Draining the Medicare pool

Insurance is all about risk. Medicare is an insurance program, and it works because it pools together everyone in the Medicare-eligible age group—whether they’re healthy or sick. By doing that, Medicare spreads the risk around: Some people are sick and need reimbursement, but the risks represented by those people are offset by the lower risk of others who aren’t sick right now, or are simply very healthy.

Medicare—like other insurers—can keep its costs—and recipients’ costs—low, by having the largest risk pool possible.  That is the beauty of a single-payer system, of which Medicare is a highly successful example.

And that’s precisely where the Ryan/Romney Medicare plan falls on its face. Ryan/Romney turns Medicare into a privatized voucher program. Under the Ryan/Romney plan, Medicare-eligible seniors will be encouraged to seek out private insurers for their “Medicare” plan. Paul Ryan boasts that this is a way to save money. It’s not, and that risk pool deal is the reason.

When everyone goes out shopping for variegated, private Medicare plans, they’ll be breaking up the Medicare risk pool into much smaller puddles. Insurers who manage these reduced pools will have less risk to spread around among their customers, so, they’ll inevitably charge higher premiums to cover the additional risk. If I’m not mistaken, this is basic actuarial math.

Unfortunately, we’re not hearing much about this in the mainstream press. Maybe that’s because no one understands the risk pool or has bothered to look into it. But knowing about the vaporization of the current, giant Medicare risk pool is essential to understanding what’s wrong with the Ryan/Romney plan.

Additional side effects

The risk-pool breakup would have other ramifications, too. The reason that so many doctors and hospitals participate in Medicare–and accept its low reimbursement rates– is that the program provides a guaranteed stream of patients. In a shrunk-down, Ryan/Romney Medicare world, healthcare providers could have less incentive to take on the reduced volume of patients—and they’d have even more insurance companies to deal with.

Also, as the pool shrinks, Medicare will lose its clout in negotiating rates for services and pharmaceuticals. The burden of higher costs will fall to seniors.

Finally, there’s this troubling idea, suggested by a reader of Andrew Sullivan’s The Dish:

…The Ryan plan destroys the political/social contract between older citizens and younger workers. Why should I continue to pay for the healthcare of people who happen to be over 55 when the Ryan plan says I have no chance of ever getting that kind of coverage?… Ryan’s plan creates a generational divide that will eat away at the consensus behind providing health care for older citizens, which is what I suspect he wants.