Ryan’s budget frames 2012 election around Medicare

By Christopher Papagianis
March 23, 2012

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.

10 comments

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A politician with a spine? I thought those were extinct from a political process of “natural de-selection”!

Now that the medicine has been defined and provided, maybe Americans will be smart enough to hold their nose and swallow it. It’s harder and harder to “kick the can down the road” now that we’re financially under water and heading ever deeper!

Posted by OneOfTheSheep | Report as abusive

great comment from one. it is a shame that many corporations are paying zero taxes or less and the 1% are paying the second lowest in my life. I worked for social security and medicare and i do not need some politician to take that away from me.

Posted by frankmazuca | Report as abusive

Paul Ryan’s practical, common sense approach to restructuring Medicare will make the program more viable long-term, no doubt.
The current President’s ‘plan’ to appoint a panel of 15 bureaucrats to essentially choose winners and losers, is exactly what it appears to be. A talking point in a campaign speech. Par for the course for a man who eats, sleeps and breaths politics.

Posted by greyblog | Report as abusive

It’s not a spine to invoke killing off one section of the population for the benefit of another. If you cut off health care for the elderly, that’s what you in effect do. So how is that meritorious? To protect the bond payment equations of the financial sector?

Posted by wilhelm | Report as abusive

Yes, it is a very brave and honorable thing to sell something to someone, take the money paid and spend it, and then not deliver what was bought.

If American elderly take a “haircut” on Medicare, I demand that all other creditors of the USA take the exact same percentage cut. China, and every other holder of USA debt. Savings bonds. Federal “Insurance” of each and every type, especially to include financial instruments and obligations, Federal benefits including all payments of each and every kind to former Federal employees including “elected” ones and military ones. Every “forgiven” or otherwise not collected “loan”, “aid” or any other transfer of money or assets to every foreign entity. Hit everyone if you are to hit your own people.

They do not care about defrauding the American people because they have rigged the “election” process in this country and made it a laughingstock. Our re-election rates are higher than the Soviet Politburo’s while polls show single digit approval ratings. Noe that is “fair”.

But if they rob foreigners, they do not have to loan them any more money. That they care about. Just not paying for healthcare. And these people brag about “values”. Al Capone had better values.

Posted by txgadfly | Report as abusive

@wilhelm: Ryan’s proposal does NOT suggest “killing off one section of the population for the benefit of another”. Google “straw man fallacy”.

@txgadfly: You would lay at the feet of Ryan responsibility that rightfully belongs at the feed of congressmen of BOTH parties going back to the sixties. It was Congress, NOT Ryan, that promised “something to someone, [took] the money paid and [spent] it…”, and now must re-negotiate the promises as they now exist.

BOTH parties agree that there simply is not enough money available to keep these expanded promises in their present form. What part of “unsustainable” do you not understand?

I agree that Medicare should not exclusively “take the hit”, but, as Willie Sutton famously said: “That’s where the money is”. The journey of a thousand miles still begins with a single step.

Ryan does not seek to “not deliver what was bought”. He, to the contrary, is interested in preserving as much as possible of that in good faith by re-negotiating HOW part of it is to be delivered to future recipients. He offers SOMTHING instead of NOTHING.

The alternative is eventual default, a reality you seek to simply deny. The choice you desire is simply not one that exists, and so you’re angry. You’re not alone, but open your eyes…it’s time to quit whining and suck it up.

America is BROKE! Our ship of state has become a submarine and as she goes under you would have the hatches remain open! I don’t agree.

Posted by OneOfTheSheep | Report as abusive

ending all these ridiculous and trillion dollar wars would help save a lot of money, and everyone is afraid to cut the def dept… Go where the money is …. military industrial complex….

Posted by edgyinchina | Report as abusive

So far I agree with this proposal of defining a ceiling for the Medicare benefits, and allow the patient to choose between Medicare or private health insurers. If the cost of private health insurers really goes down, this is really a good alternative. However, given the history of rising premiums, even with the supposedly incentive of competition, I doubt that premiums will go down. Insurers always find justification to raise the rates and the customers have no choice but to swallow it. (That’s why I agree with Obamacare for requiring insurers to spend only 20%, instead of 30-40%, of premiums on admin cost). This may come down eventually to a huge majority choosing Medicare, this one with cut benefits. Aside from insurer profit, the other costs, such as hospital and doctor fees, and medicine, are not addressed. I believe these are the major drivers of healthcare cost and the reason why U.S. has the highest in the world.

