The Optimist’s Guide to Repeal and Replace

Published October 19, 2011

Even before President Obama’s law made matters worse, Americans faced serious problems in health care—and we cannot simply revert to the status quo. In the wake of repeal, we must be ready to advance solutions.

At its core, the health care problem is one of inflation, driven by the overutilization of services, dramatic underpayments, and massive inefficiency. If you look closely, the reason is easy to see: The health care sector lacks most of the basic building blocks of a functioning market.

For one thing, markets require transparent prices, so that consumers can discover value. But in health care, the “consumer” is usually either a big insurance company or the government. Health care providers have no incentive to provide transparent prices to their patients, because their patients don’t pay directly—it’s the government bureaucrat or the insurance company bureaucrat who pays the bills.

Second, markets do not function well when consumers are insulated from marginal costs. We’re all paying more for health care, through much higher premiums and taxes. But the share we pay at the doctor’s office has plunged. The system that shields us from the cost of services has actually left us paying much more.

Doubling Down on Bad Policy

Rather than tackle these root drivers of the problem, the President’s law goes in the other direction. It expands broken government programs, enhances bureaucratic control, and imposes flawed mandates that will continue to drive up the cost of health care. Where there were cost-containing tools that help patients reduce their exposure to exploding costs, such as health savings accounts, the President’s health law essentially dismantled them.

The new health law does nothing to address the pressure that escalating health care costs are putting on the federal budget. Instead, it doubles down on the flawed design of open-ended, subsidized government health care. The result? A health-care system characterized by overutilization and inefficiency, in which costs are rising at two to three times the growth rate of GDP.

There is no serious dispute—on either side of the aisle—that health-care inflation is the primary driver of our unsustainable deficits. The disagreement isn’t really about the problem. It’s about how best to control costs in government health care programs. And if I could sum up that disagreement in a couple of sentences, I would say this: Our plan is to empower patients. Their plan is to empower bureaucrats.

Empowered Bureaucrats

The law empowers a board of 15 unelected officials, the Independent Payment Advisory Board (IPAB), to hold the growth of Medicare spending to GDP plus 1 percent by reducing reimbursements to health-care providers. Unless overturned by a supermajority in Congress, the recommended cuts dictated by this board become law.

The deterioration in seniors’ care that is projected to occur under IPAB would be so untenable, the board is unlikely to yield any savings at all. Future Congresses would be under tremendous pressure to undo the cuts, just as past Congresses have time and again reversed scheduled cuts to physicians’ pay.

Pain cannot be sustained. You cannot control costs by using price controls, which impose painful cuts within a fundamentally broken framework.

Patient Centered Model

The solution is to move away from defined-benefit models and toward defined-contribution systems. Under a reformed approach, the government would make a defined contribution to the health-care security of every American, rather than continue to offer open-ended, well-intentioned, but ultimately empty promises.

The growth of these defined contributions should be capped, to reduce the inefficiencies that have led health-care costs to spiral out of control. But they should be adjustable so that more help goes to the poor and the sick, while less financial support goes to those who are fortunate enough to need it the least.

In other words, defined contributions should underpin a system driven by patient choice and centered on patient needs—one that offers real security instead of empty promises.

In Medicare, patient-centered reform means premium support. This is the approach advanced in the House-passed budget, and also on a bipartisan basis with Alice Rivlin and other Democrats who understand the need to move toward increased choice and competition in health care.

In Medicaid, patient-centered reform means block grants to state governments, so that they are freed from onerous federal mandates and empowered to design Medicaid programs that meet the unique needs of their citizens, such as providing vouchers to low-income families, so they may have the dignity of having private insurance just like everyone else.

And with regard to health insurance for working Americans, patient-centered reform means replacing the inefficient tax treatment of employer-provided health care with a portable, refundable tax credit that you can take with you from job to job, allowing you to hang onto your insurance even during those tough times when a job might be hard to find.


Empowering Individuals

Patient-centered reform must promote transparency on price and quality—and give patients the incentives to act on this information. By putting the power into the hands of individuals, we can let competition work in health care just as it does everywhere else. Instead of top-down price controls imposed by 15 bureaucrats at IPAB, let’s try bottom-up competition driven by 300 million consumers.


Paul Ryan (R-WI) ([email protected]) is Chairman of the House Budget Committee. This column is adapted with permission from remarks delivered at the Hoover Institution.