Monday, May 30, 2011

Obamacare v Ryancare


Patrick_L said...

Ok, some of my following comments are pretty wonky- but they need to be to rebut the Washington Examiner’s argument. The short-answer- Capretta and the Examiner are wrong. While the PPACA exchange subsidies have the potential to lose purchasing power like Ryan’s, under almost any conceivable scenario they are very likely to do much better than Ryan’s premium supports at maintain value. (The qualifiers are needed because the future is unknown, but PPACA’s exchange subsidies are designed to be much more resistant to erosions in purchasing power over time).

Slight sidebar but still relevant: Medical inflation has averaged about 2.5 percentage points above GDP growth since 1970. (Source: Ryan proposes having the premium supports always rise for everyone with increases in the CPI. CPI is generally well below GDP because of productivity and population growth, let along historical GDP+2.5 for medicine or GDP+1 or 0.5 that Obama has proposed trying to achieve. Everything also depends on whether growth rates are applied to total program costs or per-beneficiary costs, something which I’m not perfectly clear on for every plan. It’s hard to be definitive because of all the moving variables involved that depend on projections and other economic variables, but it’s obvious that Ryan’s standard is far more severe (possibly more than twice as severe) than anything Obama has proposed- which is particularly problematic because of the effects of compounding.

Ryan’s proposal has no connection to market signals or the cost trends of private health insurance- it simply sets out its formula, which means that the premium support payments run the risk (or near-certainty from all historical evidence) that they won’t keep up with the rising costs of health insurance- which will quickly lead to a declining value of the premium support payments. PPACA on the other hand is always partially linked to cost trends of health care, fully protected until at least 2017, and potentially fully linked afterwards (which would mean no relative decline in value of the exchange subsidies). However, the subsidies have the potential of losing some value/not keeping pace if the costs of all subsidies combined rise above about .5% of GDP. This could happen, but it isn’t certain. So that’s one difference- Obama’s PPACA proposal is less likely than Ryan’s to run into a situation where support payments would lose value.

In addition, the PPACA subsidies (while declining relative to health care cost increases- i.e. losing value) would under projections (and almost any conceivable future) rise much faster than Ryan’s CPI formula. This part is very complicated- I don’t understand fully how all of it works and the factors that go into determining the growth rates of the subsidies under different conditions- but CBO projects the exchange subsidies rising much faster than Ryan’s proposed-level. PPACA’s subsidies might still lose purchasing power, but they would do so much slower than Ryan’s premium supports would- a factor which is made particularly troubling do to the effects of compounding.

Patrick_L said...

Also, while Ryan has said his proposal would include income-adjusted support (so those who need more help would get more help), the growth rate formula (as far as I know, and I’m over 90% certain on this) does not include any income-adjusted protection. So the initial benchmarks under Ryan are income varied, but the effects of growth rates would equally impact everyone. PPACA’s subsidies are not only income-adjusted (and actually written in law unlike Ryan’s proposal- so we know that these income-adjustments in PPACA are sufficient- Ryan’s could end up being insufficiently progressive), the modified growth-formula that would kick in if the total cost of exchange subsidies rose above roughly 0.5% of GDP is income-varying. In PPACA, any erosion of purchasing power is progressive. Ryan’s approach does not include this modification- which means losses of purchasing power would hit Medicare beneficiaries equally, which would mean that low-income seniors would more quickly be hurt.

In conclusion, PPACA’s subsidies and growth rates are superior to Ryan’s in (at least) three important ways. They are far more connected to trends affecting the overall health care sector so are less likely to lose purchasing power, would lose purchasing power more slowly than Ryan’s approach, and would only do so in a progressive manner.

Other thoughts: The IPAB is an extremely powerful force for cost-control, as recognized by everyone with a brain. You can’t criticize its potential- you can only criticize how it does it. However, it’s important to remember that IPAB essentially does what any private company would do in these circumstances- find ways to save money. The problem for some is that Medicare is such a larger insurer that providers would almost certainly comply with. But- a point that conservative economists like Tyler Cowen have argued because they accept a government-program like Medicare is going to be around- if you’re going to have a government-program like Medicare- why shouldn’t it operate more like a private company and actually try to look after its bottom line? IPAB is not doing anything different than what a private insurer, or any company, would try to do in these circumstances. As far as I can tell, the problem people have with IPAB is that it’s a government program doing this.

Also, “Obamacare” is not “Ryancare” on steroids. Though they have major differences, if anything- “Ryancare” is “ObamaCare” on steroids. Ryan’s approach being successful and not hurting seniors’ health care would require far larger cost-savings than PPACA shoots for, and does so through a mechanism with far less potential to achieve the necessary cost-savings. In addition, Ryan’s approach is worse in that he applying the exchanges-model to an elderly and sick-population that is far more likely to be hurt by the incentives like adverse selection present in a private market system. In addition, let’s not forget that seniors are already well-served in the current program, and Ryan is proposing forcing future seniors out of that model and into a system with higher administrative costs and more fragmented market leverage for the insuring entity/ies- the last point which is problematic because of the rising evidence that much of the health care sector’s problems is excessive provider market leverage. The Boston Globe for instance has done some excellent research on how this problem affects Massachusetts’ health care costs (using information obtained from the requirements of RomneyCare).