James Pethokoukis

Politics and policy from inside Washington

Paul Ryan’s pro-market healthcare reform

November 19, 2010

Rep. Paul Ryan, along with fellow Obama deficit panel member Alice Rivlin, has put together a plan to cut the growth of government healthcare spending. This is the heart of it:

A new Medicare program should be created for future retirees (those who first become eligible by turning 65 on or after January 1, 2021). The new Medicare program would provide a payment – based on what the average annual per-capita expenditure is in 2021 – to purchase health insurance. The payment would grow annually at a rate of GDP +1 percent.

The annual payment would be adjusted by income, with high-income seniors receiving a reduced payment and low-income seniors receiving extra support. The payment would also be geographically rated and adjusted for health risk. In addition to a higher Medicare payment amount, low-income “dual-eligibles” would also receive a fully funded account from which to pay out-of-pocket expenses.

In order to receive the Medicare payment, a beneficiary would select a plan from a newly created Medicare Exchange. Health plans which choose to participate in the Medicare Exchange must agree to offer insurance to all Medicare beneficiaries, thereby preventing cherry picking and ensuring that Medicare’s sickest and highest cost beneficiaries receive coverage.

For those now enrolled in Medicare, or becoming eligible before 2021, the traditional fee-for-service Medicare program would continue. Premiums for the current program would be held harmless from the effects of the creation of the new Medicare program.

This plan is based on the Medicare fix outlined in Ryan’s fantastic Roadmap for America (as translated by the Congressional Budget Office).

Starting in 2021, new enrollees would no longer receive coverage through the current program but, instead, would be given a voucher with which to purchase private health insurance. In 2021, when enrollees would first receive the voucher, the average voucher for 65-year-olds would be worth $5,900 (in 2010 dollars). The voucher would be adjusted to reflect the age and health status of enrollees. If all Medicare beneficiaries (including older people with higher average expenditures) were to receive a voucher in 2021, the average voucher amount would be $11,000 (in 2010 dollars). …  The amount of the Medicare voucher … would be indexed to grow at a rate halfway between the general inflation rate, as measured by the consumer price index for all urban consumers (CPI-U), and the rate of price inflation for medical care, as measured by the consumer price index for medical care (CPI-M). Using that blended rate, CBO estimates that those amounts would increase at an average annual rate of 2.7 percent for the next 75 years, in comparison with the average annual growth rate of nearly 5 percent that CBO expects for per capita national spending for health care under current law.

So one big difference between the Ryan Roadmap and Ryan-Rivlin is that the growth rate for the Medicare payment/voucher is higher under Ryan-Rivlin. Also, the  Ryan Roadmap is more aggressive on raising the age for Medicare eligibility. Compare the two. First, the Roadmap:

The age of eligibility for Medicare would increase incrementally from 65 (for people born before 1956), as it is under current law, to 69 years and 6 months for people born in 2022 and later.

Now Ryan-Rivlin:

In 2021, begin raising the Medicare eligibility age to correspond to OASDI normal retirement age (2 months per year beginning in 2021 and stopping at age 67).

Now both the Ryan Roadmap and Ryan-Rivlin are far preferable to Obamacare and the modified-Obamacare plan outlined in Bowles-Simpson which relies on government technocrats to lower costs rather than market forces. Here is how Ryan-Rivlin compares to the status quo:

ryanrivlin

A huge improvement, but the Ryan Roadmap would lower health spending to roughly 5 percent of GDP in 2050 — half of Ryan-Rivlin –which is why the Roadamap’s long-term budget chart looks like this:

ryanchart

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