Comparing Ryan’s Medicare Plan to What Congress Gets
By UWE E. REINHARDT
Today's Economist
Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.
On April 15, the House of Representatives passed, on a partisan vote, the budget plan that Paul D. Ryan, Republican of Wisconsin and chairman of the House Budget Committee, had earlier introduced to his committee.
Mr. Ryan’s plan should be read closely by every voting citizen, as it comes closer than any other legislative proposal I can recall to the libertarian vision for America.
At the same time, I urge readers to study the Congressional Budget Office’s analysis of Mr. Ryan’s plan and a very good summary of the plan by the Henry J. Kaiser Family Foundation.
With regard to health care, the Ryan plan envisages a major withdrawal of at least the federal government from the financing of health care in America. Among the major provisions to that effect are these:
• Through block grants rather than sharing actual outlays by the states on Medicaid, it would drastically reduce the federal government’s contribution to the state-run Medicaid programs, which, of course, might force states to raise their taxes on their residents or significantly reduce eligibility for the program.
• It would repeal and defund the president’s health-care law, in particular the large federal subsidies that would go either to low-income families toward the purchase of health insurance or to the states to enroll such families in Medicaid. Instead, the plan says, it would “advance common-sense solutions focused on lowering costs, expanding access and protecting the doctor-patient relationship.” What the alternative solutions expanding access would be, especially the financing of these solutions, is not made clear.
• For people now 55 or younger, the traditional Medicare program – a defined benefit plan — would cease to exist and, starting in 2022, would be converted to a defined contribution program. Starting in 2022 the eligibility age would gradually be ratcheted up to 67 from the current 65.
It is not surprising, and altogether healthy in our democracy, that Mr. Ryan’s vision has drawn sharp criticism from the liberal camp, including a speech by President Obama himself. In this post, I will leave such commentary untouched and focus on only one aspect of the proposal.
In an Op-Ed piece in The Wall Street Journal, Mr. Ryan wrote, “Starting in 2022, new Medicare beneficiaries will be enrolled in the same kind of health-care program that members of Congress enjoy.”
He repeated that assertion on NBC’s “Meet the Press” on April 10, when he said, “For future generations, what we are proposing is a personalized Medicare, a Medicare system that works exactly like the health care I have as a member of Congress and federal employees have.”
Exactly? I beg to differ.
There is a huge difference in one important aspect between the Medicare program in the Ryan budget plan and the Federal Employee Health Benefit Plan, or F.E.H.B.P., for federal employees and for members of Congress.
Basically, the F.E.H.B.P. is best described as a typical employer-sponsored health insurance plan. The federal government’s – that is, taxpayers’ – annual contribution to the premiums paid to competing private insurers by employees and members of Congress would rise in step with the average premiums charged by the private insurers (see Page 1).
These premiums have been rising over time more or less in step with the overall increase in per-capita health spending in this country.
By contrast, under the Ryan plan, the federal contribution toward the purchase of private health insurance by future Medicare beneficiaries would be indexed only to the Consumer Price Index (see Page 2 of the C.B.O. analysis).
Over the last three decades, the C.P.I. has grown at a much slower rate than per-capita health spending, especially since 2000 (see the chart below).
The following table shows the numerical difference between the growth in the C.P.I. and health insurance premiums since 2000. The table also shows that with the exception of a few years, private health insurance premiums tend to rise as fast and often faster than does Medicare spending per beneficiary, in good part, of course, because Medicare can control the prices it pays the providers of health care (although not the volume of these services).
Department of Health and Human Services, Office of the Assistant Secretary for Planning and Evaluation, April 12, 2011. *California Public Employees’ Retirement System, which functions as a private health insurance exchange for 1.3 million active and retired public employees.
**Start of Medicare Part D Prescription-Drug Plan.
Indexing the federal contribution to Medicare beneficiaries to the C.P.I. can thus be expected to shift an ever-larger share of the total health spending on Medicare beneficiaries from the books of government to the household budgets of these beneficiaries. It is fair to wonder whether members of Congress would ever pass a bill indexing the federal contribution to their insurance premiums only to the C.P.I. rather than, as now, to the growth in insurance premiums.
As the Congressional Budget Office noted in its analysis of the Ryan proposal, for a typical 65-year-old with average health spending enrolled in a private plan
with benefits similar to those currently provided by Medicare, C.B.O. estimated the beneficiary’s spending on premiums and out-of-pocket expenditure as a share of a benchmark: what total health care spending would be if a private insurer covered the beneficiary. By 2030, the beneficiary’s spending would be 68 percent of that benchmark under the proposal (see Pages 20-24 and Figure 1 on Page 22).
If private insurance premiums after 2030 continued to grow at a rate exceeding the growth in the C.P.I., the federal contribution to Medicare might shrink even further.
Perhaps this is what the voting public wants — and perhaps not. Either way, it is important that voters, especially those under age 55, follow with open eyes the fierce budget battle now erupting between Republicans and Democrats, so they will be well informed of the consequences of each choice offered them by the feuding politicians.
Unfortunately, the combatants themselves will probably not disclose the full consequences of their options to the voting public. Instead, politicians on both sides of the aisle are likely to camouflage these consequences in mellow language, as Representative Ryan did in regard to his Medicare proposal.
Politicians and elected officials appear to have concluded from years of experience that the public has never favored those who tell them the harsh truth. It’s almost as though the public wants to be misled.
The specific proposals aside, does the Ryan plan offers anything to control overall health-care spending?
No, nor does that appear to have been Mr. Ryan’s objective.
As the Congressional Budget Office observed, “Private plans would cost more than traditional Medicare because of the net effect of differences in payment rates for providers, administrative costs and utilization of health services, as described above.” The data in the table above support that conclusion as well
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