Paul Ryan Medicare Plan Is Not Really That Radical

Almost as soon as Mitt Romney announced that Paul Ryan (R-Wisc.) would be his running mate for this fall’s election, the ads started. Unsurprisingly, the Democratic line of attack has focused on the Wyden-Ryan plan for reforming Medicare, so named because it was conceived in partnership with progressive Democrat Ron Wyden (D-Ore.). To be sure, the plan is not perfect, and there are substantive policy questions that must be addressed before such a plan can be enacted, but “the end of Medicare as we know it” this is not. In fact, a closer examination of the facts reveals the plan to be a cogent bipartisan alternative that has a long history of support. In fact, a similar policy first appeared in the Senate’s own version of the 2010 health reform legislation, and before that in a reform proposal under President Bill Clinton.

The Facts

In the first, the plan maintains the traditional fee-for-service (FFS) Medicare option that is the de facto program into which seniors are automatically enrolled for hospital and physician services. This alone was sufficient to lead the fact-checking site PolitiFact to proclaim the Democratic refrain that such a plan would “end Medicare as we know it” the 2011 lie of the year. Secondly, any changes would only apply to those aged 55 and under, providing a decade-long lead-time during which the policy can be gradually implemented. 

Currently, the standard FFS option operates on what is known as a “defined benefit” model, meaning that the government will pay for any covered service to any provider willing to accept CMS’s fee schedule. Unfortunately, the standard method of controlling costs under this arrangement has consistently been to rely upon across-the-board cuts and uncertainty for physicians and other providers, which can lead to reduced access for vulnerable seniors.

However, in an effort to instill some healthy competition into this monopsonistic equation, bipartisan policy thinkers have begun advocating a “defined contribution,” or “premium support,” approach that will function in conjunction with a competitive bidding model. The Wyden-Ryan plan is the latest iteration of such thinking.

Generally speaking, such an approach would allow private plans, as well as traditional FFS Medicare, to compete for the business of the elderly over a given geographic region. This competition would take place within a “Medicare Exchange” that would be prohibited from denying coverage to individuals based on pre-existing conditions or charging hugely divergent premiums to individuals based on health status at the time of enrollment. However, each exchange plan must be actuarially similar to that of traditional Medicare. 

Beneficiaries will be provided a subsidy equivalent to the second-cheapest alternative in their region, though this restriction does not appear in the Romney plan. If they choose a more generous plan, they will be responsible for the difference. If they choose a cheaper plan, they can pocket the difference and use it for out-of-pocket medical expenses, such as co-pays, deductibles, and the like. These premium supports will be pegged at the growth of our gross domestic product +1%, the exact same level set under the Affordable Care Act (ACA).

Astute readers will have long since noticed that this all sounds somewhat familiar. The ACA utilizes many similar methods, though it would attempt to force all Americans, along with their hugely divergent health and coverage needs, into such a rigidly structured market. Indeed, perhaps the greatest difference between the Wyden-Ryan proposal and the ACA is that the public option, that much maligned scourge against which conservatives so vehemently protested in 2009 and 2010, survives in the guise of traditional Medicare!

Of course, pure competitive bidding between public and private plans remains poor policy, though the increased homogeneity of the senior population makes some of the other insurance market reforms called for in this plan somewhat less disruptive. Government does not so much compete as dictate the market and circumstances under which it will operate. As such, it is essential that policymakers develop strategies to somewhat level the playing field between public and private payers in any competitive bidding model.

The limitation of the subsidy to the second cheapest proposal may help this, as traditional Medicare is unlikely to take this spot. In fact, researchers from Harvard recently determined that private Medicare Advantage firms, free of the constraints currently imposed upon them, could likely deliver the standard package of Medicare benefits for a premium that is about 10% cheaper than current levels.

The Cuts

Much has also been made of the House-passed budget's (authored by Ryan) “cuts” to this popular social program. It is important to note that the Congressman did not conceive of these methods.  In fact, they have already been signed into law … as the Affordable Care Act.

According to CBO, the ACA will reduce Medicare spending by $716 billion between 2013 and 2022.  However, rather than contributing to the fiscal solvency of the program, these cuts are actually intended for future spending under the law.  This is one of the many budgetary issues that have drawn objections from conservative observers, including Ryan.

Rather than use these monies to fund another unaffordable entitlement, the House budget would instead apply much of it to the fiscal solvency of our existing entitlement. Further, the cuts, as structured under the ACA, would have a direct and immediate impact on current beneficiaries, whereas the Ryan plan would apply only to those aged 55 and younger. As a consequence, this plan would actually cut Medicare funding less than the law signed by the president, even under these dubious budget assumptions.

Conclusion

Reasonable people can disagree on policy, and there are many details that will provide ample fodder for policy thinkers to mull over and argue. However, with “Medicare as we know it” scheduled to go broke in 2024, or perhaps even sooner, if the opinions of CMS’s Chief Actuary, Richard Foster, are to be believed, demagoguing genuine reform proposals is just plain irresponsible [Note: Former Deputy Director of the White House National Economic Council, and current Social Security and Medicare Trustee, Charles Blahous, makes a similar claim, full paper here]. 

The truly radical position in this case would be to do nothing. The state of this country’s entitlements merits an adult conversation, and hopefully we can provide it. After all, we don’t want to be “radical.”