Left And Right Extremists Fail To See Paul Ryan's Win-Win Entitlement Reform

Left And Right Extremists Fail To See Paul Ryan's Win-Win Entitlement Reform
March 27, 2013

Peter Ferrara

Peter Ferrara is senior fellow for entitlement and budget policy at The Heartland Institute, a... (read full bio)

The New York Times told its readers on March 12 that Paul Ryan’s proposed 2014 budget involves “eliminating Medicare’s guarantee to retirees” and “dispensing with Medicaid and food stamps….”  But Joe Farah, CEO of WND News, told his readers on March 15 that Ryan’s budget “fails to address unsustainable ‘entitlement’ programs.”  They cannot both be right.  But they can both be grievously wrong.

We hear a lot of talk about how Ryan’s proposed traditional budget is so “extreme.”  But it is these two comments that represent the extremes on the issue.  This kind of disconnected from reality rhetoric from both sides is what makes our democracy dysfunctional, unable to seriously discuss major issues.

A Better Medicaid for the Poor

Ryan’s proposals for Medicaid and food stamps would simply extend the proven, enormously successful, 1996 welfare reforms of the old AFDC program to those two programs.  The 1996 AFDC reforms returned the share of federal spending on AFDC to each state in the form of a “block grant” to be used in a new welfare program redesigned by the state based on mandatory work for the able bodied.  Like Medicaid, federal funding for AFDC previously was based on a matching formula, with the federal government giving more to each state the more it spent on the program, effectively paying the states to spend more.  The key to the 1996 reforms was that the block grants to each state were finite, not matching, so the federal funding did not vary with the amount the state spent.  If a state’s new program cost more, the state had to pay the extra costs itself.  If the program cost less, the state could keep the savings.  The reformed program was renamed Temporary Assistance to Needy Families (TANF).

The reform was shockingly successful, exceeding even the predictions of its most ardent supporters.  The old AFDC rolls were reduced by two-thirds nationwide, even more in states that pushed work most aggressively, as those formerly on the program went to work, or married someone who worked.

As a result, in real dollars total federal and state spending on TANF by 2006 was down 31% from AFDC spending in 1995, and down by more than half of what it would have been under prior trends.  At the same time, because of the resulting increased work by former welfare dependents, the incomes of the families formerly on the program rose by 25%, and poverty among those families plummeted.

Medicaid currently pays doctors and hospitals only 60% or less of costs for their health services to the poor.  Consequently, the poor on Medicaid face grave difficulties in finding doctors and hospitals that would serve them, and in obtaining timely and essential health care.  They suffer worse health outcomes as a result, including premature death.  Scott Gottlieb of the New York University School of Medicine writes in a March 10, 2011 commentary in the Wall Street Journal (“Medicaid Is Worse Than No Coverage at All”),  “In some states, they’ve cut reimbursements to providers so low that beneficiaries can’t find doctors willing to accept Medicaid.”

What the states could do under Ryan’s proposed reforms is shown by the example of Rhode Island, which received a broad waiver from federal Medicaid requirements in return for a fixed cap on federal financing for 5 years.  The state turned to managed care, competitive bidding by health care providers, and comprehensive case management by private insurers for those on Medicaid.  It shifted more long term care out of nursing homes to home and community-based care.

The Lewin Group, a top health care consulting firm, studied the reforms and concluded that they were “highly effective in controlling Medicaid costs” while improving “access to more appropriate services.”  Indeed, the state’s costs were reduced by nearly 30% in the first 18 months alone.  Yet the poor enjoyed assigned health providers to ensure they received essential care.

Alternatively, states could serve the poor by using the program to provide premium assistance that would help the poor to pay for the private health insurance of their choice in the marketplace.  Such premium support would free the poor from the Medicaid ghetto, enabling them to obtain the same health care as the middle class, because they would be able to buy the same health insurance in the market.  Such market health insurance has to pay the doctors and hospitals sufficiently to enable those with that insurance to obtain timely, effective health care, or their insurance would have no customers.

This would be an enormous gain for the poor.  Yet, CBO scores extending these same reforms to Medicaid as saving $750 billion over 10 years.  That is why it involves win win entitlement reform.

The poor would similarly gain from extending these same reforms to food stamps, just as they gained from the reforms of AFDC, with similar savings for taxpayers.  This cannot remotely be characterized as “dispensing with Medicaid and food stamps,” as the esteemed New York Times tells us.  The Times these days reads like a college Marxist student newspaper.

A Better Medicare for Seniors 

The Senate Democrat budget, which actually does fail to address unsustainable entitlement programs, says regarding Ryan’s budget, “House Republicans would dismantle Medicare….”  But Ryan’s budget proposes to increase Medicare spending from 2014 to 2023 alone by 70%.  That cannot be accurately characterized as dismantling Medicare.

