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How to reform Medicare with faith in market principles – including vouchers

As Americans debate proposals to reform Medicare, they should know that all of them involve trade-offs. Where the current system and the Paul Ryan plan fall short, a true voucher system provides choice, coverage, and cost-efficiency.

By David C. Rose / June 29, 2011

St. Louis

House Budget Chairman Paul Ryan (R) of Wisconsin is proposing major – and highly controversial – changes to Medicare. Though the Senate recently rejected his plan, it may play a big part in the 2012 presidential campaign.

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Mr. Ryan is pitching his reforms as “premium support.” What is premium support, exactly? Is it a voucher system? Let’s take a closer look at Ryan’s plan and then weigh the pros and cons.

To understand the Ryan proposal, we first have to understand how Medicare works. Medicare is essentially a single-payer system for Americans older than 65. Part A (which everyone gets by default) pays for most hospitalization expenses. Part B (which is optional but most people pay extra for) covers medical expenses beyond hospitalization like most private insurance plans do. Both A and B employ the fee-for-service approach. Part C (which after 2003 evolved into what’s now called Medicare Advantage) allows people to elect to have the government send its premium support directly to any one of a set of insurers who offer a wide variety of plans.

In some ways, the premium support program that Rep. Ryan has proposed resembles Medicare Advantage. In both plans, government doesn’t actually provide insurance – private insurance companies do – so government is only acting as a funding mechanism. In both plans, people can choose among competing alternatives.

Ryan’s plan attempts to control costs by changing the fee structure: Instead of providing a set of benefits at any cost, the government will provide seniors with a set of funds they can use to pay for medical care. These funds would go directly to insurers, not patients, so it’s not truly a voucher system.

Indeed, a voucher system – such as America’s food stamp program – is a fairly simple operation that provides citizens with public funds to purchase private goods. Ryan’s plan, by contrast, retains much of the complexity of the current Medicare system.

The upsides to Medicare reform plans

As Americans debate proposals to reform Medicare, they should know that all of them involve trade-offs.

The upside of the current Medicare entitlement is that it provides peace of mind to the elderly – they will all be insured. The downside is that since it is based on an unsustainable funding model, they either won’t all be insured for long or the insurance the elderly have will be so heavily rationed it will be politically intolerable.

The upside of the Ryan plan is that, like the present plan, it guarantees that all of the elderly will be insured and builds on lessons learned from the Medicare Advantage program. The downside is that for some elderly people, additional choices creates additional anxiety. And observers worry that the pemium support funding wouldn’t keep pace with fast-rising medical costs.

The upside of a true voucher system is that it is very simple and very transparent. It narrowly solves the crux of the problem, which is making sure everyone gets health insurance. If set up correctly, say, through a national sales tax, it overcomes a “free-rider problem” that results from people knowing that hospitals will treat them even if they haven’t paid into the system.


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