Medicare


How Should Washington Control Medicare Spending?

On May 19, I participated in a public forum in Washington, D.C., sponsored by the Heritage Foundation, called “How Should Washington Control Medicare Spending?” My remarks focused on why a market-based reform of Medicare would be far superior to government-imposed cost controls. The event was moderated by Bob Moffit of the Heritage Foundation, and I was joined on the panel by Gail Wilensky, a former administrator of the Health Care Financing Administration and now a Senior Fellow at Project Hope. Full details on the event are available here, and my slides are available here.

posted by James C. Capretta | 11:48 am
Tags: Medicare
File As: Health Care

The $6,400 Question

The ongoing delusion of the price-control solution

When President Obama decided to take the political low road and demonize House Budget Committee Chairman Paul Ryan’s Medicare reform plan in his budget speech last month, it wasn’t really surprising. President Obama demonstrated in the 2008 campaign that he is a world-class practitioner of shamelessly dishonest political attacks when he went after Senator John McCain for proposing a change in the tax treatment of health insurance, and then pushed for a change himself once he was elected. Given this track record, there was every reason to believe he would jump on the chance to demagogue on health care again if the opportunity presented itself. And boy has he. It’s now clear based on four weeks of a relentless barrage that his reelection effort will be based heavily on creating fear in the electorate, and specifically among seniors, about the supposed negative consequences of the Ryan Medicare plan. So much for an administration devoted to hope and change.

But what exactly is the substantive basis for the president’s attack on Ryan’s proposal? Here’s the key paragraph from the speech:

[The Ryan plan is] a vision that says America can’t afford to keep the promise we’ve made to care for our seniors. It says that 10 years from now, if you’re a 65-year-old who’s eligible for Medicare, you should have to pay nearly $6,400 more than you would today.

Where did the $6,400 figure come from?

Best as anyone can tell (the president didn’t cite a source), it seems to have been derived from the Congressional Budget Office’s April 5 analysis of the Ryan budget. On page 22 of that report, CBO (always so helpful!) provided its assessment of what it would cost an average 65-year-old to enroll in a private health plan compared to what it would cost that same average 65-year-old to stay in traditional Medicare. It’s an illuminating piece of work on the part of CBO, but perhaps not for the reasons CBO intended.

The mechanics appear to be as follows: CBO says the Ryan plan would provide an $8,000 “premium support credit” for average-health 65-year-olds in 2022, which would only cover 39 percent of the total cost of providing a standard Medicare package of services to such beneficiaries. That puts the total cost of the private plan at $20,500, of which the beneficiaries would be required to cover $12,500 out of their own pockets.

By contrast, CBO says the traditional Medicare program could provide the same standard package of services for just $14,800 in 2022 (in what’s called the “alternative fiscal scenario”). Under current law, the government would cover about $8,600 of the total cost, leaving a little under $6,200 for the beneficiaries to cover themselves. With rounding, the difference between what it would cost the average 65-year-old under the Ryan plan compared to what it would cost under current law is “nearly $6,400” in 2022, or so it would seem from CBO’s numbers.

Ironically, this analysis from CBO actually tells us much more about CBO than it does about what the Ryan plan will mean for seniors in 2022.

There are two key assumptions underlying the numbers that are highly implausible and reveal a systematic tilt toward government-run health care.

First, CBO says that in 2022 government-run Medicare could provide the standard package of health coverage for just 72 percent of what it would cost a private plan to do so. How could that possibly be? Simple: Price controls, and especially the deep cuts in Medicare’s fixed prices imposed under Obamacare. If one assumes that there are no consequences whatsoever to paying ever-lower rates of reimbursement for medical services, then, sure, government-run Medicare, and for that matter government-run health care more generally, would look cheaper on paper than private health insurance.

And, in fact, this is not a new development. Health care price controls have always looked good on CBO tables, which is a huge problem in the policymaking process. But they never look quite so good in the real world. Consider Medicaid. State governments have imposed extremely low rates for most medical services, and the program’s participants often have a difficult time securing access to needed care. Far too often, it’s insurance on paper and not in practice. Moreover, because the rates are so low, the quality of care provided to the Medicaid population is well below what most Americans would find acceptable.

CBO’s analysis makes none of these quality distinctions. Price-controlled Medicare, with payment rates as low as Medicaid’s today relative to private insurance, is assumed to provide the same quality care as private coverage. It’s absurd.

