Thursday, April 7, 2011

Defined Contribution Versus Defined Benefit in the Proposed Republican Reform of Medicare

The Disease Management Care Blog took a look at the House of Representatives' Republican proposal that reportedly includes a massive reform of Medicare. 

What's It All About?

As the DMCB understand it, persons who are currently less than age 55 would, when they become Medicare eligible, get "premium support payments" (think of them as sliding scale vouchers) that could be used to buy commercial insurance.  When this is combined with switching Medicaid to block grants and the repeal of the Affordable Care Act, health care costs measured as a percentage of gross domestic product (GDP) would be halved.  In exchange, however, the average beneficiary's out of pocket costs would likely increase.  The Congressional Budget Office has calculated the price of a 'standardized benefit" and determined that Medicare currently covers about 75% of its cost (it's all on page 21).  All else being equal, Medicare's share would decrease by 2030 to about 68% of the cost, leaving beneficiaries having to pay for the absolute difference of 7%.

The Politics

Check out the Republican pitch and viewers will see a prudent cost cutting "path to prosperity."  Given the Democrat's pugilistic retort using the tiresome jargon of "Big Oil," "slashes support for seniors in nursing home," "tax breaks" and "tax cuts for the wealthiest," voters can predict where this is going. 

Curiously, (at the time of this writing*) there are no fawning "web-first" policy exclusives on this Republican proposal from any of the high visibility medical journals. This forced the intrepid DMCB to go-it-alone. Navigating through the distraction of the partisan background nattering, the DMCB concluded the Republican proposal could be nothing less a "tipping-point" public sector move away from an entitlement policy of "defined benefit" to one of "defined contribution". 

Defined Benefit vs. Defined Contribution

In broad terms, the Medicare entitlement (once deductibles, co-pays and other limitations are factored in) covers the "benefit" of  all medically necessary services. Representative Ryan proposes the government change that by providing Medicare beneficiaries with a dollar "contribution" that, in turn, can be used by them to buy on their own insurance.  While the details are fuzzy, the Republicans are proposing that that contribution can be flexed based on income status, pre-existing illness and the evolving price of a standard benefit.

Those of us working in the private sector have long gotten used to the notion of "defined contribution" in retirement funding.  That's obviously less true for public employees, who are grappling with the twin downsides of grumpy taxpayers and governments' fickle unwillingness to adequately fund an open ended benefit promise. Medicare's travails are eerily similar, the only difference being that a) this is health care, not retirement (Social Security is not being touched... yet) and b) future Medicare beneficiaries have met the two-headed enemy of taxpayer vexation and government underfunding, and they are us.

The Third Rail?

While this wrinkle on "benefit" versus "contribution" may be noteworthy, the DMCB will bravely go one step further on the notion of the dreaded "Third Rail."  Given the growing familiarity with "defined" benefit arrangement in the young and middle aged workforce, the DMCB thinks this may turn out to less of a showstopper than generally appreciated. Arguments that future Medicare beneficiaries can find a better health insurance plan on their own may resonate with chronically disillusioned and independently minded Generation X'ers.  Current Medicare beneficiaries - the ones who vote - won't see any change.  Next?

Aside From the Politics, What Else?

Is this all about cutting the budget deficit?  A responsible attack on the burgeoning U.S. debt?  A repugnant exercise in social injustice? A long needed debate on the role of government? Irresponsible cost cutting that ignores the revenue side of fiscal probity?  2012-style political brinkmanship?  "All that too!" says the DMCB, but as the debate unfolds, it will ponder two additional under-appreciated dimensions in the Republican proposal:

1. What will the Republican plan do to assure that these "premium supported" insurance plans deliver?  That includes financial strength, a decent benefit and the flexibility to adopt novel features like future iterations of population health management.  Given the stubborn pandemic of chronic conditions, there may be a role for government in assuring that insurers cover modern versions of high value health care.

2.  While cost cutting is always welcome to the DMCB, what do the health insurance actuaries (and international bond markets) have to say about the predictability of the Republican plan? Thanks to countless broken promises, the DMCB is initially skeptical about government projections on a "percent of a standard benefit."  Yet, one possible advantage of the Ryan Plan is that taxpayers (and holders of Treasurys) won't continue to be held hostage by the open-ended promises of Medicare.  We may or may not be able to ultimately afford what the House Republicans are proposing, but at least our budgets may turn out to more predictable than the current Medicare benefit.

Stay tuned!

*Coda:  After posting this on the evening of April 7, the DMCB got an early morning April 8 New England Journal email alerting it about this Perspectives article predictably titled "How Not to Reform Medicare" by the Brooking Institution's Henry Aaron.  It makes many of the same distinctions between "benefit" versus "contribution" and, while extolling many of the virtues of premium support payments, notes there's a problematic cost-shift to beneficiaries as well as diminished consumer protections (especially among duals).  Dr. Aaron points out he invented the concept of premium support payments and doesn't like what he sees.

1 comment:

Bradley Dean Stephan said...

Kudos to DMCB for even attempting to incise and biopsy Ryan's hope, as well for walking the middle rail in exploring its pros and cons. Of course, to update an old phrase: "All politics is ideological." (Remember, you heard it here, first!) By this I mean one's evaluation of Ryan's bill is in the eye of the beholder, with the fundamental determinant being whether the beholder places more faith in government or more faith in business. For me, I'd rather place my fate (and 'old age benefits') in the hands of voters, rather than shareholders.