A Health Care Plan Ryan, Obama, and Romney Should All Get Behind

Isabel V. Sawhill

Health care spending in the United States is on an unsustainable path. Because it is growing much faster than our incomes and our economy, it threatens to dominate the budgets of households, businesses, and governments, crowding out other priorities.

As we contemplate the future and debate what to do, we need to recognize that we face a fork in the road. One path leads to a privatized system. The other path leads to a public system. The path we take will have enormous consequences for our society.

No wonder debates over health care have become so fierce. But here’s the good news: A sensible compromise is not only possible but may be the best outcome. In a hybrid system, everyone – whether young or old – would have access to both private insurance and a public plan.

Right now, Medicare is primarily a public system. The government pays providers for whatever care is deemed necessary. In contrast, working-age Americans are in an essentially private system. Most of them are employed and covered by a private insurance plan that is heavily subsidized by their employers. The larger debate should be about which of these two systems makes more sense. Medicare for all? Or subsidized private insurance for all?

Let’s stipulate that the amount of subsidy provided to the individual is the same in both cases. In addition, let’s assume that the subsidy is adjusted for an individual’s age, health status, and income. Finally, there has to be a cap on total spending growth as there is in most other advanced countries and in the Affordable Care Act beginning in 2015.

These assumptions are both reasonable and allow us to focus on the major differences between the two systems. Note that under these assumptions, benefits for the elderly are more related to income than under Medicare but there are also more subsidies for the non-elderly, as in the Affordable Care Act.

The pros and cons of a public system

A public system has some obvious advantages. The government has enormous leverage to use its buying power to secure low prices and adequate coverage for recipients. Its administrative costs per person are likely to be low, with marketing costs and profits out of the picture. Other advanced countries with public systems spend far less on health care than the US and get just as good health outcomes.

On the other hand, in a public system, innovation and efficiency might be compromised. Politics would also almost surely play a role in establishing how providers are reimbursed and benefits designed. For example, in the Affordable Care Act, evidence about what works to improve health cannot be used to set reimbursement rates for providers, and the powers Congress has given to the independent board whose job is to help control costs are strictly limited.

But what really kills the idea of Medicare for all is the fact that government budgets for health care would more than double and taxes would have to rise to European levels or beyond to pay for the expanded public system. Can anyone imagine Congress – even a Democratic Congress – voting to roughly double the size of the federal government and the taxes needed to pay for it?

Where Paul Ryan’s ‘private’ plan falls short

One alternative is to move Medicare, which is essentially a single-payer public system, to look more like the private system used by most working-age Americans. Why should only older Americans benefit from a guarantee to health care at government expense?

Republican House Budget Chair Paul Ryan’s proposal to replace Medicare with “premium support” would, in principle, shift the elderly from a public system into an essentially private system similar to the one other Americans participate in through their employers. Under his plan, starting in 2021, newly eligible seniors would receive a subsidy to buy a private insurance plan on a regulated market exchange. The amount of the subsidy would be adjusted for the individual’s age, health status, and income. So far, so good.

The problem is that, under his plan, subsidies would grow only as fast as the rate of inflation in the economy as a whole – a rate that is much slower than the rate at which health care costs have been growing. As many critics have noted, the result is that seniors would have to pay far more out of pocket than they do now.

However, with some modifications – such as a more reasonable rate of growth for the subsidies and a continued public option similar to traditional Medicare – his plan could work quite well.

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The promise of a hybrid health care plan

This kind of hybrid plan was featured in the Rivlin-Domenici Commission report last fall. Insurance companies would compete to provide the best coverage possible at the lowest cost. They would have every incentive to favor providers who innovate in the delivery of care and end up providing better care at lower cost. Consumers would also have more choices than under a single payer alternative.

Without further innovation in the health care sector, costs will continue to escalate, and the only issue will be who pays for them: the individual or the taxpayer. Getting better value for our health care dollar – wherever it is spent – is absolutely critical.

The conclusions are clear: Medicare for all is not a viable solution in a country that doesn’t like big government or much higher taxes.

A privatized system has some advantages; however, the benefits of choice and competition are often exaggerated. Most health care expenditures are concentrated among a small group of individuals who are in no position to shop for care, and competition among insurance companies has done little to restrain costs. Anyone who believes otherwise should look at Medicare Advantage – the privatized version of regular Medicare. It has not achieved any clear efficiencies.

Fortunately, we don’t have to choose one system over the other. We are moving to hybrid cars, and we can move to a hybrid health care system as well. The solution may be to provide a private system for the elderly, but with a public plan as one option. The corollary is that we should then provide a public option for the non-elderly as well. I’d even like to think there’s the making of a grand political compromise here.

Democrats would have to accept some form of premium support for the elderly in return for Republicans accepting a public option for the non-elderly. Over time, individuals would then vote via their enrollment decisions on which option they liked better. The government would be forced to compete with the private sector on an equal footing. And the private sector would not be able to raise premiums without limit. Best of all, seniors and working-age Americans would be in the same system, leading to more fairness and greater efficiency for the system as a whole.