Last week I testified before the House Budget Committee as part of a hearing on "Fulfilling the Mission of Health and Retirement Security." My written testimony was posted last week here. Now the audio and video of the entire hearing are available online, including questions posed by committee members to the panel on which I sat, along with Alice Rivlin, Chuck Blahous, Paul Van de Water. The audio for the hearing is available here, and I have embedded the video below (my testimony begins at 21:15).
The political ground has been shifting rapidly ever since the American people delivered a vote of no confidence on the current direction of public policy when they went to the polls earlier this month.
Nowhere is that shift more evident than in the recent release of a bipartisan plan to dramatically reform the nation’s health entitlement programs. Sponsored by incoming House Budget Committee Chairman Paul Ryan and former Clinton administration budget director Alice Rivlin, the “Ryan-Rivlin” plan represents a real breakthrough in the long standoff between the parties over how to address the most pressing problem in the federal budget, which is the relentless, long-term rise in costs of Medicare and Medicaid. Ryan and Rivlin both serve on the presidential commission looking at ways to reduce the nation’s short- and long-term budget deficits, and they offered their health-entitlement reform plan to their fellow commission members for consideration.
In Medicare, the Ryan-Rivlin proposal would be transformative. It picks up on a key feature of Rep. Ryan’s “Roadmap” budget plan, which is that new enrollees in Medicare after 2020 would receive their entitlement in the form of a fixed contribution from the federal government rather than today’s defined benefit program structure. These Medicare enrollees would then apply their entitlement against the cost of health insurance. The value of the defined-contribution payment from the government would grow at a rate of GDP per capita plus one percentage point. The plan would also restructure Medicare for current beneficiaries by rationalizing the cost-sharing with a single, higher deductible and more uniform coinsurance across care settings, as well as an out-of-pocket cost limit. Secondary insurance plans would be prohibited from covering the first $500 of the deductible or more than half of the cost-sharing for services.
For Medicaid, Ryan and Rivlin propose moving toward a fixed block grant payment from the federal government to the states. The block grant payments would be indexed to grow with the size of the Medicaid population as well as per capita GDP growth plus one percentage point. The plan does not specify in detail what new flexibility the states would receive to administer the program, but it would presumably be significant new freedom to make changes as needed to run Medicaid according to state priorities.
Beyond Medicare and Medicaid, the plan would also impose limits on noneconomic and punitive damages in medical liability cases as well as repeal the ill-advised long-term care program (called the “CLASS Act”) that was created in the recently passed health care law.
The Congressional Budget Office (CBO) has already issued a preliminary assessment of the budgetary implications of Ryan-Rivlin, and the results are impressive. Over the next decade, Ryan-Rivlin would cut federal deficit spending by $280 billion, and by 2030, federal spending on the major health entitlement programs would be about 1.75 percent of GDP below a reasonable baseline projection.
But the importance of Ryan-Rivlin goes well beyond its details and current CBO cost estimate. The fundamental problem in American health care is that the federal government is providing open-ended financial support for health insurance coverage. Most Americans get their insurance through Medicare, Medicaid, or employer-sponsored insurance. And in each case, the federal government’s support for that coverage increases commensurately with costs. So when costs or premiums rise by an extra dollar, the federal treasury is picking up a sizeable portion of the added expense, thus substantially undermining the incentive for economizing by those enrolled in the coverage or those providing the services.
The solution is an across-the-board move toward more fixed federal financial support for coverage. That’s a central element in the Ryan Roadmap, and has been a theme in just about every market-based reform of health care proposed over the past quarter century. At various times, moving away from open-ended entitlements has gotten the support of some Democrats, most especially when former Senator John Breaux championed “premium support” for Medicare in the late 1990s. But, by and large, most Democrats have resisted these kinds of moves and attempted to control entitlement costs with arbitrary price controls instead.
Ryan-Rivlin is thus an important step because it brings a prominent official from the Clinton administration onto a proposal that would decisively move away from the health entitlement status quo. That’s no small matter.
Ryan-Rivlin is far from ideal. It is largely silent on ObamaCare, which would push the health system in precisely the wrong direction by extending open-ended entitlement promises to millions of new people. Households with incomes below four times the poverty line would see their premiums capped as a percentage of their income, regardless of the expense of their health plan coverage. Moreover, the new law leans heavily on price controls to cut costs, which only distort the marketplace and undermine the quality of American medicine. These damaging aspects of ObamaCare would substantially undermine the benefits that the Ryan-Rivlin approach would produce. The lesson is that there’s no getting around the need to repeal ObamaCare in its entirety. If it remains in place, there will be little that can be done to stop a full government takeover. What’s needed is a full replacement program, with fixes not only for Medicare and Medicaid but also for the tax treatment of health insurance so that workers too become cost-conscious consumers in a reformed marketplace.
Still, Ryan and Rivlin should be applauded for taking this courageous step and putting their health entitlement reform plan on the table for consideration. It is a clear demonstration that the conversation has shifted, and in a much more positive direction.
