Would vouchers for Medicare create an insurance market to meet demand?

Paul Ryan’s plan to remake Medicare into something closer to a free-market plan relies on vouchers to allow seniors and the disabled to choose their own plans and manage their own care decisions.  In order to succeed, the private insurance market will have to create products to meet the demand.  Benjy Sarlin at TPM asks a question that has also occurred to me as well, which is whether those products will actually come to market:

At first glance, Paul Ryan’s plan to send millions of seniors into the free market with dwindling vouchers in hand might seem a boon to the private insurance industry. But would companies even want to participate?

Unlike the Affordable Care Act, which mandated that millions of young and healthy Americans purchase insurance with government subsidies, the Paul Ryan plan would instead bring the oldest, sickest, and least profitable demographic to the table. And with the CBO projecting that the average senior would be on the hook for over two-thirds of their health care costs within just 10 years of the plan’s adoption — a proportion that is projected to worsen in the long run — the government subsidies backing them up may not bring in enough profitable customers to make things worthwhile.

“If reimbursement rates are too low to provide basic benefits, they’ll tell the government, ‘You do it,'” one insurance lobbyist told TPM. “I don’t think they can require they lose money, they’d just pull out.”

There is no small amount of irony in this argument, because it’s the same one conservatives make about the existing systems of Medicare and Medicaid, and the ObamaCare program as well.  As those already on the plans know, the government doesn’t cover anywhere near the same percentage of costs as private insurers.  That’s one reason Medicare Advantage proved so popular as a private-public partnership to cover the costs and services that otherwise are out-of-pocket for Medicare/Medicaid recipients or poorly covered by its reimbursements.  Providers already are leaving Medicaid patients to the emergency rooms, and they’re increasingly doing the same for Medicare patients too because of the poor reimbursements.

Furthermore, ObamaCare exacerbates the problem by putting arbitrary mandates on insurers, where the reimbursements have been more rational thanks to competition.  HHS has had to issue more than a thousand waivers to keep insurers from closing down their businesses in order to meet mandatory premium-to-care ratios that were important to no one except members of Congress who didn’t understand the concept of risk pools, but who were certain they could run the industry better than the stakeholders could.  As experiments in ObamaCare-like systems showed in Maine and Massachusetts, imposing top-down, mandate-heavy systems usually results in provider flight and skyrocketing costs.

Insurers competing to add providers to their networks have to negotiate reimbursements, which is why providers don’t generally turn down insurance.  Ryan’s plan offers incentives for existing insurers to jump into a newly-created senior market, not the least of which is tens of billions of dollars each year in cash generated through the vouchers.  Looking at a massive new market with that much at stake, the problem won’t initially be whether seniors can find a plan, but whether the plans will differentiate enough for seniors to have some flexibility in crafting plans that fit their individual situations.  And that, in any case, would still be a huge improvement to the one-size-fits-all, single-payer Medicare and Medicaid systems that have crowded out private-sector insurers for decades.

Still, the question will be whether the voucher system can hold up over the long run.  Government subsidies tend to inflate costs, as we have seen in the student-loan industry.  Thanks to a flood of money that spiked demand, college tuition costs expanded far past the rate of inflation over the last four decades, and government spending had to increase just to keep up with the prices. Vouchers for health insurance run the risk of doing the same thing, and a $15,000 voucher in 2014 that sufficiently subsidizes an insurance plan may fall woefully short in 2020 when the costs become more apparent.  Better insurance also runs the risk of overuse that will drive up provider costs as well, just as it does now in the non-senior health-care sector.

The best system overall for the US is one that gets third party payers out of the way of pricing signals, but on senior care, that’s almost certainly a political impossibility.  Ryan’s plan works best to get cost control in the government portion of health-care financing as a transition from single payer, but it may not be a viable long-term solution, either.