Incidentally, it should be noted that in Medicare Advantage, private-sector HMOs were able in 2010 to provide the standard package of Medicare services for less than what government-run Medicare costs (according to MedPAC data). And that’s in spite of the price controls imposed by government-run Medicare. The reason is that government-run Medicare is a massively inefficient operation. Yes, it pays very little per service, but the volume of services provided has been soaring on an annual basis for years and years.

The other crucial assumption is that competition in Medicare has no effect whatsoever on the efficiency or cost of the options offered to Medicare participants. The whole point of the Ryan plan is to build a functioning marketplace, in which plans have to compete for the business of cost-conscious consumers. Ryan rightly believes that this is the key to genuine “delivery-system reform,” by which those delivering the services to patients find new, better, and more efficient ways of providing needed services at less cost. But CBO’s assessment assumes nothing will change at all.

Those who have been pushing for a market-based solution for health care have long complained that CBO’s analyses inevitably favor a command-and-control approach. This latest analysis only confirms that point of view. Unfortunately, it’s a sad reality that genuine reform of the nation’s health entitlements and broader health system are likely to be enacted in spite of analyses from CBO, not because of them.

posted by James C. Capretta | 10:13 am
Tags: Ryan Plan, CBO, Medicare
File As: Health Care

Defending the Ryan Medicare Plan

I have a new column up at Kaiser Health News on efforts to discredit the Ryan Medicare plan:

Ryan's critics have focused particular attention on his plan's indexation of the Medicare "premium support credits" to the CPI in the years after 2022, suggesting that this idea is somehow beyond the pale. But this is sheer hypocrisy on their part because the indexing of government-financed premium credits below cost growth is in the president’' plan too, and yet not a complaint has been heard about that from its advocates. That's right. After 2018, if the aggregate governmental cost of premium credits and cost-sharing subsidies provided in the state-run exchanges exceeds about 0.5 percent of GDP (a condition that the Congressional Budget Office says will be met), the recently-enacted health law requires the government's per capita contribution to health plan premiums in the exchanges to rise more slowly than premiums. The administration actuaries interpret the law to mean that the government's contributions toward coverage will rise with GDP growth after 2018. CBO appears to have a different interpretation. Still, under all interpretations and projections, it's clear that the exchange credits in the new law will not keep pace with expectations of rising health costs. And that's exactly what the president is now saying is so wrong with Ryan's Medicare plan.

Critics contend that the Ryan plan would shift huge new costs onto Medicare beneficiaries for reasons beyond the indexing of the credits, and they cite CBO's analysis of the Ryan budget as proof. But this analysis is based on two flawed assumptions. First, it assumes that traditional Medicare can keep cutting what it pays to hospitals and doctors with no consequences whatsoever for the beneficiaries. CBO's assessment is that in 2022 traditional Medicare could provide the insurance benefit for just 66 percent of what a private insurance plan would cost. This is sheer folly based entirely on deep payment reductions for services. If those cuts really were to go into effect as scheduled, Medicare rates would be well below those of Medicaid, and seniors would have very restricted access to care. CBO's analysis also assumes no savings from establishing rigorous competition in the Medicare program. But the cost-cutting in the prescription drug program demonstrates that the potential is there for massive savings from a functioning marketplace.

The full column is available here.

posted by James C. Capretta | 2:13 pm
Tags: Obamacare, CPI, Paul Ryan, Medicare
File As: Health Care

Medicare’s Actuaries Say Obamacare Vouchers Could Be Tied to the CPI

Yesterday, I posted a detailed explanation of how Obamacare would index vouchers provided through the state exchanges. This was a follow-up to my original column on this and other subjects from last week.

But, detailed though yesterday’s post was, there’s still more to this story.

To recap from the beginning: The president and his allies have been attacking House Budget Committee chairman Paul Ryan’s Medicare reform plan for indexing, on an annual basis, the “premium support credits” provided to future program entrants to the consumer price index (CPI).

These attacks seemed more than a little hypocritical to me. After all, didn’t Obamacare do exactly the same thing? Section 1401 of the law requires the “premium credits,” or vouchers, provided through the state exchanges to be adjusted in the years after 2018 “to reflect the excess (if any) of the rate of premium growth … over the rate of growth in the consumer price index.” That would seem to mean that beneficiaries getting insurance through the exchanges would pay for cost growth above the CPI, and the government’s contribution toward the premium would grow with the CPI. Further, this adjustment is only to occur in years when the aggregate cost of the premium credits and cost-sharing subsidies in the exchanges exceed 0.504 percent of GDP.

