Analysis

Ryan’s Medicare Plan Would Lower Insurance Costs

The Republican’s plan to reform seniors’ health care would save money.

Vice President Joe Biden on Thursday fiercely criticized his Republican opponent Paul Ryan’s Medicare reform plan. The Wisconsin congressman’s proposal to subsidize seniors’ private health insurance plans would “eliminate the guarantee of Medicare,” said Biden during a televised debate between the two candidates.

In fact, in the second iteration of his plan, Ryan, who chairs the House of Representatives’ budget committee, preserved Medicare as an entitlement. He eliminated it altogether for Americans under the age of 55 in his original, 2011 budget and replaced it with a voucher program but revised that approach earlier this year.

Republican presidential candidate Mitt Romney expressed sympathy for Ryan’s original plan but hasn’t explicitly endorsed either.

There is no question that Medicare has to be changed. The program’s own trustees expect the fund to run into a deficit in 2024. Once the trust fund is depleted, revenues from Medicare taxes would initially be enough to cover 90 percent of expenses but that share declines to 75 percent by midcentury, then rises to 88 percent by 2085.

Over the next 75 years, Medicare’s unfunded obligations are estimated to add up to a total of $24.6 trillion. In reality, if nothing changes, the program will be far heavier indebted as the official numbers assume $575 billion in savings included in President Barack Obama’s health reform law and a 29 percent reduction in physician reimbursements in 2012. That is unlikely to happen. Time and again, Congress has overwritten payment reductions and it’s almost certain to do so again, especially in an election year.

The president’s health reform law did make cuts to Medicare providers and installed an advisory panel of health-care experts to find savings but only prolonged the program’s longevity by a few years.

Democrats have strongly rejected Paul Ryan’s reform proposals. The president said that his voucher plan would leave seniors “at the mercy of the insurance industry.” Joe Biden on Thursday argued that “people are going to have to pay more money out of their pocket.”

Ryan countered that “choice and competition” will restrain the rising costs of health insurance. “We would rather have fifty million future seniors determine how their Medicare is delivered to them instead of fifteen bureaucrats deciding what, if, where, when they get it,” he said, referring to the advisory board that the president has created.

Estimates of the individual costs that Ryan’s Medicare reform proposal would incur vary. Biden cited a figure that is based on calculations by the Congressional Budget Office which predicted that Ryan’s private competition model would cost future retirees $6,400 more annually. That analysis was based on his first, 2011 reform plan, however. Ryan’s 2012 plan preserves Medicare and links the “premium support” subsidy to the insurance cost of the second lowest bidder so seniors would be guaranteed at least two health plans whose premiums meet 100 percent of the contribution.

The Congressional Budget Office in 2006 also found (PDF) that private insurers and competition could do Medicare more cheaply than the government program. A study by Michael E. Chernew, David M. Cutler and Zirui Song published in The Journal of the American Medical Association in August reached a similar conclusion.

Chernew, Cutler and Song compared the costs of traditional Medicare with Medicare Advantage, a program that allows seniors to buy private insurance. They found that between 2006 and 2009, under Medicare Advantage, the second lowest bidder cost 9 percent less than traditional Medicare. If Ryan’s plan had been in effect then, seniors would have had to pay an average of $64 per month extra to stay in traditional Medicare or could have saved the money by buying a private insurance plan.

As America’s population ages, the number of workers who are paying taxes to finance Medicare shrinks relative to the number of seniors who are enjoying benefits. Something has to be done and soon or even retirees who are currently in the program will be affected.