During his health care address on Tuesday, House Budget Chairman Paul Ryan (R-WI) explained his overarching health care philosophy this way: “Simply put, badly designed government policies are to blame for much of what is wrong with health care today, and the solution is clear: We need to transition from the open-ended, defined-benefit approach of the past…to market-oriented, defined-contribution reforms that promote choice and competition.”
The existing “defined benefit” approach is not without its problems, but it guarantees that Americans receive health care benefits and spreads the economic risks across rich and poor, healthy and sick. A defined contribution is a lump sum of money that does not come with any promises that it will be sufficient for individuals and families to purchase the health care coverage they need in old age. It also asks the individual to shoulder more of the risk of insurance.
As health care analyst Bob Laszewski put it yesterday, in Paul Ryan’s premium support dream world — in which future retirees are handed a lump sum (that’s the defined contribution) to go out and purchase insurance through an exchange of pre-approved private plans — “neither insurers nor health care providers would have any of the risk, and therefore responsibility, for keeping costs under control. The entire burden for the adequacy of these premium support payments would be with the beneficiary. If health care costs rose faster than these premium supports, tied to these indexes that have always trailed health care inflation, too bad for the beneficiary. Any excess cost is borne by the individual”:
Ryan and his colleagues would argue that this is just what we need to create—a market so robust we can finally begin to control costs. Beneficiaries struggling to make their health care dollars stretch would seek out those health insurance plans that really did control costs….As I have said before, after more than 20 years of defined contribution health insurance experience in the market there is no evidence this will occur. The Ryan school of health care thought argues that, “By putting the power into the hands of individuals, we can let competition work in health care just as it does everywhere else.”
I am continually amazed at those who argue the health care market can work, as Ryan put it today, “as it does everywhere else.” They are right that the health care system is too much driven by third-party pay and its beneficiaries have historically had too little incentive to be prudent buyers. But the health care market is also a one driven by complex science, major and legitimate philosophical differences about treatment choices, and enormous supply-side powers.
Indeed, Austin Frakt has pointed out repeatedly that if individuals with higher cost sharing really do use less care, then beneficiaries in employer-sponsored insurance (who receives a 40 percent tax subsidy, on average) should spend less than Medicare enrollees — who receive a far higher government subsidy. But data from the Kaiser Family Foundation suggest that this just isn’t the case.
“In short, grandma, or you or me for that matter, is no match for the American health care system,” Laszewski concludes. “[H]ospitals, doctors, drug companies, and insurers have the potential to affect the cost of health care far more than your grandmother will ever have.” And without taking steps to controlling their costs and changing the way they’re reimbursed, Ryan’s plan is just what it sounds like: a major cost-shift.