Why privatizing Medicare will cost more and reduce seniors' coverage

Should Medicare as we know it come to an end? Congressman Paul Ryan (R-WI) and fellow Republicans say it has to in order to avoid financial collapse. They want to turn the program over to private insurance companies and get the government out of providing benefits directly.

The idea isn't new. In fact, it is being tried out right now. Under a program known as Medicare Advantage, beneficiaries can opt to receive coverage from a private company, usually an HMO, instead of traditional Medicare. About a quarter of them have chosen to do so.

What have we learned from this trial run? It turns out that private plans don't reduce costs; they increase them. In 2008, the government paid 13% more for beneficiaries under Medicare Advantage than under traditional Medicare (See Kaiser Family Foundation report). That's almost $1,000 per beneficiary on average.

It wasn't supposed to turn out this way. When the Bush administration started Medicare Advantage in 2003, it envisioned substantial savings. The hope was that private plans would ratchet up efficiency to compete for beneficiaries. Instead, they continue to rely heavily on government subsidies, which added about $14 billion to Medicare spending in 2010.

The Obama health reform law gradually reduces these subsidies over time until the cost of Medicare Advantage roughly equals the cost of traditional Medicare. The Congressional Budget Office predicts that lower subsidies will save the government $105 billion over the next ten years. However, the reductions will also cause many plans to reduce coverage, which will lead some seniors to drop them.

To be fair, many private plans that operate under Medicare Advantage offer extra benefits, like dental care, vision care, and health club memberships. However, they also tend to serve seniors who are healthier, which should balance out the added costs to some extent.

Many beneficiaries are satisfied with their private plans. However, providers often see things differently. The AMA reports physician complaints of frequent claim denials and deceptive practices that they do not see under traditional Medicare.

If privatizing Medicare is so expensive, how would the Ryan plan reduce costs? Essentially, it would use a similar approach to Obama's. The subsidies for private coverage would be capped, and, over time, would fall behind the inflation rate for medical costs.

However, the Ryan approach has one big difference. It would force all beneficiaries into private plans. If low subsidies caused them to lose benefits, they would have no option to return to traditional Medicare.

Given how expensive privatizing Medicare is to begin with, the Ryan plan has to keep subsidies extremely low to achieve savings. This would inevitably force private plans to limit benefits dramatically.

In other words, the Ryan plan wouldn't reduce Medicare costs through private market competition. It would reduce them by shrinking coverage. It simply shifts the burden of imposing the cuts from the government to private companies.

Without question, Medicare must be reformed to bring its spiraling costs under control. Congressman Ryan can be commended for provoking needed debate on how best to do it. But no one should hold the illusion that his plan would lower costs by harnessing private sector efficiency. His plan controls costs by leaving seniors with far less coverage, some of which may be lifesaving.

Could this turn out to be the death panels we were warned about last year?

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