It turns out, however, that the law is written so poorly and ambiguously that other conclusions might be reached about what the words of the law actually mean. That seems to be the case with the Congressional Budget Office, as its cost projections for premium credits in the exchanges grow at a rate above the CPI in the years after 2018, even though CBO believes that aggregate spending will exceed that threshold of 0.504 percent of GDP.

So, as I explained yesterday, it would appear that CBO is assuming a different adjustment is applied, which would have the effect of scaling back the government’s contribution below health-cost growth — and for some people, even below CPI growth — but on average somewhat above it.

But what about the actuaries who run the numbers for the administration? How do they see things?

First, they expect that the aggregate-spending condition won’t be met. In other words, the CPI-based adjustment to the premium credits doesn’t become operative in their projections because they see spending on the credits and cost-sharing subsidies coming in below 0.504 percent of GDP. After 2018, they assume the effect of this threshold will be to index the government’s contributions toward premiums to GDP growth.

But what would happen if their cost projections are wrong and aggregate spending did exceed 0.504 percent of GDP?

If that were to occur, they believe the law would require indexation of the vouchers provided by the government in the exchanges to the CPI — the exact same policy that is under so much attack in the Ryan plan. And, let’s be clear, it wouldn’t take much of an adjustment in cost projections for the actuaries to assume this indexing provision will go into effect in 2019 and future years. 

So, yes, those who are attacking the Ryan Medicare plan have a serious problem. They, starting with the president, have made a huge political issue of how that plan indexes the government’s contribution for Medicare coverage. But their own experts believe Obamacare, under certain conditions, does exactly the same thing. 

[Cross-posted on Critical Condition]

posted by James C. Capretta | 6:43 pm
Tags: Obamacare, CPI, Paul Ryan, Medicare, vouchers
File As: Health Care

A Clarification on the Indexation of Obamacare’s Vouchers

In my post last week, I asserted that the premium subsidies provided in Obamacare’s state exchanges would be tied over the longer run to consumer inflation.

The story is actually much more complicated than that, and requires additional explanation. (Fair warning: What follows is very technical.)

The way the law (see page 111) works is that it sets a limit on the percentage of income a household must pay for premiums when it is getting insurance through the state-based exchanges. In 2014, the government’s contribution is determined by subtracting the maximum contribution required from a household from the total premium required for the second-lowest-cost “silver plan.” The percentages of income used to set limits on household premium payments are to be adjusted in the years after 2014 based on factors specified in the law.

What are those factors? From 2015 to 2018, the law says that the percentages “shall be adjusted to reflect the excess of the rate of premium growth for the preceding calendar year over the rate of income growth for the preceding calendar year.” This provision is written poorly and imprecisely. What does it mean to “reflect” the excess of premium growth over income growth? How exactly are the percentages to be adjusted? The law does not specify a mathematical formula. It just says that an adjustment shall be made.

Common sense would indicate that this adjustment is intended to prevent household contributions from becoming an ever smaller share of the total premium. Income is expected to grow less rapidly than health costs. If the percentages of income required for premium payment by households were held constant, the share of the premium paid by households would fall over time (and, conversely, the government’s share would rise). This adjustment is clearly intended to keep the proportion required from households and the government roughly constant over time and prevent the government’s contribution from rising even faster than health costs.

After 2018, the law says that, in addition to the adjustment made to reflect premium growth in excess of income, the percentages shall also be adjusted

to reflect the excess (if any) of the rate of premium growth estimated under subclause (I) for the preceding calendar year over the rate of growth in the consumer price index for the preceding calendar year.

Again, the law doesn’t say how the percentages are to be adjusted, or on what basis. Nor does it define what it means to “reflect” premium growth over the CPI.

One reasonable interpretation is that this second adjustment is intended not to maintain proportionality between the government and households over time but to require households to pay for premium growth in excess of consumer inflation. That would mean limiting the government’s contribution to growth in the CPI, and adjusting the household percentages accordingly to ensure full payment of the balance. This approach would have the virtue of some underlying logic. Household premiums would be adjusted to “reflect” the excess of premium growth over the CPI, which looks to be the objective of the provision.

