The Ryan budget plan for Medicare and Medicaid

I've been mocking the idea that either party - but least of all the Republicans - has any real interest in slowing our march off the cliff of fiscal disaster. But now comes the Ryan plan to cut Medicare and Medicaid, which one could argue has the potential to steer us away from the cliff.

I only say "one could argue" that it has this potential, because the real question would be whether future Congresses were willing to deny funding for healthcare that voters were demanding. Either under present law or the Ryan plan, Congress in 10 or 15 years will face the same choice between unsustainable spending growth on the one hand, and denying people valuable and important healthcare procedures on the other.

I'm skeptical that the Ryan plan is going to go anywhere politically, at least over the next three years (i.e., spanning the 2012 election). If the Democrats have any sense (irrespective of whether the plan is actually good or bad), they will fight hard against it. It obviously can't be passed this year without their full cooperation, and cutting healthcare might be an unappealing Republican banner for the 2012 election.

But then again, who knows? I'm not convinced that either the Administration or leading Democrats in the Senate actually share their party's historic convictions. They may also lack the guts to contest this in the terms that Karl Rove and Frank Luntz would urge if working for them. Obama, I suspect, actually secretly agrees with the plan, as he has pretty broadly bought into the pro-free market ideological shift of the last 30 years - a shift that has had both good and bad policy consequences. Thus, it is not just, as Krugman intimates, that he is desperately eager to be "nice" (although that may play a role as well).

Regimes fall when their proponents no longer believe in them. I also suspect that the long-term U.S. political equilibrium is to gut Medicaid. When the political preferences of poor Americans have essentially zero political weight, as this article and the recent Hacker-Pierson book suggest, there may be no reason to expect significant medical aid to the poor. And if only the top 10 percent of the income distribution matter politically, as these sources also suggest, then why not cut everyone else's healthcare? Maybe this is politically feasible after all, and even if one dislikes it as policy it might still in principle lead to averting fiscal disaster, albeit at a social cost in other ways. But then again it may remain farfetched to think that Congress in ten to fifteen years will decline to pay for seniors' healthcare spending - even if it is willing to throw the poor off the Medicaid bus.

OK, enough on politics and projections, what actually is the plan? The most convenient source I've found is Uwe Reinhardt in his NYT Economix Blog. So what I'll do next is quote, in bold, his list of the plan's 6 key features, and then insert some commentary.

"1. The change would not affect people eligible for Medicare currently 55 or older, who would remain in the traditional program. The new rules would start in 2021 — that is, for persons currently under age 55." Ouch. I am a bit under 55; as it happens I have an older sibling who is just over. Looks like one of us will do better in this regard than the other. More particularly, this bright line is inequitable. There's no reason why older individuals who have adequate financial resources should be exempted from sharing in the budgetary hit, and treated so much differently than younger ones with only slightly more time to plan. But perhaps, as a consumer, I should take comfort from Matt Yglesias' observation as follows: "If a 'divide and conquer' strategy succeeds in abolishing Medicare for people born after 1956 ... [o]ver time you’ll have a growing set of private voucher firms lobbying for more people to lose Medicare and be put into the voucher pool. You’ll also have a declining set of people born before 1956 to object to Medicare abolition. And you’ll have an ever-growing pool of people born after 1956 who’ve been told that they’ll never benefit from Medicare no matter what happens, but who are being asked to pay the taxes that finance it. That doesn’t strike me as a remotely sustainable equilibrium."

"2. Beneficiaries who turn 65 in 2021 or later would receive from Medicare a voucher to purchase private health insurance." Ryan wants to deny it's a voucher, but his argument appears to be purely formalistic, based on sending funds directly to the insurance companies, rather than via the consumers. When you get to the rate of voucher growth over time (see below), this is the big source of budgetary saving. But it is independent of the fact that one is using vouchers rather than the current system. Vouchers that grow fast enough don't save any money, whereas the current system with tighter spending and reimbursement controls can save all the money one likes (albeit with the same painful tradeoff of people being denied care, e.g., as healthcare provides opt out of Medicare). Now, there would be big cost savings if healthcare "privatization," which is what's going on here, were itself a source of efficiency gain. But healthcare experts are skeptical of this, reflecting that it's a market in which consumer choice doesn't work very well. Jonathan Gruber, for example, referring to recent Medicare experiments with HMO-style "Medicare + Choice," says: "Our existing efforts to privatize Medicare have failed ... We don't have a good track record ... the [potential Ryan plan] savings doesn't come from all the good things from competition -- it comes from cutting Medicare over time."

"3. According to the Congressional Budget Office, 'the amount of the voucher would be calculated by taking the average federal cost per Medicare enrollee in 2012 (net of enrollee premiums) and growing that amount at the annual rate of growth in G.D.P. per capita plus one percentage point.'" This is the million-dollar question for which no one has a good answer. Healthcare expenditures are growing relative to GDP. They probably should. due to the incredible things that tecnnology increasingly makes possible - saving and extending lives, and greatly increasing suffering people's quality of life. But what is the limit given that it can't consume anywhere near 100% of GDP? This is a bit of a conundrum given that our usual model for making good allocative decisions - well-informed consumer choice - is problematic in the healthcare sector. This very likely does mean, however, that - if Congress stuck to it - increasingly people who are not rich would be denied healthcare treatment that would have enormously helped them, in life-saving and life-changing ways. BTW, Ryan has a point here, which should be acknowledged, when he insists (correctly) that merely the growth rate is being cut. If the plan were to take force, non-rich people in twenty years might in absolute terms still get better care than anyone is getting today - but they might be getting far worse care relative to what was contemporaneously available.

"4. The voucher amount would be adjusted by the beneficiary’s geographic location and health status and would be means-tested — that is, it would be higher for lower-income beneficiaries than for those with higher incomes." Obviously, the details are important here distributionally. The tax law and econ literature (see, e.g., pieces by Louis Kaplow and by Tom Griffith/Michael Knoll) is a bit skeptical of regional cost of living adjustments, which create moral hazard (I get the taxpayers to pay more by living in a high-cost area that may offer consumer amenities or, in the case of healthcare, higher regional treatment norms).

"5. Starting in 2013, beneficiaries would face a $600 combined deductible for ... [the two main parts of] Medicare combined, but pay a 20 percent co-insurance on each part — including hospital care — up to a catastrophic out-of-pocket limit of $6,000, after which cost-sharing would be zero." [OOPS - previous analysis here deleted, as a commentator suggests I misinterpreted this.]

"6. Between 2021 and 2032, the eligibility age for Medicare would be increased to 67, from 65." I might be fine with this if Medicaid were sufficiently strong, but obviously it won't be under the plan.

The fundamental question remains, what should the long-term healthcare system look like? In many areas I have strong pro-market sympathies, although I also want the government to address externalities and distributional issues (both of which can readily be seen in terms of market failure). But one has to have good sense about where markets don't work so well. I believe healthcare is one of the paradigmatic such areas, which is one reason why countries with single-payer healthcare systems often get better results than the U.S. in healthcare outcomes per dollar spent. The financial sector is another such area, as even Alan Greenspan briefly recognized (before reverting to his ignorant-idealogue type). How best to structure the healthcare portion of the economy is the real question in policy design, but I don't expect a reasoned political debate about this.