To balance the budget, I also agree with cutting the intelligence, defense and military budget. I believe this budget has been bloated for many decades, benefitting only the military industrial complex, and sad to say, the armed forces. There should be significant cut in the headcount as well as operating budget. If going to war, the war budget must pass the congress scrutiny first. The last 2 war cost $1.7T (borrowed) that didn’t bring real benefits to the U.S. but instead more post-war costs for veteran programs, continuing medical cost, military family benefits, and interest on the borrowed money. (Ironically, the war also push the oil price from $20′s to $110′s and never recovered since). I believe that in this digital age, soldiers should play lesser role in the warfare, and lesser personnel is needed to maintain the military. The govt should shrink the budget for military personnel, benefits, and hardware. The cut in military & defense should be as much, if not more than medicare budget. After all, Medicare benefits many people, and we have contributed to Medicare.

And then there’s the tax reform. To balance the budget, revenue should be addressed as well as expense. There’s the unnecessary tax break for the wealthy. For the last 10 yrs this cost $800B, which like the wars, contributed to the huge deficit. Take note that last 5yrs, at 14% of GDP, is the lowest tax receipts since 1950. Prior to that, it was averaging 17%-18%. Corporate tax receipts was averaging 3.5% of GDP from 1950-70, has steadily decline to 2% in the 80′s, further 1-1.5% in the last 2 decades. Meanwhile, U.S. population has been growing steadily as well as the senior population.

So the solution: higher tax revenue (fed/state), lower military spending, lower healthcare cost. But I must add that Education and R&D shouldn’t be sacrificed. Of course the devil is in the details.

Posted by Corina2012 | Report as abusive

Debt is debt is debt.

Why short one creditor when you should short them all? If America is broke, why send the bill to the American wage earner instead of the holders of all of those Treasury Bonds? There is no reason at all. Being bankrupt means paying your secured debt holders proportionately.

That is what is right. There is absolutely no reason the American wage earning class, which has paid over 45% of the Federal income from taxes for decades, should get shorted more than anyone else. Get used to it. Wars cost money. If you steal it and spend it, someone will likely want it repaid. Who cares if foreigners will not lend any more money to the Federal Government? Not me. Now that would balance the budget.

This proposal is to steal from the weak and pay to the strong. The reason that 90% of the population is “weak” is that the system is corrupt, corrupt, corrupt and the elections rigged, rigged, rigged. If they do this, we need an entirely new government system. Then the Constitution of 1789 will have utterly failed to deliver an electoral republic.

What is the “Defense” Department defending? The Republican and Democratic Parties? Or the American People?

Posted by txgadfly | Report as abusive

[...] Reuters Opinion It’s too early to return to normal policies – Lawrence Summers Trickle-down consumption – Chrystia Freeland After the Robin Hood Tax – Hugo Dixon Who’s to blame when an injured soldier kills civilians? – Mac McClelland Ryan’s budget frames election around Medicare – Christopher Papagianis [...]

[...] Ryan’s budget frames 2012 election around Medicare (blogs.reuters.com) [...]

It was the Republicans, starting with Reagan, who enacted ‘unfunded tax cuts’ & began running up the current US deficit.

http://advisorperspectives.com/dshort/up dates/Debt-Taxes-and-Politics.php

See how the graph starts rising steeply from 1981, when Reagan introduced ‘supply-side economics’ — the only exception being Clinton, who brought the budget back to surplus & presided over an economic boom.

To this day, G.O.P candidates are pushing ‘tax cuts’. It’s dishonest & un-American to complain about the deficit & the economy, while blocking Democratic efforts to improve it. Remember the public option? That would have done more to bring down costs & provide a cheaper option, than any other recent suggestion.

Republicans attacked & blocked it.

Don’t forget that healthcare is cheaper (half the price) & better in Canada, France, Sweden & half-a-dozen other European countries. Many of them with single-payer or public options.

Posted by ThomasW | Report as abusive

[...] Ryan&#39s spending budget frames 2012 election all around Medicare This would not make Medicare low-cost or maintain health fees from growing, but it must significantly constrain the charge of their progress, employing buyer pressure to motivate the kind of business-model innovations that American medicine badly needs. Read much more on Reuters Weblogs (blog) [...]