But, apparently, that is not how the provision is being interpreted by congressional scorekeepers. The Congressional Budget Office’s cost projections show the exchange subsidies growing, on a per capita basis, at a rate that is just below 5 percent annually from 2019 to 2021 — which is above its long-term annual inflation assumption of 2.3 percent, but certainly well below historical health-cost growth rates.

What other way of making this second adjustment is possible? It might be that CBO is assuming an entirely different way of “reflecting” the excess of premium growth over the CPI on household premiums (although CBO has not issued any kind of official explanation of how it is interpreting this provision). An example can help illustrate what might be going on. Suppose premium inflation is 7 percent, and CPI growth is 2.3 percent. CBO could be assuming that the initial adjustment (premium over income growth) requires household premiums in the exchanges to rise by 7 percent. In addition, the second adjustment then requires premiums to rise by the excess of 7 percent over 2.3 percent (or 4.7 percent). Thus, household premiums would be required to rise by a total of 11.7 percent under this example. The percentages of household income used to set premiums would be adjusted accordingly to hit these new premium requirements.

Note that this method doesn’t make a lot of policy sense. It effectively double-counts health inflation in the beneficiaries’ premium payments. Premium growth rates already include health inflation above the CPI; adding the excess of premium growth over the CPI to premium growth simply counts health inflation twice.

Note also that doing the calculation this way means the government’s contribution will grow at widely varying rates, by income. In all cases, the government’s contribution will grow at a rate below health-cost inflation. And, in some cases, the government’s contribution will actually fall below CPI growth. For instance, if the total premium for coverage in an exchange is $18,000 in 2018, and if health inflation is 7 percent and the CPI is 2.3 percent, the government’s contribution would fall below the CPI for any household that was paying at least $9,000 toward the total premium in 2018.

There’s an additional complication. The law states — in a provision called “the failsafe” — that this additional adjustment to reflect premium growth over the CPI will only apply in years (after 2018) in which “the aggregate amount of premium tax credits under this section and cost-sharing reductions under section 1402 of the Patient Protection and Affordable Care Act for the preceding calendar year exceeds an amount equal to 0.504 percent of the gross domestic product for the preceding calendar year.

CBO assumes that spending on the subsidies and cost-sharing credits will (“probably”) exceed the threshold, and therefore the additional adjustment is operative (see p. 35 of The Long-Term Budget Outlook).

The chief actuary of the Medicare program, however, has stated (see p. 5 of this analysis) that his office estimates the aggregate spending on the credits will be just barely above the 0.504 percent of GDP threshold in 2018. Consequently, according to the actuaries’ projections, the government’s vouchers in 2019 and beyond would rise roughly in concert with GDP, not the CPI.

To sum up: My column asserted that Obamacare’s exchange vouchers would be tied to consumer inflation. That is apparently not CBO’s interpretation of what the law requires (based on a review of CBO’s current cost projections), although the law is so vague and imprecise that alternative interpretations are certainly possible. The larger point of the column remains valid regardless. Critics of Rep. Paul Ryan’s Medicare plan are on the warpath about vouchers for private insurance falling below baseline expectations of cost growth. The same accusation can be leveled against Obamacare’s vouchers. Indeed, some Obamacare participants would get vouchers that grow at less than the rate of the CPI. And even assuming this apparent interpretation of what the law requires, it is easy to see how allhouseholds in Obamacare’s exchanges would be facing double-digit premium increases each and every year after 2018 if health costs continue to rise as rapidly in the future as they have in the past.

[Cross-posted on Critical Condition]

posted by James C. Capretta | 5:25 pm
Tags: Obamacare, inflation, premiums, Medicare, Paul Ryan
File As: Health Care

Obamacare’s Cruel and Inhumane Inflation-Indexed Vouchers

Hypocrisy and cynicism come awfully easily to some people.

Recall that in October 2008, then-candidate Barack Obama launched a ferocious political attack on his opponent. In debates, and then in tens of millions of dollars’ worth of advertisements, the Obama-Biden campaign excoriated Senator John McCain for proposing to “tax health benefits for the first time in history.” Never mind that the McCain proposal would have provided a refundable tax credit that would have more than covered the lost tax benefit for the average household — and that the whole point of the McCain reform was to give individuals control over a tax benefit that today is under the total control of employers. Obama saw an opportunity for serious political demagoguery, and facts weren’t going to stand in the way.

