Rep. Paul Ryan, R-Wis., and Sen. Ron Wyden, D-Ore., have made a new proposal to reform Medicare. This proposal is in sharp contrast to the earlier proposal by Rep. Ryan.
In that proposal, elderly people who turn 65 in 2022 would have received premium support for private health insurance, and those who turn 65 before 2022 would have had the choice to remain in the traditional Medicare plan or opt out to choose private health insurance with subsidized premiums. This plan was dropped when Democrats and elderly groups objected to this attempt to privatize Medicare. Now Rep. Ryan is at it again with the help of Democratic Sen. Wyden to gain traction to his plan in the Congress, and especially among senior Americans.
On Dec. 31, 2011, the Standard-Examiner, in its editorial page, published an editorial by the Chicago Tribune, in which the Tribune has praised the new proposal by Rep. Ryan and Sen. Wyden. Following is a critical look at some of features of the new proposal:
1. Starting in 2022, Americans over the age of 55 would have the choice to remain in the current Medicare plan or choose a private health insurance plan from the Medicare-approved exchange. However, contrary to many media reports, including the Chicago Tribune, the Center on Budget and Policy Priorities reports that premium support for traditional Medicare or private plans would substantially shift costs to beneficiaries, thus "leading to the demise of traditional Medicare over time..."
2. The plan would tie the growth in spending per beneficiary to Gross Domestic Product, plus 1 percent on per capita basis. For over two decades potential (full employment) GDP growth had been close to 3.5 percent per year, however actual growth may differ from potential. For example, in 2011 the growth rate was close to 2 percent and is expected to be 2.4 percent in 2012. If health care cost rises faster than actual GDP growth as it has over time, beneficiaries will bear substantial out-of-pocket costs for health care. The proposal recommends congressional intervention to restrain cost. However, given the recent congressional paralysis on many significant economic issues, I do not expect much from Congress to restrain the cost of health care in the market place. The Affordable Care Act of 2010 (passed without any Republican vote) restrains cost by reforming delivery systems, payment systems, research, and, as a last resort, it creates an Independent Payment Advisory Board to make proposals to restrain Medicare cost if cost rises more than actual GDP growth plus 1 percent.
3. The CBPP appropriately states that the current Medicare plan -- a defined-benefit plan -- will be replaced by a defined-contribution plan in the new proposal. As opposed to the Affordable Care Act, the proposal does not specify health care cost cutting measures.
4. The proposal claims to protect low-income beneficiaries but, as CBPP reports, the proposal lacks specifics about premiums and cost sharing. Jennifer Rubin writes, for The Washington Post, that under the new plan, Medicaid beneficiaries would continue to receive support for out-of-pocket expenses, while other low-income seniors would receive "fully funded" savings accounts. However, according to the CBPP, the proposal is not clear about who would be eligible, how much would be deposited in savings accounts, and how the funding would be indexed yearly. It is also not clear what will be the states' share in this funding. High-income seniors will face reduced subsidies -- a good idea that can be implemented even now.
The new plan may not result in significant budgetary savings, according to the CBPP. The proposal lacks specific actions to restrain costs of medical care, including hospital cost, insurance premiums and drugs' cost. However, it is clear that it is intended to pass the major burden of health care costs onto seniors. Then there are questions, such as, could one switch between the public option and the private option, how the shortfall will be financed in the traditional Medicare funds in the interim period when the new plan goes into effect, and how the private option will be funded.
The idea that private insurance companies will have to compete with traditional Medicare under the proposal makes economic sense. Rep. Ryan should have voted for the public option in Affordable Care Act. Now he is touting the virtues of public option side by side with private insurance in the Medicare proposal. Given the fact of increasing merger activity among hospitals and among insurance companies and medical care institutions, and the fact that the proposal lacks the specifics to control cost of health care, it is not apparent that this public-private competition would succeed in restraining cost.
Once the details come out, one can then evaluate if this change of mind by Rep. Ryan on public-private competition is meant to create a windfall to private insurance companies or meant to reform and save the Medicare system.
Vijay K. Mathur is the former chair and professor of economics and is now professor emeritus, Economics Department, at Cleveland State University, Cleveland, Ohio. His articles also appear on Blogonomics at vijaymathur.blogspot.com. He writes original blogs for the Standard-Examiner at http://blogs.standard.ner/economics-etc/