House Budget Committee Chairman Paul Ryan, R-Wis., probably did not anticipate the kind of trouble his plan for privatizing Medicare would cause members of his own party. Ever since Democrats scored an upset in a New York state special congressional election that turned on the Republican candidates support for the Ryan plan, GOP presidential hopefuls and lawmakers have been stumbling around the negative reaction the "Path to Prosperity" has drawn from many voters.
Americans have every reason to dislike Ryan's plan. Starting in 2022, it would give Medicare beneficiaries an $8,000 voucher -- the amount currently spent on the average recipient -- to go out and buy health insurance on the private market. Eight thousand dollars won't buy much health insurance in many markets, and seniors who can’t make up the difference would be left with little or no coverage.
However, there is one good thing about Ryan's plan, and it has been completely overlooked. Offering beneficiaries the same voucher, no matter where they live, would expose the egregious amount of money Medicare wastes in many parts of the country.
In Minneapolis, Medicare spent on average about $7,000 per beneficiary in 2007, the most recent Dartmouth Atlas figure available. That's on the low end. Medicare spent about the same amount in Sacramento, Calif., and Salt Lake City, and even less in Salem, Ore. At the high end, Medicare paid out nearly $16,000 per beneficiary in McAllen, Texas. Spending in Miami, Detroit and Boston wasn't far behind.
What could possibly account for a $9,000 difference in spending? It isn't prices, since Medicare does a good job of controlling prices across the country. If you ask hospitals and physicians in these high spending regions, they will say their patients are sicker and need more care. That claim just isn't borne out by the data. Poverty and chronic disease are the main reasons patients need more care. There's a two-and-a-half fold difference in spending between the highest- and lowest-spending regions, but the prevalence of chronic disease or poverty in these regions explains only a fraction of the variation.
And it doesn't look as if Medicare recipients in these high-spending areas are getting better care, or more effective care. They are simply getting a lot of extra care they do not need -- and Medicare foots the bill.
Under the current system, beneficiaries are largely shielded from both regional differences in spending and from the way their health care is delivered. Medicare picks up the tab for 80 percent of the cost of care, and most patients don't know the difference between necessary and unnecessary care. Under the Ryan plan, those regional differences might come into focus when seniors are forced to buy their insurance on the private market.
There's no guarantee that private insurers would base their prices on local spending, but if they did, $8,000 a year would buy patients in Minneapolis a gold-plated health plan, with all sorts of fringe benefits -- maybe a new pair of glasses every year, or memberships in health clubs. In Miami and McAllen, $8,000 would hardly be enough for a high-deductible plan.
There are a couple of scenarios that might result from making such disparities transparent. Medicare beneficiaries in McAllen and Miami would complain to their members of Congress, who would lean on Medicare to offer bigger vouchers to beneficiaries in high-spending regions. Of course, this would defeat the purpose of the Ryan plan and leave Medicare shelling out just as much as it does now, when it's still an entitlement.
But if Congress stuck to its guns, and if insurers did price their plans on the basis of current spending patterns, Medicare patients in high spending regions would either have to dig into their pockets for the difference between their voucher and local premium prices, or they would have to move from more expensive to more affordable regions as they get priced out of the health care market. A senior citizen in McAllen might choose to move to nearby San Antonio, where average per beneficiary costs are just north of $9,000. Of course, that may not be an option for the oldest and sickest patients. Many elderly patients will be unable to be selective about where they receive their medical care, and if the healthiest patients move to less expensive regions, premiums in the already-expensive regions could spiral out of control.
There is a third alternative. Providers in the high-spending regions could learn to care for patients more conservatively. Much of the difference in spending can be attributed to disorganization among providers in high-spending regions, and their habit of delivering exceptionally aggressive care at the end of life. These regions generally have a high number of specialists per capita, and a high ratio of specialists to primary care providers. Greed is also part of the problem. The amount of fraud makes south Florida look a little like the intersection between medicine and the "Pirates of the Caribbean."
Getting providers in high-spending regions to modify the way they deliver care and to look more like providers in low-spending regions is the goal of much of the health law, and turning Medicare into a defined contribution could bring the problem of regional variation into focus. But it's hardly the ideal way to drive reform of health care delivery. That should be accomplished with a reimbursement system that makes the provider, not just the patient, vulnerable to the economic consequences of excessive Medicare spending.
Shannon Brownlee is the acting director of the New America Foundation Health Policy Program. Eric Schultz was a New America health policy intern.