Health Care Changes in Paul Ryan's Plan

Considering its role as the biggest driver of long-term deficits and debt, health spending has to be addressed in any serious long-term budget plan. And to Rep. Paul Ryan's credit, he has definitely done that in his FY 2012 budget proposal. There are numerous provisions in the proposal that deal with federal health care spending. Let's go through them:

• Medicaid Block Granting: Starting in 2013, Congressman Ryan's budget converts Medicaid into a block grant to the states that would grow each year by population growth and inflation. This would save the federal government $771 billion over the next decade, and significantly more in later years. Along with some other small changes, the proposal would reduce base (non-PPACA, or health care reform) Medicaid spending by about one third in 2022 and one half in 2030. By giving states full responsibility over their own Medicaid costs and by reducing their federal subsidy, block granting the program would likely lower overall (not just federal) Medicaid spending and lead to some new efficiencies -- particularly since the budget calls for granting additional flexibility to the states. However, the reductions in spending are quite deep, and would therefore likely cause states to cut provider payment rates, scale back the benefits package, limit eligibility, and/or find additional money from other tax and spending changes.
• Medicare Premium Support: Beginning for those who turn 65 in 2022, Medicare would be transformed into a premium support system. Beneficiaries would receive an $8,000 subsidy -- adjusted each year for inflation and age composition -- to be spent on one of a number of private insurance plans. The plans would all be required to comply with a standard for benefits package, accept all enrollees, and charge everyone of the same age the same price (HHS would manage various risk subsidies and transfers to avoid adverse selection problems). In addition, under the Ryan plan, subsidies would be reduced for higher earners, and lower earners would receive additional government funds through a Medical Savings Account. Though these changes will have no impact on the deficit over the next decade, they will result in substantial government savings over time -- savings which will come largely from higher beneficiary contributions since health spending is projected to grow far more quickly than the rate of inflation (which is roughly how fast the premiums grow).
• Raising the Medicare Retirement Age to 67: In addition to changing the structure of Medicare, Congressman Ryan would increase the eligibility age for the program. Beginning in 2022, the plan calls for increasing it from 65 to 67 at a rate of 2 months every year (so that it reaches 67 by 2033). In isolation, CBO has estimated this measure would eventually reduce Medicare costs by 7 percent.
• Medical Malpractice Liability Reform: Congressman Ryan's budget calls for comprehensive medical malpractice liability reform, or tort reform. According to CBO, a proposal like this could save $60 billion in total.
• Health Reform Repeal: This move is an expected one, given continuous Republican calls to repeal the Affordable Care Act (ACA). However, in contrast to what some in his party have proposed, Congressman Ryan actually keeps most of the Medicare cuts from ACA and dedicates them to deficit reduction. Whatever one thinks of the merits of repealing the coverage provisions, Congressman Ryan deserves credit for doing so in a fiscally responsible way -- subtracting from rather than adding to the budget deficit. That said, the Congressman's repeal would axe two of the provisions with the most promise for "bending the cost curve": the excise tax on high-cost insurance and the Independent Payment Advisory Board (IPAB). In addition, he repeals the other revenue provisions (such as the Hospital Insurance surtax) at a time when we need more revenue, not less. Congressman Ryan would do better to keep IPAB and the revenue provisions, as well as the other Medicare cuts.
• (Not) Paying for the Doc Fix: Like President Obama, Congressman Ryan calls for a "Doc Fix" to prevent a roughly 30 percent cut in Medicare physician payments. Also like the President, though, the Congressman relies on a "magic asterisk" to pay for this fix -- in other words he counts on savings which he doesn't specify. We criticized President Obama for relying on this gimmick for eight years of offsets; Congressman Ryan's budget goes the extra mile by relying on it for ten. Absent this gimmick, his debt numbers would be more than $350 billion (1.5 percent of GDP) higher in 2021.

With a few exceptions (such as the magic asterisk for the Doc Fix), Congressman Ryan deserves an incredible amount of credit for taking on the largest driver of our growing debt -- federal health spending -- head on. Not only would these changes reduce federal health spending substantially over the next decade, but they would also bend the federal health care cost curve in a way that makes these programs more than sustainable over the long-run.

CBO can attest to the magnitude of the changes. Under their extended-baseline scenario (current law extended beyond ten years), federal spending on health care programs grows from 5.5 percent of GDP in 2010, to almost 9 percent in 2030, and over 12 percent by 2050. Under Congressman Ryan's plan, it would grow to only 6 percent in 2030 and then decline to less than 5 percent of GDP in 2050.

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Of course, it is important to recognize that a substantial portion of these savings will come from higher premiums for beneficiaries and higher costs to states. While it's true that both block granting and premium support have the potential to change incentives in a way that encourages efficiencies and slows cost growth, few if any analysts believe it is possible to slow per-capita health spending down to the rate of inflation; getting down to GDP+1 percent will be tough enough.

Those who would argue that this rate of growth is too slow have a fair point (Ryan-Rivlin allowed growth at GDP+1 percent), as do those who would prefer to control costs in alternative ways (the Fiscal Commission listed several). But we have to get health care spending under control, and to the extent we are more lenient on health care than Congressman Ryan, it's important to identify savings elsewhere in the budget (for example, from Social Security and defense spending) or new revenues (especially from tax expenditures) to make up at least the lion's share of the difference.

Even with substantial revenues and cuts elsewhere, though, federal health spending must be brought under control. Congressman Ryan has presented one way forward; now others must step up with alternatives.