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Analysis: Medicare And Medicaid Get Squeezed In Ryan Plan

Apr 04, 2011

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Everyone agrees that controlling health care costs is the key to bringing long-term federal budget deficits under control. Government spending on Medicare for seniors and Medicaid for the poor has grown nearly twice as fast as the rest of the economy for decades and is by far the largest component of future projected deficits.

But government funded health care programs aren’t unique in that regard. Employer-based coverage for the working population, which is provided through private insurance companies, has grown just as fast. The problem in a nutshell is the cost of health care, not its funding source.

That’s why it’s important to consider how the two separate sides of our health care system – public plans and private plans – will interact should the Medicare privatization plan that Rep. Paul Ryan, R-Wis., touted on Fox News Sunday become law. The House Budget Committee chairman’s alternative budget would turn Medicare over to private insurers for anyone who retired after 2021. Future retirees would receive a capped payment to buy insurance (he called it “premium support,” not a voucher). Medicaid would be turned into a capped block grant – which translates as a fixed sum awarded to states.

Capping expenditures is central to cost-control in the Ryan plan, which is essentially the same plan that he co-authored with former Congressional Budget Office director Alice Rivlin during the fiscal commission deliberations. The plan limits the annual growth in the amount earmarked for either premium support or block grants to one percentage point more than gross domestic product (call it GDP+1).

That’s about half of the actual health care cost outlays in most years. According to Congressional Budget Office projections released in January, federal spending on Medicare and Medicaid is expected to nearly double to $1.6 trillion by 2021, about a 7 percent annual increase. If the primary goal is holding down taxes and spending, capping that rise at GDP+1 provides the upside. With a wave of the legislative wand, government spending on health care for the old and poor would be reduced to more manageable proportions – between 3.5 and 4.5 percent a year depending on how fast the economy grows. Taxpayers could rejoice.

But just because the government slowed its spending doesn’t mean that old people and the poor wouldn’t have the same health care bills they had before. Health care for these vulnerable populations absent some other force in the marketplace would continue growing at rates significantly faster than the Ryan plan’s GDP+1 formula, just as it has for decades.

Who would pick up the costs that once were picked up by the government? Under the existing system, doctors and hospitals already complain bitterly about the insufficient fees that Medicare pays for the services they provide seniors. Whenever Congress gets close to actually cutting physician pay, which is mandated by prior cost control laws, they immediately restore the cuts out of fear thousands of doctors will carry out their threats to stop seeing Medicare patients.

One option for physicians and hospitals under a capped Medicare premium support system would be to step up what they have always done when faced with inadequate Medicare reimbursement. They could shift even more costs to private, non-Medicare payers, that is, employers and their covered employees. For working stiffs and their bosses, higher taxes would be replaced by higher insurance premiums.

Another option would be for insurers to begin making skimpier plans available to seniors, who would have to make up the additional costs out of their own pockets. Co-pays would rise. Deductibles would rise. Fewer services would be covered.

Isn’t it possible that making seniors have “more skin in the game” through higher out-of-pocket expenses will succeed in cutting out wasteful spending and keep premiums within the capped limits? That’s what a group of conservative think tank experts argued in a letter to Congressional leaders on Friday. Premium support “is a new way of structuring the financing of Medicare benefits that gives beneficiaries more control over their health choices and spending,” they wrote. “This premium support arrangement would reverse the incentives now in Medicare that promote wasteful spending.


What this ignores is an extensive body of research that shows raising out-of-pocket expenses has consistently failed to hold down costs. Moreover, when people do self-ration care based on price, they are just as likely to eliminate vital and cost-effective health and preventive services as they are to jettison waste. Most citizens, especially the frail elderly and the under-educated poor, are ill-prepared to sort out the wheat from chaff in modern high-technology medicine.

There is one way to avoid these negative outcomes. The government could set minimum standards for the insurance plans sold to seniors and the poor and set up exchanges, perhaps in the states, to enforce those standards. It could also guarantee that the premium support was adequate for poorer seniors (about half live solely on Social Security) to purchase those plans.

There’s a precedent for this approach. Republicans call it “Obamacare.” Democrats call it health care reform, which also included an Independent Payment Advisory Board that every year after 2015 is going to recommend to Congress cuts in Medicare anytime expenditures go over GDP+1. Republicans want to repeal this measure, along with the rest of the bill.

Turning Medicare and Medicaid over to the insurance industry selling exchange-regulated policies would require one more law change in order to achieve the savings promised by Ryan-Rivlin. It would require the government directly regulate the prices charged by insurers so they never grew faster than GDP+1. While Democrats were willing to put that on the table for Medicare (subject to a Congressional vote, of course), no one has been willing to suggest price controls on the private sector.

Princeton University health economist Uwe Reinhardt, who sits on the boards of device-maker Boston Scientific and Amerigroup, a managed care provider, argued in his February critique of the Ryan-Rivlin plan that the most likely outcome of turning Medicare into a defined contribution plan from its current defined benefits would be an ever-widening gap between the level of government support and what constitutes good health care in our society. That would lead to “a multi-tiered health system with a highly financially constrained, bare-bones system for tax-financed health insurance, a broad but varied set of tiers for privately insured patients and a boutique tier for Americans able to afford that style of care.”

Ryan suggested his plan would avoid this fate by means testing the premium support handouts. “Wealthy seniors” would get less, while poorer and sicker seniors would get more. Yet he acknowledged that a premium support system would shift more costs onto seniors as a group.

And it was that element that drew immediate fire from his counterpart on the Budget Committee, ranking member Rep. Chris Van Hollen, D-Md., who was more than willing to send a surge of current down the third rail of American politics. The Ryan plan, he said, would “end the current health care guarantees for seniors on Medicare, and deny health care coverage to tens of millions of Americans. That’s not courageous, it’s wrong.”

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