The Magazine

The Democrats’ Fuzzy Math

Yes, Paul Ryan’s Medicare plan would lower costs.

Jul 18, 2011, Vol. 16, No. 41 • By JEFFREY H. ANDERSON
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President Obama and the Democrats claim that the Medicare reforms proposed by Paul Ryan and the Republicans would shift the burden of health costs onto the backs of seniors. This has been the central—and essentially the only—argument the Democrats have made against the GOP plan. But the Democrats’ claim is contradicted by four decades’ worth of empirical evidence. 

Paul Ryan Picture

Dave Clegg

Under Ryan’s proposal, the government would provide premium support to future seniors (who are now under 55) to help them purchase a private health plan of their choice. Participating insurers would have to cover all comers and couldn’t vary premiums based on health status. The poor would get additional help. The reforms are designed to facilitate competition and choice, without having government bureaucrats ration care.

The Congressional Budget Office (CBO), however, projects that increasing competition and choice would actually raise costs. While saying it “is hard to predict,” the CBO projects that spending under Ryan’s plan “would grow faster than such spending for the same beneficiary in traditional Medicare.” But experience suggests the opposite.

A Pacific Research Institute study I authored found that the costs of the two flagship federal health care programs—Medicare and Medicaid—have risen far more than the costs of all other health care in the United States. From 1970 through 2008, the costs of Medicare and Medicaid each rose one-third more, per patient, than the costs of all other health care in America—the vast majority of which is purchased privately. And that’s without counting the Medicare prescription drug program.

In fact, if Medicare’s costs had risen only at the rate of non-Medicare, non-Medicaid costs, the program would have spent $7,197 per beneficiary in 2008 instead of $9,634. That 34 percent difference adds over $100 billion to Americans’ annual tax burden. 

Even more tellingly, as a percentage of the gross domestic product (GDP), Medicare’s and Medicaid’s costs have each risen more than twice as much as the costs of all other health care in America. Health costs apart from Medicare and Medicaid have grown 41 percent per patient, in relation to GDP, while Medicare’s and Medicaid’s costs have grown 89 percent and 91 percent—nearly doubling—as a share of GDP. 

So why would the CBO claim that allowing seniors to choose among private plans would increase Medicare’s costs? In recent congressional testimony, CBO director Douglas Elmendorf admitted that his agency doesn’t have “the tools, the analysis we would need to do a quantitative evaluation of the importance” of injecting more competition and choice into the health care system. 

Likewise, when assessing the dramatic reduction in payment rates to Medicare providers, which is slated to happen as a result of colossal sums of money being siphoned out of Medicare and spent on Obamacare, Elmendorf says the CBO doesn’t attempt to “model the access to care or quality of care” that would result. Instead, the CBO simply assumes that providers would continue to treat just as many Medicare patients, giving them exactly the same quality of care, despite being paid far less for their services—less even (eventually) than for treating Medicaid patients. 

Elmendorf recognizes the problem, saying, “That is a gap in our tool kit and a gap we are trying to fill.” In the meantime, however, the CBO is clearly—and admittedly—scoring government-based proposals (cutting payment rates, imposing price controls) far too favorably while similarly understating the benefits of market-based solutions.

In addition to these admitted shortcomings in its analysis, the CBO is likely relying on frequently cited studies that look only at the rise of private insurance costs, while ignoring the profound shift in the private health care market away from out-of-pocket spending. According to figures from the Centers for Medicare and Medicaid Services (CMS), in 1970, private insurance expenditures accounted for just 38 percent of all private health costs. In 2007, they accounted for 74 percent. Correspondingly, out-of-pocket expenditures dropped from 62 percent to 26 percent. Imagine if Medicare used to cover only 38 percent of seniors’ care and now covered 74 percent, yet that change wasn’t taken into account in gauging its success in controlling costs. 

Under Ryan’s plan, it’s unlikely that private insurers would continue to absorb an increasing percentage of out-of-pocket costs. (If the CBO thinks otherwise, it should factor seniors’ out-of-pocket savings into its analysis.) The apt comparison, therefore, is total private costs versus total Medicare costs, and the latter have risen far more than the former. 

Nor is this attributable to the fact that it costs more to cover seniors. My study measures the percentage growth in costs, not the absolute rise, and it cost more to cover seniors in 1970, too. What’s more, the most recent CMS age-based figures (which cover ages from birth to 64) show that, from 1987 through 2004, the fastest-growing medical costs were for those 18 and under.

Why, then, do Medicare’s costs rise disproportionately? Because the program is as devoid of healthy competition as it is replete with wasteful inefficiency. In Medicare, if providers get it right the first time, they get paid once. If it takes four or five times—at seniors’ inconvenience and sometimes at their peril—they get paid four or five times as much. 

In neglecting this historical evidence, the CBO is likely erring not only in its cost-growth estimates but also in its initial projections. While admitting it is “difficult to estimate,” the CBO says that, as of today, coverage under traditional Medicare would cost 11 percent less than coverage under Ryan’s proposal (which wouldn’t go into effect until 2022).

The CBO bases this estimate on private plans’ higher administrative costs and higher (per-procedure) payment rates to providers. But there are two problems with this: One, Medicare’s notoriously low payment rates don’t keep providers from making up the difference (and then some) by prescribing more care—which Medicare almost always pays for, no questions asked. Two, most private administrative costs are money well spent—in establishing networks of accountable doctors, combating fraud, and so on. 

The CBO cites Medicare’s administrative costs at 2 percent and private insurance’s at 11 percent (including taxes and profits). The Washington Post and 60 Minutes, however, have reported that Medicare loses $60 billion a year in fraud, and the Government Accounting Office cites a figure of $48 billion, which it admits is incomplete. Just splitting the difference, that’s more than four times the combined profits of the nation’s 10 largest health insurers last year (according to the Fortune 500)—and it adds more than 10 percent to Medicare’s costs. That alone eliminates the gap in administrative costs—and then some. 

Could the CBO really be overstating the initial cost of coverage under Ryan’s proposal by 11 percent (or more)? Well, the CBO was off by 35 percent—in the same direction—in its 10-year estimate for the Medicare prescription drug benefit, a program after which Ryan’s Medicare reforms are largely modeled. 

In all likelihood, premium support under Ryan’s proposal would cover the entire cost of most seniors’ plans. Support would then rise with inflation (although this could easily be modified to, say, inflation plus 1, 2, or 3 percent—as necessary—while still generating massive savings). Most important, by facilitating competition and choice among private plans, Ryan’s reforms would dramatically reduce the growth of Medicare’s costs—thereby making it much easier to keep the program, and the country, solvent. 

It boils down to this: Things don’t get cheaper or more efficient by being funneled through the massive bureaucratic apparatus of the federal government. The Democrats, and the CBO, would have us believe that they do. But empirical evidence and common sense say otherwise.

Jeffrey H. Anderson is a senior fellow at the Pacific Research Institute.

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