One of the key Republican criticisms of last years health-care lawthe Patient Protection and Affordable Care Act, or PPACAwas that its Medicare cuts were so aggressive as to be illusory. Skittish future Congresses would surely repeal these cuts, Republicans argued, so PPACA would wind up widening the federal budget gap despite the Congressional Budget Offices rosy projections. But this year, both House Republicans and President Obama are advancing budget plans that rely on Medicare costs growing even more slowly than they would under PPACA. Their proposals are thus vulnerable to the same criticism. Congressman Paul Ryan, who has led the House effort, has offered a plan that makes clear the difficult choices that lie ahead and that includes some positive structural changes to Medicare and Medicaid. But his budgets projections rely on an assumption that we can spend far less money than we had planned to run both programsand those savings are too ambitious to be plausible under the reforms he proposes.
The most discussed part of Ryans proposal is his plan to convert Medicare from its traditional form to a premium-support model for people currently under 55. These people would receive government assistance to pay part of a premium for a health-insurance plan purchased through a federal exchange. Crucially, the value of this subsidy would grow only as quickly as the Consumer Price Indexeven though CPI growth is generally expected to be about 2 percent, while per-capita health-care spending is expected to rise by 5 percent to 6 percent annually. As health-care costs rise faster than inflation, seniors would have to pay out of pocket for a greater share of their health costs each year, or consume less health care.
This premium-support model, however, wouldnt begin until 2022. Before then, Ryan proposes to spend $389 billion less on Medicare through 2021 than the presidents budget proposal would. But Ryans budget, like the presidents, would keep the Medicare cuts from PPACAthe same ones that, Republicans complain, are wishful thinking. And both budgets would also make the doc fix, a rise in physician-reimbursement rates that Congress regularly implements.
Where, then, would Ryans $389 billion come from? He doesnt advance a specific plan, though Alan Simpson and Erskine Bowles made some suggestions in their report late last year that he could adopt. These include lower physician-reimbursement rates, mandatory rebates from pharmaceutical companies, and higher co-payments and deductibles. They also include tort reform, which Ryans plan does call for, and which Simpson and Bowles estimate would cut Medicare spending by $64 billion over ten years. These steps, though, would meet stiff political resistance. And Ryans proposal involves repealing some of the key cost-saving features of PPACAthe Independent Payment Advisory Board and the Cadillac tax on high-cost health plansand doesnt lay out a new agenda for cost control.
On Medicaid, Ryans numbers are similarly optimistic. In the current system, the federal government matches a percentage of what states spend on Medicaid. Ryan would convert that arrangement into a block-grant program in which states receive a lump sum from the federal government and set the terms of their own low-income health-care programs. To pay for costs in excess of that lump sum, states would have to levy their own taxes. Thats a good ideabut again, the rate of spending growth that Ryan envisions is too slow. In his plan, the growth of the Medicaid block grants would be linked to CPI and to each states low-income population. Health-care costs, meanwhile, would surely rise much faster than that, meaning that each year, states would either have to reduce the generosity of Medicaid or raise more state-level tax dollars to pay for the program. Eventually, the situation would become untenable.
The president, in a much more limited fashion, also relied on slower health-cost growth in his speech this week on deficit reduction. Part of his plan is to lower the target rate of Medicare spending growth from GDP plus 1 percentas PPACA specifiesto GDP plus 0.5 percent. But like Ryan, he is light on details about how to achieve that, aside from his support for lower prescription-drug pricing.
Constraining the growth of health spending isnt a lost cause, and leaders in Washington shouldnt abandon it. But they have to be realistic when they come up with estimates of future spending growth. Previous proposals, such as Simpson and Bowless and Alice Rivlin and Pete Domenicis, have tried to limit spending growth to the rate of GDP growth plus 1 percent, or to the average of CPI and medical inflation. These rates are already aggressively low, but theyre achievable. A growth trend in line with CPI, like Ryans, simply isnt plausible.
Politicians must also create robust cost-control mechanisms. As economist Tyler Cowen has written, these fall into two categories: consumer-directed cost control and government-planned cost control. I share Cowens view that a mix of the two is whats called for. (Those who support an entirely consumer-directed model should remember that private health-insurance markets havent exactly held the line on costs over the last 20 years.) PPACA and the presidents proposals to revise it dont offer enough cost-control measures; the Ryan plan offers even fewer. And these mechanisms are supremely important: without them, spending targetswhether Ryans, Obamas, or someone elsesare just numbers on a page.
An opportunity for health-care cost control that has so far been overlooked lies in the tax code: if we reduced or ended tax preferences for health benefits, wed lessen peoples incentive to consume too much health care, and costs would rise more slowly. Both Obama and Ryan have said, without specifics, that we should enact a tax reform that broadens the income-tax base, and Ryan has previously called for ending the exclusion of employer-paid health benefits from income tax and replacing it with a one-size-fits-all credit that doesnt get bigger when you consume more health care. If he incorporates that idea into his budget proposal, hell be able to make a much stronger claim that his plan slows health-care cost growth.
It would be even better if Ryan dropped his proposal to repeal the Independent Payment Advisory Board. Yes, Republicans bristle at central planning of health spending. But Medicare is already a single-payer government health-insurance program, and Ryans plan would take more than 40 years to phase it out. While its still around, its hard to see why we shouldnt protect the taxpayers interests by making sure that its expenditures are cost-effective.
As for Obama, hes on the record against taxing health benefits. John McCain proposed to replace the health-care tax exclusion with a credit in the 2008 campaign, and Obamas campaign endlessly demagogued that plan as a scary threat to tax your health insurance for the first time. But since then, Republicans have shifted from attacking Democrats Medicare cuts to calling for even bigger ones. It would be a good time for the president to do his own flip-flop and call for taxing health benefitsespecially since such a move would make the tax code more progressive.
Both Ryans and Obamas budget proposals have problems beyond the health-care issues. For one thing, theyre both vague (especially Obamas). The president wants to tax too much and do so in a way thats particularly economically damaging. Ryan is insufficiently aggressive about cutting the defense budget and probably too aggressive on nondefense discretionary spending. An eventual compromise plan might look a lot like the Simpson-Bowles report. But because our federal budget troubles are, first and foremost, health-spending troubles, making realistic estimates of health savings is the most important step in producing a budget plan that works.
Josh Barro is the Walter B. Wriston Fellow at the Manhattan Institute and a regular columnist for RealClearMarkets.