Robert G. Hansen is senior associate dean of the Tuck School of Business at Dartmouth College.
Medicare reform has again risen to the forefront of policy discussion. Republican vice presidential candidate Paul Ryan has proposed a "premium support" plan for Medicare which, along with other options, deserves serious review. Premium support is similar to defined contribution retirement plans, where an employer contributes a fixed amount to employees who can invest the money in a variety of mutual funds. My employer offers employees the choice of TIAA-CREF, Fidelity, and Calvert. Premium support is also similar to the current Medicare Part D prescription drug coverage, to the way that under-65 individuals will buy health insurance under the Affordable Care Act, and to voucher plans in education.
The Ryan plan raises the question of how much choice and variety we will have in health plans for the elderly. As an analogy, compare the offerings I have with my defined contribution plan (all the mutual funds and investment vehicles of the three firms noted above) to my choices of health plans offered by my employer (three similar plans administered through one company). I would much prefer to get "premium support" from my employer to buy a health plan, just as they give "premium support" to buy a retirement plan, because the high quality choices I have in retirement plans dwarf what is available on the health side. Vice versa, I cannot imagine having just three mutual funds offered by my employer in which to invest for retirement: I imagine the three funds would be something wonderfully creative like "conservative, neutral, and aggressive," and that the service would be terrible and the management fees huge.
The current situation in K-12 public education provides another useful analogy. Public primary education in many parts of this country is far from great, with many parents therefore choosing to send their children to private schools. Yet the use of school vouchers is still limited. A two-tier educational system results in (broadly speaking): public schools for most students, and private schools for the wealthier. If vouchers were available to all, there would be a larger variety of schools available, at different prices and with different focuses, and all parents would be free to choose what kind of school they want their children to attend. There are other issues involved with vouchers, but this prediction about the extent of choice available if vouchers were more prevalent is a safe one.
The Ryan plan would open up healthcare plans for the elderly in exactly the same way. Citizens would use their voucher/credit to buy a health plan on the open market, and competition would ensure a variety of plans ranging from basic to elaborate. The basic plan could be stipulated to be of a minimum coverage level, just as for private plans under the Affordable Care Act. However, even within those constraints, we should expect to see a wide variety of different plans, with different deductibles, co-pays, wellness incentives, and even coverage for different devices, procedures, hospital stays, and long-term coverage. And, of course, citizens could opt to put more of their own money into healthcare, to buy whatever kind of plan they want and can afford. Instead of setting specific service reimbursement rates for doctors and hospitals, the federal government would simply determine the level of premium support.
If Medicare remains as it is, with everyone required to enroll in the basic plan, we are likely to end up with a two-tier outcome similar to public education. Basic Medicare is a one-size-fits-all option, and we all pay for it through our taxes. To a limited degree, two tiers have already formed, with some seniors buying supplemental insurance on top of Medicare, and some employers continuing to provide medical coverage to previous employees, leaving Medicare as secondary coverage. But with the basic plan designed in Washington and imposed on everyone, without an opt-out, the vast majority of citizens will be denied meaningful choice in their health plans in old age. While there are other important considerations in dealing with Medicare reform, there is a fundamental question about the extent to which we want choice to be part of the health equation for the elderly.