How a Competitive Health Care Model Falls Short

If Ryan's cap -- growth in the economy plus half a percentage point -- had been in place for FEHB during that period, the increase in spending would have been limited to 3.4 percent annually, which was less than half its 7.1 percent growth rate. KHN used 10-year annual averages rather than year-to-year changes to help adjust for changes in benefits or other annual fluctuations.

The FEHB plan is also a more generous program in several ways than what Republicans propose for Medicare -- including that the federal contribution to benefits rises in sync with premium increases. Under Ryan's proposal, that might not be the case. The government contribution toward enrollees' costs, an annual subsidy, would be based on the cost of the second-lowest priced private insurance plan in a region, or the traditional Medicare program, whichever submitted a lower cost bid. If spending growth exceeded his target of the rate of economic growth plus 0.5 percent, his plan calls for Congress to cap spending.

Conservatives, however, say the Republican proposal for Medicare would work better than the federal worker program at holding down costs because it would be structured differently. The government contribution would not be based on a percentage of the premium.

In the FEHB plan, "the more expensive the plan, the bigger the (government) contribution," at least until the cap is reached, said James Capretta, a fellow at the conservative Ethics and Policy Center.

In contrast, under the Republican proposal, beneficiaries would be responsible for paying any costs above the stipend, which would be set at the price of the second lowest private plan bid or the cost of traditional Medicare, whichever is lower.

The Romney campaign has been quoted in press reports as saying he doesn't endorse the cap in the House Republican budget, although he had praised an earlier proposal by Ryan and Oregon Democratic Senator Ron Wyden, that indexed growth to GDP plus 1 percent.

Ethan Rome, executive director of the liberal Health Care for America Now advocacy group, contends there are only two ways the proposal would slow spending growth.

"The first is they shift cost from the federal government to seniors ... who can't afford them," he said. "The second is competition, and there's no evidence whatsoever that competition will control costs in any real way."

Conservatives disagree, arguing that competing health plans would have incentive and flexibility to reduce costs.

"They can reduce costs with disease management, different payment mechanisms, care coordination," said Joseph Antos of the American Enterprise Institute. "They might have higher deductibles, or lower. We do this in the [federal worker plan] all the time. Are we going to get massive savings right away? Not right away, but over time."

Fluctuations In Spending For Medicare Prescription Plan

Capretta argues that a better comparison to the Republicans' Medicare proposal is Medicare's drug program in which private insurers compete for enrollees, and the government covers about 75 percent of the cost of the program and enrollees pay the rest.

Contrary to some early predictions, the program has numerous competing plans. Although premiums for some plan sponsors have gone up, others have avoided significant increases.

Capretta and other conservatives discount the notion that trends such as the switch to cheaper generics, rather than competition, have held down cost growth.

"Would that [generic drug use] have happened without competition" among private insurers? Capretta asked. "Government would have had to mandate it and how could government do that?"

Yet even in the drug program, KHN's analysis found that cost growth has fluctuated year to year. In two of the past five years, annual spending per enrollee exceeded Ryan's cap, according to data from the Centers for Medicare and Medicaid Services.

The program's costs are projected to grow more quickly in the next decade. In their most recent report.

last April, Medicare's trustees projected the average annual increase in expenditures per enrollee to be 5.6 percent through 2021, as a result in part of a restored pipeline of new brand name drugs.

Economists say the continued rise in health spending in traditional Medicare, the drug program and the federal workers benefit plan shows how hard it is to slow costs, which are driven by factors ranging from new technologies and drugs to a growing percentage of people with chronic illnesses.

"It's been really hard to change the cost trend," says Marsha Gold, a senior fellow at Mathematica Policy Research, who studies Medicare. "Just saying [we're going to do it] isn't enough to get it to happen."

Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a nonprofit, nonpartisan health policy research and communication organization not affiliated with Kaiser Permanente.

Presented by

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

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