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Health Exchanges: Common Ground for Medicare Reform?


Virtual marketplaces where consumers shop for standardized insurance policies may hold the key to bridging divisions between Democrats and Republicans

(Corrects fourth paragraph to clarify that the quote from Frakt was the title of a blog post.)

Medicare is on track to consume 7 percent of gross domestic product by 2035, double the current level, according to a Congressional Budget Office scenario that incorporates widely expected developments. On May 13, Medicare's trustees predicted that the program's Hospital Insurance Trust Fund, which helps cover benefits for future retirees, would be exhausted by 2024, five years earlier than predicted last year.

Yet politicians are stalemated over competing fixes. "It's very sad," says Stuart M. Butler, director of the Center for Policy Innovation at the conservative Heritage Foundation. "Both sides know there's got to be a conversation."

Policy experts searching for something that might form the nucleus of a compromise are turning to the not-so-new concept of health exchanges. These are virtual marketplaces in which consumers shop for standardized health insurance policies. The government provides a subsidy to help many buy policies, with the amount greatest for the poor and the sick.

Health exchanges appeal to Republicans because they foster competition and offer choice, and to Democrats because in at least some versions they ensure a minimum level of coverage regardless of income. Exchanges are supposed to create incentives to keep people healthy at the least possible cost. "More cabbage, fewer CABGs," is the title of a blog post by Boston University professor and and health blogger Austin Frakt, using the acronym for coronary artery bypass grafts. "The real action is fundamentally reorganizing the delivery of care," and exchanges that make people better shoppers are a component of that, albeit not the only one, says Massachusetts Institute of Technology economist Jonathan Gruber, who has consulted for Democrats on health care.

Strangely, given the recent acrimony, the two parties' positions on health exchanges are almost mirror images. The deficit-reduction plan devised by House Budget Committee Chairman Paul Ryan (R-Wis.) contemplates health exchanges only for people 65 and older. President Barack Obama's Patient Protection and Affordable Care Act has them only for those who have not reached the age of Medicare eligibility. Alice M. Rivlin, White House budget director under President Bill Clinton, sees that divergence as an opportunity for compromise. "Chairman Ryan has had trouble explaining why he is for exchanges in his Medicare reform and against them in ACA, and President Obama has the opposite problem," Rivlin, a Brookings Institution senior fellow, wrote on May 16 on The American Square blog.

In a May 31 interview, Rivlin suggested the parties could meet in the middle on a plan that she and retired Senator Pete Domenici (R-N.M.) advanced last year as co-chairs of the Bipartisan Policy Center's Debt Reduction Task Force. A compromise would incorporate health exchanges into Medicare while keeping traditional fee-for-service care alive as one alternative. "There hasn't been a serious bipartisan negotiation," Rivlin says. "That has to happen."

Boston University economist Laurence J. Kotlikoff agrees with Rivlin that the Ryan plan for Medicare is strikingly similar to the Obama plan for working-age Americans. He says Democrats should embrace it for that reason, with two changes: Ryan's cost-cutting proposals should extend to current retirees, not only those turning 65 starting in 2022. And Kotlikoff says Ryan's ceiling on spending growth is unrealistically low. He would allow Medicare to grow at the same pace as the overall economy.

Not everyone is convinced that Republicans and Democrats can find common ground on health exchanges. Robert E. Moffit, a senior fellow at the Heritage Foundation's Center for Policy Innovation, says the two sides' aspirations for them are too different. Conservatives, he says, favor state-level exchanges with light regulation, while liberals want a single national exchange that, in his opinion, would be a stepping stone to single-payer health care. Says Moffit: "People on both sides of the ideological spectrum have written in favor of health exchanges, but I can promise you that they don't mean the same thing."

The only way to keep health-care costs from devouring the federal budget is to get all participants in the system working together. "We have amazing clinicians and technologies but little consistent sense that they come together to provide an actual system of care from start to finish," Dr. Atul Gawande, a surgeon at Brigham & Women's Hospital in Boston and writer for The New Yorker, told Harvard Medical School graduates in May. He encouraged them to function like members of a racetrack pit crew. The hope for health exchanges is that they can help bring about that kind of change.

The bottom line: Both parties say they want health exchanges as part of health-care reform. They disagree on what exchanges are.

Coy is Bloomberg Businessweek's Economics editor.

Steve Ballmer, Power Forward
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