How a Competitive Health Care Model Falls Short

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The track record of "managed competition" shows it's not the panacea for health spending that its supporters -- Romney and Ryan among them -- suggest.

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(BrianSnyder/Reuters)

Republican vice presidential nominee Paul Ryan says his proposal to overhaul Medicare would use market competition to tame costs in the government health program relied on by almost 50 million people.

As models, he often cites the health program for federal employees - including members of Congress -- and Medicare's prescription drug program. "It works with federal employees, it works with the prescription drug benefit, and more to the point, it saves Medicare," Ryan said on Meet the Press in April.

Both of those programs get high marks from beneficiaries for the choices they offer. But their track record on cost control is more complicated, raising questions about whether the competitive model is in fact the silver bullet that backers have suggested.

The federal employee health insurance program is often touted as holding down the increase in premium prices more successfully than private workplace plans or government-run programs. But a data analysis done for Kaiser Health News (KHN) and interviews with experts shows it has not held down costs per enrollee as efficiently as Medicare during the past decade.

Average spending in the federal workers' program grew at 7.1 percent annually per enrollee, higher than the 5.8 percent growth rate for traditional Medicare -- excluding the drug program -- over the decade ending in 2010, according to data analyzed at KHN's request. The analysis, based on ten-year averages, was done by Walton Francis, a consultant and principal author for 30 years of the Consumers' Checkbook Guide to Health Plans for Federal Employees.

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In addition, the analysis found that spending growth in the federal workers' program far exceeded the rate at which Ryan proposes to cap Medicare each year -- the increase in the nation's economic growth plus half a percentage point. Had federal workers' benefits been indexed to that rate, "there's no question ... [it would] have constrained spending or increased premium costs of participants," Francis said.

More significant cost control has been achieved by the Medicare prescription program, which relies on private plans to provide seniors with drug benefits. Since its start in 2006, the program's spending growth has been 30 percent less than initially projected by the Congressional Budget Office.

The reasons for that are intensely debated, however. Some attribute it to the structure of the program, in which multiple plans compete for enrollees , giving insurers strong incentives to hold down costs. "The cost they've come up with is far less than anyone predicted," GOP presidential nominee Mitt Romney said on Meet The Press on September 9. "Look, competition works."

Others point to an increase in the use of less costly generic drugs, and a slowed pipeline of new brand-name drugs, which have held drug spending nationwide at historically low levels.

"The most important factor has been the large number of popular drugs that have gone off patent and become generics," which are less expensive, said Jack Hoadley, a researcher at Georgetown University's Health Policy Institute who studies Medicare. The blockbuster cholesterol-lowering drug, Lipitor, for instance, went off patent in 2011.

How We Got Here

For most of the last 50 years, health care spending, both by government and private programs, has grown an average of 2.5 percent points faster than GDP each year, according to federal data. Spending has slowed recently, partly because economic difficulties have led people to put off elective medical care.

Medicare now consumes about 15 percent of the federal budget. With 10,000 baby boomers retiring every day, pressure on the program's finances is expected to intensify and both political parties have offered options to curb the cost increases.

The Democrats' approach, enacted in the 2010 health law, relies heavily on financial incentives to spur greater efficiencies from providers. The law also reduces annual payment increases to hospitals and other providers, as well as payments to private Medicare Advantage plans. As a backstop, beginning in fiscal 2015, if Medicare spending exceeds 1 percentage point above the nation's economic growth rate, also called gross domestic product, an expert panel must propose reductions in spending. Premium increases and benefit cuts would be off limits. If Congress fails to enact an alternative, the board's recommendations would be put in place.

Republicans argue that a more effective approach would be to use market forces to promote more choice and drive down costs, touting examples of competition such as the federal employee health benefit program, known as the FEHB plan, and Medicare's prescription drug plan, as examples.

To be sure, neither program is directly comparable to Medicare in scope, benefits or enrollees -- the FEHB program has more generous benefits and younger beneficiaries, while Medicare Part D deals only with drugs. Perhaps most important, neither indexes spending to economic growth.

Federal Workers' Plan Is More Generous

FEHB, which covers about 8 million people, allows enrollees to choose among competing private plans, which offer varying premiums and services. For most of them, the government pays 75 percent of the premium up to a specified cap. The cap is based on 72 percent of the average cost of all plans. Beneficiaries who choose more costly plans pay the difference.

The biggest reason for Medicare's better cost performance over the ten-year period analyzed by KHN was its ability to pay doctors and hospitals less, said Chapin White, senior health researcher at the Center for Studying Health System Change. "There's a big and growing gap between what Medicare pays on average for hospital and physician services and what private insurers pay," he said.

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Julie Appleby and Marilyn Werber Serafini are senior correspondents for Kaiser Health News.

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