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Medicare reform: This could work

The Wyden-Ryan proposal brings innovation to the market without dismantling the federal program.

December 28, 2011
  • House Budget Committee Chairman Paul Ryan (R-Wis.) takes reporters' questions during a news conference in Washington on Dec. 7, 2011.
House Budget Committee Chairman Paul Ryan (R-Wis.) takes reporters'… (Chip Somodevilla / Getty…)

If you were looking for someone to save Medicare, you might think of Sen. Ron Wyden (D-Ore.), a healthcare wonk who helped found his state's chapter of the Gray Panthers advocacy group for senior citizens. You probably wouldn't pick House Budget Committee Chairman Paul D. Ryan (R-Wis.), whose proposal to replace Medicare with vouchers has made him some senior groups' Public Enemy No. 1. Nevertheless, the two have teamed up to offer a bold and politically risky plan that could help slow the rate of growth of premiums and bring more innovation to the health insurance market without dismantling one of the federal government's most popular programs. Lawmakers should give it serious consideration as they look for ways to solve the government's long-term budget problems.

The Wyden-Ryan plan is, simply put, a much better version of Ryan's previous proposal. Starting in 2022, it would give seniors subsidies that they could use to buy insurance through new regional marketplaces called exchanges, similar to the ones created by the 2010 healthcare reform law. But rather than eliminating Medicare for anyone not yet 55 years old, as Ryan proposed, Wyden-Ryan would continue to make the current Medicare program available as an option through the new exchanges. And rather than shifting the risk of rising healthcare costs onto seniors, the plan would guarantee that subsidies would be large enough to buy at least as much coverage and value as Medicare provides. In other words, the government would provide the same kind of defined benefit that Medicare does today, while giving seniors the option to obtain that coverage somewhere else.

Why bother providing a private alternative, if Medicare works? Because its costs are growing unsustainably. It's already one of Washington's costliest programs, and its burgeoning demand for dollars is draining resources from other priorities. It can't survive on its current trajectory. Although the healthcare reform law took numerous steps to rein in Medicare, including a cap on its budget that increases only slightly faster than the economy grows, it didn't do enough to eliminate the incentives in the system to demand too much care and charge too much for it.

The Wyden-Ryan proposal tries to slow the increase in costs by basing the subsidy amount on the cost of the second-least-expensive insurance plan in the exchange, whether it be Medicare or a private plan offering equivalent or better benefits. That would give insurers the same incentive to compete on price that they have in Medicare's prescription drug plan, whose costs have grown more slowly than projected. That sort of competition is absent from or hobbled in Medicare's other coverage areas. To give seniors more incentive to look at low-cost alternatives, the proposal would let them keep the difference between the federal subsidy and their monthly premiums. It also would let them move back to traditional Medicare if they weren't happy with the alternatives.

Wyden-Ryan would also let small businesses offer employees tax-free subsidies to purchase health insurance through exchanges, an innovation that would give workers more choices and more freedom to retain plans if they change jobs. By joining thousands of other shoppers in the exchange, they should also have access to better deals than their employers do in the market for small group policies.

The proposal isn't a silver bullet. It wouldn't address the fraud, inefficiencies and quality problems that contribute to Medicare's rising costs; it leaves much of that work to the healthcare reform law. Competition may not hold down costs as effectively in insurance as in other goods and services because a patient's demand for care may be completely unaffected by price. Someone might shop around for a better price on a hip replacement, but not on emergency treatment. Private insurers may find ways to attract the healthiest seniors to their plans, sticking Medicare with the sickest and most expensive patients. And by shifting some of Medicare's customer base into private plans, the proposal would reduce Medicare's ability to set prices for physician and hospital services well below the rates negotiated by private insurers. On the other hand, Medicare's low rates have led doctors and hospitals to just shift part of their costs onto non-Medicare patients.

Despite those caveats, Wyden-Ryan could be a significant improvement over the current system. The problem for Republicans is that it relies so much on the healthcare reform law. If that law and its cost-saving initiatives were repealed, Medicare's budget could easily rise faster than allowed by the spending limits in Wyden-Ryan (which track those in the healthcare reform law). As a result, the government would have to find ways to spend less on the program, possibly by forcing seniors to pick up a growing share of the cost of their care.

The problem for Democrats, meanwhile, is that Wyden's work with Ryan undermines a major part of their strategy for winning back control of the House: accusing Republicans of wanting to "end Medicare as we know it." The fact is, the country can't afford Medicare as we know it today, and last year's healthcare reform law started the process of changing it. The Wyden-Ryan plan is a promising addition to that effort.

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