Rep. Ryan’s Budget Plan recommends a voucher program for Medicare eligible senior citizens that would start at an as yet uncertain date in the future.
I am not particularly fond of President Obama’s approach to Medicare. The problems are severe and many of them could be corrected very easily if he attended to the basics of risk management and insurance. Obama kicks a can down the street but the can will stay on the street and someone else will eventually kick it where it belongs in a few years.
Rep. Ryan, on the other hand, is kicking the can down the first sewer by the side of the street and nobody is going to be able to fix the mess his Plan will create. So understanding his plan is critical for health care providers and the health care consuming public.
And yes, I know that Ryan’s pain is deferred for many years – but it still happens some day and this is the impact it will have when implemented.
Of Politics And Ceiling Wax
This is a really critical moment and so despite the fact that all of us run the spectrum from Conservative to Liberal and beyond, I am going to try to explain some of the more obvious flaws in Ryan’s plans for Medicare. Regardless of one’s political views – reality is reality.
I will try to keep the numbers very simple – If you are interested you can get real numbers from Medicare data.
The problem with Rep. Ryan’s plan has a lot to do with ceilings of various types, as I will explain below.
Averages – What You Don’t Know Can Cost You
Suppose the average health care costs for Medicare recipients are about $10,000 a year. The lowest is $0.00 and the highest is somewhere in excess of $500,000.
50% of senior citizens incur health care costs less than $10,000 and 50% of senior citizens incur health care costs greater than $10,000.
Perhaps another 10-20% of senior citizens incur health care costs greater than $10,000 and lower than $13,000.
Somewhere we have the 5% of the Medicare population that will incur the highest cost during the next years. i will assume that their health care costs exceed $100,000 during the next year.
We, and obviously health insurers, can fairly accurately predict membership in these three different groups on the basis of past Medicare and health services costs
How Insurance Really Works
Insurers have expenses. Insurers start with average costs and then they “load” this for operating expenses, profit margins, and the ubiquitous “Risk Premium” that compensates for the risks we think they are taking. Truth is large insurers do not take risks, only small insurers. But that is another article.
The operating expenses of small insurers are spread over small number of policyholders. Smaller the insurers have higher expense loads as a result. The higher the insurer’s expense load, the lower the amount of premium available to pay health care claims.
A big insurance company has a CEO. Two smaller insurers have two CEOs. A lot of the basic costs to run an insurance company are incurred regardless of size.
Let’s say that all these costs, when added to the $10,000 average health care costs for senior citizens come to a premium of $13,000 for the average Medicare recipient
I will be excessively kind to Rep. Ryan and assume assume that costs will NOT rise. Rep. Ryan’s plan fails to adequately adjust vouchers for inflation, assuming that this will keep ill and injured senior citizens from requesting care.
Rep. Ryan says his plan will create a dynamic marketplace for insurance and allow senior citizens to buy insurance rather than rely on Medicare. More to the point, Rep. Ryan says his approach will save money and Medicare.
So it pays to look for where the money may be saved and where definitely will not be saved.
Savings From Rep. Ryan’s Voucher Program
First step. If we know nothing about senior citizens at all, except the average cost of care ($10,000), it might seem that a fair premium for these new health insurance plans for ALL seniors would be about $13,000.
Pleasant as this thought is, it is incorrect. If you come into my Mom and Pop insurance company in a wheelchair I am going to roll your wheelchair right out the door.
Some senior citizens have heart disease, cancer, asthma, diabetes, kidney disease and liver problems. Others will be in hospitals the day they need to buy their insurance policies. These are the people who will be in the top 5% cost group for the next year.
No insurer is going to sell a policy for the top 5%, most costly, senior citizens for much less than $130,000. This involves the same expense loads, profit loads, and risk premium loads as are applied to seniors whose costs will average about $10,000.
Insurers could sell such policies for closer to $100,000. But unless insurance regulators are stepping on their throats, why would they do this? If Rep. Ryan was a champion of insurance regulation and government intrusion into the affairs of insurers, we might imagine that he would do this.
But Rep. Ryan’s commitment to government regulation of insurers is not so strong. We should not plan on health insurers selling policies to the most costly senior citizens for much below $130,000.
But even if the insurers cut their profit, risk premium, and expense loads way down, the least they are likely to sell that policy for is maybe $105,000. So, despite the fact that i am pretty sure most insurers will prefer more money, to less money, I will use the lower figure $105,000.
Savings: Let Me Count The Ways?
So let’s start counting up all the money Rep. Ryan is going to save us.
50% of senior citizens will incur health care costs less than $10,000 next year but will get a voucher for $13,000. Net savings to the Medicare program for 50% of senior citizens?
Additional costs of $3,000 – $13,000 per year. Huh?
