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How to reform Medicare with faith in market principles – including vouchers

As Americans debate proposals to reform Medicare, they should know that all of them involve trade-offs. Where the current system and the Paul Ryan plan fall short, a true voucher system provides choice, coverage, and cost-efficiency.

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House Budget Chairman Paul Ryan (R) of Wisconsin is proposing major – and highly controversial – changes to Medicare. Though the Senate recently rejected his plan, it may play a big part in the 2012 presidential campaign.

Mr. Ryan is pitching his reforms as “premium support.” What is premium support, exactly? Is it a voucher system? Let’s take a closer look at Ryan’s plan and then weigh the pros and cons.

To understand the Ryan proposal, we first have to understand how Medicare works. Medicare is essentially a single-payer system for Americans older than 65. Part A (which everyone gets by default) pays for most hospitalization expenses. Part B (which is optional but most people pay extra for) covers medical expenses beyond hospitalization like most private insurance plans do. Both A and B employ the fee-for-service approach. Part C (which after 2003 evolved into what’s now called Medicare Advantage) allows people to elect to have the government send its premium support directly to any one of a set of insurers who offer a wide variety of plans.

In some ways, the premium support program that Rep. Ryan has proposed resembles Medicare Advantage. In both plans, government doesn’t actually provide insurance – private insurance companies do – so government is only acting as a funding mechanism. In both plans, people can choose among competing alternatives.

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