YOU DECIDE: What’s the best approach to Medicare?

Date posted: August 31, 2012

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

I’m only a couple of years away from being eligible for Medicare, the federal government program to help senior citizens pay their medical bills. So as someone who will soon be using Medicare, I’m keenly interested in its future.

Unfortunately, according to most experts, Medicare’s future is in doubt. The reasons are simple. The number of seniors is growing rapidly, they are living longer, and medical care costs have been rising faster than incomes.

The result: government spending for Medicare has been jumping off the charts and soon could comprise an unsustainable chunk of the federal budget. Therefore, all plans to slow the growth of government spending and borrowing have to address Medicare. The big question, of course, is how?

With the selection of Representative Paul Ryan as a vice-presidential candidate, alternative approaches to restraining the rise in Medicare spending are now front and center in today’s political campaigns. Representative Ryan has developed a detailed plan for Medicare that is in sharp contrast to ideas outlined by President Obama and his administration.

Both approaches — the Ryan plan and the Obama plan — actually have the same goal of limiting the annual growth in Medicare spending to the growth rate in the total economy plus 0.5 percent. This is an ambitious goal, because it would cut Medicare’s growth rate of the past 20 years in half.

But the plans differ dramatically on how to accomplish this goal. The differences focus on the degree to which economics can or cannot be applied to our health care system.

The Ryan plan ultimately relies on the mainstay of economics — competition — to moderate the growth of Medicare. Following his ideas, Medicare recipients could choose among several private insurance plans for coverage of their medical costs. The government would financially assist seniors in the purchase of their plan.

The amount of subsidy would depend on the cost of the insurance plan chosen by the Medicare recipient. The government would establish a benchmark plan with certain features and reasonable costs. Seniors choosing a more costly plan would receive a smaller subsidy and likely have to pay more out of pocket, while seniors choosing a less costly plan would receive a larger subsidy and maybe even a cash rebate. Additionally, all financial assistance would be calibrated to the medical condition of the senior, meaning the sickest seniors would receive higher subsidies.

The Ryan plan is placing a big bet that competition, one of the key features of economics, will keep Medicare costs in line. For example, if insurance company A charges more for its policy than insurance company B does for the identical policy, then one of two things will happen. Either everyone will buy from B and A will go out of business, or A will reduce its price to be more in line with B.

So the essential idea of the Ryan plan is that seniors will now have a financial incentive to shop for the best insurance policy that meets their needs at the lowest cost, just like seniors and all consumers do with most products and services.

But not everyone thinks competitive economics works in the health care field, and this viewpoint is the basis of the administration’s proposal on controlling Medicare costs.

There are two potential issues that some analysts see in applying the traditional competitive model to health care. One issue is based on lack of information. Properly functioning competitive markets rely on consumers having enough knowledge and skill to evaluate alternative products and their prices and select the best one for their situation.

However, critics of applying the competitive model to health care say medical issues and medical insurance policies are simply too complicated for the average consumer to evaluate effectively.

Secondly, many say that health care — because it deals with life and death — should not be treated like other products and services and put in the hands of companies whose objective is to maximize profits.

Therefore, say these critics of the competitive plan, government needs to use its power to protect seniors by issuing regulations and promoting incentives to move the heath care system toward greater efficiency and improved outcomes.

Of course, supporters of the competitive approach have retorts to their critics, including that third parties as well as competing companies can provide the necessary information to seniors for competition to succeed.

But the larger point is that we now have a big debate about the best approach in Medicare. It’s one we all need to follow, because this is one of the biggest you decides we face today. As a senior citizen, I know I will be watching!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/

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