Medicare: Who Bears The Risk?

What is the principal difference between a traditional pension plan and a contemporary IRA, 401(k), or 403(b) retirement account? For a senior citizen in the United States, the difference is a matter of the placement of risk.

In both situations, someone contributes a target amount of funds each year into his investment account. He then hopes to manage those investments in a manner that will produce sufficient returns to pay himself (or his retirees) a target amount of benefits in the future.

But what if the actual returns are insufficient to pay the target benefits? In that case, for traditional pension plans, the contributor is on the hook to make up the difference. That’s why we say that such plans are required to pay their “defined benefits.”

However, for contemporary retirement accounts, the retiree must either make up the difference or settle for less than his target amount of benefits. That’s why we say that such accounts are only expected to invest their “defined contributions.”

This distinction can help us understand what U.S. Speaker of the House Paul Ryan has in mind when he promises to convert the Medicare program into a “premium support” model. At the moment, Medicare is primarily a defined benefit plan, with the government required to spend whatever is required (beyond a relatively small retiree contribution) to pay for a target level of medical benefits.

If Speaker Ryan has his way, though, Medicare will become a defined contribution plan. The government will contribute a target amount of funds to care for each senior citizen, but if the cost of medical benefits exceeds a senior’s contribution, the citizen will need to make up the difference or go without care.

Ryan calls this approach a “premium support” model because each senior citizen is responsible for financing the cost of his own medical care. Although Ryan’s proposed government program will offer a target amount of financial support to make the premium (i.e. the cost) more affordable, there will be no guarantee that this support will cover the full costs of care.

Thus, both traditional pension plans and the current Medicare program assign the risk of investment shortfalls to plan sponsors or the federal government. Under most circumstances, as long as these entities remain solvent, a retiree will bear no risk of possessing insufficient funds to meet his needs.

However, both contemporary retirement accounts and Ryan’s proposed new Medicare program assign the risk of investment shortfalls to senior citizens. Whether or not employers and the federal government remain solvent, a retiree will bear the full risk of possessing insufficient funds.

Is that fair to the retirees? For many of us, the question is a moot one in the investment industry. After all, many have already gravitated into contemporary retirement plans.

But for almost all American retirees, the question is a critical one in the health care industry. Speaker Ryan has not yet attempted to implement his plans, and a concerted effort to lobby (for or against) his proposal may result in the preservation or extinction of the existing Medicare program.

Rethinking Medicare: The Paul Ryan Approach

Imagine, for a moment, that you are 85 years old and blessed with a reasonably healthy physical constitution. Like many Americans of that age, you may take blood pressure medication on a daily basis to control a mild heart condition, and you may feel the plague of arthritis starting to creep into your fingers and knees. Nevertheless, all in all, you would probably believe that you have no reason to complain about the health care service system.

But what would you do when you actually need to obtain medical care? Since the advent of the Medicare program in 1965, all Americans over the age of 65 in need of care have simply traveled to the offices of their doctors and flashed their enrollee identification cards. Although these seniors do pay modest monthly premiums, the vast majority of all of their medical costs — from medication expenses to physical therapy fees — is financed by the federal government.

Last week, though, Republican House Budget Committee Chairman Paul Ryan unveiled a vastly different vision for Medicare, one that would utterly transform the program. And then, for good measure, he proposed an equally dramatic transformation of the Medicaid program.

Buy It Yourself!

For Americans who reach age 65 after January 1, 2022, Ryan proposed that the Medicare program simply hand them a list of private insurance companies, and invite them to buy policies for themselves. The federal government would subsidize costs by sending each insurer a “premium support payment” for each enrollee; nevertheless, insurers would be free to establish prices as they see fit, and enrollees would be expected to either pay the difference or survive without insurance.

Medicaid, the health insurance plan for the poor, would be converted into a “block grant” system under the Ryan plan. The federal government would simply hand each state a lump sum of money each year; governors and legislators would then be free to cover as many — or as few — citizens and services as they see fit. Each state would decide for itself whether to charge citizens for insurance coverage; if it decides to do so, Medicaid enrollees would be required to either pay the amounts or live without access to health care.

Ryan argued that these innovations are required to slash the federal government’s budget deficit to manageable levels, and to finance a reduction of the federal income tax rate for the wealthiest taxpayers from its recent levels (between 35% and 40%) to a significantly lower 25%. According to Ryan, the lower tax rates are needed to stimulate future economic growth.

The federal government’s budget would undoubtedly be placed on much sounder footing under Ryan’s plan. However, there would be no guarantee that elderly or poor citizens could obtain health coverage from any insurer.

Obama and Romney

Ironically, Ryan’s proposal regarding the government’s compilation of a health insurer list is actually similar to the concept of Health Insurance Exchanges that are embedded in President Obama’s national health plan. And Obama’s plan is itself similar to Republican Governor Mitt Romney’s universal Health Connector web site for Massachusetts.

Indeed, despite occupying opposite ends of the political spectrum, Obama and Romney each signed legislation that guarantees access to affordable health insurance to all citizens. Ryan’s proposed legislation, though, would seek to ensure a stable government budget and lower income tax rates by withdrawing this guarantee from the seniors and the poor who already possess it.

