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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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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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