Monday, June 6, 2011

Vouchercare

Paul Krugman writes that Vouchercare is not a "new, sustainable version of Medicare." It may be new and I suppose that its adherents can call it whatever they like, but its recipients would not find it especially sustaining.

Vouchercare, a.k.a. the Roadmap for America's Future, would starting in 2022 provide seniors with an average of $11,000 with which to purchase insurance. But there's a catch: That's $11,000 in 2012 dollars. To understand what that means in terms of actual purchasing power, calculate the present value of $11,000 using a discount rate based on historical medical inflation rates (3-5% over the last ten years):

  • At 3%: $8,135
  • At 4%: $7,431
  • At 5%: $6,753
Moreover, Ryancare vouchers are indexed to the general rate of inflation as opposed to the medical rate. The medical rate is historically higher. Suppose that the vouchers grow at an average rate of 3% a year for five years while medical inflation increases at a rate of 4%. Although the payout would be $12,752, the actual purchasing power will have dropped to $7,081. This table shows the declining actual value of the vouchers over 25 years given a medical inflation rate of 4% with the vouchers indexed to 3%:

  Payment Value
Year 1 $11,000 $7,431
Year 5 12,752 7,081
Year 10 14,783 6,747
Year 15 17,138 6,428
Year 20 19,867 6,125
Year 25 23,032 5,836

The Center on Budget and Policy Priorities, using the CBO assumptions provided by Rep. Ryan, estimates that by 2080, Medicare benefits will have been effectively cut by 76%. And even that may be optimistic: Medicare currently operates with an administrative overhead of 1-2%. One organization estimates health insurance company overhead to be as high as 31%, all of which is passed on to purchasers in the form of reduced purchasing power.

So, Krugman is right: Vouchercare is not Medicare. It would be one thing if its adherents were forthright about their intent to gradually eliminate the government role as a health insurer for elders. Then we could have an honest debate, albeit one they would lose. But, as happens too often in the health care reform discourse, ideology has once again trumped honesty.