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The Importance of Ryan-Rivlin

James C. Capretta | 11/24/2010
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The political ground has been shifting rapidly ever since the American people delivered a vote of no confidence on the current direction of public policy when they went to the polls earlier this month.

Nowhere is that shift more evident than in the recent release of a bipartisan plan to dramatically reform the nation’s health entitlement programs. Sponsored by incoming House Budget Committee Chairman Paul Ryan and former Clinton administration budget director Alice Rivlin, the “Ryan-Rivlin” plan represents a real breakthrough in the long standoff between the parties over how to address the most pressing problem in the federal budget, which is the relentless, long-term rise in costs of Medicare and Medicaid. Ryan and Rivlin both serve on the presidential commission looking at ways to reduce the nation’s short- and long-term budget deficits, and they offered their health-entitlement reform plan to their fellow commission members for consideration.

In Medicare, the Ryan-Rivlin proposal would be transformative. It picks up on a key feature of Rep. Ryan’s “Roadmap” budget plan, which is that new enrollees in Medicare after 2020 would receive their entitlement in the form of a fixed contribution from the federal government rather than today’s defined benefit program structure. These Medicare enrollees would then apply their entitlement against the cost of health insurance. The value of the defined-contribution payment from the government would grow at a rate of GDP per capita plus one percentage point. The plan would also restructure Medicare for current beneficiaries by rationalizing the cost-sharing with a single, higher deductible and more uniform coinsurance across care settings, as well as an out-of-pocket cost limit. Secondary insurance plans would be prohibited from covering the first $500 of the deductible or more than half of the cost-sharing for services.

For Medicaid, Ryan and Rivlin propose moving toward a fixed block grant payment from the federal government to the states. The block grant payments would be indexed to grow with the size of the Medicaid population as well as per capita GDP growth plus one percentage point. The plan does not specify in detail what new flexibility the states would receive to administer the program, but it would presumably be significant new freedom to make changes as needed to run Medicaid according to state priorities.

Beyond Medicare and Medicaid, the plan would also impose limits on noneconomic and punitive damages in medical liability cases as well as repeal the ill-advised long-term care program (called the “CLASS Act”) that was created in the recently passed health care law.

The Congressional Budget Office (CBO) has already issued a preliminary assessment of the budgetary implications of Ryan-Rivlin, and the results are impressive. Over the next decade, Ryan-Rivlin would cut federal deficit spending by $280 billion, and by 2030, federal spending on the major health entitlement programs would be about 1.75 percent of GDP below a reasonable baseline projection.

But the importance of Ryan-Rivlin goes well beyond its details and current CBO cost estimate. The fundamental problem in American health care is that the federal government is providing open-ended financial support for health insurance coverage. Most Americans get their insurance through Medicare, Medicaid, or employer-sponsored insurance. And in each case, the federal government’s support for that coverage increases commensurately with costs. So when costs or premiums rise by an extra dollar, the federal treasury is picking up a sizeable portion of the added expense, thus substantially undermining the incentive for economizing by those enrolled in the coverage or those providing the services.

The solution is an across-the-board move toward more fixed federal financial support for coverage. That’s a central element in the Ryan Roadmap, and has been a theme in just about every market-based reform of health care proposed over the past quarter century. At various times, moving away from open-ended entitlements has gotten the support of some Democrats, most especially when former Senator John Breaux championed “premium support” for Medicare in the late 1990s. But, by and large, most Democrats have resisted these kinds of moves and attempted to control entitlement costs with arbitrary price controls instead.

Ryan-Rivlin is thus an important step because it brings a prominent official from the Clinton administration onto a proposal that would decisively move away from the health entitlement status quo. That’s no small matter.

Ryan-Rivlin is far from ideal. It is largely silent on ObamaCare, which would push the health system in precisely the wrong direction by extending open-ended entitlement promises to millions of new people. Households with incomes below four times the poverty line would see their premiums capped as a percentage of their income, regardless of the expense of their health plan coverage. Moreover, the new law leans heavily on price controls to cut costs, which only distort the marketplace and undermine the quality of American medicine. These damaging aspects of ObamaCare would substantially undermine the benefits that the Ryan-Rivlin approach would produce. The lesson is that there’s no getting around the need to repeal ObamaCare in its entirety. If it remains in place, there will be little that can be done to stop a full government takeover. What’s needed is a full replacement program, with fixes not only for Medicare and Medicaid but also for the tax treatment of health insurance so that workers too become cost-conscious consumers in a reformed marketplace.

Still, Ryan and Rivlin should be applauded for taking this courageous step and putting their health entitlement reform plan on the table for consideration. It is a clear demonstration that the conversation has shifted, and in a much more positive direction.

James C. Capretta is a fellow at the Ethics and Public Policy Center and project director of ObamaCareWatch.org.


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