Are you confused about the future of Medicare?
Everyone knows that Medicare reform is critical for bringing the federal government's long-term structural debt and deficit into better balance. Yet during the months leading up to the March 2010 signing by President Obama of his signature health care reform bill—the Patient Protection and Affordable Care Act—Republicans assailed it for planned cutbacks in projected Medicare spending that totaled almost $500 billion. Former Republican National Committee Chairman Michael Steele called for a senior bills of rights in the Washington Post on Aug. 24, 2009, that would "protect Medicare and not cut it in the name of 'health-insurance reform.'" Republicans have now lined up behind Representative Paul Ryan's (R-Wis.) proposal that dramatically slashes Medicare spending even more for anyone under age 55.
Say what? No wonder many people are confused. To cut through the claims and counterclaims, examine a statement Ryan has made repeatedly. In his Pathway to Prosperity booklet, Ryan describes his plan for Medicare this way: "Starting in 2022, new Medicare beneficiaries will be enrolled in the same kind of health-care program that members of Congress enjoy." Sounds good, right? The thing is, there is but a surface resemblance. The differences are crucial and illustrate why his plan isn't reform.
In essence, under the Ryan plan Medicare recipients in 2022 would get a "premium subsidy" paid directly to a health plan of their choosing. The value of the subsidy would increase at the rate of the consumer price index; the Congressional Budget Office estimates the subsidy would be worth $8,000 initially. The yields on Treasury Inflation Protected Securities signal that investors expect consumer price inflation to average a bit over 2 percent over the next 30 years. Medicare per capita spending rose at an average annual rate of 6.7 percent between 1985 and 2009. The "cost" savings on Medicare come largely from older folks dipping deeper into their pockets and the government picking up less of the Medicare tab.
Not Exactly Comparable
The federal government pays two-thirds of the health-care premium tab for members of Congress. (The current salary in Congress is $174,000 vs. a median income of $21,000 for Medicare beneficiaries.) The Kaiser Family Foundation estimates that the Medicare program would pay 58 percent of the tab for the typical 65-year-old in 2022, while under the Ryan plan the percentage shrinks to 39 percent. Even more striking, the out-of-pocket cost under Ryan's proposal for the typical 65-year-old would be more than twice as large as with traditional Medicare—$12,500 vs. $5,630. The reason for the large gap is that the cost of providing benefits is greater with a private insurance system than under traditional Medicare. Private plans have higher administrative costs and historically pay higher fees to providers than traditional Medicare.
These numbers alone say the cost-shifting embedded in the Ryan plan is unrealistic and the comparison to the health-care plan of Congress misleading.
Of course, the idea animating Ryan on Medicare is that those higher-cost projections are wrong because the changes will unleash the power of the market. Just as with the federal employee health plan, cost-conscious seniors would get to shop for the private insurance plan that best meets their needs. The competition by millions of seniors would force medical professionals, hospitals complexes, insurance companies, and other providers to embrace strategies for greater efficiencies and lower costs. It's a genuine leap of faith considering that insurance companies haven't exactly held the line on premium price increases. For instance, the average family premium has risen 27 percent since 2005 and 114 percent since 2000. In 2011, premium rates for federal employees will increase an average 7.2 percent. Last year the hike was 8.8 percent. "We tried a version of the Ryan plan in the 1990s, and it was called managed care," says David Cutler, an economist at Harvard University and a supporter of the Affordable Care Act. "It failed, and there's no reason to try it again."
Decline of Defined Benefit Plans
Another reason for skepticism: U.S. workers' experience with the 401(k) retirement plan. Three decades ago Corporate America moved away from the traditional defined benefit pension plan in favor of the 401(k). Yet at a savings and investing conference May 23-25 at Boston University, participants repeatedly highlighted the flaws in that shift. Half the workforce isn't covered by a pension plan at work. About one in five workers doesn't participate in their company plan, although that figure is rising due to automatic enrollment. At the end of 2009, the average 401(k) balance was $58,351, according to the Employee Benefits Research Institute in Washington, D.C. It's hard for people to save—and figures such as these suggest many workers will fall short of a comfortable retirement. Financial literacy is abysmally low even though investment decisions about stock and bond allocations will decide a retiree's future standard of living. "The 401(k) isn't getting the job done," TIAA-CREF Chief Executive Roger W. Ferguson Jr. said at the conference.
It's hard enough for workers in their 30s and 40s to manage their retirement savings choices. The Ryan plan would demand those 65 and older also to become savvy consumers of health insurance plans and their policies. "There is a presumption that more choice is better," says Zvi Bodie, finance professor at Boston University. "But for many people at that age, more choice is horrible."
Instead of members of Congress and the federal health plan, the better comparison may be Medicaid. It's the federal-and-state health program for poor families, low-income elderly, and the disabled. Medicaid is a means-tested program, and Ryan would like to do the same with Medicare. The wealthy would receive a much lower subsidy than everyone else. State and local governments are cutting into Medicaid as they struggle to balance their budgets. It will be easier for the federal government to target Medicare in a similar manner the more that system is seen as a welfare program rather than a universal benefit.
The bottom line for fixing Medicare: Back to the drawing board.