The Democrats add, “the Republican plan would privatize Medicare by simply handing beneficiaries vouchers that are capped at growth levels below projected health care costs.”  But this is not how the Republican proposal works at all.  The Democrat Party is just abusing vulnerable seniors with dishonest, disconnected from reality rhetoric like this.

Ryan’s Medicare reforms would simply extend the more modern, popular, and successful policies of Medicare Parts C and D to the old fashioned Medicare Parts A and B.  Medicare Part D is the prescription drug program.  Just like Ryan’s proposed Medicare reforms, Part D provides premium support payments to seniors, which they use to purchase the private prescription drug coverage of their choice.  Because of the private market competition, and incentives for seniors to choose lower cost plans, Part D costs have run 40% below projections.  Compare that to Parts A and B, which by 1990 cost 10 times the original projections for that year when the program was adopted.

Medicare Part C is Medicare Advantage, under which nearly 30% of seniors have already chosen private insurance to provide all of their Medicare coverage.  Seniors believe they get a better deal through this highly popular program due to choice and competition.

Ryan would empower workers under age 55 today with the choice of a private plan competing alongside traditional Medicare when they retire in the future.  All those private plans must provide at least the same benefits as Medicare today to participate.  Medicare would provide these future seniors with a premium support payment they could use to pay for or offset the premium of the private health insurance they chose.  That premium support payment is set by competitive bidding under rules ensuring it will be enough to pay for at least two of the competing plans providing at least the same benefits as Medicare.  Or seniors even in the future could choose to stay in Medicare just like it is today.  These Medicare benefits under Ryan’s reforms are just as guaranteed as Medicare benefits are today.

Ryan includes extra assistance for lower income seniors empowering them with more choices, while means testing the assistance for higher income seniors like Medicare Parts B and D do today.  Ryan’s Medicare would also provide higher payments to the insurers for sicker seniors.  It would also assess a fine on insurers covering more low-risk seniors, and pay incentive payments to insurers covering more high-risk seniors.  This would create special competition in the private market focused on serving the sickest most in need of first rate health care.

So Ryan’s reforms do not involve “simply handing beneficiaries vouchers that are capped at growth levels below projected health care costs.”  Congressional Democrats have a responsibility to understand Republican proposals so they can truly determine if they support the reforms or not.  But like little children, Congressional Democrats just close their eyes and stomp their feet “No!”

This Medicare reform plan was actually developed by President Clinton’s Medicare Commission, so it had bipartisan support at a time when the Democrat Party had grown ups in influential positions, rather than just adolescent, Marxist, revolutionaries posing in grown up drag.  The legislation providing for these reforms was actually introduced in the Senate by liberal Democrat Sen. Ron Wyden of Oregon.  It has been endorsed by long time liberal academic Alice Rivlin, the Godmother of the CBO, serving as its first director.

Indeed, the plan was developed from an initial proposal in 1995 by two lifelong liberal scholars, Henry Aaron of the Brookings Institution, and former CBO Director Robert Reischauer.  They were the first to propose a premium support system for Medicare in a 1995 article in the journal Health Affairs.  The Reischauer/Aaron concept was later embodied in Medicare Parts C and D in the 2003 Medicare reforms, where they have already worked very effectively.

By contrast, President Obama’s Affordable Health Care Act, aka “Obamacare,” supported by all of these Senate Democrats, cut Medicare by $716 billion over the first 10 years alone.  According to the Annual Report of the Medicare Board of Trustees for 2010, over the first 20 years of full implantation of the Affordable Care Act, 2014 to 2033, Obama’s Medicare cuts would add up to $5 trillion.  According to the 2010 Financial Report of the United States Government, the present value of President Obama’s total future cuts to Medicare total $15 trillion.

These are all primarily cuts in payments to doctors and hospitals for health care services to seniors under Medicare.  Medicare’s Chief Actuary Rick Foster reports that by the end of this decade, Medicare will be paying less to doctors and hospitals for health care for seniors than Medicaid pays for health care for the poor.  And Medicare will be falling farther and farther behind Medicaid each year.  Ultimately, Medicare payment rates will be one-third of what will be paid by private insurance, and only half of what is paid by Medicaid.

Under Obamacare, soon enough seniors will be lined up behind welfare mothers in trying to find doctors who will see them and hospitals that will admit them.  These cuts affect seniors already retired today, not just those years into the future.

Foster reports that even before these cuts already two-thirds of hospitals were losing money on Medicare patients.  In a few short years, hospitals that serve seniors in particular will begin closing, and retirees will have increasing difficulty obtaining access to care.  As Harvard University health economist Joe Newhouse explains, seniors will likely have to seek care at community health centers and safety net hospitals.

