Its Debatable but Not Really Different

The political debate over the future of Medicare seems to be a clash of philosophies, but in fact ,  there doesn’t seem to be that much difference in the vision for the future of the health care.

The Romney/Ryan campaign argues that their plan will bring market forces to the Medicare program to reduce costs, while claiming the Obama administration would use bureaucracies to control costs. The Obama campaign claims that Romney/Ryan plan actually increases costs while saving the Medicare program money by shifting those costs to Medicare beneficiaries. The Affordable Care Act seeks to control Medicare costs through a number of provisions that alter both provider incentives and the organization of the delivery of care.

The Romney plan provides vouchers to Medicare beneficiaries and allows them to choose among several private plans and traditional Medicare. The goal is create a competitive market that gives private health insurance plans incentives to control costs and increase quality. This is in fact very similar to the theory behind the Affordable Care Act.

There are a wealth of important details not specified that would determine the outcome of such a plan, but a major issue is how to address risk selection. If the better Medicare risks tend to opt for the private plans and the poorer risks are more likely to remain in traditional Medicare the result would be an increase in total Medicare costs unless the value of the voucher was considerably less then the actuarial value of traditional Medicare.

You don’t have to search very hard to find this type of risk sorting in then Medicare program: it is happening right now. Medicare Advantage plans are attracting healthier and lower costs beneficiaries than traditional Medicare. As a result those plans are being overpaid. The Affordable Care Act adjusts payments to Medicare Advantage plans to the tune of $716 billion in attempt to address this risk selection.

One way the Romney plan could address this risk selection issue by regulating the Medicare market in exactly the way the Affordable Care Act regulates the insurance market for younger individuals and small groups. In other words, in order to make their plan work they would have to adapt the Affordable Care Act for seniors.

The theory behind both the Romney/Ryan Medicare plan and the Affordable Care Act is that competition between insurance plans will force insurers to renegotiate their contracts with providers giving providers more incentives to reduce costs and increase quality. The Affordable Care Act has a number of provisions setting up demonstrations or experiments under Medicare to test a a number of ideas for restructuring provider incentives.

There are two broad strategies for changing provider incentives in the ACA that work toward the same end: an integrated patient centered system of care. The first is to change reimbursement from service based payments to episode-based payments. The definition of an episode ranges from the bundle of services addressing a specific diagnosis to the patient’s entire health for the length of the contract.

Episodic payment changes provider risk and encourages the second broad strategy: health system integration. The concepts behind patient-centered medical homes and accountable care organizations are that with the correct incentives a health system will work to increase health. Managing the health of an individual (or giving the individual the tools necessary to manage their own health) requires a fully integrated system. That system will have incentives to reduce utilization, invest only in cost-effective technologies, and increase preventative care. That’s the theory behind both sides’ plans.

Health care cost inflation is the single most important element creating long-term structural budget deficits. All other issues can be addressed with relatively minor changes. Addressing the issue of health care cost inflation requires significant changes in our health care financing and delivery system. Despite the mudslinging there is actually a good deal of consensus on the elements of a more effective health care delivery system. Unfortunately the heat and smoke of politics hinders a more careful discussion of the operational details and trade-offs of health care reform.

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