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Nine Points About the Republican Budget

April 08, 2011

By Avik Roy

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Why Paul Ryan’s “Path to Prosperity” just might succeed


There’s been an avalanche of commentary on Paul Ryan’s “Path to Prosperity,” and rightly so. Ryan’s proposal, which would reform entitlement spending, balance the budget, and begin paying off the debt, is the most important legislative proposal of my lifetime. It may not pass in its current form. But there is a much better chance than you’d think that it will pass in modified form, perhaps under another president. Either way, it will change the way we talk about the deficit and the debt for a very long time.

The plan is quite comprehensive, encompassing discretionary spending, defense spending, financial regulation, Fannie and Freddie, tax reform, welfare programs, and Medicare and Medicaid. (As David Brooks puts it, PTP “dodges Social Security,” which is acceptable, given Social Security’s lesser impact on our long-term fiscal problems.)

As for getting debt under control, here’s what the Congressional Budget Office had to say about the “Path to Prosperity”:

The resulting budget deficits under the proposal would be around 2 percent of GDP in the 2020s [down from 9 percent in 2010] and would decline during the 2030s. The budget would be in surplus by 2040 and show growing surpluses in the following decade. Federal debt would equal about 48 percent of GDP by 2040 and 10 percent by 2050.

And Yuval Levin has put together some nice charts, based on the CBO numbers, that show how dramatically PTP changes our country’s fiscal trajectory, relative to both current law and the Obama budget.

Much of the criticism — some of which came even before anyone knew the proposal’s details — has been plainly dishonest. Josh Marshall of Talking Points Memo described the “Path to Prosperity” as “getting rid of Medicare.” Incoming DNC chairman Debbie Wasserman Schultz called it a “death trap for seniors.”

That’s not to say that Representative Ryan’s plan is perfect. No proposal of its scope and ambition could ever be, and Ezra Klein has a good bullet-pointed summary of the “Path to Prosperity” from the liberal perspective. So let’s sift through the most controversial aspects of the plan: those related to health-care entitlements. It’s going to be a rather wonky exercise, though I’ve done my best to make it readable by breaking it up into bite-sized chunks.

But first, I have three words for those who disapprove of Ryan’s approach: Where’s your plan? If you think that slowing the growth of Medicare and Medicaid spending is a bad thing, which taxes would you raise instead? If you actually favor Medicare and Medicaid cuts, but using government-dictated rationing instead of individual choice, could you please explain why? And this is, at heart, why Ryan’s bold stroke just may work: by forcing his critics to produce an honest alternative.

1. Paul Ryan is not a mass murderer.

Most thoughtful people understand that it’s demagogic and dishonest to say that PTP will “get rid of Medicare,” act as a “death trap for seniors,” kick the poor onto the street, etc. But just for good measure, let’s confront these assertions with facts.

Consider this: According to 2008 figures from the OECD (the latest year available), public-health expenditures per capita in the United States were the third-highest in the world: $3,505. Bear in mind that that’s only government-sponsored care, which in the U.S. covers only about 30 percent of the population. By comparison, single-payer stalwarts such as France and Germany cover their entire population for $2,875 and $2,870 per person, respectively; market-oriented Switzerland achieves the same for $2,735.

Hence, the assertion that slightly reducing the growth of Medicare and Medicaid will jeopardize the health care of Americans is difficult to justify. Every other developed country in the world with a functioning health-care system spends far less than we do, and many of them, Switzerland especially, achieve comparable results.

2. Liberals agree that we spend too much on health care.

Indeed, we’ve been hearing for years, if not decades, from liberal health-policy experts that America spends too much on health care without achieving better health outcomes. Here’s none other than Barack Obama on that point:

We, as a nation, are now spending a far larger share of our national wealth on health care than we were a generation ago. At the rate we’re going, we are expected to spend one fifth of our economy on health care within a decade. And yet we’re getting less for our money.

And yet, some of these same liberal health-policy experts are objecting to the fact that Paul Ryan wants to…spend less on health care. So I ask our Democratic friends: Have you suddenly changed your minds? Or is it that spending less on health care is fine, but only so long as it’s centrally planned by a board of unelected government officials, instead of by individual choice?

