What to Do About Medicare


The biggest single long-term problem for the federal budget is the out-of-control growth of Medicare. Naturally, the Republican Pledge to America, which calls for "fiscal responsibility" and warns against "pushing off our long-term fiscal challenges," has almost nothing of substance to say about it—and certainly nothing that would count as a "solution."

But that doesn't mean that potential solutions don't exist. Indeed, one of the most promising comes from the ranking Republican on the House Budget Committee, Paul Ryan.

Historically, the problem with Medicare has been the political difficulty of cutting payments to providers. Congress passed a law to govern payment rates in 1997, but has repeatedly voted to override reimbursement cuts whenever they've been on the table. The PPACA relies similar provider rate cuts to hold spending in check. But as Cato's Michael Cannon argues in today's IBD, when those cuts come on deck, we can expect "intense lobbying by enrollees and the affected producers will thwart these measures." By contrast, Cannon writes, Paul Ryan's Roadmap proposes a system that's far more likely to keep the program in check:

They're called "incentives." And we have to "change them."

The Roadmap, in contrast, would substantially diminish each producer group's incentive to lobby for greater subsidies. The Roadmap would give enrollees a voucher with which to purchase insurance. Sicker and poorer enrollees would get larger vouchers, and the average voucher would grow more slowly than Medicare spending has grown in the past.

Larger vouchers would mean greater demand for medical care. Yet each producer group's incentive to lobby for a higher growth rate would be much less than their incentive to lobby to increase the prices Medicare pays them today.

If hospitals lobby for a higher voucher growth rate, how will they know that the added subsidies will come back to them, rather than ambulatory surgical centers? Many groups would just free-ride on the lobbying efforts of other groups.

The fact that more producer groups would care about this growth rate than about each of Medicare's current price-control schemes paradoxically means that each group would spend fewer resources on lobbying. That gives the Roadmap's spending restraints a better shot at surviving the political process than the SGR or ObamaCare's cuts.

The crucial difference here is that Ryan's plan changes the incentive structure for providers, which would hopefully reduce pressure on legislators to continually throw more money at the system. Canon's right to frame the Roadmap as having "a better shot" than other methods; Ryan's plan is more likely to be effective, but there's there's never a guarantee. Still, it strikes me as a smarter way to reform the system than to come up with a new way to call for the same sort of cuts that have frequently failed to materialize in the past.