Paul Ryan’s Medicare Voucher Plan Improves With Each Pass

March 21 (Bloomberg) -- Democrats suspect that Representative Paul Ryan proposed a tax overhaul in his 2013 budget to camouflage a politically foolhardy Medicare privatization plan. They have it backward: Ryan’s Medicare proposal is getting better with each pass.

It’s his tax plan that seems slapdash, lacking important details, including who would pay more and who less, that would allow us to judge its merits.

So we’ll focus on Ryan’s Medicare blueprint for now. It remains a work in progress, but with further tweaking has the potential to be truly transformative. It could begin to stop the growth of health-care costs, the U.S.’s toughest challenge in a generation. And it shows that the Wisconsin Republican continues to be his party’s boldest policy thinker.

Ryan’s first offer on Medicare reform a year ago would have turned it into a voucher-like system, called premium support. In essence, rather than pay seniors’ doctor and hospital bills, as the government does now, it would subsidize each older American’s purchase of a health plan from a menu of options. (The new system would begin only when people now under age 55 retire and qualify for Medicare.)

The problem with the old Ryan plan was that annual increases in the premium support would have been capped at the rate of inflation -- a steep cut considering that Medicare costs have grown about 8 percent annually for the last 15 years. Eventually, the failure of the subsidy to keep pace with health-care inflation would have saddled seniors with unbearable out-of-pocket costs.

Liberal Democrat

Ryan improved his plan in December when he teamed up with Oregon Senator Ron Wyden (proving that even a liberal Democrat can appreciate premium support). Their plan would have offered seniors a subsidy to buy private health insurance, only this time they could choose the traditional Medicare program. Still, benefits would be capped. But Ryan and Wyden would have allowed more generous increases in per-capita Medicare spending of 1 percent above the rate of gross domestic product growth, or about 4 percent if the plan were in place this year.

The 2013 budget that Ryan unveiled Tuesday picks up some important features, including the Medicare option, from the Ryan-Wyden plan. It would create a competitive-bidding process to determine the annual increase in the government voucher, forcing health plans and the Medicare program to compete for patients. The federal subsidy would be based on the second-least-expensive plan in each market. Ryan would means-test Medicare by subsidizing the poor more and the wealthy less. And beginning in 2023, he would increase gradually the Medicare eligibility age until it reaches 67 in 2034.

Those are all desirable additions. But Ryan 3.0 tweaks the GDP-plus-1-percent formula -- making it a less generous GDP plus 0.5 percent -- probably because the original formula wouldn’t have bent the cost curve enough. Health care is the biggest driver of future budget deficits, and Ryan needed to be less generous in order to cut overall government debt. The Congressional Budget Office estimates that, by 2030, spending on the average Medicare beneficiary would be $7,400 (in 2011 dollars) under Ryan’s plan, 14 percent lower than what would be spent under current law.

Even then, his plan rests on an unproven theory: that competing private plans will find numerous efficiencies, including better coordinated care, which will allow them to offer the same health benefits as traditional Medicare for less money. And instead of Medicare, with its considerable market power, setting provider rates and determining which procedures to cover, each plan would do the negotiating, with seniors deciding which one offers the best value.

The danger is that Ryan may be cutting costs too steeply, forcing Americans to choose from a stingier menu of options while shouldering ever-higher out-of-pocket costs. He may also be relying too heavily on seniors’ ability to make smart decisions about their insurance -- often when they are frail or seriously ill.


To avoid these pitfalls, Ryan should clarify that insurers wouldn’t be able to charge any Medicare patient excessively high premiums. One way to do that would be to require insurers to charge the same premiums for all enrollees of the same age. To keep private insurers from cherry-picking the healthiest seniors, plans must be “risk-adjusted,” insurer-speak for customizing government subsidies for the average beneficiary’s health status. Finally, participating plans must be required to offer benefits at least as comprehensive as traditional Medicare.

Democrats are already hammering Ryan for ending Medicare as we know it. But the CBO estimates that the present system will run out of money in the next nine years. Ryan’s plan may be poor politics, but it’s the right policy.

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