Tuesday, October 16, 2012

New Study of Romney's Medicare Plan

Ricardo Alonso-Zaldivar of the Associated Press recently published an article analyzing Mitt Romney's proposal to change Medicare to a "premium support" system.

In a new report issued by the nonpartisan Kaiser Family Foundation, it was determined that roughly six out of ten Medicare beneficiaries would pay higher premiums under Romney's privatized system. The study was modeled around Romney's proposal, but Kaiser acknowledged that it should not be taken as a full analysis  because Romney has not revealed all of the details of his plan yet.

There are some notable distinctions. While Romney's plan allows current recipients and those ten years from retirement the option to stay in the current system, the study by Kaiser analyzes a privatization plan that is already in place. The report also did not factor in Romney's promise of providing additional financial help to low-income seniors and those in poor health because Kaiser did not have enough details.

Here are some specific findings from the study:
"Overall, the study found that 59 percent of all Medicare recipients would face higher premiums if they stick with their current coverage, including about half of those in the traditional program.
In five states — California, Connecticut, Florida, New Jersey and Nevada — more than 45 percent of beneficiaries would pay at least $100 a month more in premiums."
This study admittedly does not cover every nuance of Romney's plan, but it does provide a nonpartisan view of the potential results of Romney's Medicare plan.


  1. This comment has been removed by the author.

  2. I am not sure this is a privatization issue as much as it is an accounting and cross-subsidy issue.

    One's medicare premiums do not cover more than about a third of the expected value of the care one will get from Medicare by numbers in the NY Times (here: http://www.nytimes.com/interactive/2012/02/12/us/relying-on-government-benefits.html?ref=us or here if that is behind paywall: http://www.coyoteblog.com/coyote_blog/2012/02/medicare-taxes-are-too-long.html. Note that this is not a demographic effect related to more people receiving care than paying premiums -- these are lifetime numbers for one individual.

    So it is unlikely that private insurance would match Medicare premiums, since essentially 2/3 of one's medicare will be paid out of general revenue rather than premiums, an enormous hidden subsidy. This goes back to an article I had on this blog (http://www.privatizationblog.com/2012/05/large-barrier-to-achieving.html) pointing out that poor public accounting systems often make evaluation of privatization options really difficult.

    In other words, just because premiums are higher does not mean that it would not be a net savings to the government to take this approach. Subsidizing private premiums to reach current medicare levels might well be cheaper than the enormous tax subsidy that is required to keep Medicare premiums low today. I would not necessarily advocate for such a kluge, of course, if for no other reason that rates (and cronyism) would skyrocket over time with a partial government subsidy, much like higher education tuitions have risen over the last several decades to capture government loans and subsidies.

    In the case of medicare, there are other issues that make apples to apples comparisons hard. In addition to the premium subsidy issue, medicare does not count a lot of its costs. For example, private companies have to bill and collect premiums, but the IRS does this for Medicare at no charge.

    Further, Medicare gets the benefit of near marginal cost pricing on some of its reimbursement rates. This works OK if it is a third of the market, but if the model is applied via Obamacare to the whole market, not everyone can get marginal cost pricing - someone has to pay the fixed costs.

    Anyway, the Kaiser study does not try to address any of these issues. We should not draw conclusions one way or the other about private vs. public options based on apples and oranges accounting.