Over age 54? You needn’t worry about the proposal House Budget Committee chairman Paul Ryan, R-Wisc., unveiled Tuesday for a redesign of Medicare.
Under age 54? You’ll need to pay a bigger share of the cost of your medical care once you’re retired.
Ryan’s remake of Medicare would save as much as $285 billion a year by 2030, and would mean less federal spending on medical care in future decades for today’s workers and their children.
Ryan’s Medicare redesign is at the heart of a long-term budget plan he released Tuesday. He said the plan would cut $6.2 trillion in spending from President Barack Obama’s proposed spending plans over the next 10 years. That works out to about a 13 percent reduction over the ten-year period.
Under Obama’s blueprint, federal outlays would be nearly 23 percent of gross domestic product over the next ten years; Ryan says his plan would keep federal outlays under 20 percent of GDP. But the bigger savings would come after that initial ten-year period.
The Medicare redesign Ryan is proposing resembles one he offered with Alice Rivlin, a Democrat, an Obama supporter, and former budget director in the Clinton administration.
Replacing open-ended Medicare payments
The plan would replace the current open-ended system of Medicare payments with one in which the federal government would subsidize people to purchase insurance. In health insurance jargon, this is called “premium support.”
Ryan would set up a system called “the Medicare exchange” in which beneficiaries would choose an insurance plan they preferred.
His summary of the Medicare proposal said, “Health plans that choose to participate in the Medicare exchange must agree to offer insurance to all Medicare beneficiaries, to avoid cherry-picking and ensure that Medicare’s sickest and highest-cost beneficiaries receive coverage.”
Under his plan, poorer and sicker people in Medicare in future decades would be more heavily subsidized by the taxpayers than would wealthier and healthier retirees.
The premium support payments would grow annually at the GDP growth rate, plus one percent. This would mean that Medicare spending would grow much more slowly than under the current system.
Ryan would apply his plan only to those who turn age 65 in 2022.
Here are the important themes to keep in mind when assessing Ryan’s plan:
- Laying down a markerRyan will include his Medicare proposals in the budget resolution for fiscal year 2012, which begins in October.
But no budget resolution that incorporates these ideas is going to be adopted; the Democratic-controlled Senate would not agree to it.
So the Ryan proposals are significant mostly for setting down a marker of what Republicans would do if they had the power to do it.
These ideas would be enacted only in the ideal scenario for Republicans: they keep control of the House of Representatives in 2012, gain control of the Senate and the Republican candidate wins the presidency. Then in 2013 these proposals are enacted.
Of course, events may not unfold in that way.
And as Ryan acknowledged Tuesday at his press conference at the Capitol, calling for a fundamental redesign of Medicare exposes him and his party to Democratic charges they are bent on destroying Medicare and are indifferent to the suffering of old people.
“Look at these new people who just got here,” he said, referring to several freshmen Republican House members standing at his side. “They didn’t come here for a career; they came here for a cause. This is not a budget, this is a cause…. We cannot keep going down the path of fearing what the other political party would do to us if we try to solve a problem”
But given the danger of damaging Democratic ads in 2012, why is Ryan proceeding?
One reason is he has already committed himself to fundamental Medicare reform over his years in Congress, carving out his identity as a numbers cruncher and fiscal hawk.
And he has support from House Speaker John Boehner who said last week, “For 20 years, I've watched leaders around here look up at the size of the problem of growing entitlement spending. It's like looking up at the mountain; they see how steep it is” and decide to put off action for another day, or another decade.
But, he said, “We are imprisoning the future for our kids and our grandkids if we do not act, and it's time to act.”
- It’s a bet on the debt. Ryan and his fellow Republicans seem to be convinced that today’s voters — especially those under age 54 — are more alarmed about the national debt than they are about cuts in future benefits.
Gross federal debt is now about 100 percent of gross domestic product, the highest level since immediately after World War II, and will grow as more Baby Boomers retire and start collecting Medicare and Social Security benefits.
Ryan and other Republicans fear a Greek-style sovereign debt crisis in which investors dump their Treasury bonds and force interest rates sharply higher.
“This is the most predictable economic crisis in our history,” Ryan said Tuesday. Referring to the president and members of Congress, he asked, “What if they knew what could done to prevent it from happening, and if they had time to prevent it, but they decided not to, because it wasn’t good politics?”
Ryan mentioned last month that investment fund giant PIMCO “dumped their Treasury bills in their major bond fund the other day. I'm very worried this thing is starting to accelerate.”
PIMCO managing director Bill Gross writes in his Investment Outlook for this month that his fund “has been selling Treasuries because they have little value within the context of a $75 trillion total debt burden.”
He added, “Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers,” that is, by means of “inflation, currency devaluation and low to negative real interest rates.”
- Ryan’s savings target is higher than Obama’s.
According to the chief actuary of the Medicare system, Obama’s health care overhaul will reduce the government’s outlays on Medicare by about $500 billion between now and 2021. In 2019, that would mean a savings for that year of about $127 billion, or about 0.7 percent of GDP. Obama's plan does that by reducing future payments to hospitals and hospices and by nudging doctors toward more standardized cost-effective treatments.
Ryan is aiming for far higher savings. According to the Congressional Budget Office’s preliminary analysis of the Ryan-Rivlin plan, it would cut health care spending by as much as 1.25 percent of GDP in 2030, with increasing savings in subsequent years. If one uses the Goldman Sachs forecast for U.S. GDP in 2030, a cut of 1.25 percent would equal $285 billion just for that one year.
Former CBO director Rudolph Penner said if the growth in spending for Ryan’s redesigned Medicare is limited to GDP growth plus one percentage point, “then it would certainly save money compared to a continuation of current law.”
The premium support system “would clearly be designed to reduce Medicare spending by adjusting the support level for something other than automatic health care cost increases,” said former Senate Budget Committee staff director Bill Hoagland. Pegging the premium support payments to GDP growth plus one percentage point means that spending will “clearly be less than what would be projected under current law. This is bound to show savings.”
- Would you be better off under Ryan’s Medicare plan or under the Obama-reformed Medicare?
From the the details Ryan released on Tuesday, it seems that today’s over-65 voters — who overwhelmingly favored the Republicans in the 2010 elections, according to exit polls — would not stand to lose under a Ryan-ized Medicare.
But today’s middle-aged workers, when they retire in, say, 2025, would not get the same level of benefits that Medicare beneficiaries do today.
Stephen Zuckerman, a health care economist and Medicare expert at the non-partisan Urban Institute said, “The most serious flaw is that the focus of this approach is on limiting federal spending on Medicare, without being concerned about the potential of this change to shift costs to Medicare beneficiaries.”
And the Congressional Budget Office said in its analysis of the version of Ryan’s plan that he offered with Rivlin last year that if it were enacted “future beneficiaries would probably face higher premiums in the private market for a package of benefits similar to that currently provided by Medicare.”
On the other hand, while Ryan increases the cost burden on Medicare beneficiaries in 2030, he'll be reducing the burden on workers in 2030 of having to pay for future Medicare payments.