Congressman Paul Ryan (R-WI) and Alice Rivlin, former director of the Congressional Budget Office (CBO), have proposed an entitlement spending reform plan that is striking both for its boldness and its left-right-coming-together origins. There are a number of interesting parts, but I want to focus on the three most important:

  • Medicare would, for the first time, be transformed into rational insurance. Beginning in 2013, all enrollees would be protected by a $6,000 cap on out-of-pocket expenses; in return they would pay for more small expenses on their own.
  • After a decade, people newly eligible for Medicare would receive a voucher to purchase private insurance instead. The value of the voucher would grow at the rate of growth of GDP plus 1% (note: for the past four decades, health care spending per capita nationwide has been growing at about GDP growth plus 2%).
  • Medicaid would be turned into annual block grants to the states. The value of the block grants would also grow at GDP growth plus 1%.

Bottom line verdict: This is a good proposal that deserves serious attention. To guarantee its success, however, more needs to be done to (1) allow the private sector to control costs through economic incentives, competition and entrepreneurship and (2) allow young people to save for the growing share of expenses they will be expected to bear.

How Does This Plan Compare with the Affordable Care Act (ACA)? Given that Ryan has been previously attacked by Paul Krugman and others on the left because of his ideas about voucherizing Medicare, a natural question arises. How does the Ryan/Rivlin slowdown in Medicare spending compare to the health reform bill Congress passed last spring a bill supported by some of the very people attacking Ryan?


Answer: Ryan/Rivlin reduces government spending on Medicare by less than the ACA does! As previously reported, the health reform act begins slowing the rate of growth of Medicare payments to doctors and hospitals almost immediately. By the end of this decade, Medicare rates will fall below Medicaid rates for everyone enrolled in Medicare! As the Medicare actuaries office has affirmed this will affect access to care for all seniors, not just new enrollees in future years.

Under Ryan/Rivlin, by contrast, everyone 55 years of age and older is grandfathered, so to speak. Lower spending only kicks in for people under the age of 55.

[Note: The CBO score of Ryan/Rivlin assumes that the proposal will be tacked onto the ACA, which is current law.]

How Does This Plan Compare to Other Entitlement Reform Proposals? Clearly, Washington is in the mood to talk about entitlement reform. We previously analyzed the Bowles/Simpson deficit commission report [see PowerPoint and full report], which was followed by a Domenici/Rivlin report. All these plans try to limit federal spending to the growth rate of GDP plus 1% — the ACA, by reducing fees for providers; Domenici/Rivlin, by having enrollees pay larger premiums; and all three private sector proposals, by a premium support approach, under which the federal government makes available a fixed number of dollars (or vouchers), beneficiaries add to that amount from their own resources and health plans compete against each other. The ACA, by contrast, limits spending to the growth rate of GDP and has no premium support!

Will any of this actually work?

Are the Cuts in Medicare Spending Realistic? Everyone agrees we are on an unsustainable path. But if we don’t get off the path, efforts to limit government spending will only unload costs onto the private sector. That is, costs won’t be controlled; they will only be shifted.

The ACA makes incentives more perverse for patients (by making more care free of deductibles and copayments), leaves provider incentives (to maximize against reimbursement formulas) largely in place, creates hurdles for private sector efforts to control costs (e.g., by blocking attempts to reduce benefits or increase cost sharing) and puts all its cost-control faith in the federal government’s ability to conduct pilot programs, do comparative effectiveness research and other unlikely initiatives.

Domenici/Rivlin shifts premium costs to the beneficiaries but gives no new tools to patients or providers to control spending.

Both Bowles/Simpson and Ryan/Rivlin reform Medicare by capping catastrophic expenses and increasing patient exposure for small medical bills. (There is an across-the-board deductible of $600 in Ryan/Rivlin.) This by itself will dampen spending, as patients are forced to compare the cost of small dollar care with the value they place on other uses of money. It would probably also obviate the need for Medigap insurance, which, after all, only exists because gaping holes in Medicare expose beneficiaries to catastrophic costs.

Still, we could do much better.

Making the Proposal Better. We have previously proposed a way of building on these ideas and going further to liberate 310 million patients, 800,000 doctors and countless other provider personnel to solve the problems before us with three fundamental Medicare reforms:

  • Using a special type of health savings account, beneficiaries would be able to manage at least one-fifth of their health care dollars, thus keeping each dollar of wasteful spending they avoid and bearing the full cost of each dollar of waste they generate.
  • Physicians would be free to repackage and reprice their services — thus profiting from innovations that lower costs and raise the quality of care.
  • Workers (along with their employers) would save and invest 4 percent of payroll — eventually reaching the point where each generation of retirees pays for the bulk of its own post-retirement medical care.

In the paradigm case (the one defining government’s contribution, say, for Medicare Advantage insurers) beneficiaries would face a $2,500 deductible and they would be able to deposit $2,500 in an aftertax (Roth) health savings account.

These reforms would dramatically change incentives. Whether in their role as patient, provider or worker/saver, people would reap the benefits of socially beneficial behavior and incur the costs of socially undesirable behavior. Specifically, Medicare patients would have a direct financial interest in seeking out low-cost, high-quality care. Providers would have a direct financial interest in producing efficient, high-quality care. And worker/savers would have a financial interest in a long-term financing system that promotes efficient, high-quality care for generations to come.

With assistance from NCPA Senior Fellow Andrew J. Rettenmaier, we have been able to simulate the long-term impact of some of these reforms. The bottom line: Under reasonable assumptions, we can reach the mid-21st century with seniors paying no more (as a share of the cost of the program) than the premiums they pay today and with a taxpayer burden (relative to national income) no greater than the burden today.

What about Low-Income Beneficiaries? Ryan/Rivlin have a nice idea here. For Medicare beneficiaries whose low income also qualifies them for Medicaid (the dual eligibles), forget Medicaid and deposit $6,600 for each of them in a health savings account. This gives them the financial resources to pay the $6,000 in out-of-pocket expenses they are potentially exposed to plus $600 to boot.

This post first appeared on John Goodman’s Health Policy Blog.

John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis.  He is also the Kellye Wright Fellow in health care. The mission of the Wright Fellowship is to promote a more patient-centered, consumer-driven health care system. Dr. Goodman’s Health Policy Blog is considered among the top conservative health care blogs on the internet where pro-free enterprise, private sector solutions to health care problems are discussed by top health policy experts from all sides of the political spectrum.

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