Bi-partisan Proposal Would End Medicare As We Know It
Mark Miller

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Seniors who were angry about health care reform and Medicare turned out in big numbers for Republicans in last month's mid-term elections. I've written many times that their concerns were largely unfounded. But now, the conservative shift seniors helped produce in Washington could set the stage for something that really is worthy of their wrath: the end of Medicare as we know it.

All of the various bi-partisan deficit reduction proposals floating around Washington propose Medicare spending cuts far beyond anything in the health care reform law. But the most aggressive, by far, is offered by two members of President Obama's deficit commission, Rep. Paul Ryan (R-Wis.) and Alice Rivlin of the Brookings Institution. Rivlin served as the Clinton Administration's budget director, and Ryan is expected to chair the House budget committee under a Republican majority next year.

They propose replacing Medicare with a fixed voucher benefit seniors would use to buy private health insurance coverage; if their actual health care tab exceeds the voucher's value, they'd be left to pay any additional expense out of pocket.

That shift would bring a profound change to the American retirement landscape--no less so than the change many have experienced over the past three decades from defined benefit pensions to defined contribution 401(k) plans. And we all know how well that's been working.

Many of the ideas in the Ryan-Rivlin Medicare plan come from Ryan's "Roadmap for America's Future," which also calls for partial privatization of Social Security, tax cuts for the rich and massive cuts in federal spending.

The Ryan-Rivlin plan is branded "bi-partisan" inside the Beltway because it has Republican and Democratic authors but it's far from centrist. If anything, Ryan-Rivlin shows just how far right the center has moved in Washington.

"This is beyond liberal and conservative," says John Rother, executive vice president for policy at AARP. "It's a fundamental change in the nature of the Medicare promise, changing it from a defined benefit to a defined contribution. It's not conservative, it's radical."

To be sure, Medicare must be addressed as part of any federal deficit solution. Spending for Medicare and Medicaid are projected to rise from four percent of GDP in 2007 to 12 percent in 2050, and 19 percent in 2082, according to the Congressional Budget Office (CBO). At that point, health care outlays would be equal to the total amount the government spends today.

But those increases reflect mainly projected higher per-beneficiary expenses, rather than a rise in the elderly population, according to the CBO. In other words, Medicare spending reflects the broader problem of exploding health care costs in the U.S. economy.

Many experts agree that we need reforms to the way health care is delivered in the country that produce more effective and efficient results--and not just in Medicare. "There's plenty of evidence around the world and in the U.S. that this is possible," says Rother. "It's clear that more integrated approaches, person-centered approaches and approaches that don't reward providers for excess utilization can produce better results than what we have now."

The jury is out on whether the new health care reform law will be effective in containing costs. It does create a powerful new Independent Payment Advisory Board that can review and recommend price cuts in Medicare. It also contains financial incentives aimed at inducing health care providers to improve quality and efficiency, and it cracks down on waste and fraud in Medicare.

Ryan-Rivlin argue that private insurance companies are in better position to drive efficiency into health care. But there's little evidence to date that this is the case. The Ryan-Rivlin plan simply throws the cost explosion issue out of the window by capping the federal government's liability. CBO projects that Ryan-Rivlin would bring federal health spending as a percent of GDP down to about 8.25 percent in 2030--a feat that's not hard to accomplish when you flip the cost problem over to someone else.

Here are the plan's key components:

-- Starting in 2021, people who turn 65 would not enroll in traditional Medicare, but instead would receive a voucher to purchase care in the private market. "If the payments aren't sufficient to cover rising costs, beneficiaries would have to pay more in premiums or see their benefits cut," says Tricia Neuman, vice president of the Kaiser Family Foundation and director of the foundation's Medicare policy work.

And the grandfathering provision doesn't mean today's seniors shouldn't be worried, according to Joe Baker, president of the Medicare Rights Center. "There's no reason other than politics to grandfather in people over age 55. For anyone older who thinks they made it in under the wire, I'd say, 'You're next.'"

-- The eligibility age for Medicare would be raised gradually starting in 2021, from 65 to 67 in 2032.

-- Medicare Part B premiums would be increased gradually over five years to cover 35 percent of total program costs, up from 25 percent currently.

--Cost-sharing provisions for traditional Medicare and Medigap supplemental plans would be streamlined into a single set of deductibles and co-pays replacing the more complex structures in place today. The changes would introduce valuable catastrophic coverage to Medicare's hospitalization program, while increasing the cost and deductibles for the Medigap supplemental plans that currently provide that protection.

"There would be some winners and some losers, probably depending on health status," says Neuman.

--The CLASS provision of the health care law, which creates a public-option long-term care (LTC) insurance program, would be repealed.

--Limit federal contributions to state Medicaid programs by turning it into a block grant program; states would receive a fixed amount that could grow at the rate of GDP plus one percent.

The Ryan-Rivlin plan envisions seniors shopping for health care with their vouchers in a public insurance exchange that probably would resemble the current marketplace for Medicare prescription drug and Advantage managed care programs. Managed care programs--PPOs and HMOs--likely would dominate the exchange offerings.

"Ryan-Rivlin is oriented toward achieving cost reductions in the private sector," says Dan Mendelson, CEO of Avalere Health, a research company specializing in health care. "It could create a vibrant market, just like the prescription drug program. It could work."

Few experts expect the Ryan-Rivlin Medicare plan will advance unless the Republicans take charge of the Senate and White House after the 2012 elections. "If that happens, we'll have a serious discussion about this," Mendelson says.

A serious discussion certainly is in order -- one that includes a careful look at how deficit cutting would impact older Americans. "We need to see the big picture," says Rother. "A lot of people look at these budget cuts and say if everyone gets a haircut, it's balanced. But they haven't looked at the impact on individuals. For retirees in the future, it's going to be less Social Security and much higher health care costs."

Mark Miller is the author of "The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living" (John Wiley & Sons/Bloomberg Press, June 2010).

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