Medicare Needs the Ryan Plan’s Cost Controls

This article appeared on US News and World Report Online on August 17, 2012.
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Medicare in its current form is clearly unsustainable. This isn’t rocket science — just arithmetic. A typical couple retiring last year will, on average, pay $150,000 in Medicare taxes over their lifetime, but receive more than $350,000 in benefits. As a result, the program ran a combined deficit of more than $288 billion last year. Going forward, the most optimistic scenario puts Medicare’s future unfunded liabilities at more than $35 trillion. More realistic estimates suggest that the shortfall could actually exceed $90 trillion.

The question, therefore, isn’t whether to reform Medicare, but how.

President Barack Obama would reform it from the top down, empowering a 15‐​member board of unelected bureaucrats, the Independent Payment Advisory Board to cut reimbursements to doctors and hospitals. Whether or not such cuts are successful in reducing long‐​term Medicare costs, they will make it more difficult for seniors to see their doctor. In fact, Medicare’s own actuaries predict that as many as 15 percent of hospitals could close, and some estimates suggest that up to 40 percent of doctors will stop seeing Medicare patients.

In contrast, Paul Ryan would reform Medicare from the bottom up by increasing competition and consumer cost‐​sharing. If anything, in fact, his plan is probably too timid since it makes no changes to the system for anyone age 55 or older. Even those under age 55 would still have the option to remain in conventional Medicare if they wish to do so. However, the growth in spending under traditional Medicare would be capped at roughly the same growth rate as proposed by Obama.

Those who wished another option, however, could choose instead to receive a voucher or premium support payment based on bids by private insurers in their area. Seniors who choose a lower‐​cost plan can keep the difference, while those who choose to enroll in a more expensive plan will have to pay the difference between the government payment and the premium.

Does that mean that, over time, many seniors will have to pay more to receive the same level of benefits as today’s seniors? Probably. But as noted above, Medicare simply cannot continue to provide that level of benefits in the future without bankrupting the country. Ryan’s plan puts the decision over how to balance paying more or getting less in the hands of each individual consumer. In contrast, Obama would simply impose that decision on every senior from above.

By increasing competition and forcing healthcare consumers to make value‐​based decision, the Ryan plan holds the prospect of finally restraining the growth of Medicare costs. And it does so by trusting and empowering consumers rather than government bureaucrats. It may not be perfect, but it’s a big step in the right direction.