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

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Ryan’s plan attempts to control costs by changing the fee structure: Instead of providing a set of benefits at any cost, the government will provide seniors with a set of funds they can use to pay for medical care. These funds would go directly to insurers, not patients, so it’s not truly a voucher system.

Indeed, a voucher system – such as America’s food stamp program – is a fairly simple operation that provides citizens with public funds to purchase private goods. Ryan’s plan, by contrast, retains much of the complexity of the current Medicare system.

The upsides to Medicare reform plans

As Americans debate proposals to reform Medicare, they should know that all of them involve trade-offs.

The upside of the current Medicare entitlement is that it provides peace of mind to the elderly – they will all be insured. The downside is that since it is based on an unsustainable funding model, they either won’t all be insured for long or the insurance the elderly have will be so heavily rationed it will be politically intolerable.

The upside of the Ryan plan is that, like the present plan, it guarantees that all of the elderly will be insured and builds on lessons learned from the Medicare Advantage program. The downside is that for some elderly people, additional choices creates additional anxiety. And observers worry that the pemium support funding wouldn’t keep pace with fast-rising medical costs.

The upside of a true voucher system is that it is very simple and very transparent. It narrowly solves the crux of the problem, which is making sure everyone gets health insurance. If set up correctly, say, through a national sales tax, it overcomes a “free-rider problem” that results from people knowing that hospitals will treat them even if they haven’t paid into the system.

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