How Consumer Choice Can Save Health Care

By Paul Ryan

May 26 (Bloomberg) -- The failure of politicians in Washington to address the crisis in Medicare is putting the health security of Americans at risk.

The U.S. House of Representatives recently passed a budget that advances a plan to save Medicare for today's senior citizens and strengthen it for future generations. But instead of seeing an opportunity for bipartisan action, President Barack Obama and his party have seized it as a chance to play politics with the health of our nation. The Democrats' dishonest characterization of this plan before the special Congressional election in New York State on May 24 was just the latest example.

Here are the facts. Medicare is a critical program that helps people age 65 or older achieve health security. But it's headed for a painful collapse. Independent experts and leaders in both parties agree that if we do nothing, Medicare will exhaust its trust fund in nine years, putting enormous pressure on the federal budget as health-care costs continue to rise.

Unless we act, we're moving toward a debt-fueled economic crisis, harsh cuts that affect today's seniors and enormous tax increases that diminish the dreams of the next generation. We can save Medicare, but we have to reform it so that it delivers the high quality we expect, at a price we can afford.

Skyrocketing Costs

If we don't get skyrocketing health-care costs under control, we have no hope of containing government spending and averting a debt crisis. Health spending per person increases by almost 9 percent every year. As a result, total expenditure for health care has gone from consuming 5 percent of our economy in 1960 to almost 20 percent today. Medicare is a top driver of these unsustainable costs. More than 75 percent of Medicare recipients -- that is, 35 million people -- receive what's called the fee-for-service insurance plan. This means that Medicare reimburses doctors and hospitals for seniors' health-care services. 

This system leads to higher costs and lower quality for two reasons: First, the patient is disconnected from the cost. Fifty years ago, Americans spent a lot less on health care than they do today, but the share they paid for directly was much larger. In 1960, patients paid for about half of their own health-care costs. Today, that share is down to just 12 percent, with the rest paid for indirectly, through third parties such as Medicare.

We all pay for Medicare with our tax dollars, and Medicare patients also pay premiums, but someone else pays the actual bills -- and so the true cost of care is hidden. When we pay directly for something, and we know how much it costs, we have a strong incentive to demand the best value. In health care, we don't. Is it any wonder that the costs keep rising?

No Competition

The second reason costs are going up and quality is going down is that fee-for-service Medicare insurance has no competition: It pays doctors and hospitals even if the quality of the care they provide is poor and the cost is high. That means doctors and hospitals have had little financial incentive to deliver the best care to patients at the lowest price. Their incentive instead has been to structure their business so that every aspect of care requires many services, even if some are duplicative or might not be any more effective than a course of care that used fewer services. There is broad agreement that this has led to rising costs. The disagreement is over what to do about it.

President's Strategy

One of President Obama's strategies is to let a panel of 15 unelected officials decide how much Medicare will pay doctors and which services it will cover. This panel was created by the health-care law enacted last year, and the president recently gave a speech in which he argued that these officials should be given the power to cut hundreds of billions of dollars from Medicare for current seniors. This approach is centered on the power of government price controls. Other supposed cost-saving aspects of the president's plan, such as bundled payments, speak to the same misguided faith in government's ability to successfully control costs where it has failed so often in the past. Price controls encourage more consumption of a good or service as its price is artificially lowered by the government.

There is a better approach: The budget the House recently passed saves Medicare, period. First, the House plan protects today's seniors from any disruptions. Our budget ensures no changes for those who are now 55 or older. Second, our plan provides real reform to save and strengthen Medicare for current taxpayers, so that it is there for them when they retire. Rather than putting the government in charge, our plan provides financial support to help future Medicare patients pay for the insurance plan that works best for them and their families. Patients will have the freedom to choose from a list of guaranteed coverage options -- the same kind of system members of Congress enjoy today. We also ensure that lower-income seniors and those with more health risks will receive greater support, while healthy seniors with more resources receive less.

Consumers in Charge

Our reforms will stop the relentless increase in our health-care costs. Some take issue with this claim, arguing that the reforms in our budget merely cap the government's cost exposure but lack a true cost-containment mechanism. Critics who say our budget would leave seniors paying more are ignoring the fundamental laws of economics. In stark contrast to reducing reimbursements to providers and denying benefits to patients, our plan relies on the best cost controls ever devised: consumer choice and competition. When providers are forced to compete for patients' business, they will look to lower the costs and increase the quality of their services -- the way it always works when the consumer is in charge.

The urgent need to reform Medicare and the president's misguided response have left us with a profound question: Who should be making health-care decisions for you and your family? A panel of officials in Washington? Or you?

(Paul Ryan represents Wisconsin's First Congressional District and serves as chairman of the House Budget Committee. The opinions expressed are his own.)

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From Andrew:

This argument is overly simplistic -- if you actually work in healthcare, you would see it right away - I agree with him that government inaction is very dangerous - I do not agree with him that the private sector can do this better - here is why:

1. the private sector pays using a fee for service model as well and while there are good models in the private sector, they have done little to control costs.
2. Most, if not all doctors, get paid more by private insurers – not less – so it actually costs the healthcare system more
3. I do not believe seniors would have protection from the poorly run system we have today – it’s very confusing – and simply letting the private sector takeover would leave too many vulnerable
4. Competition in the private sectors has done NOTHING thus far to control costs – private sector rates for policy holders are going up at alarming high rates of up to 30%.

However, I do not believe it is an unsolvable problem:

1. The Independent Payment Advisory Board set up by healthcare reform is actually a good idea – why would you not let experts in the healthcare system identify waste/inefficient healthcare to make changes
2. We need to start educating the public that there are limits to the amounts of treatments/drugs that we can afford – I do not mean to ration healthcare – that is taboo, but perhaps there can be limits on incredibly expensive drugs that have marginal benefit – take for example Avastin, the drug used to treat cancers.  I does not work in late stage breast cancer.  Costs 100,000 to treat a patient and studies show IT DOES NOT WORK.  While you cannot put a price on life, and Medicare clearly would has an impossible time saying no to covering the drug.  However, they could limit reimbursement – allowing the patient to decide if they want to spend some of their own money.  If we are not willing to confront these types of issues, we are fooling ourselves.
3. We need to change the rules on how the healthcare system reimburses providers.  Take for example colonoscopies – if done in an office, it costs less than $1,000.  Done in a hospital facility, it costs double or triple.  So unless we are willing to change how this all works, again, we are kidding ourselves.

In summary, while it’s simple to throw out ideas like privatizing Medicare, the fact on the ground is that it’s much harder to address all the complex and interconnected issues – that does not mean we should stop what has started, I actually think we need to be more aggressive.  I just do not think privatizing this system and turning into a voucher program will meet the real needs of our seniors.

While I disagree with him, I commend Paul Ryan for tackling this issue as it is a step in the direction of solving this country's healthcare problems.