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Ryan's Budget Frames 2012 Election Around Medicare

March 23, 2012

By Christopher Papagianis

This week, House Budget Committee Chairman Paul Ryan released what amounts to the most substantive roadmap for fiscal policy that any Republican is likely to offer in 2012. Many political pundits and policy analysts, especially those on the left, are eager to dig into the details to alert the public about the potential (negative) impacts of a budget that slices off $5 trillion in total federal spending compared with the plan offered by President Obama in February.

Providing 100 pages of budget and policy detail in an election year is considered political suicide by many. Democrats fully intend to use the plan to campaign against Republicans in the fall, hoping to gain an advantage not only in select House or Senate races but also in the presidential contest.

Ryan, though, sees this as the only responsible path forward: So what if his plan won’t get enacted into law this year. Should Ryan’s House colleagues, or the candidates for president, avoid taking a detailed position on our country’s fiscal future? As Ryan explains: “If we simply operate based on political fear, nothing is ever going to get done.”

Keith Hennessey provided a great top-line summary of how Ryan’s budget compares with Obama’s:

  • Under the Ryan budget, debt would peak at 77.6 percent of the economy in 2014. Under the President’s budget, debt would peak at 80.4 percent of the economy in that same year.
  • The Ryan budget would cause debt to steadily decline to 62.3 percent of GDP by the end of the decade. Under the Obama budget, debt would flatten out by 2018 and end the decade at 76.3 percent of GDP, 14 percentage points higher than under the Ryan budget.
  • At the end of 10 years, debt would be declining relative to the economy under the Ryan budget, while it would be flat under the president’s budget.

While most of the Republican candidates for president have signaled support for Ryan’s proposal, Governor Romney’s proposals probably track the closest, particularly in the area of Medicare reform. This is a big deal, since it suggests that the presumptive Republican nominee will be advancing an agenda that also echoes the key policy contrast that Ryan is purposely setting up for November.

For Ryan, Congress not only needs to reign in today’s discretionary spending but it also needs to rise to the challenge of making the hard policy choices that will affect the size and shape of tomorrow’s debt and deficit trajectory. And the number one driver of our long-term debt problem is rising healthcare costs.

It’s rare in public policy debates that you can find one data series that succinctly summarizes why an issue is important. This point fits almost perfectly: In 1971, federal health spending accounted for 1 percent of the nation’s GDP. All other government spending that year (combined) accounted for 17.1 percent of GDP. In 2011 – exactly 40 years later – health spending accounted for 5.6 percent of GDP and all other spending combined accounted for 17.1 percent. In effect, the entire growth of government over the past 40 years can be attributed to healthcare spending. (Of course, this glosses over how spending across different categories or federal programs has oscillated year over year – but the broader point, about what the largest cost driver moving forward is, still holds. It’s also important to note that over the past four decades, federal tax revenue collections have averaged about 18 percent of GDP annually.)

The Congressional Budget Office projected that spending on health programs, and on the new entitlements created by Obamacare, will reach 10.4 percent of GDP by 2035 and 13 percent by 2050. Ryan notes in his budget that Medicare spending alone is set to rise from 3.7 percent of GDP today to 14 percent by 2085, though CBO also notes that the program will run out money in only about 10 years. In short, this is why so few are arguing today – a full two years after Obamacare was enacted – that the law solved the problem of healthcare cost inflation.

President Obama has actually reinforced this premise in speeches. Last year, he said: “If you look at the numbers, then Medicare in particular will run out of money and we will not be able to sustain that program no matter how much taxes go up.” Both Obama and Ryan have the same goal: limiting healthcare cost inflation moving forward (to the rate of GDP plus 0.5 percent). (Note: Ryan believes his plan could have even greater positive impacts over the long term but adopted this target to accommodate the CBO’s budget scoring and review process.) The fundamental difference between the two, however, is how they try to affect the underlying cost dynamics to achieve the target.

Yuval Levin, the editor of the public policy journal National Affairs, has presented one of the more compelling descriptions of Ryan’s approach to Medicare reform:

Rather than providing insurance directly to all American seniors​ – setting payment rates, making coverage decisions, and directly paying doctors and hospitals​ – Medicare would assign to each senior roughly the amount it would have spent on his coverage and allow him to spend that “premium-support” subsidy on a private health insurer of his choosing. The private insurers would have to provide at least the same minimum level of coverage as Medicare does, but they could organize their plans​ – any coverage beyond the minimum, their payment rates, their arrangements with doctors, and so on​ – as they liked. If a senior chose an insurer that charged less than the premium-support payment provided by Medicare, he could keep some or all of the difference, giving him a strong incentive to shop around and choose carefully (and giving insurers a strong reason to offer cheaper plans). If he chose a plan that cost more than the premium-support level, he would have to make up the difference out of his own pocket.

More efficient ways of organizing and providing health care have to come from physicians and hospitals, but those providers have to be motivated by the people who pay their bills​ – that is, the insurers​ – who in turn need a good reason to provide attractive comprehensive health coverage at the lowest possible cost. A premium-support system would use the leverage of Medicare’s enormous budget to make that happen​ – essentially turning the problem into the solution. Seniors would still have a heavily subsidized and guaranteed health-insurance benefit, but it could be provided at a sustainable cost, and without badly distorting the economics of the broader health sector. This would not make Medicare cheap or keep health costs from rising, but it should dramatically constrain the rate of their growth, using consumer pressure to encourage the kind of business-model innovations that American medicine badly needs.

On the flip side, President Obama and a majority of Democrats favor more modest reforms that would keep in place the traditional fee-for-service system. But, as Jim Capretta notes: “Medicare’s administrators have been trying for many years to change the dynamics within the traditional fee-for-service program and have failed.” CBO recently published a report reviewing all the failed demonstration programs and policy experiments that were aimed at affecting change from within the system. (See also Capretta’s post rebutting the top arguments against moving to a premium support model.)

Obama’s backup plan is to rely on an independent (and unaccountable) board of 15 bureaucrats to make the really tough decisions or program cuts. The central problem with this approach is that the “Independent Payment Advisory Board (IPAB)” is also likely to pursue the same approaches that the government has tried over the preceding decades. And changes that amount to just cutting payments that go to healthcare providers ultimately diminish the quality and access of care and lead to rationing. By offering up this board, a cynical interpretation of the administration’s intent is that they are trying to punt on some of these really tough decisions (and any corresponding political fallout), but still claim some near-term credit for acknowledging that there is a big problem.

Make no mistake: Reforming Medicare is a huge challenge. Both the politics and details of the policy are challenging. An anecdote from Ryan’s recent op-ed speaks directly to this: “We assumed there would be some who would distort for political gain our efforts to preserve programs like Medicare. Having been featured in an attack ad literally throwing an elderly woman off a cliff, I can confirm that those assumptions were on the mark.”

Fundamentally, Ryan’s objective is to restructure Medicare as a way to preserve the program for its beneficiaries over the long term. The new plan for Medicare would resemble more of a defined contribution plan than a defined benefit program, a transition that’s clearly in the interest of the federal government, or taxpayers generally, in that it would allow for more budgetary control. But the arguments for change that are the most persuasive demonstrate how the reforms could improve healthcare generally, by handing over the power that’s currently in the hands of government bureaucrats to consumers and patients. After all, the best way to get consumers and patients the healthcare services and benefits they want is to follow common sense: Empower consumers with choices.

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