[Laurence Kotlikoff] ‘Vouchercare’ is the right name for Medicare

There’s a lot in a name. Just ask the so-called pinkos from the 1950s, or any ethnic group denigrated with a nasty epithet.

In our Medicare debate, the role of invective has been foisted upon the word “voucher.” If we want to get our government’s finances under control, it’s time we rehabilitated it.

The use of the V-word screams “far right wing.” Its public utterance has become so dangerous that Democrat Alice Rivlin and Republican Paul Ryan, in proposing their Medicare fix last December, referred to vouchers as “payments to providers.” Nonetheless, when Ryan put forward a similar plan this spring, Democrats immediately labeled it with the V-word.

I, too, have used the V-word in my own reform proposal, which is a voucher system for the entire country. Five Nobel laureates, most quite liberal, signed on, but others said they were uncomfortable with the word. One famous economist told me his mother would disown him if he endorsed a plan containing it.

Lately, though, people have been asking more questions about the V-word. Yes, Ryan’s plan features vouchers, but isn’t our Medicare card effectively a voucher? His recommendation is to limit Medicare spending growth, but aren’t such limits inevitable? Aren’t the president’s new health exchanges for the uninsured really a voucher plan?

These questions are forcing Ryan’s critics to respond. Paul Krugman’s recent New York Times column, “Medicare Is Not Vouchercare,” is a case in point. Krugman manages to drop the V-word in his title and nine times in his column. As for his other words, they are, well, truthy.

First, Krugman suggests that Medicare directly pays all health-care providers. Not so. More than one fifth of Medicare participants are enrolled in Medicare Part C, in which the government makes payments to providers through private insurance companies. That’s the same system that Ryan is proposing, albeit for all participants.

Second, Krugman says vouchercare “would pay a fixed amount toward private health insurance ― higher for the poor, lower for the rich, but not varying at all with the actual levels of premiums.”

Again, not so. All the plans ― Ryan’s, Rivlin-Ryan, my own, the president’s health care exchanges and Medicare Part C ― explicitly or implicitly adjust payments according to the patient’s risk profile, providing larger amounts for those with higher expected health care costs.

Next Krugman claims that “If you couldn’t afford a policy adequate for your needs, even with the voucher, that would be your problem.” Nope. The voucher plans will require insurers to offer a basic policy whose coverage is set by a medical panel. No one can be turned down by participating insurers.

Granted, not everything will be covered by the basic policy, but not everything is covered by the current Medicare system. Indeed, Medicare covers only 45 percent of the total health care costs of the elderly.

Krugman also rails against Ryan’s proposed vouchercare budget, claiming it’s too low. But Ryan spends the same in the short run as the current system. Ryan’s plan is too stingy with respect to future spending, but that’s easily fixed without changing his basic structure.

Finally, Krugman suggests we can control Medicare spending by adopting better cost controls. No doubt. But by my count, we’ve had 19 different Medicare cost-control initiatives in the program’s 45-year history, and costs are still exploding. The one thing we haven’t tried, which Ryan proposes, is to put Medicare on a strict budget equal to the total amount of the vouchers.

This is what Canada, whose health care system Krugman admires, does. It sets a budget to pay doctors, build and run hospitals, buy medications and so on, and the country sticks to it. The difference is that under Ryan’s plan, private insurance companies, rather than provincial insurance ministries, receive the vouchers and reimburse health care providers. The vouchers would include a small fee to the insurance companies, but even Canada pays the folks working for its provincial insurance ministries.

The advantage of having private insurers is they can compete with one another to provide the best health care per voucher dollar. They can also experiment to give us the best financial incentives to improve our health. And since they will directly bear the costs of every extra dollar spent on health care on the elderly, they will have the right incentives to control costs. Finally, private insurers can form a buffer between Congress and elderly voters, who want the system to cover more than it can afford.

We don’t have a lot of time to get Medicare right. It’s the 800-pound gorilla when it comes to deficit reduction. Even if the debt ceiling is raised before August and formal default is averted, investors and rating companies are going to need more than empty promises of future Medicare cost controls to keep buying U.S. government bonds and maintain the bonds’ AAA rating. They will want a policy in place that will work for sure. Vouchercare is the answer, and Krugman has done this policy a great service in coining its name. 

By Laurence Kotlikoff 

Laurence J. Kotlikoff, a professor of economics at Boston University, is a Bloomberg View columnist. The opinions expressed are his own. ― Ed.