The Myths and Realities of the Ryan Medicare Plan

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By Andrew G. Biggs, Resident Scholar at the American Enterprise Institute

Gov. Mitt Romney's selection of Wisconsin Rep. Paul Ryan as his vice presidential running mate has turned the 2012 presidential election into a referendum on Medicare reform. Ryan has sponsored multiple Medicare reform bills in Congress, with the Left charging that the Romney-Ryan ticket would "gut Medicare" by turning it into a "voucher system," and even "ending Medicare as we know it." Moreover, President Obama's supporters say, the Romney-Ryan approach would force seniors to pay an extra $6,400 per year toward their Medicare costs. But would Ryan and Romney's reform ideas, known as "premium support," really do all of these terrifying things?

The Truth About Vouchers

To begin, is premium support for Medicare a "voucher system" as opponents claim? The label "vouchers" brings up frightful images of helpless seniors being handed a little cash and charged with entering the cut-throat private insurance marketplace to secure whatever coverage they can. The reality is much closer to the Federal Employees Health Benefits (FEHB) program for government workers than to this imagined horror story. Under the FEHB, the government pays a set amount toward employee health premiums, which can be applied to a range of approved health plans offered by a number of insurers.

The key to the FEHB is that numerous private insurers offer competing plans and federal workers choose which plan they prefer. All plans must be open to all participants, meaning that no one can be denied for pre-existing conditions. Competition among insurers spurs efficiency, and the fact that federal employees wanting a more expensive plan must pay the higher premium on their own makes individuals more cost-conscious.

Paul Ryan's premium support plan, co-developed with Oregon Democratic Sen. Ron Wyden, is similar to the FEHB, but with several key differences. Unlike the FEHB, in which insurers set their own standards for care, under the Ryan-Wyden plan all insurers must provide standard benefits at least matching those from traditional Medicare. Moreover, the traditional Medicare program will continue to offer benefits alongside offerings from private insurers. If traditional Medicare is truly more efficient than private insurance, as its defenders claim, many seniors will simply stay where they are.

A Burden on Seniors?

Democratic critics maintain that Ryan's plan merely shifts costs to retirees, requiring them to pay an extra $6,400 per year to match Medicare's benefits. This figure, which derives from a Congressional Budget Office analysis, is misleading for three reasons.

First, as my colleague Jim Capretta has pointed out, this figure assumes that the current Medicare benefit package will remain unchanged. But, as Medicare's chief actuary has warned, the $700 billion Medicare cuts passed as part of the Obamacare legislation could drive one-sixth of hospitals out of business and risk "jeopardizing access to care for beneficiaries."

Second, the $6,400 per year claim also assumes that premium support won't lower costs through provider competition and consumer choice, which, of course, is the entire rationale behind them. In reality, costs could be lower. While Obamacare controls costs through across-the-board cuts to good and bad providers alike, under a premium support plan providers could develop and fine-tune a variety of different models to reduce costs while maintaining quality.

Lastly, this $6,400 figure is actually based on an older version of Ryan's plan that tightly controlled the growth of Medicare spending. But in Ryan's more recent, compromise plan with Wyden—something obviously much closer to a plan Congress might actually pass—Medicare spending rises at the same rate as under President Obama's budget. The claim that the Romney-Ryan approach "guts Medicare" as is simply false. In fact, because Romney would repeal the Medicare cuts made as part of Obamacare, Medicare would actually be more generous under the Romney-Ryan approach.

Medicare's Cloudy Future

Does Paul Ryan's premium support plan "end Medicare as we know it," as President Obama claims? Perhaps, but Medicare as we know it is both inefficient and insolvent. But claims that it "guts Medicare" or turns it into a voucher system don't hold up to scrutiny.

If there is anyone who gutted Medicare and put seniors at risk it is President Obama, who reduced Medicare funding by over $700 billion to fund the Obamacare plan. As a result of these cuts, Medicare actuaries warn, seniors may lose access to doctors and hospitals. The Romney-Ryan premium support model is not perfect — no plan can fix Medicare's multi-trillion dollar deficits without difficult tradeoffs. But Mitt Romney and Paul Ryan have at least proposed a solution, one which could reduce costs and improve quality to put Medicare on a more sustainable track. President Obama has offered no counterproposal. In contest for the country's No.1 leadership position, that alone should be important to voters.

Andrew G. Biggs is a Resident Scholar at the American Enterprise Institute (AEI).Prior to joining AEI he was the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA's policy research efforts and led the agency's participation in the Social Security Trustees working group. In 2005 he worked on Social Security reform at the National Economic Council and in 2001 was on the staff of the President's Commission to Strengthen Social Security.