Insurance Vouchers and Changing Incentives

There is a telling exchange on Representative Ryan’s privatization of Medicare on Bloggingheads between Glenn Loury of Brown University and Mark Schmitt of the Roosevelt Institute. This Bloggingheads took place nearly two weeks ago and much discussion has ensured since then.  I like how the discussion puts the concept of shared risk front and center and the difference between letting so-called market forces make decisions for us versus “panels of experts” .

The key benefit of the vouchers, of privatization, is that by shifting risk to individuals one “changes their incentives” (Loury) and by changing their incentives to purchase medical services, medical care spending is reduced.  Loury has a revealing example that may tell us all we need to know about the Republican approach.

Let’s say you face the following end of life decision:  I could choose kidney dialysis at a cost of Y and live for an average maximum of 6 months. Or I could choose to enter a hospice, die within 30 days ( the numbers are made up) at a cost far less than Y. Let’s assume my private, non-Medicare insurance will cover only a portion of Y costs, leaving me with a substantial bill to cover.

Under Medicare I would likely choose kidney dialysis and live for six more months for I pay nothing.  The incentives under private insurance are very different.  Do I want to spend down my estate, the inheritance I wish to hand down? This inheritance could be the means of support for my surviving spouse.  The poorer I am, the more difficult the circumstances of my family, the more likely I will choose to conserve my estate. (The issue for many of us  is  less the value of estate than the amount of debt I leave behind for others to pay.)

The great “virtue” of privatization is the way decisions become economic decisions about allocating resources “rationally”.   But, are these choices we want others to have to make??

Let’s say NO.  Are we willing to pay the cost of kidney dialysis for six months of life?

The larger question is, how do we control costs under Medicare?  Does it makes sense to limit services at the end of life?  If we think so, then how do we do it?  What’s an acceptable approach?

Republicans have no problem with “letting the market decide”. In other words, forcing  individuals into tough decisions like the one above.  Why is this “private” approach preferable to decisions made by “medical panels”?

…..House Republicans are determined to repeal reform’s strongest cost-control measure: an independent board that would monitor whether Medicare is on track to meet spending targets and, if not, propose further reductions that Congress would have to accept or replace with comparable savings.

Republicans charge that this would allow “unelected bureaucrats” to “ration” health care, and members of both parties object to relinquishing any power over federal spending. But Congress has shown it is far too susceptible to lobbying by insurers, hospitals, patients and other special interest groups. It makes sense to let experts drawn from diverse backgrounds set a course for Congress based on the best available evidence of what might work.

It might be unfair to link cost cutting panels to decisions about end of life care.  At the same time any interference with the supply of health care tends to be dismissed as decisions by “unelected bureaucrats”.  Republicans have no problem rationing health care via the market.  If I decide against kidney dialysis because I do not want to pay cost, hasn’t kidney dialysis been “rationed”, or allocated by the health care market, the interaction of health care consumers and providers?  Is so-called rationing that different from the effects of a market?


Mark Schmitt compares Ryan’s proposal, which shifts more  risk of the financial consequences of illness to individuals, to a similar shift that has taken place in saving for retirement.  Defined benefit plans promise a certain return to retirees.  A shortfall in the return on the investment that funds your retirement income must be covered by the employer. If the economy collapses during your retirement as it did in 2008, the employer is responsible for making good on the expected benefits of your retirement plan. The company bears the risk, not the retiree.

Many of us, probably most of us, have defined contribution retirement plans.  Our retirement is not based on a projected benefit; there is no guaranteed level of benefit. Our employer makes a defined contribution to a retirement fund to which we may also contribute.  We  manage the fund and suffer the financial risk of our investment choices  and a broader risk that the gods of the financial markets may not be smiling when we retire.  With defined contribution plans we run the risk that a prolonged bear market will lower our targeted standard of retirement living.

Lowry defends the Ryan plan using the example of the shift in retirement risk to downplay the significance of the shift in risk in the Republican Medicare voucher plan.  What’s the big deal with shifting more risk of unexpected medical costs to seniors?  The change in who bears the cost of retirement benefit risk has not been controversial.  I think we would agree. It has happened; we all acknowledge that there is risk and we appear to find the risk acceptable.  Of course, the most recent recession might be causing us to rethink the acceptability of that risk.   The  recession should remind all of us of the value of “socializing” risk through social security, which provides a guaranteed benefit by transferring risk to all taxpayers.

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1 Response to Insurance Vouchers and Changing Incentives

  1. Pingback: Medicare Debate: Arguing About Consequences of Spending Reductions | openmindsnhadvantage

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