The Ryan plan implicitly relies on competitive market forces to maintain health coverage, presuming that a significant number of insurance plans would rush into the vacuum that would be created by an expiring Medicare system. But is it reasonable to assume that private firms would rush into this industry sector, simply because a dominant government program is withdrawing from it?

Too Big To Fail

Furthermore, let’s assume for a moment that the private sector does manage to take the place of the current Medicare program by enrolling tens of millions of senior citizens into government subsidized plans. Might those private plans then be deemed “too big to fail” by the federal government?  After all, if such plans ever begin to default on tens of millions of consumer health insurance policies, wouldn’t the government be forced to consider a bail-out?

75 million people, for instance, are now enrolled in the health plans of UnitedHealth Group; this insurer may indeed already be too big to fail. What if the firm signs up tens of millions of additional elderly consumers? How could the federal government then permit it to fail?

An ensuing bailout of the health insurance industry could make the recent banking industry rescue seem like small potatoes. If the Ryan plan results in the replacement of an explicit government program with an implicit government guarantee of private insurers — similar to the government’s implicit guarantee of Fannie Mae debt, for instance — the initiative may indeed fail to achieve its author’s laudable goals.

Health Systems and the Public Interest, Part II

You lie!

That’s the shout that rang out across the venerable chamber of the United States House of Representatives last week. It was hurled across the room by an angry politician at the President of the United States during a nationally televised speech at a joint session of Congress.

No such brazen heckling had ever occurred in the history of the republic. After being chastened by members of his own Republican Party about his grievous offense, the Congressman issued an immediate apology to President Obama. Nevertheless, commentators across the nation decried the coarsening of our social and political discourse.

But let’s consider the condition of our society for a moment. In retrospect, isn’t it a bit surprising that it actually took so long for this to happen? Politicians have been demonizing each other for many years, and have watched their supporters attend and disrupt the public events of their opponents. Sooner or later, it was inevitable that such incivility would seep into the hallowed halls of Congress.

So what has protected our federal government from such unruly outbursts until now? Most likely, it has been sheer institutional inertia that has protected our government from the coarsening effects that have plagued our society, inertia that is also impeding – and perhaps protecting as well – our health care system from the upheaval of massive reform.

Government Inertia

Last week’s Part I of this column concluded by noting our public consensus that the federal government should play some role, even if just a limited one, in ensuring health care access for all Americans. It explained that such a consensus places politicians squarely in the midst of all reform efforts, which proves to be both a blessing and a curse to innovators who are seeking to improve the system.

On the one hand, intense government involvement is a mighty force that applies the powers of legal regulation and budget spending to enact sweeping change. But on the other hand, such involvement is also a deadening force that buries the possibility of change under a blanket of feasibility studies, public feedback meetings, and arcane parliamentary activities.

Our government is indeed a massive bureaucracy that, like any huge organization, struggles to adapt to changing conditions across numerous sectors. Financial service industry reform initiatives, for instance, are now stalled despite the recent bank-induced economic collapse that almost plunged the world into a Second Great Depression. And although scientists agree that global warming will dramatically affect future climate conditions, a national plan that effectively addresses the challenge remains elusive.

National Health Care: How Did We Get Here?

Our entire national health system, of course, can be characterized as a haphazard collection of programs that were originally created under social conditions that are now obsolete. The programs, though, have never been modified to adapt to contemporary conditions because of government inertia.

Consider, for instance, the motley assortment of health programs that cover the majority of working adults in this nation; namely, plans offered by for-profit insurers. Why are employers involved with their employees’ personal health insurance policies at all, as opposed to their personal property or liability insurance policies? Well, they only began offering health insurance as a fringe benefit when the government temporarily placed price controls on wages, and simultaneously made business expenditures for employee health insurance contracts tax deductible.

Health benefits were then viewed as a simple avenue for modestly increasing employee compensation at a time when wage increases were prohibited. Today, of course, wage increases are commonplace … and yet the government regulated system of health insurance remains rooted in place.

A similar situation exists in Medicare, the federal program that insures all citizens over 65 years of age. It was originally created during the Johnson Administration’s War on Poverty to provide an affordable and relatively inexpensive array of medical services to seniors in the final few years of their lives.

Today, of course, it covers an overwhelming array of incredibly costly services. And many seniors now live well into their 80s, 90s, and even their centenarian years, relying on Medicare to finance their care for many decades. And yet the government system of insurance for such individuals remains rooted in its original form.

What Comes Next?

President Barack Obama entered public office with a promise to enact Change We Can Believe In. And citizens across the ideological spectrum agree that change is indeed required to address the various failings of our national health system. But can we actually believe that our government possesses the will and the ability to enact such change?

In today’s volatile social and political environment, it is undoubtedly a fool’s game to undertake predictions about any proposed legislative initiative. Nevertheless, considering the government’s longstanding condition of institutional inertia, it may be unrealistic to hope that truly universal coverage will become a reality in the near future.

Insurance reform? Yes, that is realistic … and in fact is likely. An expansion of new initiatives to serve the uninsured? That too is realistic … and would actually represent a continuation of trends that have promoted programs such as Medicaid and CHIP.

But government legislation that would provide every legal resident with universal health care? Though we can always hope for such an outcome, it may be unrealistic to expect one any time soon.