By John Reichard, CQ HealthBeat Editor
August 11, 2012 -- Mitt Romney's choice of Rep. Paul D. Ryan as his running mate accelerates a national debate over a premium support-based overhaul of the Medicare program—possibly teeing it up for prime consideration in Congress next year if the Republican ticket proves to be a winner with the voters.
The premium support blueprint is controversial, to be sure. But it can't be laughed off as purely partisan, as doggedly as Democrats will try. It has proved to be attractive to such influential Democratic thinkers as former Congressional Budget Office (CBO) directors Alice Rivlin and Robert Reischauer. And it's an idea that has led pragmatic Democrats like Oregon Sen. Ron Wyden to think Medicare's core promise—a guarantee of decent affordable health care during old age—can be kept in a way that finds common ground with Republicans who insist that Medicare spending must be reined in sharply to defuse the debt crisis.
But it's also a concept with plenty of warts and unproven assumptions. Ryan has been unable to show how premium support could fly politically and still deliver the budget savings he says the nation so desperately needs. The CBO foresees big new costs down the road for beneficiaries of a Ryan-type approach. Still, this new focus on premium support will force Democrats to detail and sharpen their case for how an alternative Senate Majority Leader Harry Reid calls "smart spending cuts" would save Medicare over the long term.
Premium Support Defined
Premium support refers to a system under which Medicare enrollees would pick from a menu of competing plans with a fixed government payment to help defray premium costs. Enrollees would be on the hook for any charges above the government contribution. But they could save money by selecting a plan with a premium below the federal subsidy.
By limiting its premium contribution, the federal government gets control over how much it shells out for Medicare each year. Competition among plans to keep their premiums close to the federal contribution would keep beneficiaries from having to pay big new costs as the government limits its own contribution—in theory at least.
Some academics see significant savings from this approach. University of Minnesota economist Roger Feldman, for example, has predicted annual Medicare savings of 8 percent and possibly much more.
The Ryan Approach
Democrats say Ryan's Medicare overhaul would subject seniors to the whims of the private market, suggesting they'd have no protection against rising premiums and watered down benefits. Ryan counters that by saying that under his approach to overhauling Medicare, the government's contribution toward premiums would be equal to the cost of the second least expensive plan in a given market, or traditional Medicare, whichever costs less.
In other words, the government would fully cover the premium costs of some plans, and of traditional Medicare in some instances, Ryan says.
Ryan's plan could be more politically feasible because he delays its start until 2022 and he exempts baby boomers. It also would retain traditional Medicare for individuals 55 and older in 2011.
An early version of the Ryan plan called the "Path to Prosperity" would have ended the traditional Medicare fee-for-service program as an option for younger Americans. However, that changed in December 2011 when Ryan, in concert with Wyden, announced modifications to his plan.
The premium support system would still begin in 2022, and, as before, Americans 55 and older in 2011 would see no changes to Medicare. But, unlike before, the plan would keep the traditional Medicare fee-for-service program as an option when premium support started in 2022. The private plans offered couldn't water down Medicare benefits. "Any private plan that wishes to participate in this new program must provide at least as comprehensive a benefit as traditional fee-for-service Medicare," Ryan and Wyden said.
But there are huge questions about how vulnerable beneficiaries would actually be under a premium support system.
A CBO analysis of the original "Path to Prosperity" Ryan plan said that out-of-pocket costs for Medicare beneficiaries would more than double in 2022 when compared with the current system. CBO also said the plan would actually drive up overall health expenses by requiring people to get care through private plans. Essentially, seniors would be picking up the extra costs in the form of higher out-of-pocket expenses. Democrats said at the time that the average costs for Medicare enrollees would rise from $5,538 in 2022 under current law projections to $12,513 that year under the Ryan plan.
'On the Back of Grandma'
Insurance industry analyst Robert Laszewski said of the earlier Ryan premium support approach that it shifted too much financial risk from the government to the beneficiary. "Everything's on the back of Grandma," he said. "How is Grandma going to do this?" Capping Medicare expenditures would help solve America's health spending problem. But, he said, insurers, doctors and hospitals also should have to absorb some costs if expenses increase. "Most of the risk needs to be with the big boys in the system," he said.
Ryan and Wyden appeared to take that view to heart when they announced modifications to the original Ryan plan the following month. They said that increases in Medicare spending above the amount the federal government would pay "will be reflected in reduced support for the sectors most responsible for cost growth, including providers, drug companies, and means-tested premiums."
Wyden boasted that "this is the only proposal—let me emphasize, the only proposal—that stipulates that if costs rise you don't automatically throw those costs onto the backs of senior citizens in the form of higher premiums."
But the pair didn't explain exactly how stakeholders other than beneficiaries would be forced to shoulder the burden of rising costs not borne by the federal government. They appeared to say lawmakers would have to pass legislation to make that happen. But they didn't say what would happen if Congress refused. Nor did they specify how much their proposal would reduce Medicare spending.
Does Limiting Contributions Work?
Republicans point to the Medicare Part D prescription drug program as evidence that a system of competing plans and limited premium contributions can work wonders. They note that Part D costs much less than the CBO has projected.
But former CBO Director Peter Orszag, who served as head of the Office of Management and Budget under President Obama, rejects the defined contribution approach, including Medicare premium supports.
"The whole goal ... is that by shifting risk onto individuals you want them to become better shoppers, and thereby to reduce the total cost for themselves and the federal government combined," he said recently. "There is some limited evidence that more cost sharing does help to reduce cost," he noted. "The question is how big is it? And the answer is it's not very big. The reason is that even under these kinds of approaches you still provide insurance against catastrophic costs and the vast bulk of health care costs come from those catastrophic cases. So you don't get as much traction from that cost sharing method. And then against that you've got less negotiating leverage with hospitals and doctors because you're splintered across multiple providers and you also have higher" administrative costs.
In other words, Medicare beneficiaries are in multiple plans, which means lower negotiating pressure to obtain favorable rates, he said, adding that administrative costs are higher because plans have to figure in a profit.
But American Enterprise Institute analyst Joseph Antos, and Gail Wilensky, who run Medicare in the early 1990s under President Bush, said in a recent paper that it's important to add market incentives to Medicare through defined contributions. "Reliance on competitive markets rather than on regulatory controls provides strong incentives for more efficient delivery of the health care services that consumers truly value," they wrote. Antos said he wants people to ask themselves, "Why am I buying this? Shouldn't this be better?"
Ryan is fully immersed in the details of the premium support debate and brings the same budget wonk's sensibility as Orszag to the interplay of argument. That means the weeks ahead could be particularly focused on health policy.