And this does not even count any further cuts that may be adopted by Obamacare’s Medicare death panel, the Independent Payment Advisory Board (IPAB).  That Board will be composed of 15 unelected, appointed, Washington bureaucrats with the power to adopt still more Medicare cuts that would become effective even without the approval of Congress.

Ryan further explained the effect of the reforms in an Address at the AARP convention last September:

“Now in order to save Medicare for future generations, we propose putting 50 million seniors, not 15 unaccountable bureaucrats, in charge of their own health-care decisions.  Our plan empowers future seniors to choose the coverage that works best for them from a list of plans that are required to offer at least the same level of benefits as traditional Medicare.  This financial support system is designed to guarantee that seniors can always afford Medicare coverage – no exceptions.  And if a senior wants to choose the traditional Medicare plan, then she will have that right.  Our idea is to force insurance companies to compete against each other to better serve seniors, with more help for the poor and sick – and less help for the wealthy.”

These reforms are better for seniors than Obamacare’s Medicare most of all because they free seniors from the cuts and government health care rationing involved in Obamacare’s mangling of Medicare, by allowing them to choose private insurance paying market rates instead.  Only through such private insurance will seniors be able to continue to enjoy the high quality, most advanced care they have come to expect from Medicare.

Ryan concluded in his address to AARP, “You see, Medicare is going bankrupt.  Everyone understands this…So the disagreement isn’t about the problem.  It’s about the solution.  [The President’s] top down bureaucratic cuts to Medicare just don’t work.  Providers stop providing care.”  Ryan’s reforms reduce future Medicare spending by no more than President Obama does through Obamacare.  The difference is that the Ryan spending savings are achieved through market incentives, senior choice, and marketplace competition that has been proven to work.

This is win win entitlement reform, because the result would be a better Medicare for seniors than Medicare under Obamacare, yet the taxpayers would enjoy major savings from the reforms.

Health Care for All Without Obamacare

Ryan’s budget also proposes to repeal Obamacare, with a CBO scored savings of nearly $2 trillion over the first 10 years alone.  Several years after implementation, Obamacare would still leave 30 million uninsured, according to CBO.  Yet, free market health policy economists, in particular those led by John Goodman at the National Center for Policy Analysis, have already long proposed a comprehensive health care safety net that would assure essential health care for all, with no individual mandate and no employer mandate.  These reforms are fully consistent with Ryan’s proposed budget as well.

The first component of such reform would be the Medicaid block grant reforms that are already included in Ryan’s budget.  Consequently, if you are too poor to buy health insurance, the government would give you the additional funds you need to buy it.

The second safety net component would be High Risk pools in each state.  Those uninsured who become too sick to purchase health insurance in the market, perhaps because they have contracted cancer or heart disease, for example, would be assured of guaranteed coverage through the risk pool.  They would be charged a premium for this coverage based on their ability to pay, ensuring that they will not be asked to pay more than they could afford.  Federal and state funding would cover remaining costs, which could be financed through the Medicaid block grants as well.  Similar risk pools already exist in over 30 states, and they work well at relatively little cost to taxpayers because few uninsured actually become uninsurable in the private market.

Consequently, if you are uninsured and become too sick to then get market insurance, you are assured of getting essential coverage.

The third safety net component would be guaranteed renewability, which means as long as you continue to pay your premiums, the insurer cannot cut you off because you get sick, nor can it impose discriminatory premium increases any greater than for anyone else in your original risk pool.  Contrary to President Obama’s misleading rhetoric, insurance companies in America have never been allowed to cut off those covered after they get sick, which would be insurance fraud.

Consequently, if you have health insurance, you will be able to keep it, and so will be assured continued access to essential health care.

The fourth component would be for the government to offer every individual the same, uniform, fixed-dollar subsidy for health insurance, whether employer-provided or individually purchased, through a refundable tax credit for all replacing the current tax preference only for employer health insurance.  The credit would be equal to what we expect to spend from public and private sources on free care for each person on average when he or she is uninsured.  If an individual chooses to be uninsured, the subsidy would be sent to a safety net agency providing health care to the indigent in the community where the person lives, so he could get health care there as well.

Consequently, the uninsured as a group would effectively pay for their own care, eliminating any free rider problem, without any individual or employer mandate.  That is because by turning down the tax credit for health insurance by choosing not to insure, the uninsured would pay extra taxes equal to the average amount of the free care given to the uninsured.  The subsidies for health insurance would then effectively be funded by the reduction in expected free care the insured would have consumed if uninsured. This could be implemented through Ryan’s proposed tax reform.

This again would be win win entitlement reform, achieving universal health care for all, with enormous savings for taxpayers.

[First Published at Forbes]

Peter Ferrara

Peter Ferrara is senior fellow for entitlement and budget policy at The Heartland Institute, a... (read full bio)