And this was no sideshow in the presidential race. It was a top-tier issue, one of a few that ultimately decided the outcome. Indeed, in October 2008, when the race moved from a dead heat to Obama’s advantage, no issue was featured more prominently in TV attack ads than McCain’s supposed plan to “tax health benefits.”

Then, after assuming office, President Obama had a very sudden and inexplicable change of heart. Taxing benefits for the first time in history really didn’t seem like such a bad idea after all. The change of heart was so thorough that Obama went from chief opponent to chief proponent of the idea in a matter of months. As Obamacare wound its way through Congress, the administration gave the concept a new name — the “high-cost-insurance tax,” or “Cadillac tax” — and insisted that it be included in the final version of the legislation, to the great consternation of organized labor. Now that’s shameless.

Fast-forward to April 2011 — the early stages of the next presidential contest. House Republicans — led by Budget Committee chairman Paul Ryan — have drafted a budget plan to put the nation’s fiscal house in order. It includes a proposal to reform Medicare. Everyone who is 55 and older today will remain in the current Medicare structure. Those below age 55 will get their entitlement in the form of “premium-support credits,” which will be applied to private health plans of their choice on an annual basis. The government will oversee this new Medicare marketplace, organize the information and choices for the beneficiaries, and ensure that all of the plans meet minimum standards.

The program will begin in 2022, at which point the premium-support credits will reflect what the traditional Medicare program costs at that time. In the years after 2022, the premium support credits will be increased commensurate with the rise in consumer inflation, as measured by the consumer price index (CPI).

By the Democrats’ reaction, you’d think this idea was the beginning of the end of Western civilization.

“Cruel.” “Inhumane.” “The end of Medicare as we know it.” From the president on down, liberals everywhere have jumped on the Ryan Medicare plan as the worst idea ever conceived. In the president’s budget speech last week, which was really just a partisan attack on the Republican budget plan, the concept was where he focused his most intense fire. According to the president, no proposal like the Ryan Medicare plan will ever meet his approval.

And what is it about the Ryan plan that liberals find so appalling and unacceptable? Well, according to the president’s speech — and columns by Alan BlinderPaul Krugman, and Ezra Klein — it’s the fact that the Medicare “premium-support credits” could be used only for private insurance, and that the credits themselves would be indexed on an annual basis to consumer inflation, not health costs. They argue that, as the years go by, the credits will fall farther behind the actual cost of insurance, and leave seniors with larger and larger premium bills.

But, wait a second, there’s something vaguely familiar about how the Ryan Medicare plan is supposed to work. Inflation-indexed credits. Competing private insurance plans. Government oversight of the marketplace. Oh yeah: That’s the description of Obamacare that advocates have been peddling for months.

Here are the facts. In the new state-based “exchanges” erected by Obamacare, persons with incomes between 133 and 400 percent of the federal poverty line will be eligible for new, federally financed “premium credits” — dare we say “vouchers”? These vouchers can be used only to purchase the private health-insurance plans that are offered in the exchanges. There will be no “public option” to choose from. Initially, the vouchers will be pegged off of the average cost of silver plans in the exchanges, with a limit on the premium owed by the consumer based on their income. In future years, however, growth in the government’s contribution will be limited, first to the rise in average incomes and then the CPI.

That’s right: Obamacare’s new health-entitlement vouchers are indexed to general consumer inflation too. So if Ryan’s Medicare plan is “cruel” and “inhumane” because the credits supposedly fall behind rising costs, then the exact same criticism can be leveled against Obamacare.

But somehow, that’s never acknowledged. Even by Washington standards, the cynicism at work here is stunning. Liberals everywhere are practically giddy at the thought of running against the way the Medicare credits are indexed in the Ryan plan. Only problem is, it’s in their plan too.

The real issue here is what really needs to be done to control health costs. To Congressman Ryan and others, the fundamental problem is how Medicare works and operates today. The dominant Medicare fee-for-service model is the No. 1 reason we have a fragmented and inefficient health sector. That being the case, the key to slowing the pace of rising costs — for everyone — is Medicare reform.

Liberals have essentially conceded this point, but never say so. In Obamacare, all of the “delivery system reforms” that the law’s apologists tout — bundling of payments, Accountable Care Organizations, even the Independent Payment Advisory Board — are aimed at changing how traditional Medicare fee-for-service works today. The idea is that the federal government has the capacity to “reengineer” how health care is delivered by adjusting the levers of Medicare.

