Why Medicare Premium Support Makes No Economic Sense In Three Charts

Rep. Paul Ryan’s (R-WI) Medicare reform plan — which would provide future seniors with vouchers to purchase health care coverage from private insurers — is predicated on the assumptions that Medicare costs are spiraling out of control and that private insurers would do a better job of controlling spending than the federal government. But an analysis of spending data from the Urban Institute’s John Holahan and Stacey McMorrow reinforces doubt in both claims and finds that the traditional fee-for-service program is more efficient than private payers. As a result, the GOP’s Medicare reforms “unlikely to be the answer to Medicare‚Äôs rising costs and will, in some versions, simply shift a substantial amount of spending onto Medicare beneficiaries,” the authors conclude.

First, consider the claim that Medicare costs are so high that legislators must fundamentally restructure the program, take it out of government hands and hand it over to the private market.

Health spending in the last decade increased about 3 percentage points faster per year than the growth in GDP. Troubling yes, but growth in both private health expenditures and Medicare declined in the second part of the decade (you can partly blame the recession for this phenomenon).

Over the next decade, private health spending and Medicare expenditures are projected to grow at 5.7 to 5.8 percent per year. Those numbers are high, but the breakdown between Medicare and private insurance is revealing. Medicare will experience an influx of babyboomers, but as a result of the payment changes in the Affordable Care Act, “expenditures per enrollee are expected to increase by only 2.7 percent per year.” Private health insurance, on the other hand, will see far smaller enrollment increases, but spend almost twice as much — 4.9 percent more per enrollee per year:

Expenditure data from the last decade only reinforce the notion that Medicare is more efficient than private payers. For instance, enrollment in private insurance declined and the growth in private health expenditures naturally fell over the full decade (2000 to 2010). But per enrollee costs still increased 4.5 percent per year from 2006 to 2010. Over the 2000 to 2010 period, Medicare experienced a boost in enrollment — thank you baby boomers — while its per enrollee expenditure came in at slightly below private spending — 4.2 percent more per year — and growth actually slowed:

The Congressional Budget Office (CBO) estimates that “Medicare spending averages 11 percent less than a private insurance plan for the same package of benefits,” partly because “Medicare has lower administrative costs and has lower payment rates than private payers.” The ACA builds on these efficiencies by reducing payments to Medicare Advantage plans, hospitals, skilled nursing facilities, and home health services. Actuaries estimate “that these provisions have reduced the projected Medicare spending growth rate by more than 1 percentage point.”

So how exactly would the GOP proposal of transferring more seniors into less efficient — more expensive — private insurance save any money? Well, the only way it would is if seniors picked up more of the cost of coverage.

ThinkProgress intern Fatima Najiy contributed to this post.