Indeed, that appears to be the progressive point of view: that the only way to reduce health costs is to use Medicare’s government-monopoly power to force hospitals and doctors to accept lower payments, and to force beneficiaries to accept reduced benefits.

The conservative approach to lowering costs is to increase the degree to which individuals control their own health dollars, by using cost-sharing devices such as high-deductible health plans and health savings accounts. Numerous studies have shown that beneficiaries using such plans are smarter consumers of health care, spending more on the things they need and less on the things they don’t. Switzerland shows that the consumer-driven approach works just as well, if not better, than the single-payer one. Most important, it preserves individual choice: something that Americans still value highly.

3. Two models of cost control: central planning vs. free markets.

Paul Ryan has launched the first shot in a debate that has both empirical and moral components.

First: Which approach is the most efficient? Putting government in charge of everything, or letting consumers freely choose the care they most value? On a purely dollars-and-cents basis, it’s important to note that the U.S. government could spend less with either approach, as the single-payer countries have shown on the one hand, and Switzerland on the other.

But most single-payer countries, exemplified by Britain and Canada, have been forced to severely ration care in order to make ends meet. Rationing disproportionately discriminates against the elderly, because, from a strictly utilitarian standpoint, it’s more cost-effective to spend $100,000 to keep a 30-year-old healthy than to keep an 80-year-old on life support.

And this gets us to the second, moral component of health-care reform. In progressives’ ideal world, the government gives everyone the same kind of insurance, regardless of need or want. In conservatives’ ideal system, individuals purchase insurance for themselves, with appropriate subsidies for the poor and disabled. In that free system, people accept a certain proportion of responsibility for their own care, and choose the insurance plans that fit their needs. If a given insurer is too draconian in its practices, it will quickly acquire a bad reputation, and lose business. On the other hand, if it doesn’t do a good enough job of governing costs, consumers will pick a cheaper plan.

The market-based approach is fundamentally freer, because there is an escape valve if plans become too restrictive. In a single-payer system, your only escape valve is to leave the country. Here in America, we have a hodge-podge of both. We have single-payer Medicare for the elderly; government-run Medicaid for the poor; heavily subsidized but employer-sponsored insurance for most people in between; and now the Obamacare exchanges for people of lower-to-middle incomes who are too wealthy for Medicaid.

4. Cost-sharing is critical to reducing Medicare spending.

One of the elements of PTP that liberals are most aggressively lambasting is its cost-sharing provisions: the devices that insurers use to prevent wasteful spending, such as deductibles, co-pays, and co-insurance. Deductibles require the beneficiary to spend a certain amount, say $1,000, before the insurance kicks in. Co-pays allow insurers to steer beneficiaries toward certain favored products or services (e.g., charging a $5 co-pay for purchasing generic drugs, but $30 for the branded equivalent). Co-insurance charges beneficiaries a percentage amount, say 10 percent, for all services rendered above a certain threshold.

Medicare, in theory, uses similar cost-sharing mechanisms. But there’s one huge difference: Seniors routinely buy supplemental insurance plans, called “Medigap” plans, that obliterate the deductibles, co-pays, and co-insurance features of basic Medicare. Medigap plans are an epic rip-off for taxpayers: They dramatically increase wasteful spending and cost seniors very little in additional premiums (because, from the insurer’s standpoint, these plans require very little financial commitment).

The “Path to Prosperity” — following the recommendations of the National Bipartisan Commission on the Future of Medicare, led by Democrat John Breaux and Republican Bill Thomas during the Clinton administration — finally constrains Medigap plans in order to ensure that seniors engage in smarter health-care consumption.

Liberal policy analysts create a trap for conservatives. They assume that health expenditures will continue to grow at historically high rates even with a more rigorous cost-sharing system. But the whole reason we have extreme health expenditures is because we don’t require seniors to share costs. MIT economist Amy Finkelstein has shown that half of the six-fold rise in real per-capita health spending from 1950 to 1990 can be explained by the introduction of Medicare. The reason is not surprising: If you give something for free to a large number of people, they’ll consume a whole lot more of it.

Again: There are two ways to reduce health-care expenditures. One is to have the government ration care, determining in a one-size-fits-all manner what insurers should cover. The other is to let seniors choose for themselves the benefits that are best suited to them, giving them the incentives to do so wisely.

