FROM: Robert Swendiman, MD MPP
DATE: September 28, 2012
RE: The Path to Prosperity Plan
While your joint proposal with Senator Coburn (R-OK) and Representative Ryan’s “Path to Prosperity” are both constructed around the concept of premium support for Medicare beneficiaries, there are key differences that warrant your consideration. Rep. Ryan’s plan places hard limits on future Medicare expenditures, by means of fixed annual caps on spending, which may expose seniors to higher out-of-pocket medical bills over time. The Path to Prosperity also raises the age of Medicare eligibility gradually over the next two decades. These effects should be weighed carefully in light of financial risk to current and future Medicare enrollees.
Cost Containment. Rep. Ryan's plan allows private insurance companies to compete with traditional fee-for-service (FFS) Medicare, mitigating cost growth through competition. The Path to Prosperity also establishes a new “Medicare Exchange,” overseen by the Centers for Medicare and Medicaid Services, where seniors can choose among a range of insurance plans (with traditional Medicare included as a choice). In the Exchange, the second lowest bid will determine the exact amount of federal premium support to individuals, estimated at about $7,500 per person in 2023. All plans must offer actuarially equivalent benefits to traditional FFS Medicare, though it is important to note that these benefits will not necessarily be the same. Individuals who choose higher cost plans will have to pay the difference in premiums, and those who pick the lowest cost option will receive a rebate.
In contrast to your proposal, the Seniors’ Choice Act, Rep. Ryan would limit the annual per capita premium support to match growth of nominal (adjusted for inflation) GDP plus 0.5%. If premiums rise faster than this rate, seniors will have to cover the excess expenses out-of-pocket (with some adjustment for income). This lower cap contributed to the loss of the bipartisan support of Senator Ron Wyden (D-OR), because it shifts more costs to seniors in the future. He had originally cosponsored a similar plan with Rep. Ryan, employing a 1% cap. In March, the Congressional Budget Office (CBO) evaluated Rep. Ryan's proposal against current predictions of Medicare spending. Using its “extended alternative fiscal scenario,” which more accurately predicts the political climate than an evaluation with no changes in current law, CBO estimated that traditional Medicare expenditures would increase from 3.25% of GDP today to 7.25% by 2050. In comparison, Rep. Ryan’s proposal would cut 2050 spending projections by a third, with Medicare representing only 4.75% of GDP.
With passage of the Affordable Care Act (ACA) in 2010, the Medicare Board of Trustees estimated an extension of the Medicare Trust Fund’s solvency from 2016 to 2024. Repeal of ACA, as proposed by Rep. Ryan, would reverse these dates; however, his plan would provide significant long term savings, and few believe Medicare would ever be allowed to “go broke” in the short run.
Financial Risk to Seniors. The primary concern with these hard caps on federal subsidies is that premiums will rise faster than nominal GDP plus 0.5%. Over the past few decades, the annual cost of health insurance per capita has risen approximately 2% per year faster than GDP growth. While competition within the Exchange and incentives for diminished utilization would help private plans lower costs, CBO in 2011 predicted that this scheme would still raise out-of-pocket costs for seniors over time. This is true for two reasons: first, private insurance plans have higher administrative costs and provider payment rates compared to traditional Medicare; and second, the federal premium support will grow proportionally smaller as medical inflation continues to surge.
CBO admits that its predictions contain significant uncertainties, and partisanship has steered the rhetoric concerning the merits and limitations of this approach. However, one thing is clear: with rapidly rising costs, along with fiscal uncertainties that surround the health care industry in general, the potential risk of cost-shifting medical expenses to seniors is real. This hard limit on spending is the fundamental difference between your Seniors’ Choice Act and Rep. Ryan’s Path to Prosperity.
Access to Care. Both your proposal and Rep. Ryan's plan would increase the Medicare eligibility age to 67, although the latter takes a more gradual approach. Medicare beneficiaries who are eligible prior to 2023 would remain in traditional FFS Medicare. Starting that year, the Medicare eligibility age would increase by two months each year until it reaches age 67 in 2034. CBO analysis projects that raising the Medicare age would cut total Medical spending in 2035 from five percent of GDP to 4.7%, a net savings of about $150 billion. However, many unemployed seniors would bear the cost of insurance themselves in those last two years, likely finding themselves either paying for expensive plans in the individual insurance market, or uninsured.
The Bottom Line. Like many current proposals, Rep. Ryan’s plan does little to change the underlying drivers of rising costs in the health care industry. The Path to Prosperity does, however, have a very strong emphasis on reducing federal Medicare expenditures, though it appears to expose seniors to more out-of-pocket costs in the future. These issues should be considered simultaneously when weighing support for this plan.
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