Ryan and others have a far more plausible theory. The key to “delivery-system reform” isn’t more government regulation but cost-conscious consumption on the part of Medicare participants. If they can reduce their premiums by signing up with high-quality, low-cost networks of care, they will do so. They just need to be given the opportunity.

The Congressional Budget Office analysis that shows seniors in 2030 paying higher premiums compared to current Medicare assumes two things that are not plausible. First, it assumes that Obamacare’s deep and permanent cuts in what Medicare pays hospitals and other providers of care can be sustained in some form. They can’t. The chief actuary of the Medicare program has stated repeatedly that if these rates were to stay in place, seniors would have very restricted access to care, because nobody would see them.

Second, CBO assumes that the Ryan plan’s Medicare reform will induce no response, or at best a minimal one, from those supplying services to patients. This is absurd. It’s as if the CBO doesn’t believe in economic incentives. The whole point of the Ryan plan is to build a marketplace, and the key is cost-conscious consumers. If seniors are given a fixed level of support from the government, they will immediately seek out the best value they can find. Health plans that can deliver better value at lower cost will be highly attractive, and thus gain market share. The race will be on to find better ways of doing business to cut costs. That’s the way to get genuine “delivery-system reform.”

In fact, there’s already a model in place in Medicare that demonstrates the value of this approach. It’s the much-maligned drug benefit that was enacted in 2003. Costs for the program have come in 41 percent below expectations, in large part because seniors have signed up in droves with low-cost plans that heavily push generic substitution.

The president’s real alternative to Ryan’s plan is rationing. He wants to empower the Independent Payment Advisory Board to ratchet down even further on what hospitals and other providers are paid. This is truly a crazy idea. Obamacare has already pushed Medicare rates below those of Medicaid. Now he wants to double down on irrational price cutting, and thus drive even more providers out of the program.

Talk about cruel.

[Cross posted on NRO

posted by James C. Capretta | 9:53 am
Tags: IPAB, Obamacare, Paul Ryan, Medicare
File As: Health Care

Paul Ryan’s Medicare Fix

I have a new article as the lead story of the latest print edition of National Review; it’s on the Medicare reform element of the Ryan debt-fix proposal and the unduly negative response to it. Here’s an excerpt:

The Obamacare “solution” for Medicare is nothing of the sort, and nothing new at all. It’s an approach that has never worked to control costs in the past, and it won’t work this time. All price controls ever do is drive out willing suppliers, after which the only way to balance supply and demand is with waiting lists.

The Ryan alternative starts from an entirely different premise. Its solution is not top-down cost-cutting but a more productive and efficient health sector. The only way to slow the rise in costs without compromising the quality of American health care is by getting more bang for the buck: making the provision of services to patients more efficient each year.

That can be achieved in health care the same way it has been achieved in other major sectors of the American economy: with a robust, well-functioning marketplace, filled with cost-conscious consumers. That’s the centerpiece of the Ryan Medicare reform.

Read the full version here (subscription required).

Also, a recent article at Kaiser Health News quotes me in response to President Obama’s remarks delivered with his own debt-fix proposal:

“It was so partisan and so badly received. Clearly he ... just wants to try to position himself better, vis-à-vis the Ryan plan and posture politically for 2012 so he's not going to get a deal.” Giving the Independent Payment Advisory Board more power to reduce Medicare rates, which Capretta says are already too low, will “start jeopardizing access to care for the patients and so it’s just it doesn’t make any sense.”

Finally, be sure not to miss Representative Ryan’s response to President Obama’s speech in a conversation at the invaluable new think tank e21.

posted by James C. Capretta | 3:15 pm
Tags: Paul Ryan, Medicare, Obamacare
File As: Health Care

What Real Leadership Looks Like

House Budget Committee Chairman Paul Ryan has laid out a vision for twenty-first century governance that will become the GOP program for 2011, 2012 and beyond.