5. Under PTP, states can spend as much as they want on Medicaid.

Another progressive complaint about the “Path to Prosperity” is that its approach to constraining Medicaid costs — giving block grants to states that grow at GDP plus 1 percent — will lead to bad consequences, since so many Medicaid beneficiaries are elderly and disabled, and therefore unable to control their costs.

This point of view involves a gross oversimplification of Medicaid, and ignores most of the serious structural problems that will have Medicaid eclipse Medicare as our largest health-care entitlement.

Most important, the current system, in which the federal government is obligated to provide matching funds to states that seek to expand Medicaid, incentivizes states to spend more on the program: For every dollar they spend, they receive a minimum of an additional 50 cents from Washington. This is an easy choice for state politicians. The fairest way to reform this system is to give states fixed block grants. That way, states can find the most efficient Medicaid structure for their residents, and they get to keep any savings they achieve.

Another huge problem with Medicaid is fraud. It’s estimated that approximately 10 percent of all Medicaid spending is fraudulent. Here the problem is the reverse of the one above: States are under-incentivized to root out fraud, because they don’t keep all of the savings if they find it. The block-grant system ensures that states gain much-needed savings if they successfully fight fraud.

Also, the “Path to Prosperity” includes a repeal of Obamacare, including its disastrous expansion of Medicaid, a program that is already failing the poor on an epic scale.

What’s important to remember is that block grants are not a cap on Medicaid spending, but rather a floor. States are still free to spend as much as they want on Medicaid. They’ll just have to raise taxes or cut spending elsewhere in order to fund the additional spending. This is exactly as it should be. What progressives want is a system in which expansions of Medicaid are funded with money borrowed from our children: which is exactly what Paul Ryan is attempting to end.

6. Under PTP, the rich will pay more for Medicare than the poor.

One criticism you hear from liberals is that Paul Ryan is balancing the budget on the backs of the poor. Given that the vast mass of government spending is aimed at the poor, there is simply no way to avoid this. According to Jeffrey Miron, almost half of all federal spending is aimed at redistributing income from higher-income to lower-income Americans.

But one of the key components of the “Path to Prosperity” is that it introduces means-testing into Medicare. Under the premium-support system, poorer and sicker Medicare beneficiaries will gain larger subsidies, and wealthier beneficiaries smaller ones. I, for one, believe that the wealthy shouldn’t even be eligible for Medicare. People who can easily afford their own care shouldn’t receive nearly free care from taxpayers.

Both conservatives and liberals have resisted means-testing Medicare. Conservatives are averse to redistributive policies, and liberals have long believed that Medicare’s universality is a key component of its political staying power. A key technical question with means-testing is that you have to make sure you don’t incentivize people to spend down their savings in order to qualify for more subsidies. (This happens routinely with Medicaid.)

However, we can no longer afford to give away free health care to the rich, and it’s a great thing that PTP moves us in the right direction. If Representative Ryan’s critics genuinely believe that PTP overemphasizes reductions in welfare programs for the poor, they should join me in calling on him to engage in even more aggressive means-testing of Medicare.

7. “Vouchers” is not a swear word.

A lot of liberals are complaining that the Ryan plan “voucherizes” Medicare, because in their lexicon, vouchers are bad. Fortunately or not, the Ryan plan doesn’t actually contain vouchers, but rather riffs off of the premium support model proposed by the Breaux-Thomas commission. While vouchers would have represented a more truly market-oriented approach to Medicare reform, Representative Ryan shifted leftward in order to attract Democrats. Predictably but sadly, none are biting, despite the fact that many Democrats have supported similar reforms in the past.

Here is the difference between vouchers and premium support: Vouchers work like the food-stamp program, in which the government gives poor people a debit card that they can use to buy food at a grocery store. Similarly, Medicare vouchers would give a beneficiary a certain dollar amount, which he is then free to spend on whatever insurance policy he wants. In the premium-support model, the government pays the insurers directly, and all the beneficiary is left to do is choose among a tightly regulated collection of very similar health plans.

There are some advantages to government regulation in this area: A poorly designed voucher system will incentivize insurers to seek out the healthiest patients and ignore the sickest ones. But a well-designed voucher system can address that, as Representative Ryan showed in his “Roadmap.” The key drawback of the tightly regulated premium-support approach is that government bureaucrats install all sorts of mandates and requirements about how insurance plans must be designed, instead of letting consumers decide what benefits they want in the marketplace.

