Rethinking Medicare: The Paul Ryan Approach

Imagine, for a moment, that you are 85 years old and blessed with a reasonably healthy physical constitution. Like many Americans of that age, you may take blood pressure medication on a daily basis to control a mild heart condition, and you may feel the plague of arthritis starting to creep into your fingers and knees. Nevertheless, all in all, you would probably believe that you have no reason to complain about the health care service system.

But what would you do when you actually need to obtain medical care? Since the advent of the Medicare program in 1965, all Americans over the age of 65 in need of care have simply traveled to the offices of their doctors and flashed their enrollee identification cards. Although these seniors do pay modest monthly premiums, the vast majority of all of their medical costs — from medication expenses to physical therapy fees — is financed by the federal government.

Last week, though, Republican House Budget Committee Chairman Paul Ryan unveiled a vastly different vision for Medicare, one that would utterly transform the program. And then, for good measure, he proposed an equally dramatic transformation of the Medicaid program.

Buy It Yourself!

For Americans who reach age 65 after January 1, 2022, Ryan proposed that the Medicare program simply hand them a list of private insurance companies, and invite them to buy policies for themselves. The federal government would subsidize costs by sending each insurer a “premium support payment” for each enrollee; nevertheless, insurers would be free to establish prices as they see fit, and enrollees would be expected to either pay the difference or survive without insurance.

Medicaid, the health insurance plan for the poor, would be converted into a “block grant” system under the Ryan plan. The federal government would simply hand each state a lump sum of money each year; governors and legislators would then be free to cover as many — or as few — citizens and services as they see fit. Each state would decide for itself whether to charge citizens for insurance coverage; if it decides to do so, Medicaid enrollees would be required to either pay the amounts or live without access to health care.

Ryan argued that these innovations are required to slash the federal government’s budget deficit to manageable levels, and to finance a reduction of the federal income tax rate for the wealthiest taxpayers from its recent levels (between 35% and 40%) to a significantly lower 25%. According to Ryan, the lower tax rates are needed to stimulate future economic growth.

The federal government’s budget would undoubtedly be placed on much sounder footing under Ryan’s plan. However, there would be no guarantee that elderly or poor citizens could obtain health coverage from any insurer.

Obama and Romney

Ironically, Ryan’s proposal regarding the government’s compilation of a health insurer list is actually similar to the concept of Health Insurance Exchanges that are embedded in President Obama’s national health plan. And Obama’s plan is itself similar to Republican Governor Mitt Romney’s universal Health Connector web site for Massachusetts.

Indeed, despite occupying opposite ends of the political spectrum, Obama and Romney each signed legislation that guarantees access to affordable health insurance to all citizens. Ryan’s proposed legislation, though, would seek to ensure a stable government budget and lower income tax rates by withdrawing this guarantee from the seniors and the poor who already possess it.

The Ryan plan implicitly relies on competitive market forces to maintain health coverage, presuming that a significant number of insurance plans would rush into the vacuum that would be created by an expiring Medicare system. But is it reasonable to assume that private firms would rush into this industry sector, simply because a dominant government program is withdrawing from it?

Too Big To Fail

Furthermore, let’s assume for a moment that the private sector does manage to take the place of the current Medicare program by enrolling tens of millions of senior citizens into government subsidized plans. Might those private plans then be deemed “too big to fail” by the federal government?  After all, if such plans ever begin to default on tens of millions of consumer health insurance policies, wouldn’t the government be forced to consider a bail-out?

75 million people, for instance, are now enrolled in the health plans of UnitedHealth Group; this insurer may indeed already be too big to fail. What if the firm signs up tens of millions of additional elderly consumers? How could the federal government then permit it to fail?

An ensuing bailout of the health insurance industry could make the recent banking industry rescue seem like small potatoes. If the Ryan plan results in the replacement of an explicit government program with an implicit government guarantee of private insurers — similar to the government’s implicit guarantee of Fannie Mae debt, for instance — the initiative may indeed fail to achieve its author’s laudable goals.