Evaluating the Congressman Ryan’s Budget Proposal

Congressman Paul Ryan’s budget proposal has made significant waves. Many will fear that the Ryan proposal means the end of Medicare and Medicaid. Although these programs will not end, there will be significant changes.

One can think of many of these changes as a transfer of risk. Consider the Medicare program. Although Medicare will not change for currently those 55 and older, for those currently younger than 55, however, individuals will receive vouchers (i.e., a standardized payment) to cover health insurance premiums to be provided by private insurance. The individual will bear the cost from choosing more generous plans. Further, although risk adjusting the standardized payment will provide sicker patient with a higher premium subsidy, beneficiaries will also bear the risk of higher premiums due to non-risk adjusted factors (unless the premiums are community rated). Medicare will have more predictable spending levels since they will basically know the how much money they will be spending in vouchers each year.

The proposal, however, will only save money if Medicare can control the amount of money its spends on these vouchers. If beneficiaries complain that the vouchers are too low, the government could raise the voucher amount so that it covers all but the most generous plans. The proposal does say that vouchers will increase by inflation and the Medicare Economic index (MEI). However, if the MEI grows significantly, there may be little savings to Medicare for adopting the voucher program.

In the Medicaid program, the proposal shifts the risk to states. Because the Ryan proposal changes the Medicaid program from a cost matching to a block grant program, states who provide more generous benefits must cover the additional costs from state coffers. Those with less generous Medicaid programs can pocket the difference. Although the block grant will be adjusted for population growth and the number of Medicaid-eligible individuals, areas with unpredicted population growth will be on the hook for covering these extra individuals out of their coffers.

The Medicaid block grant program, however, could produce a race to the bottom. States want to attract top talent (i.e., rich people) with low taxes and lots of business opportunities. Providing generous Medicaid benefits increases taxes and increases the likelihood poor people (i.e., those who pay little tax) move into the state. The status quo, however, is the opposite, (a race to the top?) where states try to spend as much as possible to maximize their federal matching dollars. In this economic climate, forcing states to economize is needed.

The voucher system Ryan proposes is similar to both the Purple Health Plan and the current Swiss system.

Note that Ryan’s plan does have some similarities to the Obama Health Reform. He plans to allow small business to pool together to offer coverage to their employees through association health plans (AHPs). He plans to set up State-Based Health Exchanges. And Ryan also plans to create a reinsurance mechanisms to insure pools of high risk individuals. Creating the high risk pool would transfer the risk of the outlier health care expenses to the pool and make the standard benefit health insurance premium more affordable. Funding these high risk pools, historically, has been prohibitively expensive.

Conceptually, I support the Ryan proposal. It moves towards less regulation, more choice, and–most importantly–reduced cost. Right now, health care is too expensive and with the baby boomers retiring, cutting costs must be the number one priority. By letting Medicare beneficiaries have some skin in the game, it will incentivize them to choose lower cost health plans and reduce the growth rate of medical utilization in the near term.  Some analysis, however, has found that switching to vouchers will not in fact reduce cost.

Further details on the Ryan plan are below:

Vouchers for all

• Privately Insured. They will receive a flat, refundable Credit for Health Insurance Coverage.  The tax credit equals $2,300 for individual tax filers and $5,700 for joint filers and families.  In the future, the amount will be inflation adjusted.  The credit may not be used by those enrolled in Medicare or a military health coverage plan.
• Medicare.  Medicare will not change for currently those 55 and older.  For those younger than 55, Medicare will provide a standard payment to subsidize private health insurance purchases for seniors. This amount is the average amount Medicare currently spends per beneficiary, and is indexed for inflation by the projected average of the consumer price index and the medical economic index. The payment replaces all components of the current Medicare program (Parts A, B, and D).  Payment amounts will be risk adjusted based on beneficiary health status.  Not all individuals will receive the full standard payment:
  • <$80,000 ($160,000 for couples): receive full standard payment amount
  • $80,000-$200,000 ($160,000-$400,000 for couples): receive 50% of the standard amount
  • >$200,000 (>$400,000 for couples): receive 30% of the standard amount
• Medicaid.  Medicaid will be not only be converted into a block grant program, but beneficiaries will receive a health care debit cards with adjustable fund amounts, and allows recipients to combine these amounts with support from the health care tax credit.
  • $5,000: <100% of the poverty level (FPL)
  • $4,000: 100%-120% FPL;
  • $3,500: 120%-140% FPL
  • $3,000: 140%-160% FPL;
  • $2,500: 160%-180% FPL
  • $2,000: 180%-200% FPL;
  • An additional $1,000 is made available for families with a pregnancy during a 12-month period,
  • An additional $500 is made available for each family member under the age of 1.

The End of AHRQ?

The Ryan proposal restructures the current Agency for Healthcare Research and Quality [AHRQ],  removes it from the Department of Health and Human Services, and renames it the Healthcare Services Commission [HSC].  The HSC will be  managed by five commissioners chosen from the private sector, appointed by the President, and approved by the Senate.  It seems that this proposal would take away a lot of AHRQ’s power and funding for identifying high-value medical care.

Malpractice Reform

The Ryan proposal caps non-economic damages for malpractice lawsuits.  Although some evidence finds that reducing malpractice damages could reduce supplier-induced demand other studies have shown that capping non-economic damages will increase the provision of unnecessary services.