Center for American Progress

House Republican Plan to Overhaul Medicare Opposed by Original Advocate

House Republican Plan to Overhaul Medicare Opposed by Original Advocate

Top Scholar Says the Proposal Fails on Three Counts

Alex Lach details why a former proponent opposes Rep. Paul Ryan’s plan and how dangerous his plan would be for Medicare patients.

One of the original advocates of overhauling Medicare by providing direct but limited government support to individual patients says the current House Republican plan that includes this provision should be rejected by Congress.

In a hearing before the House Ways and Means Committee late last month, Henry Aaron, a senior fellow at the Brookings Institution and one of the original advocates of so-called premium support plans as an alternative to traditional Medicare spending, explained that he had “changed his mind” about the potential effectiveness of the premium support plan that is a key element of Rep. Paul Ryan’s (R-WI) House budget proposal. As Aaron put it:

While I would not go so far as to argue that premium support should never be considered for Medicare, I believe that there are overwhelming and persuasive reasons why it should not be enacted now. I also have become less confident that premium support, even if it works for the rest of the population, would be desirable for Medicare.

Aaron told the committee that in the mid-1990s he and Bob Reischauer of the Urban Institute—with whom he wrote “The Medicare Reform Debate: What is the Next Step,” the piece that introduced the term “premium support” into the health care lexicon—christened a plan that would substitute traditional Medicare spending on its patients with an individual voucher given directly to patients. Aaron said this original plan contained a number of key elements that would minimize the risk of such a fundamental switch, including:

  • Linking vouchers to health cost indices, not economic growth indicators
  • Placing a limit on the number and variety of plans that health insurance companies could offer
  • Installing a system of “risk adjustment” to discourage insurers from competing via risk selection, or agreeing to insure only those patients who are mostly healthy.

Rep. Ryan’s budget proposal does not adequately address these key details that Aaron believes premium support plans are dependent on to function effectively in reducing the costs of health care while improving the quality of patient care.

Instead of linking spending to health cost indices, the House plan would limit growth in Medicare spending to growth in the economy plus 0.5 percentage points, which would shift much of the cost to Medicare beneficiaries. The reason: Health care costs per capita are projected to grow 1.2 percentage points faster than economic growth over the next 10 years. This leaves a 0.7 percentage point difference between Rep. Ryan’s proposed Medicare spending cap and health care costs, leaving Medicare beneficiaries stuck footing the bill.

While Ryan’s plan does put a limit on the number and variety of plans that insurance companies could offer, it’s important to consider a few things. A full 25 percent of beneficiaries are already enrolled in private plans through Medicare Advantage. In 2012, however, Medicare will still spend 7 percent more for beneficiaries enrolled in Medicare Advantage plans than if those beneficiaries were in traditional Medicare. And as Center for American Progress Managing Director of Health Policy Topher Spiro has argued, “There is no evidence that private plans provide better quality than traditional Medicare, and the quality of private plans is highly uneven.” The example of Medicare Advantage demonstrates that premium support plans would likely cost more without guaranteeing increased quality of care.

Then there’s the shifting of risk to patients in Rep. Ryan’s plan. The House plan does include a “risk adjustment” feature, but Aaron does not believe the capabilities of risk adjustment in that plan are good enough to be effective in preventing insurance companies from offering policies only to the least risky patients. As he explains:

In the 1990s, risk adjustment was inadequate. It was not then “good enough” to discourage competition based on risk selection. But it was getting better. I assumed, perhaps too facilely, that it soon would get “good enough.” Well, to date it hasn’t. Recent research has shown that the Medicare risk adjustment algorithm actually increased program costs by as much as $30 billion or 8 percent in 2006.

Under Rep. Ryan’s premium support plan, these additional costs would fall on Medicare recipients least able to cope with the rising costs.

Ryan’s plan, therefore, is falsely flying under the banner of “premium support,” trying to maximize the possible savings of the plan without implementing the safeguards Aaron believes ensure quality benefits for seniors and limit out-of-pocket expenses. According to Aaron, this is not the first time this has happened. “The name, ‘premium support,’ was and is often applied to plans that lacked one, two, or all three of the safeguards that we regarded as essential,” he said. “My point, let me stress, is not a semantic quibble…when a term is used in ways that obscure important policy distinctions, the misuse is harmful.”

Harmful may be an understatement. According to Spiro, the following would happen under Ryan’s Medicare proposal:

  • Many seniors would be forced to pay sharply higher premiums to stay in traditional Medicare and keep their current choice of doctors.
  • New Medicare beneficiaries could pay more than $1,200 more a year by 2030 and more than $5,900 more a year by 2050.
  • More and more seniors would gradually shift to private health insurance plans over time, increasing the privatization of Medicare.

In short, Rep. Ryan’s premium support plan would shift costs to seniors, health care providers, businesses, and states.

Of course, the House plan would also repeal the Patient Protection and Affordable Care Act of 2010, the signature health care reform law more commonly known as Obamacare. According to Spiro, this would cause:

  • More than 33 million Americans would lose health insurance coverage in 10 years.
  • Millions of Americans would lose consumer protections that are essential for health and economic security.

Under Rep. Ryan’s plan, states would also be forced to slash Medicaid eligibility, benefits, and payments to health care providers.

Aaron finds the House plan disturbing, too, due to the savings that traditional Medicare is now recording and to the future savings that Obamacare will deliver for Medicare over the next 10 years. “There is widespread misunderstanding of Medicare’s finances,” Aaron said, explaining that “for the last couple of decades, per enrollee Medicare spending has been growing at about the same rate or a bit more slowly than has per person health care spending for the general population.”

Obamacare will accelerate that trend. As has been shown, over the next 10 years, Medicare’s growth in costs per beneficiary is projected to average only 2.8 percent per year—compared to growth in our economy of 3.9 percent per capita and growth in total health care costs of 5.1 percent per capita.

Aaron rightly gives credit for some of those declining costs to portions of the Affordable Care Act, which contributes significantly to the projected slowdown. Without the new law, Medicare would grow more than 1 percentage point faster. Other key parts of the law, such as the creation of the Independent Payment Advisory Board, limit costs and improve quality of care and are already starting to pay dividends.

Indeed, the flaws in Rep. Ryan’s Medicare plan represent a threat to the health and livelihood of our nation’s seniors. Take it from Henry Aaron, a co-creator of the very concept of premium support plans, who like anyone who looks at the facts and weighs the legitimate arguments, changed his mind on the effectiveness of Rep. Ryan’s Medicare reforms.

Alex Lach is an assistant editor at the Center for American Progress who works closely with the Center’s health policy team.

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Alex Lach

Assistant Editor