Last year, Rep. Paul Ryan's "Roadmap" -- his far-reaching plan to restore long-term budget balance through tax and entitlement reform — was the subject of relentless attacks by those favoring a larger government role in American life. New York Times columnist Paul Krugman called Ryan the "Flimflam Man" in a widely cited opinion piece in which he tried to dismiss the Roadmap as not a credible solution to the nation's budget problems. The congressional Democratic leadership followed up with an organized campaign aimed at demonizing the plan as a callous assault on Social Security and Medicare beneficiaries. Their clear intention was to use the Roadmap to damage scores of Republican candidates for House and Senate seats by association.
None of it worked. In fact, not only did the Roadmap survive the 2010 mid-term campaign, the election results — and the dominoes that have fallen since — have made it far safer politically for Roadmap proponents to advance the plan's ideas in the public square.
That the political and policy landscape has started to shift, and rather dramatically, became apparent just a week after the election when the co-chairs of a commission appointed by President Obama, on which Ryan, a Republican from Wisconsin, also serves, offered draft recommendations on how to close the short- and long-term budget deficits. President Obama had appointed former Clinton White House chief of staff Erskine Bowles and former Senator Alan Simpson (R.-Wyoming), to chair the eighteen-member group earlier this year, and he asked them to report back by December 1 — after voters were given a chance to decide the make-up of the 112th Congress.
The draft proposal put forward by Bowles and Simpson caught just about everyone in Washington off guard. It's not a business-as-usual plan. Very few sacred cows were spared. It calls for radical tax reform to lower rates and broaden the base, a reduction in the corporate tax rate, long-term entitlement spending cuts, and elimination of programs that have been around for decades. Among the most controversial items now on the table for consideration by the presidentially appointed commission is the full elimination of mortgage interest and state and local tax deductions, dramatically lower future Social Security benefits for higher-wage workers, and real cuts in pay for federal workers.
On November 17, just a week later, another bipartisan commission looking at the nation's deteriorating budget situation took its turn. This one is headed by former Senator Pete Domenici (R.-New Mexico), and former Clinton budget director Alice Rivlin, and is sponsored by the Bipartisan Policy Center. They and their commission colleagues — many of whom are Democrats — released their own version of a deficit- reduction plan, which received unanimous support from the 19 commission members.
Among other recommendations, the Domenici-Rivlin plan would cap the tax preference for employer-paid health insurance and then phase it out entirely over a number of years. It would also convert the Medicare program for future enrollees into a "premium support" program in which the beneficiaries get a fixed level of financial support from the government for the purchase of insurance. Enrollees selecting options more expensive than the average plan would have to pay the difference out of their own pockets.
Rivlin — who is also serving on the Bowles-Simpson presidential commission — followed up her work with Senator Domenici by announcing her public support for a "Ryan-Rivlin" health entitlement reform program, which the two then proceeded to offer to the presidential commission for its consideration. The Ryan-Rivlin proposal includes many of the same features in the health sector as the Ryan Roadmap. Future Medicare enrollees would receive their entitlement in the form of a fixed level of federal support for health insurance. The eligibility age would be increased gradually to age 67, up from 65 today. And the cost-sharing for current program enrollees would be modified to require most beneficiaries to pay something toward the cost of the services they receive before Medicare and secondary insurance kicked in. Medicaid would be converted into a block grant program to the states, with the states freed up to run the program as they see fit. The new long-term care program created in the health law — called the "CLASS Act" — would be repealed. And noneconomic and punitive damages in medical malpractice cases would be capped.
The Congressional Budget Office, in a preliminary analysis, estimates the Ryan-Rivlin plan would reduce the federal budget deficit by $280 billion over the next decade and 1.75 percent of GDP in 2030 (with reasonable baseline assumptions). That kind of savings is going to be needed to prevent the federal budget from going entirely off the rails in the next two decades.
Still, there's no expectation that any of these proposals are going to sail through Congress anytime soon. Indeed, what's most likely to happen in the short term is absolutely nothing. The Bowles-Simpson commission may not find common ground, at which point Congress is under no obligation to take up draft recommendations from a subset of its membership. Moreover, both the Domenici-Rivlin plan and the Ryan-Rivlin health entitlement program have already set in motion frantic efforts to mount counter-offensives among the protectors of the status quo to prevent these ideas from gaining any political traction.
But what's really important about the last month is not that any reform plan is about to pass. It's that the terms of the budget, entitlement and health care debates have shifted dramatically, and very likely on a permanent basis. The fundamental elements of the Ryan Roadmap are sweeping tax reform; changes in health care which emphasize a marketplace and consumer choice; and modifications to retirement programs that reflect demographic reality. All of these elements can now be found in budget plans endorsed by prominent Democrats, including Democrats the president himself turned to find solutions to the nation’s budget problems. Consequently, it will be much harder in the future for Democrats to demonize these ideas as they have tried to do in the past.
Paul Ryan took the courageous step of going first with a bold plan to fundamentally restructure the tax and entitlement policies that threaten to push the federal budget past the breaking point. Now others, even some from the other side of the aisle, are joining him in sponsoring similar plans. The Roadmap does indeed live on.
[Cross-posted at Kaiser Health News]