A necessary Reform? – the Ryan Plan And US Healthcare Entitlements

Guest blog by Tom Packer

Extending well beyond healthcare, Congressman Paul Ryan’s proposed budget – known by all sides as the ‘Ryan Plan’ – is ambitious in its scope and extensive in its prescriptions. In the long term the Ryan Plan aims to stabilise the share of America’s GDP taken in federal taxation at 19% – and to reduce US federal spending as a share of GDP to 19% from its current peacetime high of 24%.

Increasingly the Ryan Plan has become the core fiscal alternative of the Republican Party despite the breadth of its ideological spectrum. All but a handful of Republican members of Congress have voted to pass it into law. Mitt Romney has a somewhat nuanced position, but has stated he would sign it. It was killed in the Democratic controlled Senate –but if Romney wins the presidency it is, at the very least, likely to have a big influence on US economic policy.

This is arguably truest for healthcare. The Ryan Plan repeals the extensive changes represented by Obamacare. But it does not simply seek to defend the pre-Obama status quo. Some changes are relatively minor (for example, restrictions on suing doctors). But at the core are proposals for massive changes in the complex structure of US federal healthcare programmes (which I have outlined before).

One large change is in the Medicaid programme for low income Americans. Medicaid costs a great deal and varies widely from state to state. Ryan suggests replacing the current matching funds system for state programmes with a straight grant from the federal government, which states can then decide if they wish to top up. These grants would then be increased at the rate of population growth plus general inflation. This prevents expenditure growing as quickly, makes the states bear the fiscal costs of extra expenditure and allows for state innovation to improve the programme. The last is particularly attractive given how dubious some aspects of Medicaid are. An obvious argument against it is that it might lead to under-spending on the healthcare of the poor.

The most controversial proposed change is to Medicare (the larger programme for the elderly (which I have also described before ). This programme for elderly Americans is much more expensive than Medicaid and has much more daunting projected future costs. Ryan proposes gradually raising the eligibility age by two years between 2022 and 2032.

More significantly, he would radically rework the programme – changing it from a defined benefit programme to a defined contribution program. Currently Medicare pays for treatments on request (within certain important limits). Under the Ryan Plan new enrolees would purchase private plans, which would be subsidised. The ‘standard’ level would be $8,000 though this would be weighted by age, level of medical risk and – unlike Medicare – would be means tested, with the richest 10% getting a less generous subsidy. This voucher would over time rise in value by the rate of the consumer price index – which has been much less than the rate of increase in Medicare spending per enrolee since Medicare’s creation. A continuation of current policy would lead to an expenditure of $ 18,000 per Medicare recipient by 2040, the Ryan Plan to $11,000 per Medicare recipient.

These changes to Medicare would be applied only to people who are currently younger than 55. They would be optional for everyone else.

These proposals are daring and they clearly represent a genuine effort to grapple with the problems Medicare poses for policymakers. Ryan has obvious advantages: the possibility of getting cost discipline into Medicare, greater consumer sovereignty, making the programme more orientated towards the less well off and most of all reducing the massive fiscal burden that Medicare would otherwise pose. If this is not tackled, it would lead to massive increases in taxation or massive cuts in planned expenditure on other items – including expenditures on the poor.

But the Ryan Plan is very controversial, clashing strongly with many of the left-of-centre critiques of the UShealthcare system. If one thinks there needs to be more pooling of risk and/or more government control over healthcare purchasing then obviously the Ryan plan is the wrong approach, and many have made points along these lines.

There are also problems that are applicable even if one happens to share Ryan’s vision of a more ‘free market’ system of healthcare. One is the need to weight the government payment for risk-‘risk adjustment’. This is necessary because otherwise tricky cases (for example cancer survivors) would find it hard to get a Medicare payment and others would be able to spend a great deal of money. But it provides an incentive for individuals and insurance companies to game the system to increase their financial worth – and those who believe in private ingenuity should be the most wary to assume a regulation can eliminate all ways of doing this.

Secondly, medical ‘cost inflation’ has for many decades gone well ahead of the general price index. The structure of Medicare and Medicaid are probably part of the reason for this but unquestionably, so are other factors, such as general advances, the desire of richer populations to spend more on healthcare and the tax incentives for third provider healthcare in the United States. This suggests that if the Ryan Plan is passed before a broader reform of US healthcare cost pressures it could cause a very real squeeze in the quality of care for the elderly.

Thirdly, it’s worth noting that past efforts to put a cap on Medicare payments have been overrode by Congress again and again. The Ryan Plan is different from these efforts in that it at least changes the structure of Medicare, in its efforts to prevent costs rising so fast. However combined with the reality of US healthcare it provides a real possibility for reversal.

Paul Ryan himself has shown some awareness of these problems. For example, the latest version of the plan includes traditional Medicare as an option for those currently under 55 as well. But that leaves the question of how to have a ‘level playing field’, between traditional Medicare and what one might call ‘Ryancare’. This could easily be very similar to Ryan’s original proposal or completely emasculate it.

Already Ryan’s plan poses political dangers to the Republican party. For example,  there are good grounds for believing it meant the Republican’s lost a seat in a ‘special election (the US equivalent of by elections) in the New York 26^th . Elderly voters seem particularly concerned, even though they’re least likely to be negatively affected by the plan.

Fundamentally the Ryan plan represents a very brave attempt to transform US healthcare entitlements in a more market orientated direction. Whether it is correct policy or politics is another matter. However, what is clear is that the current trajectory of Medicare is unsustainable. Policy has to be changed in some respect.