Romney-Ryan Medicare plan dependent on effective competition

The plan backed by Mitt Romney and running mate Paul Ryan would give beneficiaries vouchers to buy insurance.Scott Iskowitz/Associated Press

The success or failure of Mitt Romney and Paul Ryan’s plan to overhaul Medicare depends largely on the answer to one key question: Would competition among private insurers hold down insurance costs?

If the answer is yes, then the Republican ticket’s proposal — to issue premium support payments to future seniors, who would use the vouchers to purchase private insurance — could work. Insurance companies’ bidding for business would require hospitals and doctors to keep cost growth below its current pace, allowing the government to save money and still give seniors the funds they need to afford good health care.

If the answer is no, then the plan could fail in one of two ways. With a cap on premium support, which Romney has neither rejected nor endorsed outright, it would expose future seniors to potentially astronomical out-of-pocket costs. With no cap on premium support, the government would be on the hook for rising insurance costs and would not save the money it needs to guarantee Medicare’s long-term stability.

The stakes are high. In a report to Congress in April, Medicare’s trustees reported that one of the program’s two trust funds — the one that covers hospital insurance for seniors — will be unable to pay its full share of seniors’ health care costs in 12 years. Republicans and Democrats agree that to prevent insolvency, the government must find a way to manage its expenditures without sacrificing seniors’ benefits.

So what is the evidence behind Romney and Ryan’s belief that competition would succeed in controlling health costs? And on what counter evidence does Obama base his contention that it would fail?

The Globe asked both campaigns to identify specialists and data that support their respective arguments.

The Republicans pointed to Medicare Part D — prescription drug benefits, delivered exclusively by private insurers — and Medicare Advantage, in which seniors purchase subsidized private insurance plans in an exchange overseen by the government. The two sections of Medicare operate in ways that resemble what Romney and Ryan have proposed for the entire system.

Medicare Advantage enrollment is up 60 percent over the last five years, and more than a quarter of all Medicare beneficiaries now participate in Medicare Advantage. In the last decade, federal spending on Part D has been roughly 30 percent less than what the Congressional Budget Office estimated in 2003, when Congress passed the Medicare Modernization Act.

In February, the Obama administration announced that Medicare Advantage premiums fell 7 percent over the previous year and that premiums for prescription drug benefits remained steady for the third year in a row.

At the time of the announcement, Ryan declared that Medicare Part D “came in below cost projections because it harnessed the power of choice and competition,” lending credibility to his effort to expand the role of private insurance throughout the Medicare system.

A few days later, Ryan cited the low premiums in Medicare Advantage and Medicare Part D when he questioned Medicare’s chief actuary, Richard Foster, who was testifying before the House Budget Committee, which Ryan chairs.

“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?” asked Ryan.

“Yes, I think it can,” Foster replied. “Obviously, it would represent a large change from the status quo, but I think it could work.”

But the Obama campaign argues that Medicare Advantage and Medicare Part D prove the opposite, that competitive bidding among private insurers could not work on a larger scale.

While the premiums in Medicare Advantage plans are low, the deductibles — the amount of money seniors must pay out of pocket before insurance covers the rest — tend to be high. Such a cost structure attracts younger, healthier seniors who use health care services infrequently.

Insurance companies offering Medicare Advantage plans keep their premium rates down by “cherry picking” seniors who are cheapest to insure, said Neera Tanden, president of the Center for American Progress.

And while seniors currently enrolled in Medicare Advantage plans are saving money, the government is not. Subsidies to private insurers are based on formulas designed to predict enrollees’ costs, but the formulas, which have improved over time, still consistently overestimate the true price of care.

Last year, the government paid 7 percent more, on average, to subsidize a senior’s Medicare Advantage plan than it would have paid for the same senior to receive the same care in traditional, fee-for-service Medicare, an overpayment of $12.4 billion to private insurers.

The Affordable Care Act championed by Obama will gradually shrink payment rates to insurance companies that offer Medicare Advantage plans.

Medicare Part D is a success story, the Obama campaign acknowledges, but the president’s reelection team asserts that competition among insurers is not the main reason why.

A study published in May by the Kaiser Family Foundation concluded “the claim that Part D spending is lower than originally projected due to competing private plans seems overstated, given the multiple factors that influence drug spending trends.”

“Compared to projections, the combination of more patent expirations and few new breakthrough drugs has kept overall growth in national drug spending growth low,” added study author Jack Hoadley, an analyst at Georgetown University’s Health Policy Institute.

“The growth rate of Medicare Part D spending has been affected by both of these trends, 
as ­well as lower-than-expected enroll­ment.”