Introduction

When you look closely at GOP vice presidential candidate Paul Ryan’s proposals to restructure Medicare, it’s clear he agrees with many health insurance company CEOs that Americans — especially older Americans — don’t have enough “skin in the game” when it comes to medical costs. If his proposal to largely privatize Medicare becomes a reality, those not already 55 and older will be putting far more “skin in the game” than current Medicare beneficiaries do, and they’ll be required to peel off increasing amounts of skin every year for the rest of their lives.

I can’t tell you how many times I heard my former CEO and other industry executives say that, in addition to the ever-increasing cost of a stay in the hospital, new drugs and new medical technology, a big reason why premiums keep going up is because those of us who make a tiny fraction of what they make are not paying enough out of our own pockets (i.e., “skin”) for medical care.

They use that rather crude term when they talk to Wall Street financial analysts and policymakers to justify their strategy of moving more and more of us into what they euphemistically refer to as “consumer-directed” health plans that are in reality are high-deductible plans that require us to pay far more of our own money for medical care than we have had to pay in the past.

Ryan would change Medicare from what is known in industry jargon as a “defined benefit” plan to a “defined contribution” plan. Medicare beneficiaries would no longer have the assurance of knowing that the government would always pay the lion’s share of the cost of coverage (defined benefit). Instead, the government would give them a set amount of money in “premium-support” payments (defined contribution) every year to buy coverage from private insurers. (The 2011 version of Ryan’s proposal would replace the traditional Medicare program entirely by private insurance plans. In the 2012 version, traditional Medicare would remain an option.)

Critics of Ryan’s proposal have charged that the premium-support payments provided by the government would not be nearly enough in future years to pay for the level of coverage today’s beneficiaries have. That’s because the annual increases in those payments would be tied either to changes in the Consumer Price Index (CPI) or the U.S. Gross Domestic Product (GDP), plus .05 percent. Because medical inflation has consistently outpaced either of those measures, beneficiaries would find that the value of the premium-support payments likely would diminish every year.

In practice, beneficiaries would never touch those premium-support payments. That money would go straight into the bank accounts of the insurance companies they chose to provide their coverage.

This windfall for insurance companies could be a catastrophe for the many senior citizens who aren’t wealthy enough to absorb the additional costs of rising premiums and out-of-pocket expenses. According to the Kaiser Family Foundation, the median income of Medicare beneficiaries was $22,800 in 2006.

By contrast, in 2005, former Aetna CEO John Rowe, who never missed many opportunities to talk about the need for people to put more “skin in the game,” was paid $35 million. That same year, Rowe’s successor, Ron Williams, pulled in $31 million. Five years later, Williams’ compensation more than doubled, to $72 million.

Williams was considered a darling of Wall Street during most of his time as a top executive at Aetna. Noting that it was Williams who led Aetna’s move toward higher deductibles plans to reduce its medical costs, Sanford Bernstein analyst Anna Gupte was quoted as saying in a 2010 Bloomberg story, “He [Williams] was a leader in really adopting that model and moderating the medical-cost trend by shifting more cost to the members and having them put more skin in the game.”

Keep in mind that as our insurers were making us put more skin in the game, our premiums kept going up too. According to the Kaiser Family Foundation, they increased 113 percent between 2000 and 2010. To make matters worse, people who get their coverage through their employers saw their share of premiums shoot up 159 percent during those years. And during just the first half of that time frame (2001-2006), total out-of-pocket costs per insured person increased 45 percent, according to the Commonwealth Fund. Meanwhile, the CPI increased just 26 percent between 2000 and 2010, and health care costs grew 48 percent. Now you see why big insurance firms were so profitable during the recent recession, when millions of us saw our incomes, net worth and home equity plummet, and why the premium-support payments in Ryan’s proposal likely would not come close to covering the costs of care for future senior citizens.

There is no historical evidence to support Ryan’s suggestion that private insurance companies could do a better job of controlling medical costs than the traditional Medicare program. To be fair, the way Medicare currently reimburses health care providers — on a fee-for-service basis — undoubtedly has contributed to medical inflation and the rising percentage of total federal spending that the Medicare program consumes. And even under provisions of the Affordable Care Act and other laws enacted by Congress in recent years, many of the 17 percent of Medicare beneficiaries who have purchased Medigap polices to cover their co-insurance obligations will also see their out-of-pocket expenses go up in future years.

But private insurance companies have absolutely no track record of making health care more accessible and affordable. When you consider their failure to tame medical inflation and the fact that their business practices have resulted in 50 million of us being uninsured and another 30 million of us being underinsured, why would anyone have any reason to believe private insurers would be a good deal for future senior citizens?

What their track record does show is that they know how to do one thing very well: pay their top executives very handsomely, in part by being able to shift more of the cost of care — the skin they talk about — to the rest of us.