Three Reasons Why The Medicare Reforms In Ryan’s New ‘Path To Prosperity’ Still Set Us On The Wrong Track

House Budget Chairman Paul Ryan (R-WI) has released a new version of his ‘Path To Prosperity’ budget that makes significant concessions from Ryan’s original plan to privatize the Medicare program, but would still take us down a fairly bumpy road that could throw many seniors out of the car altogether.

Like last year’s Ryan/Wyden reform plan, beginning in 2023, the guaranteed Medicare benefit would be transformed into a government-financed “premium support” system. Seniors currently under the age of 55 could use their government contribution to purchase insurance from an exchange of private plans or — unlike Ryan’s original budget — traditional fee-for-service Medicare. That annual government contribution will no longer be indexed to an arbitrary indicator of inflation plus 1 percent, but would increase with health care costs and rely on market competition to control health care spending. Individuals who choose a plan that costs more than the benchmark would pay the difference, while those who enroll in a lower-cost plan would receive a rebate. Lower-income seniors would also be eligible for additional assistance.

Finally, the budget adopts President Obama’s a per capita cost cap of GDP growth plus 0.5 percent (while repealing the ACA’s Independent Payment Advisory Board), which would act as a “fallback to assure the federal government budgetary savings” and encourage providers to adopt greater efficiences. But since it’s unclear how this cap would be enforced, it’s likely that the cap would limit the government contribution provided to beneficiaries. Since the proposed growth rate is much slower than the projected growth in health care costs, CBO estimates that new beneficiaries could pay up to $1,200 more by 2030 and more than $5,900 more by 2050.

But that’s not the only problem with Ryan’s plan:

1. Ryan breaks up the large market clout of Medicare and pushes seniors into less efficient private insurers. As Rick Foster, Medicare’s chief actuary, admitted during a recent House Budget Committee hearing, since traditional Medicare is far better at advancing delivery system reforms, securing lower reimbursement rates with health care providers, and operating under minimal administrative overhead, transferring Medicare beneficiaries from free-for-service Medicare into the private health market would not contain overall health care spending. It would only shift costs.

2. Seniors who enroll in traditional Medicare will likely pay more for their benefits. That’s because under Ryan’s budget, private plans will be able to cherry-pick the healthiest beneficiaries from traditional Medicare and leave sicker applicants to the government. The budget states that enrollees would be “guaranteed a plan that is at least the value of the traditional fee-for-service Medicare option,” but private insurers could still attract a healthier population by simply ratcheting down services that sicker beneficiaries rely on (like chemotherapy) and building up coverage for healthier applicants (like preventive services). Should they succeed, traditional Medicare costs will skyrocket, forcing even more seniors out of the government program. Seniors who are priced out of traditional coverage over time would enroll in private plans and receive care through more restricted provider networks relative to what they currently enjoy (where nearly all hospitals, doctors, nursing homes participate). Ryan pledges that “CMS would also conduct an annual risk review audit of all insurance plans participating in the Medicare Exchange,” but as the experience with Medicare Advantage demonstrates, existing tools are still insufficient to address cherry picking.

3. The “premium support” credits won’t keep up with health care costs. Fortunately, the vouchers seniors will receive are no longer indexed to inflation. They instead rely on actual average bids in any given geographic area and would do a better job of keeping up with health care costs every year than the original Ryan proposal. But seniors in high cost Medicare areas could still experience a cost-shift and would be responsible for the difference between the amount of the premium credit and the actual cost of the policy.

So there, in a nutshell, is the problem — at least from a policy perspective. Despite its concessions, the new budget moves the health care system closer to the Ryan ideal, in which future Congresses would be able to reduce federal costs by eating away at the premium credit seniors receive. The plan does little to address the root of the cost problem — changing how we pay doctors and hospitals by moving away from fee-for-service payments — and instead limits the government’s commitment by shifting more costs to beneficiaries.