat or two about :what Congress will inject into the process to muck things up, but i see this blog deliberation as an intellectual game exclusively (flexing cortical matter only). Nothing more.

      The market solution discussion is meaningless–% level of subsidy (MAGI) will get tossed around, and sure as i breath, 4% will go to 6, 6 to 8, etc.

      Administrative pricing. Same deal. Voucher levels you state will get tinkered with–same end game.

      I am not disagreeing with most of your premise. My beef is this discussion seems like it can be summed up in two paragraphs (I probably could have said it more succinctly), and all these posts and the prior threads are pablum-esque.

      My point: recognize this is a debate on policy, not politics. Choose solution A or B, but the money but will get spent inefficiently either way and we are going to get tot he same darn place. Big Mac vs Whopper…same difference.


      • @Brad F – Sorry. It’s my job. If structure X can eek out savings over structure Y, I should point it out. Moreover, if structure Y is known to be a boondoggle and structure X has been employed to good end many times in other areas of government (yes, competitive bidding is the norm — THE NORM — in many areas of government procurement) we should give it serious consideration.

        I recommend you read the book by Coulam, Dowd, and Feldman . If you can wait until summer, they’ll have a paper out that says it all more succinctly.

    • To add one more thing, the discussion should not be based on Ryan-Rivlin plan. It should go on the dust heap like the others invoked, that never passed, because like PPACA, once it works its way through Congress, the bill you went to war with with, wont be the bill you sign.


    • I guess more cynicism, but competitive bidding in the health care sphere is spotty, and it seems like just when one proposal is ready to go live-or looks promising, some pol steps on the brakes, and poof, back to square one.

      I have been incensed with DME nonsense and the meddling over the past few years. MA, not what it should be. Part D, dont feel expert enough to comment–some exude the merits and and savings, others not.

      Grade: C (?)
      (Not anything mom would have put on the fridge, lets put it that way)

      Any light you want to shed here would be honestly welcome.

      • @Brad F – In terms of bidding, Part D is excellent. The program has other issues, but within the rules set up (not all of which are optimal), the subsidy-setting system (bidding) has worked very well.

        Seriously Brad, we do have to try! We may not get A+ grade results, but Ryan-Rivlin looks like an F on subsidy setting. I score it as such based on Medicare Advantage. We can do better. I’d take a C over an F. Wouldn’t you?

    • Maybe an F on subsidy setting, but to use a tired phrase, once a proposal like this traverses through the sausage maker (also, the proposal as laid out in referenced pdf is short on facts, and like Ezra highlights, PR’s staff not forthcoming), the actual legislation would ripen and mature.

      Granted, you can only grade the term paper you are seeing now; but as I stated above, these things coalesce with time. While I may have disagreements with Ryan, he is no fool, and knows that if that is going to be crafted in workable, passable legislation, there has to be a balance of cost reduction and accessibility. ANything otherwise, at tleast to an intelligent legislator (big assumption), is sucicide. RYan knows that too much “lett” coloring , and his proposal is toast. He probably needs to keep his yapper closed right now.

      As I write this, I am realizing that my issue has nothing to do with what some are commenting on (he says, she says), but the fact we dont dont know, and there are too many speculative intagnibles. The RR plan is unformed, and point is, it is not a static process. You have laid out the subsidy issue well, past and present, but lets see how this proposal takes shape.

      The whole kefufle seemed to have started because RR =ACA in the eyes of many; stepping on eggshells for some, with too much posturing and looking for cover.

      Frankly, I dont care. Thats not what I have been commenting on, and not the point i am trying to get across. I think (?) you appreciate that is my angle.


      • @Brad F – I confess, I’m not sure what your angle is. I’ll tell you mine plainly: I’d like folks to think more carefully about how subsidies are set and how that process is distorted by politics. In terms of access and cost, it’s the whole ballgame, as I said. There’s far too much, “Let’s assume GDP + 1%” going around. That won’t work. How about, “Let’s assume politicians will respond to incentives so we must build some protections — even if only marginally effective — against that.” The IPAB is a terrific response to that way of thinking. We need more of it. I think competitive bidding is a potential middle ground that can assist.

        I’ll say no more. You may have the last word.

    • Done.

      Its not your thing, its mine, and it was the strained (IMHO) back and forth on the other blogs, It seemed like a “you say potato, I say potatoe,” devoltion, and my sense was they agreed more than they disagreed, MOst importantly, and this is my slant, in, in the end, when it all gets put through from the leglislative hopper, both plans would look more similar than different.


      Too much caffeine and a handheld device before 6AM– a very bad combination indeed. You know how they say, “we just gave him the rope, let him hang himself with it.” Well, my neck hurts. 🙂

    • It is all about the CBO score. If Ryan-Rivlin had market pricing, it wouldn’t be scored as substantially reducing long-term deficits, because costs would increase with health care costs. The only way it scores as dramatically lowering long-term deficits is because the voucher level is set in stone, and set to increase much slower than health care cost inflation.