Medicare for a New Century
Paul Ryan's plan would modernize a program stuck in 1965.
Wall Street Journal editorial – April 7, 2011
Liberals seem delighted that Paul Ryan and the GOP have decided to charge the fixed bayonets of Medicare reform, denouncing the new House budget as a crime against seniors, humanity, and so on. Republicans are taking a huge political risk, but they are now setting the reform agenda, and their honesty may even oblige a national debate about the future of an entitlement state that can't survive in its current form.
Mr. Ryan's core insight is that Medicare needs to be modernized if it is to survive. The federal insurance program for the elderly has barely changed since 1965, several health-care revolutions and trillions of misspent tax dollars ago. The GOP plan—known as premium support—would rationalize Medicare's burden on taxpayers, while introducing market competition to control costs.
As Democrats build their re-election bids around Mediscare demagoguery, they're pretending that the choice is between "privatization" and a free lunch. Mr. Ryan has done a service in exposing this illusion. Nothing will sooner finish off "Medicare as we know it" than to continue its present march into insolvency. His is the first credible plan endorsed by either party for preserving the safety net.
Today traditional Medicare is the largest buyer of health care in America. It is also the worst buyer. The government sets prices for thousands of services, then pays nearly any doctor or hospital that a patient visits. The same arbitrary fee schedule applies to the best hospital and the worst hospital, regardless of the quality or value of the care delivered, and the bills are sent to taxpayers.
This deliberate suppression of the price mechanism has helped to turbocharge U.S. health costs. Providers who find ways to deliver better medicine at a lower cost aren't rewarded, as they would be in any other industry. Medicare spending is growing at a 7.2% annual clip, far faster than the economy. Spending is due to double over the next decade, feeding on more and more of the federal fisc and national wealth.
The 45 million Medicare beneficiaries enjoy the security of "free" health care and its no-questions-asked payments. Still, the entitlement is stuck in a Great Society time warp. It offers no protection against catastrophic expenses, the most basic function of insurance. Coverage doesn't keep up with medical progress; prescription drugs weren't added until 2003. Seniors are docked a $1,000 deductible for a single hospital stay, though nine of 10 buy medigap coverage to backfill these and other holes. Where else do people buy insurance for their insurance?
Under the Ryan premium support model, seniors would instead choose from a menu of guaranteed private insurance options of the kind younger, private-sector workers have come to expect. These plans would be subsidized by a "defined contribution," roughly equal to what the government now spends per person. This subsidy, about $15,000, would grow over time with consumer prices, but seniors who wanted more expensive plans would pay the difference out of pocket.
Premium support would create a market reward for the services that consumers value. Because seniors would be chipping in at the margin, only above the fixed-dollar subsidy, most would favor lower premiums. Insurers would compete to supply them, and providers in turn would have a reason to innovate in health-care delivery and improve what has been their negative productivity rate.
Premium support would not cure all of America's health ailments, and missing in action in the House budget is a comparable reform for the rest of the market. But Medicare is so big that if it doesn't change, nothing else can. Simply unwinding Medicare's price controls would be an historic achievement.
That said, Granny will not be turned loose unsupervised into the market wilds. The subsidies will flow through Medicare, only to regulated insurers and government-approved plans. It does not go as far as Mr. Ryan's previous "roadmap," which offered direct cash vouchers for individuals who preferred to buy insurance themselves. The subsidies are means-tested, so the poor would receive more support, as will sicker and chronically ill patients. They wouldn't kick in until 2022, more than enough time for people to adapt and exempting everyone older than 55 if they wished.
Mr. Ryan moderated his ambitions not merely because the fiscal crisis is so urgent, but because reforms of this order are so unusual. Seniors and other voters may be unnerved, especially when AARP and politicians beat the Mediscare drums. As they inspect the details, however, seniors may be surprised to learn that premium support is not an untested idea. It is even routine in parts of Medicare itself.
Traditional Medicare would look a lot like Medicare Advantage, which gives almost one of four seniors today private alternatives. Premium support forms the architecture of the Medicare drug benefit too, and as a result it has cost 30% less than almost anyone predicted.
The same concept governs the Federal Employee Health Benefits Program, which insures everyone from postal workers to Members of Congress. The same is true for several large university systems and Calpers, the benefits program for public workers in California. None are known as incubators for the pitiless ideology that Democrats impute to Mr. Ryan.
Despite this experience, one common criticism is that the subsidies wouldn't keep pace with the rising health costs that Medicare now promotes. But medicine has always proven adept at reorganizing itself when the incentives change, and costs would fall over time if more patients were demanding their money's worth.
Health care's lack of accountability to consumers helps explain why Medicare's unfunded liabilities over the next 75 years are about $31 trillion. That number is beyond human comprehension and among the reasons that creating one more new entitlement in ObamaCare was so reckless. Keeping Medicare's generational promise—that children assent to be taxed to pay for their grandparents' health care so that their grandkids can one day pay for theirs—would mean under current trends that every income tax rate, in every bracket, would need to more than double.
The brutal arithmetic is that total federal health spending is about 10% of GDP today and on pace to hit 15% in 20 years. The liberal response is more central planning and eventually the political rationing of care, even as taxes continue to climb. The alternative that Mr. Ryan has offered, including an ObamaCare repeal and a conversion of Medicaid into block grants to states, would bring that share down to 6% as premium support began to limit Medicare's open-ended spending.
The reality that Mr. Ryan has recognized is that Medicare can't be fixed with nips and tucks. Premium support is easily as important an advance as the shift from defined-benefit pensions to 401(k)s, and the transition could be as smooth. Major changes to the social compact must be grounded in some rough public consensus, and Republicans now have an obligation to persuade the country that their reform is the only one with a chance of saving Medicare for future generations.