Will Health Care Costs Defeat Paul Ryan?

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Beneath all of the fighting over the Republican "Path to Prosperity" budget orchestrated by Rep. Paul Ryan is a simple disagreement. The question turns on whether competition among health insurers can lower prices.

The enormous budgetary problems that Ryan is so concerned about can be reduced to one development: rising health care prices. If not for the thus-far intractable increases in health care prices, our finances would be in manageable order. Short-term deficits would be high, but there would be no question of the government struggling to bring spending in line with revenues in the long run.

However, Medicare, Medicaid, and the new entitlement created by the 2010 Affordable Care Act will begin to crowd out other budget priorities over the next few decades. At the same time, the rising cost of private plans will strain household finances, slowing economic growth.

To understand this point better, compare Medicare and Social Security. Both are programs with benefits guaranteed to every senior citizen, meaning that they both face the same demographic difficulties. Although Social Security, right now, spends more (in fact it's the single largest item in the federal budget), it's expected eventually to level off after the Boomers have retired. It could be preserved with relatively modest changes.

Medicare is different. Its outlays are projected to accelerate more or less forever. The runaway costs of Medicare and the other health care entitlements can only be addressed by reform, not merely by trimming elsewhere in the budget or raising taxes.

Ryan's fiscal reform plan reflects this reality. It would drastically overhaul the nation's health care system while mostly leaving Social Security alone. The question is whether the plan's strategy for bending the health care cost curve makes any sense.

The key feature of the plan, which Ryan developed with Democratic senator Ron Wyden of Oregon, is transitioning Medicare, the biggest of the health care entitlements, to a competitive-bidding model.

The changes to the other government-run health care programs aren’t intended to yield systemic changes in the insurance market: The GOP would cut Medicaid by simply block-granting funds to the states, leaving state officials to find ways to do more with less or else decrease the rolls. It would also repeal the Affordable Care Act, without offering a replacement. (Ryan, separately, has proposed an alternative, but the Republican caucus hasn't embraced it or any other scheme -- a point of criticism for the 2010 law's advocates.)

Could competitive bidding for Medicare alone solve the problem of health care cost inflation? The Congressional Budget Office projects the GOP budget to stabilize the debt even assuming that competitive bidding does nothing to improve the health care insurance market and lower prices. Ryan and his supporters hope it will do more than that, a lot more.

The idea behind the Ryan-Wyden approach is to replace Medicare's fee-for-service model with a subsidy given to seniors to purchase their own insurance. The amount of the subsidy would be set by private insurers and the traditional Medicare program bidding against each other to offer plans at the lowest cost. The amount of the second lowest bid would determine the subsidy (called “premium support” in the plan), given to seniors to apply to any qualified plan.

Republicans believe that by introducing competition among insurers into the market and making each senior a health care consumer, Medicare will become more efficient and prices will fall. As evidence, Ryan and company cite the success of the prescription drug benefit, Medicare Part D, which was similarly structured, in controlling price increases. The health care economists Robert Coulam, Roger Feldman, and Bryan Dowd have written that the Ryan plan could save 5.6 percent of Medicare costs over 10 years relative to the Affordable Care Act, even assuming that competition doesn't spur private insurers to be more efficient than they are today.

The Ryan model has a bipartisan pedigree. The premium support concept was introduced by the Brookings Institution scholar Henry Aaron and Robert Reischauer of the Urban Institute in the mid-90s. Nevertheless, many liberal commentators, including Aaron, have criticized Ryan's plan, especially for making the subsidy too stingy. With a stringent cap on the government subsidy, the argument goes, the burden of paying for health insurance won't be decreased, but instead simply shifted from taxpayers onto senior citizens.

As Paul Van de Water of the left-leaning Center on Budget and Policy Priorities cautions, "The Ryan-Wyden plan would limit the rate of growth of the voucher from year to year to the rate of growth of gross domestic product (GDP) per capita plus one percentage point — an amount that is likely to fall short of the actual rate of growth of health care costs." Furthermore, Van de Water warns, "the plan includes no mechanism that would reduce the cost of the Medicare benefit package to fit within the shrinking premium support payment."

Of course, Van de Water is assuming that competitive bidding won't work the way it's supposed to. Ryan would counter that the competitive bidding process is itself the "mechanism" that would reduce the cost of seniors' insurance. Ryan has stated that he thinks competition will drive the costs well below the cap, and that the cap was only included to procure a favorable budget score.

One's view of the GOP budget, then, hinges on the assumption that competitive bidding can succeed where all else has failed, and lower health care prices. The plan’s critics reject that assumption. Aaron and Boston University economist Austin Frakt, in particular, have argued that the Ryan-Wyden plan is no more promising than the reforms promised in the Affordable Care Act. If they are right, then many of the Path to Prosperity's other flaws become more glaring, such as its reliance on exceedingly unlikely cuts to non-defense discretionary spending: It would essentially halve services unrelated to entitlements or security in order to be balance the very long-term budget.

But if competition can lower prices, the plan’s other shortcomings might seem less insurmountable. There would be more room in the budget for other priorities, especially if a “Grand Compromise” including some concessions from the GOP on new revenues becomes a possibility. In that case, the Path to Prosperity begins to look like a possible starting point for a deal.


This article has been updated to add detail.

Joseph Lawler is editor of RealClearPolicy. He can be reached by email or on twitter.

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