Medicare doesn’t save any money at all when it takes out $13,000 and gives it to the healthiest senior citizens in the healthiest 50% because the vouchers they get cost more than the costs of their health care: At least $3,000 – $13,000 more than Medicare would have paid for their health care during the next year.
Another 10-20% of seniors would incur health care costs between $10,000 and $13,000 in the next year. How much will Rep. Ryan save by giving them vouchers? Not so much.
The cost of the voucher program, for these 10-20% of Medicare beneficiaries are higher than the costs of their care. Medicare will pay more, in vouchers, than the costs of paying for their health care.
So the savings from implementing the voucher program, for 60-70% of Medicare beneficiaries, will exceed the costs of leaving them in Medicare and this is not so good.
I usually look for a graduate of the Wharton School at the University of Pennsylvania to have developed a plan this sophisticated.
Where Medicare Does “Save” Money
Now, since we obviously don’t save any money on healthy people, in fact we pay out far more from Medicare’s trust funds than the healthiest 60-70% of seniors would consume in health care services during the next year, the savings in Ryan’s plan must come from sick people.
Stands to reason – sick people cost a lot to take care of so if you are going to be able to save money anywhere at all, it should be from sick people, and the most likely place to come from is the sickest senior citizens.
Rep. Ryan’s “Medicare savings” definitely come from sick seniors but the savings aren’t as clear as the source.
This top 5% sickest, costliest seniors will incur costs of at least $100,000. They got vouchers worth $13,000. They cannot possibly buy insurance policies with their vouchers, so they are highly likely to either stay on Medicare, hence no savings at all, or go without insurance and use their vouchers for food, shelter and utilities.
The Medicare program only “saves” at least $87,000 on the costs of care for senior citizens in the top 5% who do not stay on Medicare. But $87,000 is a lot of money to save, even if it is on a small number, less than 5% of the sickest and costliest senior citizens.
Sounds pretty good… Way to go Rep. Ryan!
Some of the 5% of senior citizens who will incur costs greater than $100,000 next year got a voucher for $13,000. They couldn’t buy any health insurance policy for less than $105,000 so unless they were very wealthy and could pay the additional $92,000 out of pocket they were uninsured. Even if they got policies, their policies will be very limited and their deductibles, co-payments and exclusions will result in very high additional out of pocket costs.
But, they did get a voucher worth $13,000 which they will be able to convert to cash.
Who Pays? Who Stays?
But remember, these are the 5% of senior citizens who have heart disease, cancer, asthma, diabetes, kidney disease, liver problems, etc. Some are already in hospitals and they are still going to consume exactly the same health care services whether Medicare is the payor, an insurer is the payor, they are the payor, a state Medicaid program is the payor or the health care provider doesn’t get paid at all.
Unless doctors, nurses and politicians are willing to roll these patients to the curb to get them out of
their facilities, these patients are going to continue to need health care services. The costs are going to be incurred by health care providers, and someone is going to have to pay for these costs.
I don’t expect to see Rep. Ryan doing clips where he wheels sick senior citizens out of hospitals and dumps them in the street any time soon. I would expect to see him in a clip where he is smiling and walking with a frail senior citizen who bought a policy when they were healthy and then had an accident.
Someone has to pay the professional and non-professional staff salaries and benefit plans, buy equipment and supplies, pay utilities, taxes, rent or mortgages, buy malpractice insurance and all the other myriad costs associated with providing care.
Under Rep. Ryan’s voucher program it just doesn’t happen to be Medicare because Medicare gave the highest cost 5% of Medicare beneficiaries a $13,000 voucher with which they were unable to buy any health insurance.
So the “savings” Rep. Ryan is claiming do not actually exist at all. They are really cost transfers to other payors.
His voucher program is a lot worse than kicking the can down the road because the one place where Medicare absolutely saves money compared to his voucher program are the 60-70% of senior citizens whose health care costs are less than the costs of the voucher.
Without the voucher program Medicare saves money on all the healthiest senior citizens who do not incur costs greater than the costs of the Rep. Ryan’s vouchers.
Rep. Ryan’s Unfixable Mess
Remember when I said that nobody would be able to clean up the mess Rep. Ryan’s Plan would create? This is the mess.
Medicare would be paying out hundreds of billions of dollars for Medicare vouchers to people who would never have generated costs that high. All that money will flow out of the Medicare trust funds in just a few years. It cannot be replaced because it became profits for private insurers for the healthiest senior citizens. Gone, poof, bye bye never to be seen again.
Absent Rep. Ryan’s plan, the funds that represent costs that are less than expected for 60-70% of senior citizens would have strengthened Medicare’s solvency. After a few years of Rep. Ryan’s Plan, with accelerated payouts of Medicare trust funds in the form of vouchers for healthy senior citizens, the Medicare program will be in far worse shape financially than without Rep. Ryan’s Plan. Trillions of dollars will have been disbursed, with little or no health care benefits for seniors having been bought with them.
