Couponcare: Paul Ryan’s proposal for changing Medicare

by Rob Cullen on May 11, 2011 - 12:28 PM

We’ll give House budget committee chairman Paul Ryan (R-Wisc.) some credit. For nearly two years now, we’ve been waiting for Republicans to offer a health care plan of their own, rather than just criticizing any plan Democrats propose. Ryan’s budget proposal, which he calls the “Path to Prosperity” finally lays out a Republican alternative.  It would mark the most radical change to Medicare and Medicaid since the programs were created half a century ago, and repeal much of the Affordable Care Act.

But while Ryan gets points for finally proposing at least something, it’s not a good something. Not only would it cover 32 million fewer people, and do nothing to reduce the overall growth of health care costs, it doesn’t even reduce the deficit by as much as the Affordable Care Act.

We’re going to break our coverage into two parts. Today– how Ryan’s proposal would affect Medicare, and in our next post we’ll look at what it means for Medicaid.   

What is Ryan’s plan for Medicare?

Ryan’s plan would scrap traditional Medicare as we know it and replace it with a voucher system. Here’s how it would work.

For people who are currently age 55 and above:

  • Not much changes– current beneficiaries will keep the same coverage, and when the others turn 65, they’ll be covered by traditional Medicare. The biggest change for this group would be the return of the “doughnut hole” for prescription drugs (since Ryan’s plan would repeal the Affordable Care Act, which eliminated this gap in coverage for seniors).

For people who are currently younger than 55:

  • Instead of traditional Medicare, when this group turns 65 they’ll get a fixed amount of money to help pay for private insurance (basically a voucher or coupon).
  • Plans will be regulated by the government on some type of insurance exchange.
  • The program will be means tested, meaning wealthier people will get a smaller voucher, and poor people will get a larger voucher.
  • Vouchers will grow at the same rate as inflation.

For people who are currently younger than 45:

  • Pretty much the same deal as above, except instead of being eligible for the Medicare vouchers at age 65, this group will have to wait until they turn 67.

One quick side note: Ryan refers to his plan as “premium support,” but Henry Aaron, a widely respected economist at the Brookings Institute who came up with the idea for “premium support” in the mid-1990’s, says that Ryan’s plan uses vouchers, not premium support.

Perhaps the real reason for Ryan’s word choice is that Medicare vouchers are extremely unpopular, especially among the elderly. A September poll conducted by the Pew Research Center and the National Journal found that 69 percent of seniors opposed vouchers for Medicare.

What’s Wrong with Ryan’s plan?

According to the non-partisan Congressional Budget Office, the problems would start immediately. Buying the traditional Medicare benefit package from private insurers would be much more expensive, because Medicare pays doctors and hospitals less than private insurance, and has lower administrative costs. From day one, seniors would be paying more out of pocket for less comprehensive coverage.

In 2022, the first year the voucher would apply, CBO estimates that total health care expenditures for a typical 65-year-old would be almost 40 percent higher with private coverage under the Ryan plan than they would be with traditional Medicare.

But it gets worse. The vouchers will grow at rate of inflation, which sounds reasonable, except health care costs almost always grow faster than inflation– often by twice as much.

Which means that over time Ryan’s vouchers will pay for less and less coverage. The CBO says that by 2030, the typical beneficiary would be expected to pay more than two-thirds of their medical costs.

Now, Ryan and his supporters would argue that the increased competition from allowing seniors to choose their own coverage will bring the total cost of health care down. In other words, “Don’t worry, the market will take care of everything.” But Brooking’s Henry Aaron (the creator of premium support we mentioned earlier) doesn’t buy that. He says:

The idea here is the competition imposed by just the elderly and disabled is going to bring about these changes. But we have a lot of choice already in Medicare, due to Medicare Advantage. If we were going to get these terrific results, why haven’t we seen them yet? [Note: providing Medicare Advantage through private insurers costs 19% more than traditional Medicare.]

Aaron says that he and the Urban Institute’s Bob Reischauer created “premium support” as a response to what they felt were legitimate criticisms of systems like Ryan’s that would privatize Medicare:

The worry was the reliable savings would come from shifting costs onto patients. The savings from competition were just something we hoped would show up. So the key element was linking the amount that individuals receive to the growth of health-care spending, not to some other index that would grow less rapidly than health-care costs.