It is unquestionably the boldest budget plan ever offered (including Reagan’s first budget), focused first and foremost on bringing federal spending commitments into line with the revenue generated from a pro-growth tax system. It reforms entitlement programs, starting with Medicare and Medicaid of course, but not ending there. Farm payments, welfare programs, and corporate subsidies all are reformed and refocused to reduce costs to taxpayers and work as they should. Outdated programs are thrown out. The bureaucracy is cut down to size. No corner of the budget is spared from scrutiny, including defense. The challenge of unlimited government, and runaway spending, deficits, and debt is immense — but the Ryan plan more than meets it.

A lot more can and will be said about the plan’s details in coming days, including by me. But for today, it’s important to focus on what this plan means in the big picture.

For starters, it completely recasts the struggle between the political parties. Everyone knows that what the president and his allies really want to do is raise taxes. They might agree to some tinkering around the margins on entitlements for show. But in their heart of hearts they believe the solution is higher rates of taxation.

The problem is they don’t have the guts to say so in public. They know that’s the surest way to permanent minority status. And so they are hoping for a more indirect route to their goal, using guile to lure gullible Republicans (see here) into agreeing to their approach without ever having to sell it to a tax-averse electorate.

The Ryan plan blows this kind of plotting by Democrats to smithereens. There’s no tax increase in the Ryan plan, and there’s no debt crisis. What’s required is far-reaching entitlement reform and serious spending discipline. By staking out that position, Ryan and his comrades have improved their leverage immensely. There’s no need to agree to tax hikes to solve the budget problem. What’s needed is for Democrats to get serious about spending reform, as Ryan has.

Moreover, with a Republican plan on the table, the media will surely start to ask Democrats, “Hey, where’s your plan?” This will force them to either come clean with their tax-hike vision, or become the party that pushed the country toward a debt-induced economic crisis. Either way, with more clarity about where the parties actually stand, Republicans can win the public fight.

At the heart of the spending problem, of course, is health care, and at the heart of the health-care cost problem is Medicare. The Obamacare “solution” is heavy-handed regulation and government-imposed cost controls. That approach never works, and only erodes the quality of the system. What’s needed is a functioning marketplace, with government oversight and cost-conscious consumers directing the allocation of resources. And that’s exactly what the Ryan plan would deliver.

The country faces serious and daunting challenges in the coming months and years. We need serious political leaders who are ready and capable of rising to the challenge. No one has demonstrated that capacity more than Paul Ryan.

[Cross-posted on the Corner.]

posted by James C. Capretta | 11:39 am
Tags: Ryan Plan, Paul Ryan, Medicare, Obamacare, debt
File As: Health Care

Medicare and the Ryan Plan

House Budget Committee chairman Paul Ryan (R.-Wisc.) is minutes away from unveiling his proposed budget for fiscal year 2012. I'll have much more to say in this space about Representative Ryan's important proposal in the days ahead. To start things off, however, here is an excerpt from a post I wrote for the New York Times "Room for Debate" series. I say a bit about the Ryan plan's approach to reforming Medicare — and defend the plan against those who claim that the proposal would unfairly burden Medicare's elderly beneficiaries:

The idea is to move toward a system where the government provides a fixed contribution that the beneficiary controls, not the government. The key is that the government’s contribution is set independently of the choice made by any one beneficiary. If Medicare participants choose a somewhat more expensive option, they will pay higher premiums. If they choose less expensive options, perhaps through a more efficient delivery system, they will pay less. With cost-conscious consumers, the 2003 Medicare prescription drug benefit has held down costs remarkably well — and much better than anyone expected. The new Ryan proposal builds on that model.

Critics say this reform would simply shift costs and risks to the beneficiaries. That critique ignores the enormous risk now placed on beneficiaries by the Affordable Care Act. Payment-rate reductions look like cost control on paper, but they provide no guarantee that patients will be served.

Moreover, as stated previously, what’s needed in the health sector is a large step-up in productivity. What’s more likely to bring that about: Another round of government-led efforts to engineer more efficiency? Or a functioning marketplace that rewards effective cost cutting with market share?

The Ryan plan is the most important step Congress could take to fix what ails American health care — and it does so in a way that heads off a fiscal crisis, too.