If you want to destroy Medicare completely, Ryan’s Plan is definitely the way to do it.
Under the voucher plan there would be some seniors who can and will buy health insurance at market prices and Medicare will transfer the costs to the insurers involved, but it won’t cost more or less to care for these senior citizens, no matter who the payor is. In fact, the private health insurance will cost considerably more than Medicare’s costs. Why?
How Insurance Really Works – Part Deux
All empty-headed, ideological rhetoric aside – Medicare is a damned efficient health insurer and would be even more efficient if they hadn’t already privatized claims payments to for-profit health intermediaries. It is way more efficient, even with the inefficient health intermediaries, than private health insurers will ever be.
Health insurers do not subsidize the costs of their policyholders’ health care – they collect premiums that exceed the costs they expect to pay by around 20-35%. The smaller and less efficient an insurer is the lower the level of benefits they provide per premium dollar.
If a group of seniors are high cost, their premiums are going to be high and finding policies they can afford will be difficult, in many case flat out impossible.
If a group of seniors are going to have low costs, their premiums will be relatively low – they can find health insurance policies but they could also pay for their care out of pocket because they don’t consume much care, or Medicare could have covered their car for less than the cost of their vouchers.
Worse still, if you have hundreds of small, competing health insurers selling policies to senior citizens, scores of these small, inefficient insurance companies are going to fail every year. When they shut down their policyholders’ costs will either be subsidized by other insurers, the government, or their policyholders bills won’t be paid at all despite the fact that their policyholder’s vouchers have been collected and used for other purposes.
Looking for a catchy sound bite phrase: “The profits in Rep. Ryan’s voucher program are privatized by insurers with low loss ratios while the losses of failed insurers, with high loss ratios, are socialized.” Wow! Who would have ever thought Rep. Ryan would be an advocate for socializing insurers’ losses?
Who exactly will be responsible for the unpaid losses of the dozens of failed insurers we know will be occurring?
I’d be guessing it will be the Federal government, State governments, other insurers, or these unpaid costs will have to be absorbed by unpaid health care providers who will sustain considerable financial harm.
So, what exactly is the Ryan Plan for these high cost (Exceeding $100,000 during the next year), uninsured senior citizens with the cash proceeds of a $13,000 voucher?
The Real Ryan Plan For High Cost Senior Citizens
As near as I can tell Rep. Ryan’s Plan goes about like this:
Some seniors will feel guilty enough about being sick and unable to pay for their care that they won’t seek care even if they could use the $13,000 voucher’s cash proceeds to pay for some of that care. They will die at home from preventable causes.
Some seniors will delay seeking care because they cannot pay the costs and will seek care at emergency rooms when they are in far worse condition than necessary.
Some seniors will go on state Medicaid programs – assuming their states haven’t gutted their Medicaid programs because they got block grants and chose to spend them in other areas. These seniors probably won’t be eligible for Medicaid if they used the proceeds of the voucher for food, utilities or rent/mortgages though.
If these senior citizens did not use their voucher so frivolously, Medicaid will take the $13,000 and whatever other assets they have to cover the costs of their care.
Some seniors will incur really high costs and nobody will pay for their care at all – the physicians, hospitals, nurses who care for these “uninsurable at any price” senior citizens will incur losses on the care they provided for these seniors, leading to more bankruptcies and closures of professional practices, hospitals, nursing homes, home health agencies.
Watch Out There Is A Hurricane Coming
Rep. Ryan’s Plan is a lot like having Homeowner’s insurance that you have been paying for over decades and then just as a massive hurricane is being forecast to hit in 5 days an agent from your insurer calls up and offers to refund your premium for the next year.
Like I said, I am not at all happy about how Obama is dealing with Medicare but Ryan’s plan is Voodoo economics at its worst.
Rep. Ryans’ Plan is simply to overpay insurers for policies for healthy people and ignore the fact that insurance would be unavailable, at any affordable price, for the highest cost senior citizens who will not be able to buy health insurance with their vouchers.
It will cost Medicare far more to give vouchers to healthy senior citizens than the costs Medicare would incur for them and the “savings” from sick senior citizens are simply costs passed on to Medicaid, Charity care or unpaid medical care that will jeopardize the financial stability of health care providers.
The Lake Wobegon Medicare Voucher System
The senior citizens living in Lake Wobegon all have health care costs, and health insurance premiums, that are below average.
Everywhere else in the universe, half of all senior citizens have health care costs and health insurance premiums that are above average.
If you live in Lake Wobegon, Rep. Ryan’s plan is the one you want.
If you do not live in Lake Wobegon Rep. Ryan’s plan is not so hot.