Will Medicare Reform be a Republican Obamacare?

Originally published on the Petrie-Flom Center for Health Law Policy, Biotechnology, and Bioethics Bill of Health blog.

As the health care community waits with bated breath to see what will become of the Affordable Care Act under the Trump administration, Republicans in Congress have set their sites on another health-related initiative that has been on their wish list for years: reforming Medicare. While Trump promised throughout his campaign not to change the fundamental ways in which Medicare works — in part to appeal to older voters, who overwhelming would like the program to stay as it is — shortly after the election, “modernizing Medicare”appeared as a priority on the transition website for the new administration.

The reform many Republicans are pushing for — championed by Speaker of the House Paul Ryan (R-WI) — is privatization along the lines of Medicare Advantage. Instead of providing for full insurance coverage through the government, as traditional Medicare currently does, Ryan’s proposal would have eligible patients purchase insurance from private companies with financial assistance from the government. The theory is that by having private insurers provide coverage, Medicare will capture efficiencies of the private market, while simultaneously offering consumers more choice in the coverage they receive.

After Paul Ryan first unveiled this plan in 2011, the Kaiser Family Foundation released a report detailing the significant fiscal problems with this “modernized” vision of Medicare. According to the Foundation’s analysis, the average out-of-pocket expense for beneficiaries increase from $5,630 under the current system to $12,500. The reason for this increase, according to the Congressional Budget Office, is that providing coverage is actually more expensive for a private insurerthan it is for the government.  The proposal faces other economic challenges as well, and ironically, some of them stem from its close resemblance to Obamacare.

Under the Affordable Care Act, exchanges were created through which individuals can buy insurance plans that meet specific coverage standards with the assistance of government subsidies. Insurers cannot discriminate against patients on the basis of preexisting conditions, but can discriminate to some extent based on age. Interestingly, all of these attributes are shared by the Republican plan for Medicare. The proposal would create what are ostensibly “Medicare exchanges,” through which eligible consumers would purchase private insurance with financial assistance from the government. The GOP Medicare plan would also prohibit discrimination based on preexisting conditions, but would permit it on the basis of age.

The similarity to Obamacare is more than just an amusing irony. The Affordable Care Act made huge strides to increase coverage for previously uninsured individuals by prohibiting discrimination on the basis of preexisting conditions, by providing financial assistance for those struggling to purchase insurance, and by expanding Medicaid. However, as insurance companies have revised their premiums for 2017, it’s become clear that insuring sicker individuals — those who would previously have been denied coverage due to a preexisting condition — is taking an economic toll on insurance company risk pools. The Obama administration announced in October that premiums for 2017 will increase by an average of 25 percent — but for some they could increase by as much as 110 percent.

The GOP Medicare plan could have a similar effect, making affordable premiums short-lived. As with Obamacare, the plan would introduce a large number of older, sicker patients into insurers’ risk pools without adding any younger, healthier patients to offset them. As a result, it’s possible that the GOP plan would have the very same sustainability issues that Republicans are currently decrying in their criticism of the Affordable Care Act.

Proponents of the GOP proposal point to Medicare Advantage as an indication that all of Medicare can successfully and sustainably be privatized. But evidence from Medicare Advantage suggests that as people age and become sicker, they transition back to traditional Medicare, taking themselves out of the Medicare Advantage risk pools. Thus, the stability of Medicare Advantage premiums is not reliable evidence that privatizing all of Medicare would be similarly feasible. Furthermore, Medicare Advantage reaps financial benefits from the low prices negotiated by the traditional Medicare program, which private insurers simply don’t have the necessary bargaining power to secure.

It’s unclear whether the GOP will be successful in its quest to overhaul Medicare. To be sure, the program does have some sustainability issues — the 2016 Medicare trustees report estimates that Medicare as it currently exists will only be able to pay all its bills until 2028. But given how unpopular Medicare privatization is with elderly, conservative voters — and the uncertainty that the GOP plan will be sustainable and affordable — Republicans could face serious political backlash if they continue to pursue Ryan’s proposal. While admitting the similarities between Obamacare and the GOP plan for Medicare may be difficult for some congressional Republicans, acknowledging that the Medicare proposal could have similarly detrimental effects on private insurance risk pools will help avoid some of the sustainability issues starting to arise under the Affordable Care Act.

The Affordable Care Act was an incredibly important step towards ensuring that every American receives the health care they need — but it isn’t perfect. Let’s hope Republicans don’t make the same mistakes as they try to revamp Medicare.

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