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Changing perverse incentives

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April 09, 2011 | comments

As soon as Rep. Paul Ryan's plan to save Medicare came out, the Congressional Budget Office said it could result in old people spending a lot more out of pocket.

Or maybe not, said the CBO, but critics ignored the second possibility and touted the first as signaling that the congressman from Janesville must hate old people. One wonders: How do these critics use staircases, since they surely doubt that gravity will go on working?

Ryan, the Republican who heads the House Budget Committee, talked of Medicare as part of his bigger plan to stave off national fiscal ruin. He maps out taxes and debt and corn subsidies, but most admirably, he deals with the entitlement programs that make up 60% of federal spending - especially Medicare, the ever rising cost of which will smother us all as the baby boom retires.

Ryan proposes that Medicare's uncapped promise to pay medical bills be continued for anyone over 55 and replaced for those younger by a different deal: The taxpayers offer a large and certain subsidy for recipients to buy health coverage from a federally supervised array, as Congress does. Subsidies would be bigger for sick, less for the rich and would rise with inflation.

Plans would genuinely differ in cost and offerings; people choosing more coverage would pay more for it. This and the sum-certain nature of the subsidy gives seniors a stake in the cost of their choices. It makes them consumers in a market, rather than dependents of a strapped Uncle Sam.

This is the flaw with critics' claim that the subsidy won't keep up with medical costs. The CBO conceded as much: Its estimate assumed that Ryan's plan would have no moderating effect on prices, but then it noted, "Future developments under the proposal might be quite different."

Different is the whole point. Now, ordinary Medicare pays bills directly whether they were too high or care was unsatisfactory. Recipients have little incentive or ability to shop. The point of Ryan's channeling money through individuals isn't to shove off costs - subsidies would about match current spending at the outset - but to change this perverse system into something where doctors and hospitals must pay attention to value and cost because their patients have the power to make them do so.

Nor is this theory. Markets work to restrain costs and improve quality across the economy. They even work in Medicare: The Part D drug benefit runs in much the way Ryan proposes and, shockingly for government, has cost much less than expected.

When critics (and the CBO) presume that turning 45 million of medicine's biggest users into consumers will do nothing to restrain costs, they're not discounting some political notion but the observed reality of goods and services from the simple to the nearly opaque. The burden is on critics to explain why the laws of economics, as real as gravity, won't work in retiree health care.

Keeping things as they are isn't an option. "Everyone can say, 'I want a system where the government covers 80% or 100% of health care costs,' but that just is unsustainable," said budget analyst Brian Riedl of the Heritage Foundation.

The traditional approach is for the government to save money by declaring it will underpay doctors. Result: The number of doctors accepting Medicare patients dwindles, even as Medicare spending rises at twice the rate of inflation and Congress annually must adjust rates up anyhow. Those so-called "doc fixes" illustrate why Washington's traditional approach is out of time anyhow.

Get the incentives working right in Medicare, and we do more than just save the federal budget. We re-establish a market fouled up for decades by the assumption that nearly everyone's health care will be paid for by someone else. Put the power of cost-benefit decisions in the hands of patients rather than with the bill-paying employer or, heaven help us, some federal cost-containment panel, and we can restrain costs for patients of all ages without having to ration in ways that leave people unsatisfied or uncured.

It means our society will be able to afford to help the elderly rather than bickering endlessly about who must pay a bankrupting bill.

Patrick McIlheran is a Journal Sentinel editorial columnist.


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