Paul Ryan's Magical Thinking

A Medicare exchange in which private plans compete with a public option?  A Medicaid program unshackled by federally determined program requirements and eligibility criteria?

Now that Governor Romney has chosen Rep. Paul Ryan as his running mate, these new visions of Medicare and Medicaid will become part of the health policy debate in every state.

They are both part of Vice-Presidential candidate Ryan’s now-famous Path to Prosperity proposal published earlier this year.

In his vision, Ryan attacks an “open-ended, blank-check” Medicare subsidy that in practical terms means a government that will pay providers what it costs to treat diseases even for the most expensive seniors. 

In his own words: 

“Medicare subsidizes coverage for seniors to ensure that coverage is affordable.  Affordability is a critical goal, but the subsidy structure of Medicare is fundamentally broken and drives costs in the wrong direction.  The open-ended, blank-check nature of the Medicare subsidy drives health care inflation at an astonishing pace, threatens the solvency of this critical program, and creates inexcusable levels of waste in the system.” (p. 48)

In his new Medicare program – which would apply to everyone under the age of 55 – Medicare would no longer be a government-run insurance program for all. 

Instead, it would be transformed into a voucher system, in which every person at the age of 67 would be given a certain amount of money to spend making a choice among “private plans competing alongside the traditional fee-for-service option on a newly-created Medicare exchange.” 

Ryan envisions that “all plans, including the traditional fee-for-service option, would participate in an annual competitive bidding process to determine the dollar amount of the federal contribution.” 

Here’s the most important part.  The plans with the best coverage won’t determine the amount of the 

Medicare subsidy.  Instead, the second-cheapest plan would; Medicare beneficiaries would be responsible for anything above this.

There’s more.  The Medicare subsidy payment would also have a “hard cap” of no more than one-half of 1% more than GDP.  If medical inflation were higher than that – as it is nearly every year – the Medicare recipient would pay the difference.

From a consumer perspective, Ryan’s Medicare exchange will be like the Affordable Care Act’s health exchange on steroids – except that it will still have a public option.

It will save the federal government money in direct care subsidies, but not through medical cost containment strategies like capping rates.  Instead, it fills in a number on the formerly blank check sent to seniors, and if this number is too small makes seniors responsible for rationing their own care. 

And if higher out-of-pocket costs aren’t enough, those seniors will also have to spend 15% or more of their payment on the administrative costs and profits of the private insurance plans they will now be offered. 

Finally, none of this comes without added federal bureaucracy.  Because the existing Medicare bureaucracy – which has little fat in it – will still be needed to manage the public option, the government will need to grow a new Medicare bureaucracy to manage and regulate the Medicare exchange.

It is magical thinking to believe that an approach that shifts costs to seniors, skims dollars for new bureaucracies, and has no direct health care cost containment features will result in better care at a lower cost.

Current seniors may be breathing a sigh of relief after considering all this, knowing that Ryan preserves Medicare as we know it for everyone over the age of 55.

But it’s too soon for a victory dance.  The biggest health care challenge a good portion of the 55+ group faces is how to pay for long term care.  Ryan has $810 billion of cuts over ten years in mind for the Medicaid program on which they will rely.

He wants to reform Medicaid “by converting the federal share of Medicaid spending into a block grant indexed for inflation and population growth…. States will no longer be shackled by federally determined program requirements and enrollment criteria.”

In other words, if a state chooses not to cover nursing home “room and board” or name-brand pharmaceuticals to absorb its portion of the $810 billion cut, it won’t have to. And if it chooses to count all of the non-institutionalized spouse’s income and assets toward the Medicaid eligibility of an institutionalized spouse, it will be allowed to.

Ryan is right that we need a debate about the future of Medicare and Medicaid.  He is wrong, however, in believing that reducing benefits can happen without pain.

Our Health Policy Matters published early this week because of the selection of Paul Ryan as Mitt Romney's running mate.  It will return to its regular publication schedule next week, with a new column on Wednesday, August 22.