You can read the entire post here.

posted by James C. Capretta | 10:00 am
Tags: Paul Ryan, Obamacare, Medicare
File As: Health Care

The Heart of the Matter

Slowing the pace of rising health care costs is the holy grail of domestic and economic policy. It’s pretty much the key to everything that’s desirable. For starters, it’s central to heading off the debt-induced economic calamity that is fast approaching. If health care costs in the future were to rise at something close to the rate of growth of wages (instead of a couple of percentage points more, as they have for most of the past half century), trillions in unfunded government liabilities now on the federal books would vanish altogether. The massive deficits now projected for coming decades wouldn’t necessarily go to zero overnight, but they would be in a range that is politically solvable, not hopeless. And if premiums for private health insurance rose moderately, it would be much easier to expand coverage to more people, even as employers could pay workers more with cash instead of health benefits. Our collective future would look far, far brighter under such a scenario.

So, yes, “bending the cost-curve,” as the president famously put it, is the right objective. But what will actually do it?

To answer the question, it’s useful to start with a recent post from the Washington Post’s Ezra Klein, who himself approached the issue in the form of a question. He asks what makes Congressman Paul Ryan so confident that the Ryan plan for Medicare reform (offered with former Clinton administration budget director Alice Rivlin, and so now called the Ryan-Rivlin plan) will work to control cost growth while Obamacare won’t.

From Klein’s perspective, it seems like Ryan is applying a double standard. In Obamacare, Congress cut Medicare payment rates for hospitals and other providers of services quite dramatically — to the tune of about $0.5 trillion over a decade. Ryan and others — yours truly most definitely included — have argued that these cuts are illusory because they are politically unsustainable. Klein wonders why that same argument doesn’t also apply to cuts under Ryan-Rivlin. After all, Ryan-Rivlin would bring Medicare spending well below baseline projections in the future by converting the Medicare entitlement into a defined contribution payment from the government. Isn’t Congress just as likely to get cold feet about those cuts as it would about Obamacare’s payment-rate reductions? In fact, aren’t the Ryan-Rivlin cuts even more vulnerable, as they would seem to more transparently fall on the shoulders of the beneficiaries?

But that’s not how to look at this problem at all. Bending the cost curve is not a matter of simply paying less for a service. What’s needed is real and continuous productivity improvement in the health sector. Doctors, hospitals, nursing homes, labs, clinics and others finding better ways to deliver higher quality care at less cost. Because if productivity in the health sector does not rise, then payment-rate reductions will simply drive willing suppliers of services out of the marketplace.

And that’s exactly what would happen under Obamacare. Providers of medical services aren’t going to take payments for services that don’t cover what it costs to care for patients. As Richard Foster, the chief actuary of the Medicare program has repeatedly warned, Obamacare’s cuts would drive Medicare’s average payment rates so low that they would fall below those of Medicaid by the end of the decade. And Medicaid’s rates are already so low that the network of physicians and hospitals willing to take care of large numbers of Medicaid patients is notoriously constrained.

The Ryan-Rivlin plan is entirely different because it is based on empowering consumers to find the best value possible for their defined contribution payment. This is the way to unleash a productivity revolution in health care. The administration says it wants everyone to have access to low-cost, high-quality models, such as the Geisinger Health Plan. The way to bring that about is with a dynamic consumer marketplace in which those kinds of plans are rewarded financially for being more efficient and higher quality. And the way to bring that about is by giving people the control and financial incentive to become active, cost-conscious consumers both of the insurance they select and the delivery system by which they get their care. And that’s exactly what would happen under Ryan-Rivlin, which is why it would work and Obamacare wouldn’t.

Klein and others continue to tout the supposed cost-cutting potential of the various Medicare demonstrations and pilots created in Obamacare. To assume that these are the answer to the cost problem is really wishful thinking in the extreme. Medicare’s administrators have been trying for years to use the levers of payment to bring about more efficient health care delivery. The problem is that building a high-quality, low-cost network requires making distinctions among physicians and hospitals that Medicare has never been able to do. To cut costs, the government always resorts to blunt, across-the-board payment cuts that actually induce more inefficient behavior, not less.

That’s almost certainly why Foster, recently testifying before the House Budget Committee, quite plainly disagreed with Klein’s premise. Under questioning about what would work to bend the cost curve, he was, as usual, quite cautious. Nonetheless, he made it clear that he had more confidence in Ryan-Rivlin than Obamacare to bend the cost curve, because Ryan-Rivlin has the potential to unlock productivity improvements in a way Obamacare does not. I’m with Foster.

[Cross-posted on NRO.]

posted by James C. Capretta | 10:30 am
Tags: Ezra Klein, Ryan-Rivlin, Richard Foster, Medicare, chief actuary
File As: Health Care

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