The Wyden–Ryan proposal—a foundation for realistic Medicare reform

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House Budget Committee Chairman Paul Ryan (R-Wisc.) takes reporters' questions during a news conference at the U.S. Capitol Dec. 7, 2011, in Washington.

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  • As 76 million baby boomers retire in the next two decades, Medicare will continue to grow at unsustainable rates @joeantos

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  • The Wyden–Ryan proposal outlines a strategy for Medicare reform that harnesses market forces to control costs @joeantos

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The need for significant Medicare reform is increasingly evident, even to policymakers long accustomed to avoiding this politically explosive topic. A host of commissions and expert groups, ranging from the President’s National Commission on Fiscal Responsibility and Reform to the Heritage Foundation, have argued that the United States is on an unsustainable fiscal path. Medicare is at the center of our fiscal crunch, with outlays that have grown about twice as fast as the economy over the past decade, according to the Congressional Budget Office (CBO).

Even if the substantial reductions in payments to health care providers included in the Affordable Care Act (ACA) are fully implemented and Congress allows the 27.4% reduction in physician payments required under current law to go through, Medicare spending will continue to grow at unsustainable rates. It is more likely that Congress will not enforce such large reductions in provider payments, making Medicare’s drain on the budget that much greater. With the retirement of 76 million Baby Boomers over the next two decades, the program will consume an ever increasing share of the federal budget unless policies are adopted to bend Medicare’s cost curve.

On December 15, 2011, Senator Ron Wyden (D-OR) and Representative Paul Ryan (R-WI) released a Medicare reform proposal based on the concept of premium support.[1] Under their proposal,

"The program’s survival depends on our willingness to make substantial changes over the next few years." -- Joseph Antos

Medicare would be converted from a defined-benefit to a defined contribution program. Instead of guaranteeing to pay for services as they are rendered, as fee-for service Medicare does, the program would give beneficiaries a subsidy (“premium support”) to purchase coverage from one of multiple competing health plans. The motivation behind the approach is to give plans a clear incentive to provide necessary services in a cost-effective manner, which can result in lower premiums or other beneficiary costs, attracting enrollees and increasing the plan’s share of the market.

The new proposal gives minimal bipartisan credibility to a concept that has long been championed by Ryan and that, in various forms, has been supported by experts on both sides of the political aisle.[2] It also represents a considerable compromise from Ryan’s earlier proposal, which was advanced as part of the House budget resolution last spring.[3]

Under the Wyden–Ryan proposal, seniors would have a choice of private plans competing alongside traditional fee-for-service Medicare. All plans, including traditional Medicare, would bid against each other, with premiums based on the plan’s cost of providing the full package of Medicare-covered services. The federal subsidy would be tied to the cost of the second-least-expensive plan in each market, which means that beneficiaries would have the option of enrolling in a less expensive plan and receiving a cash rebate. Anyone choosing a more expensive plan would pay the full additional premium out of pocket.

The subsidy would be greater for beneficiaries with greater health needs or lower incomes, and the average payment would increase with the growth in the gross domestic product (GDP) plus 1%. In addition, low-income beneficiaries who qualify for both Medicare and Medicaid would be protected from premium increases and would receive additional subsidies to cover their out-of-pocket expenses. As has been the approach with other reforms, this premium-support system would not take effect until 2022.

Wyden–Ryan is more realistic in some respects than Ryan’s earlier reform proposal. The most important change is allowing beneficiaries to opt for traditional fee-for-service Medicare if they so choose. Some conservatives criticize this change as backsliding.[4] They correctly see the traditional

Medicare program in its current form as inefficient and anticompetitive. But pretending that the program will disappear in 10 years feeds the worst tendencies of politicians, who would avoid making important but difficult decisions needed to set traditional Medicare on a fiscally sustainable path.

The reality is that traditional fee-for-service Medicare will probably have about 57 million enrollees in 2022, and it could remain a dominant force in the health sector for decades if seniors continue to enroll.[5] That is likely in rural locales and other markets that are dominated by a small number of providers. In such cases, health plans have little bargaining power and thus little ability to compete on price. In other markets where there is less concentration and more competition among providers, health plans should be better able to contract selectively and offer lower-cost options to seniors.

