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A Model for Medicare Reform

House Budget Committee Chairman Paul Ryan held a hearing today with Richard Foster, the chief actuary for the Centers for Medicare and Medicaid Services. During the hearing, this important exchange took place:

CHAIRMAN RYAN: As you may know, I’ve been working across the aisle with a member of the Oregon delegation from the Senate on a premium support plan that uses competitive bidding to help determine the contribution. Competitive bidding we’ve seen has worked well in Medicare Part D and Medicare Advantage. I’d like to get your thoughts on choice and competition as it relates to these previous successful reform plans. Given what we’ve seen in these aspects of Medicare, do you believe that competitive bidding is a process that can be successfully applied Medicare-wide?

CMS CHIEF ACTUARY FOSTER: Yes, I think it can. Obviously, it would represent a large change from the status quo, but I think it could work. We’ve seen the signs of this – you mentioned the Part D prescription drug program, for example, where the different drug plans compete against each other on the quality of their benefit package and the premium level. And we’ve seen – every year since Part D started – a migration of beneficiaries to more efficient plans with lower premiums. So that can help. We’ve also seen for durable medical equipment that competitive bidding, in this particular area of Fee-For-Service Medicare, reduced prices that we had to pay by 40 percent.

RYAN: By forty percent?

FOSTER: Forty percent, that’s right.

RYAN: Those are the kinds of cost savings we’re going to have to achieve if want to make good on the promise of the Medicare guarantee.

There are two important things to take away from this exchange.

The first is that the market mechanisms put in place when the Medicare prescription drug plan (Medicare Part D) was passed have worked spectacularly well.

As I pointed out in a Weekly Standard article with my Ethics and Public Policy Center colleague James Capretta, pro-market reformers have long contended that, with the right policies, health care could operate more like other sectors of the economy, with strong price and quality competition rewarding those market participants who improved productivity while also satisfying the consumer. The Medicare prescription drug plan allowed us to test that theory against reality.

Medicare beneficiaries choose every year from among competing, privately run drug-coverage plans. The government’s contribution toward this coverage is set at a fixed percentage of the average premium, and no more. If beneficiaries want to enroll in a plan that costs more than the average, they can do so–but they, not the government, must pay the additional premium. This structure provides strong incentives for the drug coverage plans to secure discounts from manufacturers and encourage use of lower cost products over more expensive alternatives. Drug plans that fail to cut costs risk losing enrollment to cheaper competitors. The program’s competitive design is holding down costs for both Medicare beneficiaries and for government – fully 40 percent, according to Foster.

More importantly, the choice and competition that has worked for Medicare Part D can be applied to Medicare more broadly, which is precisely what Chairman Ryan and Democratic Senator Ron Wyden are advocating, against the fierce opposition of reactionary liberals like President Obama.

In the midst of a political year in which many silly things are being said, it’s useful from time to time to pull back to the substance of governing and learn from what works. George W. Bush did what no other president before or since has done: provide a successful, groundbreaking template for addressing the most urgent domestic issue facing America — structurally reforming the entitlement state in general and Medicare in particular. This is the kind of reform that a serious conservative governing movement would celebrate, highlight, and attempt to replicate. Which is precisely what Paul Ryan, conservative-policy-wonk-turned-budget-chairman, is attempting to do.