Ryan’s plan does just the opposite.  The amount seniors get would be tied to inflation, which always grows less rapidly than health care.  This means that if the savings from competition doesn’t show up, seniors are in big trouble.

Hypocrisy

As we’ve pointed out before, Republicans attacked democrats for “gutting Medicare,” with $500 billion in cuts. Guess what? Ryan’s budget proposal includes those same cuts! When Ryan talks about repealing the Affordable Care Act in his budget, he only means repealing the spending and taxes (taxes which for the most part only affect the very wealthy or those with “Cadillac” insurance plans). He’s keeping the Medicare cuts the GOP ran against last fall.

Unfortunately, repealing the spending parts of the Affordable Care Act (ACA) also mean that the 32 million fewer people would have insurance in 2014. The spending also helps make possible the new regulations on insurance companies– things like the rules against discrimination based on pre-existing conditions.

Ryan’s plan has been hyped by Republicans as a courageous proposal to deal with the deficit, and the spending cuts are supposedly an example of a “tough choice.” But the Center on Budget and Policy Priorities has shown that his plan will yield just $155 billion in deficit reduction over the next ten years (not the $1.6 trillion he says). To put that number in perspective, the Affordable Care Act reduces the deficit more ($230 billion over ten years according to the CBO), AND provides coverage to 32 million more people.

Where does the savings from Ryan’s spending cuts go then? Instead of reducing the deficit, most of that money would go to tax cuts for the wealthy. CBPP has a list:

  • A typical hedge fund manager would benefit from Ryan’s extension of the Bush tax cuts for high-income people; the average person making at least $1 million a year would get $125,000 a year in tax breaks.
  • Heirs to multi-million-dollar estates would benefit from Ryan’s estate tax proposal, which would let them inherit the first $10 million in estate value entirely tax-free.
  • High-income investors would benefit from Ryan’s elimination of Medicare taxes on their investment income.
  • And large numbers of high earners would benefit from Ryan’s call to cut the top rate to 25 percent, the lowest in 80 years.

The Response

Weirdly, at first many pundits lined up to praise Ryan’s proposal as “courageous.” New York Times David Brooks called it “the most comprehensive and most courageous budget reform proposal any of us have seen in our lifetimes.” Slate’s Jason Weinberg called it “brave, radical, and smart.” Time’s Joe Klein said it was “without question, an act of political courage.” They argue that even if you don’t like parts of the plan, at least it’s a start.

Two things we’d like to say here. First, proposing massive tax cuts for the wealthy and powerful, while shifting health care costs onto seniors and cutting programs for the poor (two thirds of his budget cuts come from programs for lower income Americans) is anything but courageous.

As for the point that at least it’s a start, well… we already have a much better starting point– the Affordable Care Act. The Affordable Care Act deals with the underlying problem of rising health care costs, instead of simply shifting the burden onto the elderly. Brooking’s Aaron says:

It includes, in my view, just about every idea for reining in the growth of spending that analysts have come up with, though it doesn’t go far on some of them.

His former partner in creating the idea of premium support, Robert Reischauer agrees:

“If this is a competition between Ryan and the Affordable Care Act on realistic approaches to curbing the growth of spending, the Affordable Care Act gets five points and Ryan gets zero.”

An what are the Affordable Care Act’s realistic approaches to reducing health spending?:

The law has three big ideas for controlling costs: First, pay doctors for quality rather than volume; second, vastly increase the amount of information available about which treatments work best and when; and third, pay providers more to keep people out of the hospital than to treat them once they get in it. If any or all of these strategies work, costs will go down, but not because the premiums seniors pay have gone up.

And the law takes the next step by including some big ideas for how to spread cost controls through the health system: a board of experts empowered to reform Medicare even when Congress is paralyzed or worrying about other things; exchanges where people can easily compare insurers based on cost and quality (the same model Ryan uses in Medicare, incidentally); electronic medical records that give doctors easy access to the latest information about drugs and treatments.

Many of these ideas are untested– some might work better than others. But we’d do much better to strengthen the Affordable Care Act than scrap it like Ryan proposes and shift a massive burden onto seniors.

{ 1 comment… read it below or add one }

John Nagle May 12, 2011 at 11:32 am

Rob,

Great piece as usual. I just wish it could be disseminated to more people and that they would read it.

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