Orszag: Ryan Budget Would Increase Total Health Care Spending

May 25, 2011 at 1:29 pm

In a new Bloomberg column, former OMB Director Peter Orszag explains how House Budget Committee Chairman Paul Ryan’s plan to privatize Medicare would increase total health care spending.  I made the same point recently; below is the chart in my post.

Ryan Proposal Would Double Health Care Spending for Typical 65-Year OldTo some extent, the Ryan plan would shift health care costs from Medicare to the program’s beneficiaries.  But as Orszag’s column emphasizes, that’s only part of the story.  The much bigger news is that Ryan’s plan would increase total health spending for the elderly — the beneficiaries’ share plus the government’s share — by upwards of 40 percent, according to the Congressional Budget Office (CBO).

There are two reasons why.  First, private insurance plans have much higher administrative costs than Medicare.  Second, private plans have less bargaining power with health care providers and are unable to negotiate payment rates that are as low as Medicare’s.

Orszag concludes with the following message to policymakers who initially supported the Ryan plan but are now reconsidering because of its unpopularity with voters:  “If your goal is to reduce health care spending significantly, you can safely retreat from [the plan] on its substance.”

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More About Paul N. Van de Water

Paul N. Van de Water

Paul N. Van de Water is a Senior Fellow at the Center on Budget and Policy Priorities, where he specializes in Medicare, Social Security, and health coverage issues.

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7 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. Sid Finkel #

    Another critical point is that by subsidizing private insurance premiums the Ryan proposal’s main result may be in just raising the cost of those premiums and inflating the premium cost. See this analysis here.


    As far as some of the other points made, that same site has a similar analysis.


    Ryan says he has a problem and wants to get the truth out about his Plan. The truth is out, that’s the problem.

  2. Kaye #

    It has seemed to me for quite a long time that the insurance companies are the largest part of the health-care cost problems, especially the for-profit companies. The layers of administration and the quantity of paperwork they require is extremely costly and time-consuming. The number of errors they make or claims that are lost adds to the costs. Also, the reasons for denials are all given in codes that are never defined, so contesting them is very difficult. They set the premiums, define the benefits, determine the co-pays and determine what is “usual and customary.” The only problem is that these terms seem to be determined with no reference to reality. I have a preferred provider plan and tend to use participating providers. However, frequently the payment made to these providers is 15-20% of their actual charge. Even if the providers charges are somewhat inflated because they expect the insurance companies to discount them heavily, it is unreasonable to expect doctors and other health professionals to maintain a practice and a relationship with insurance companies if they are consistently compensated at severely discounted rates. They will eventually be forced to stop participating in these plans in order to make a living at all, even to pay malpractice insurance. Most elderly have some sort of pre-existing condition, so if they are forced to seek new private health insurance through some limited voucher program, most can easily be denied. Is this what we deserve?

  3. Joshua Grass #

    I’m a like to be a firm believer in markets. Is it something specific with the Ryan plan that causes the price to go up, or is there no way to drive down price without Medicare acting as a monopoly?

    • Chris Call #

      I think Nylund alludes to that point in his/her post. I think the main argument is that it does nothing to introduce price controls (premiums only can go so far above inflation, etc.), which the ACA (O-Care) does attempt. There is another aspect regarding how much of premium revenue the ins co. spends on care versus administrative and other costs incurred by the ins co. Gradually the ACA aims to make this medical loss ratio 85/15, (which is basically the ratio of costs divided by premiums). The main problem with Ryan’s plan is it has no mechanism to ensure that insurance companies won’t price seniors out of the market (given that no private insurers want to provide their costly care), or worse, that such a plan would start a race to the bottom as ins cos. would likely offer bare bones coverage at the same or higher price. Given the inelastic demand of seniors for health care, the insurance companies have to be prevented from gouging them knowing they can’t go without.

      I might be wrong on some of this but based on what I’ve read about the Ryan plan, it seems to capture most of the concerns.

    • Bernard HP Gilroy #

      Maybe there’s a way to move prices down without the bargaining power of Medicare, but if there is, neither we nor any other advanced economy has discovered it. Much more importantly, even if there is such a way, the Ryan plan does nothing to enact it. All it does is shift the elderly from a strong, low-cost, guaranteed program to a shaky, more expensive, higher-cost unguaranteed one. It lowers the cost to the federal government but only by waving a magic wand and saying, “Look! We’re paying less because we said so.” Since it does not address the actual total cost of health care, it “strengthens” the federal line by walloping the private one.

    • 6

      In this case it is the markets that are the problem. Markets are only good at lowering costs for inefficient products. When the product is health coverage, the product is payment of insurance. The only direct way to lower the cost of the insurance “product” is to not pay it, which isn’t value to the customers. (But companies still try it, such as the “prior condition” issue.) You can lower the overhead, and that’s what government (Medicare) does.

      Private companies need sales people, advertising, contracts, collection departments, medical tests for coverage, evaluation teams, redundant offices (at each company), and litigation over refusal to pay. These are transactional costs of privatized systems that don’t exist in Medicare, and you pay for them. Markets can’t eliminate them, but a single payer system can (and does).

      Also, the economics of volume pricing mean that larger programs can negotiate cheaper prices that no single company can do.

      While I share your belief in the markets to work in many areas, it isn’t a universal solution. Different systems have different benefits and disadvantages. When it comes to medical insurance coverage, single-payer will generally always be more efficient.

  4. Nylund #

    This chart gets at the crux of the problem. From the government’s budget standpoint, Ryan’s plan is good! Using this example, it decreases gov’t costs by $600. There seems to be a willful deception going on by the GOP to confuse people into believing that lower costs for the government also means lower costs in general. They seem to be purposely conflating gov’t health care costs with total health care costs. Its the latter that is truly the problem in the US. Ryan’s plan doesn’t address this, and, in fact, makes it worse. The only counter argument I’ve seen is that if everyone is given an increasingly less valuable voucher, insurance companies will be forced to lower their prices. I have yet to see any convincing argument to support this, especially given the IO literature in economics which highlights just how truly atypical the health insurance market is. You can’t use a standard model for this industry.

    Seeing this chart, its no surprise that the public is rejecting this plan. Peter Suderman just made an argument at Reason that the public dislikes this plan because the GOP has not done a good job of selling it. He seems to entirely overlook the possibility that the public is rejecting it because its simply a bad plan that ignores a bunch of serious problems (and likely makes them into even bigger problems).

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