Curb Medicare Spending the Ryan Way

October 5, 2010

Nothing presents as great a threat to the federal budget -- and therefore to economic growth -- as the persistent and rapid growth of Medicare spending, says Michael F. Cannon, director of health policy studies at the Cato Institute.

Rep. Paul Ryan's (R-Wis.) "Roadmap for America's Future" proposes tight limits on Medicare's growth, and has a better shot at reducing future Medicare outlays than past efforts because the Roadmap would change the lobbying game that fuels Medicare's growth.

  • 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, says Cannon.

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.

A voucher system would also put downward pressure on prices across the entire spectrum of care.

  • It will be far more difficult for producer groups to obtain or protect excessive risk-adjustment weights when markets are constantly showing how to deliver care more efficiently.
  • Income-adjusted vouchers would also change the game on the "patient" side, by diminishing well-to-do enrollees' incentive to lobby for higher Medicare spending.

Vouchers are the most plausible way to restrain Medicare spending.  They are also the most humane way, because they let enrollees retain the benefits that mean the most to them, says Cannon.

Source: Michael F. Cannon, "Curb Medicare Spending the Ryan Way," Investor's Business Daily, September 28, 2010.

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