Medicare Vouchers Won’t Reduce Health Spending

By :: May 31st, 2011

The House Republican plan to replace Medicare with vouchers could lower national health spending in only one of two ways: Either seniors would respond to higher out-of-pocket costs by using less—or more efficient--health care, or private insurance companies would ration their care for them. In effect, insurance company bureaucrats would replace those government bureaucrats so disparaged by House Republicans.  

If neither happens, the GOP plan will fail to reduce overall health spending. The proposal to give those turning 65 in 2022 a subsidy to buy their own insurance would merely shift those costs from government to the elderly. Unfortunately, there is no evidence that either of these strategies would reduce total medical expenses, at least based on what we know about past experiments.

Today, Medicare beneficiaries pay about one-quarter of the program’s cost. Under the House plan, proposed by Budget Committee Chair Paul Ryan (R-WI), seniors would pay about 60 percent in 2022 and nearly 70 percent by 2030. What would happen if they paid more?

For 30 years, studies have found that when people are required to spend more out of pocket, they not only cut out unnecessary care, but also avoid care they need. And delaying early treatment or prevention can lead to higher long-run costs.

What if  insurance companies ration care? The theory sounds great: Insurers that provide the most cost-effective care can lower premiums and attract more buyers. But as we learned in the disastrous HMO experiment of the 1990s, there is a fine line between managing care (a very good thing) and cost-cutting.

Properly coordinating care for seniors with multiple chronic diseases may both save money and improve health outcomes.  However, the perception that insurance companies were merely slashing benefits to boost profits inspired a consumer revolt two decades ago. The result:  HMOs largely disappeared and little has been done to control the long-term growth of medical expenses.

Despite claims to the contrary, there is no conclusive evidence that less medical spending results in better or equal long-term health outcomes. Research results are all over the place, depending on which patients are studied and for how long. The latest study-- by George Mason University researcher Jack Hadley and my Urban Institute colleagues Tim Waidmann, Steve Zuckerman, and Bob Berenson finds there is a small but “statistically significant relationship between medical spending and better health” among Medicare patients.

The House budget not only would replace Medicare with vouchers but also repeal the 2010 health law-- which does include some real cost containment. Those provisions are exceedingly modest and many are in the nature of experiments—a good choice given how much we still need to learn about delivering cost-effective care. Most reforms would be designed by hospitals and doctors, with a nudge (or more) from government.  

The health law also includes the much-criticized Independent Payment Advisory Board (IPAB), a panel that would recommend Medicare budget savings to Congress and the White House starting in 2014. But the IPAB is barred from proposing cuts in benefits or eligibility. In effect, all it can do is propose to cut payments to providers.

By repealing the health law, the House GOP would also eliminate the two key mechanisms seniors would need to buy insurance on the open market—a requirement that insurance companies not discriminate against those with pre-existing conditions (80 percent of those 65 and older have at least one) and exchanges though which buyers can shop for individual coverage. But even if they could somehow fix those problems, the GOP still needs to show how its plan is going to lower overall medical costs which is, after all, the whole point.


  1. Michael Bindner  ::  4:32 pm on May 31st, 2011:

    The entire debate is premature until the impact of pre-existing condition reforms on the market is known. If people start dropping insurance until they get sick – which is rational given the weakness of mandates – then private health insurance will require a bailout into an effective single payer system.

    The only way to stop this from happening is to enact a subsidized public option for those with pre-existing conditions while repealing mandates and pre-existing condition reforms.

    This will require more funding, probably some kind of employer payroll or net business receipts tax – which would also fund the shortfall in Medicare and Medicaid (and take over most of their public revenue funding).

    If cost savings are desired within such a formulation, allow companies to offer services privately to both employees and retirees in exchange for a substantial tax benefit. Employers who fund catastrophic care would get an even higher benefit, with the proviso that any care so provided be superior to the care available through Medicaid.

    Making employers responsible for most costs and for all cost savings allows them to use some market power to get lower rates, but no so much that the free market is destroyed.

  2. Sid F  ::  9:50 am on June 1st, 2011:

    This Blog here attempts to show that the mere presence of a Voucher/Premium Subsidy will actually increase the price of health insurance

    using basic economic analysis. It illustrates how some, but not all of the government payment for private health insurance will be captured by insurance companies who can raise premiums. And since we all know that no Republican Plan will contain any kind of rate controls the insurance companies will be free to do so.

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    Although vouchers do incentive individuals to cut costs it won’t do anything on the supply side. What do you think the result would be of adding a single payer system as well to contain health care provider pricing?

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