Paul Ryan’s Budget Alternative: Massive Rationing

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Paul Ryan has gone where I thought no Republican would dare to tread and put out an alternative budget proposal that would, in fact, balance the budget over the long term. Part of the program is draconian real cuts in all domestic programs—less money for Pell Grants, less money for local schools, less money for the FBI, less money for job training, less money for National Institutes of Health research, less money for food stamps, etc. And part of the program is cuts in Social Security—people work be getting what they’ve been promised. And part of the program involved Medicaid in a way I don’t really understand.

But over the long haul the most important thing here is Ryan’s proposed cuts in Medicare.

Spending on federal health care programs is the biggest driver of long-run projected deficits:

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The reason for this is fairly simple. The way Medicare works is that if you’re old, and you’re sick, the government will largely pick up the tab for your health care. Back in 1975 “your health care” referred to something pretty cheap. By 2005, health care had become much more expensive. And by 2035 it will be even more expensive. And Ryan’s proposal, simply put, is for the government to not pay for it.

Rather than have the government pay for your health care, the government will give you a voucher with which to buy private insurance. Initially, the voucher will be worth the same amount as the average cost of providing health care to people. But the insurance company will have higher administrative costs than Medicare, and it will have profit margins and such that Medicare doesn’t have, and it will pay more for services than Medicare does. So on day one you’ll lose your Medicare coverage and instead get a voucher that costs the government the same amount, but buys you much less in the way of health care services.

The way the government saves money over the long run, however, is that over time the voucher won’t keep up with the cost of health care. As the CBO explains in its analysis (PDF) of Ryan’s outline, the voucher will be “indexed to grow at a rate halfway between the general inflation rate, as measured by the consumer price index for all urban consumers (CPI-U), and the rate of price inflation for medical care, as measured by the consumer price index for medical care (CPI-M).” That means the value of the voucher “would increase at an average annual rate of 2.7 percent for the next 75 years, in comparison with the average annual growth rate of nearly 5 percent that CBO expects for per capita national spending for health care under current law.”

In other words, Ryan is proposing to ration care for seniors. He’ll take the baseline level of per capita medical costs for seniors in 2020 and then draw a curve representing 2.7 percent annual growth and say that any costs above that won’t be covered. If grandma’s got a bunch of money, then she can spend her money. If not, then the plug is pulled.

One could speak about this in detail, but in brief my take is that it’s totally unworkable. The whole reason Medicare was put in place in the first place, rather than just hiking Social Security benefits, is that the individual insurance market doesn’t work and it especially doesn’t work for senior citizens. As I observed in a little-read December 29 post, this would change if congress passed the Obama health care plan. If Obama’s efforts to create a viable regulatory framework in which individuals can buy private health insurance (a) pass congress, and (b) turn out to work well and be popular, then you can imagine a version of Ryan’s plan being put into place. But in the absence of that kind of reform, I just don’t see how you can do this, which is presumably why the implementation is delayed all the way to 2021 which helps Ryan avoid needing to think about implementation details.