Ryan and Wyden hint at the need for commonsense reforms to traditional Medicare, including a new structure of deductibles and copayments, a cap on catastrophic costs, and a new physician-payment system. They skirt the central problem: a disorganized fee-for-service system and top-down limits on prices paid for services drive the use of more, and more complicated, services. The program’s survival depends on our willingness to make substantial changes over the next few years — before the major reform is implemented — so that traditional Medicare can provide cost-effective care without draining the Treasury.

The current proposal also offers a more politically palatable fiscal target at the cost of achieving fewer “scoreable” savings. Under Ryan’s earlier proposal, the federal subsidy would grow only with general inflation (1.5% in 2012, according to the CBO) instead of the more generous target of GDP plus 1% (a rate projected to total 4.8% in 2012). Not coincidentally, that is the same fiscal target established for the Independent Payment Advisory Board (IPAB) under the ACA.

A 3.3-percentage-point difference in fiscal targets translates to a 1-year increase in program spending of about $20 billion, or about $300 billion over 10 years. Adopting the weaker target means a substantial loss of budget savings, but only if Congress would actually enforce the stricter limits. That may be unlikely given recent history. Over the past 8 years, Congress has overridden even relatively small reductions in physician payments called for by the sustainable growth rate formula. Clearly, a favorable score from the CBO does not guarantee lower program spending.

Will this premium-support proposal based on full competition among private plans and traditional Medicare work? Some critics argue that premium support simply shifts the cost of care to seniors without improving the efficiency of health care delivery. That would be true only if there were no room to improve health care efficiency or if plans ignored opportunities to cut costs, increase market share, and improve their bottom lines.

Under a premium-support system, each additional test or procedure would not generate additional reimbursement from the government. Most Medicare beneficiaries live on fixed incomes and are not in a position to pay more. That reality will force health plans and providers to coordinate patient care and find other efficiencies rather than perpetuating the current fragmented system.

The Wyden–Ryan proposal offers a safety valve. If its critics are correct, then traditional Medicare, with its price controls and government regulations, will be the low-cost plan in every market. Beneficiaries will shift back to traditional Medicare when the cost differences become apparent, and the competition experiment will be declared a failure.

But one should not be fooled. If the alternative to market incentives is price controls wielded by the IPAB, access to necessary services will inevitably be limited, as providers seek more lucrative business.

Given the serious fiscal problems facing this country, slowing the growth of Medicare spending is no longer optional. The only question is how to do it. The Wyden–Ryan proposal outlines a strategy for Medicare reform that harnesses market forces to control costs. It provides a real alternative to the top-down controls favored in the ACA. Paul Ryan and Ron Wyden have defined the policy parameters that could be the basis for real Medicare reform in 2013.

Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI. He also is a commissioner of the Maryland Health Services Cost Review Commission and a health adviser to the Congressional Budget Office.


[1] Wyden R, Ryan P. Guaranteed choices to strengthen Medicare and health security for all: bipartisan options for the future. December 15, 2011 (http://budget.house.gov/UploadedFiles/WydenRyan.pdf).

[2] The Debt Reduction Task Force. Restoring America’s future: reviving the economy, cutting spending and debt, and creating a simple, pro-growth tax system. Bipartisan Policy Center, November 2010 (http://www.bipartisanpolicy.org/sites/default/files/BPC%20FINAL%20REPORT%20FOR%20PRINTER%2002%2028%2011.pdf).

[3] House Committee on the Budget. The path to prosperity: restoring America’s promise. Fiscal Year 2012 budget resolution (http://budget.house.gov/UploadedFiles/PathToProsperityFY2012.pdf).

[4] Suderman P. Paul Ryan’s Medicare compromise. Reason.com. December 15, 2011 (http://reason.com/blog/2011/12/15/paul-ryans-medicare-compromise).

[5] 2011 Annual report of the boards of trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. May 13, 2011 (https://www.cms.gov/ReportsTrustFunds/downloads/tr2011.pdf).

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