My NRO colleague John Graham says that Ryan “flinched.” I don’t fault Ryan for trying to solicit Democratic support for his plan; after all, he and ex-Clinton budget chief Alice Rivlin came up with a premium-support plan when they were part of President Obama’s Fiscal Commission. (Rivlin has stated that she opposes the “Path to Prosperity” because she thinks it excessively constricts Medicare’s growth, and because it repeals Obamacare.)

Another shortcoming of the “Path to Prosperity,” identified by David Hogberg of Investor’s Business Daily, is that seniors have no incentive to purchase a plan that is cheaper than the amount they will receive in premium support. For example, if a retiree is eligible for $15,000 in premium support, but determines that a plan costing $13,000 will suit him just fine, he loses that extra $2,000. The old Breaux-Thomas plan allowed seniors to pocket a portion of the savings, giving them an incentive to save taxpayer money.

Perhaps these two problems, considered together, suggest an improvement to PTP: slightly increase the specified growth rate of the premium-support payments, in exchange for giving seniors more incentives to choose less expensive plans.

8. The as-yet-nonexistent Democratic plan: tax increases and rationing.

Paul Ryan’s proposal has received a lot of attention, and a lot of criticism. But, as I wrote above, there’s a question that every critic of Paul Ryan’s proposal should answer: Where’s your plan? If you don’t like Paul Ryan’s approach, what is yours?

There’s a reason you haven’t heard much about the Democratic plan to balance the budget: It doesn’t exist, because it would involve steps that are just as politically difficult, and far worse from a policy standpoint, than those contained in the “Path to Prosperity.”

Intellectually honest liberals who appreciate the value of a balanced budget seek to do so through three mechanisms: large tax increases on the rich and middle class (e.g., eliminating the Bush tax cuts); government rationing of health care (e.g., Obamacare’s Independent Payment Advisory Board); and defense cuts. Unfortunately, President Obama campaigned on a promise to avoid raising taxes on anyone making less than $250,000 a year, a promise that Obamacare broke in several places.

Rep. Chris Van Hollen, ranking Democrat on the House Budget Committee, says he’s working on an alternative to the “Path to Prosperity.” If Representative Van Hollen produces a plan that the CBO scores as reducing the deficit as much as Representative Ryan’s, I’ll applaud him for the plan, and the honest choice that it will provide. He may even provide us with a plausible route for compromise. If he doesn’t, however, he will be called on it. And his failure will make Paul Ryan’s success all the more likely.

9. The CBO on what happens if we do nothing.

I hardly have to remind readers of National Review about the consequences of a U.S. fiscal collapse. But that likelihood, in the absence of reform, is by far the most powerful argument for Paul Ryan’s plan.

Here is what the CBO writes in its evaluation of the “Path to Prosperity.” Under CBO’s “extended-baseline scenario,” which includes cuts to entitlement spending that have been repeatedly overridden by Congress, and no adjustments to the Alternative Minimum tax, taxes would reach the highest levels “ever recorded in the nation’s history.” In addition:

Payments to physicians under Medicare would be reduced well below current rates, and payments to other Medicare providers would grow more slowly than the cost of their inputs; nevertheless, federal debt would continue to grow relative to GDP.

The CBO’s “alternative fiscal scenario,” which involves more realistic assumptions such as continued Medicare “doc fixes” and maintenance of existing tax rates relative to GDP, “debt would skyrocket to levels unprecedented in the United States.” Also:

Revenues would be lower and Medicare’s payments to physicians and other providers would be higher than under the extended-baseline scenario….Rising tax rates or surging federal debt might accentuate concerns about the budgetary situation and thereby lead policymakers to reduce benefits under Medicare, Medicaid, or other programs.

If either of these things happens, entitlement programs including Medicare and Medicaid will face necessary, draconian cuts, far worse than anything suggested by Paul Ryan. Jacob Weisberg of Slate has written, “If the GOP gets behind [Ryan’s] proposals in a serious way, it will become for the first time in modern memory an intellectually serious party.” What remains to be seen is whether the Democratic party will become one as well.

Original Source: http://www.nationalreview.com/articles/264216/nine-points-about-brrepublican-budget-avik-roy

 

 
 
 

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