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September 27, 2012 10:15 AM The Market Won’t Save Medicare

By Max Ehrenfreund

Despite its soporific title, the Independent Payment Advisory Board is one of the most powerful elements of the Affordable Care Act. The health care law’s writers designed the board to protect decisions about Medicare from lobbyists, who almost everyone agrees are a serious problem for the beleaguered program. That’s Daniel Kessler’s argument in the latest issue of National Affairs, although he criticizes the Independent Payment Advisory Board as inadequate to the task. What he has to say is worth reading.

The Independent Payment Advisory Board can restructure how Medicare pays providers. For example, the board currently compensates clinics and hospitals for each operation, test, or other procedure done on a patient. Since providers make more when physicians perform more procedures, they have no reason to eliminate unnecessary treatments. One popular reform idea is for Medicare to pay providers a flat fee per illness or injury treated, encouraging hospitals to find ways of treating patients more efficiently.

The board’s recommendations are automatically implemented unless Congress votes otherwise, which gives it some independence from medical industry lobbyists. The current system enriches the industry at the expense of the public, and their lobbyists have repeatedly persuaded Congress to ignore various recommendations from experts and staff about how to reduce the amount of money the government spends on Medicare. As Sebastian Jones wrote in this magazine last year, the industry’s influence on Capitol Hill is so pervasive that a group of House Democrats broke with the President Barack Obama and supported a bill to eliminate the Independent Payment Advisory Board.

But if the board’s members succeed, they could not only reduce Medicare costs, but make the medical industry as a whole more efficient. Hospitals adjusting to the government’s new reimbursement protocols would encourage private insurers to follow suit.

Kessler argues that the board will be vulnerable to politics as usual, and worries that Congress could hijack its recommendations in revising them. I hope he is wrong, but if he is right, the best solution is to look for ways to ensure the board’s independence. Kessler did not persuade me that turning Medicare over to private insurers would solve the problem.

He advocates for a partial privatization of Medicare and a government subsidy to help beneficiaries pay their premiums, along the lines of Sen. Ron Wyden and Rep. Paul Ryan’s proposal:

Premium support entrusts decisions about particular cuts to a market. In doing so, it not only takes some power over Medicare administration away from Congress, but also weakens the incentives of organized interests to lobby against spending restraint in a way that IPAB does not.

Trusting decisions to “a market” is not always a good idea, and insurance markets are notoriously untrustworthy. There are all kinds of reasons why insurance markets can fail—as the recent history of the medical system in this country demonstrates.

As evidence that premium support could reduce costs, Kessler points to the Medicare Advantage program. Elderly people who choose Medicare Advantage eschew traditional Medicare and buy their insurance from a private agency, with help from the government. In fact, the program looks very similar to Wyden and Ryan’s plan.

That plan sets the amount of government support according to the second-lowest bid entered by the private insurers—otherwise they might sacrifice quality to offer the cheapest policy. The second-lowest Medicare Advantage plan tends to be about 9 percent cheaper than existing Medicare.

Yet that number is misleading, since those cheaper, private plans are successful only because they attract healthier customers, as Peter Orszag explains:

Imagine two beneficiaries. One has medical expenses amounting to $150 and the other, $50. The average cost is $100. Now imagine that a private plan bids $90 to cover beneficiaries, so it looks to be about 10 percent cheaper than traditional Medicare. That plan, however, while it is designed to be very attractive to the $50 beneficiary, isn’t appealing to the $150 one, so that person stays in traditional Medicare.
The result is that total costs rise from $200 ($150 for the expensive beneficiary plus $50 for the inexpensive one) to $240 ($150 for the expensive beneficiary plus $90 for the inexpensive one). So even though the plan “looks” like it saves money, it doesn’t. It overpays to cover the $50 beneficiary. (And that’s not even taking into account another factor: that if Medicare’s purchasing power is splintered, its negotiating leverage will be reduced. So the prices it must pay could rise. That would drive up the cost of covering the $150 beneficiary, pushing the total above $240.)

Orszag goes on to cite a paper that found Medicare typically overpaid its Medicare Advantage agencies by around 25 percent.

Kessler acknowledges this objection, and suggests that Ryan’s proposal could make cheap private plans more attractive to the elderly, cutting costs more effectively than the Medicare Advantage program. Yet that seems unlikely, if, as Kessler writes, the government subsidy is higher for people who are sicker and poorer in proposals such as Ryan’s. With the extra money, they’ll be less likely to feel a need to try to reduce their expenses.

People who are very sick will probably always choose to pay more for an insurance policy that offers them better coverage rather than to pay no more than what the government offers, or to keep the difference between the amount of the subsidy and a cheaper plan, as Ryan’s proposal would permit them to do—especially if they are comparatively wealthy.

Even if reducing costs this way is possible, Kessler’s argument is a reminder of what kind of society the Republican vice-presidential candidate envisions. Individuals who are now partially sheltered by Medicare will be wholly subject to market forces. They will make decisions about how they will grow old and die largely based on their assessments of the costs involved. Even more than they do today, the wealthy would confront death with greater ease than the poor. That’s the consequence of a proposal that “entrusts decisions” about medicine “to a market.”

Perhaps that’s all right for someone who believes it’s fair if the single most important experience in human life is better for those who have made more money. I suppose Ryan may be that kind of thoroughgoing capitalist. Yet cost sensitivity is not like the sensitivity of some scientific instrument. People don’t simply respond to price signals the way a satellite dish or a thermometer registers other kinds of signals in the environment. Cost sensitivity is something people feel, a burdensome, painful facet of human psychology. Wherever possible, our goal should be to place cost sensitivity on hospital administrators and public health officials, not on those facing grave illness and death.

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Max Ehrenfreund is a former Monthly intern and a reporter at The Washington Post. Find him on Twitter: @MaxEhrenfreund