Barack Obama and Paul Ryan agree that Medicare spending is rising too quickly to be sustainable, but their proposals to rein in Medicare are at opposite ends of the policy spectrum. The president argues for toughening government price-setting arrangements through the yet-to-be formed Independent Payment Advisory Board (IPAB). The congressman espouses premium support, which gives seniors a capped subsidy that they can use to purchase a Medicare-approved health plan. One is a top-down approach, relying on the regulatory power and financial leverage of the federal government. The other is a bottom-up approach, relying on health plans to tailor their offerings and trim their costs to attract market share.
While it is difficult for any business to say no to the government, particularly when the government is the largest single payer, no one should count on the president's new proposals to solve our fiscal crisis. CBO estimates that the IPAB would generate about $15 billion in savings between 2015 and 2019 based on its current target growth rate of GDP plus one percentage point. That's less than half a percent of the $3.1 trillion that CBO thinks Medicare will spend over the same period. The White House proposes a new target of GDP growth plus 0.5 percentage point, which would increase the savings but not enough to matter.
The president's new fiscal framework signals his unwillingness to take on Medicare's spending problems. The Affordable Care Act (ACA) cut about $500 billion from Medicare, but that money was a down payment on $1 trillion in new health entitlements. The incentives that drive Medicare spending remain unchanged, guaranteeing even larger spending reductions in the future as fiscal reality can no longer be ignored.
In contrast, the Ryan proposal pulls no punches, at least after the first decade. Instead of the current open-ended Medicare subsidy, premium support payments for people turning 65 in 2022 would grow with consumer prices—substantially slower than currently. That means the virtually guaranteed payments to the health sector would be capped, and Medicare beneficiaries would be responsible for more of their health spending. How much more depends on how the health industry reacts to the new policy.
Premium support does not mean the end of Medicare. Premium support accepts the fact that resources available to Medicare are not limitless, and it provides beneficiaries with realistic health plan options. It also is a wake-up call to the health industry to provide more efficient and effective care if plans expect to operate successfully in a world of resource constraints. If the industry responds in that way, unnecessary costs will be trimmed by the providers themselves. But the industry might seek political relief instead, which would mean higher taxes rather than increased efficiency. Our health care and our fiscal future depend on Congress just saying no, and meaning it.
Joseph Antos is a Wilson H. Taylor Scholar in Health Care and Retirement Policy at AEI