The Problems with Converting Medicare to “Premium Support”

September 27, 2011 at 2:09 pm

In a speech today at Stanford’s Hoover Institution, House Budget Committee Chairman Paul Ryan repeated his call for converting Medicare to a “premium support” system. Premium support proposals, such as those in the House-passed fiscal year 2012 budget resolution (which Chairman Ryan developed) and the deficit-reduction plan from the Bipartisan Policy Center’s Rivlin-Domenici commission, would replace Medicare’s guarantee of health coverage with a flat payment — often termed a voucher — that beneficiaries could use to help pay for private insurance. (Some proposals would retain traditional Medicare as an option.)

As I explain in a new report, converting Medicare to premium support would likely create a two-tier health care system. Affluent people would receive the most up-to-date medical care, since they could buy comprehensive coverage by supplementing the voucher with their own funds. But people of modest means who could only afford the coverage that their voucher buys would increasingly find medical advances out of reach.

Premium support raises important issues that may seem manageable in theory but would be extremely hard to resolve satisfactorily in practice. My report discusses four such issues:

  • Maintaining traditional Medicare’s ability to control costs. Premium support plans that phase out traditional Medicare, such as the House plan, would increase total health care spending (public and private combined), as the Congressional Budget Office has shown. Even premium support proposals that retain traditional Medicare as an option, such as the Rivlin-Domenici plan, would undercut Medicare’s ability to serve as a leader in controlling costs by reducing its enrollment and thereby weakening its market power in dealing with providers.
  • Providing adequate premium support payments. Under both the Ryan and Rivlin-Domenici plans, premium support payments would grow more slowly than health care costs. As a result, these proposals would shift more and more health care costs to beneficiaries each year through higher premiums and out-of-pocket charges.
  • Preventing insurers from focusing on attracting healthier enrollees. A premium support system would need to standardize plans’ benefit packages and regulate their marketing practices to assure that traditional Medicare and private plans competed on a level playing field. Otherwise, private plans would seek to attract healthier people (who cost less to cover) and discourage sicker ones from signing up, leaving traditional Medicare with a disproportionate share of less-healthy enrollees — which could drive up its costs and threaten its long-term viability. Securing the needed regulation, reporting, and enforcement would be very difficult.
  • Protecting low-income beneficiaries. Low-income beneficiaries would need substantial financial assistance to afford health insurance premiums and co-payments and obtain needed care. Some premium support proposals, including the Ryan plan, provide inadequate support and would force large numbers of vulnerable low-income beneficiaries to pay much higher out-of-pocket costs or forgo needed care.

Millionaire Myths, Indeed

September 26, 2011 at 3:07 pm

The Washington Post’s “Five Myths About Millionaires” piece yesterday by John Steele Gordon did more to perpetuate myths than dispel them.  Below are corrections to each of his five points:

  1. Gordon confuses total wealth and annual income to claim that millionaires aren’t really rich, arguing that “Today, $1 million in the bank generates only about $50,000 per year in interest.”  Anyone paying attention to today’s tax debate understands that President Obama’s proposed “Buffett Rule” would apply to people with annual incomes above $1 million, not total assets above that amount.  Even in 2011, $1 million in income a year is still rich — in fact, it’s enough to put you in the top 0.3 percent of all American families.
  2. Gordon may be correct to say that some millionaires don’t feel rich (though here, too, much of his “evidence” concerns people with million-dollar assets, not million-dollar incomes).  But in any event, people who don’t feel rich despite making over $1 million a year should consider this: the average Bush tax cut for their income category this year is $136,000, or nearly three times what the average American family makes in an entire year.
  3. In stating that millionaires as a whole don’t pay lower taxes than middle-class Americans, Gordon is attacking a straw man.  As we’ve explained, a significant group of people with incomes over $1 million — those who receive more than a third of their income from capital gains and qualified dividends — pay a smaller share of their incomes in federal income and payroll taxes than large swaths of the middle class.  The Buffett Rule states that no millionaire should pay at below the typical middle-class rate.
  4. Millionaires don’t all share the same political beliefs, Gordon argues.  That’s certainly true — many, like Warren Buffett, believe that they should pay higher taxes to contribute to our government and deficit reduction, while others want Congress to eliminate taxes on their capital gains.  But, it’s not relevant.  This diversity of opinion says nothing about what’s the best policy.
  5. Finally, Gordon argues that a millionaire’s tax would seriously limit investment, and he holds up the Bush tax cuts as evidence that large tax cuts boost jobs and the economy.  But as my colleague Chad Stone has noted (and the graph shows),“job creation and economic growth were significantly stronger in the recovery following the Clinton tax increase [on upper-income Americans] than they were following the 2001 Bush tax cut.  And the Clinton policies produced a balanced budget.”
  6. Taxes No Barrier to Economic Growth

Child Poverty Up in Most States, with Damaging Consequences

September 26, 2011 at 11:12 am

We reported last week that, in 40 states, the share of the population below half the poverty line increased between 2007 (when the recession hit) and 2010.  Today, we note that child poverty is also up in the vast majority of states.  Census data released last week show that:

  • Child poverty increased by statistically significant margins in 42 states between 2007 and 2010 (see map and table).  In no state did child poverty fall.
  • Four states — Florida, Hawaii, Nevada, and Utah — saw their child poverty rates go up by two-fifths or more.
  • By 2010, more than one in five children nationally lived in poverty.  In Mississippi, the state with the highest poverty rate, one in three did.
Child Poverty Rose in 42 States Between 2007-2010

It’s unlikely that hardship among children has eased since 2010.  Not only has unemployment remained high, but our analysis of state budgets for the fiscal year that began in July showed states making unnecessarily deep and harmful cuts to supports for our most vulnerable families, on top of the widespread cuts that states have made since the recession began.

Some states cut unemployment benefits that help keep families afloat in bad economic times.  Others cut state earned income tax credits that boost income for low-earning families or cash assistance to the poorest families.

Many states also have cut back the kinds of investments that can help give children from disadvantaged families a better shot at a more prosperous future, such as improved access to preschool programs and higher education.

We know that poverty diminishes children’s success in school, and more recent evidence confirms that it can even dampen their earnings as adults. The rising share of children growing up in poverty undermines one of the key ingredients to a strong economy and shared prosperity:  our human capital.

Child Poverty Rate Increased in 42 States Between 2007-2010

In Case You Missed It…

September 23, 2011 at 6:26 pm

This week on Off the Charts, we talked about the federal budget, taxes and the economy, poverty and government programs, and housing policy.

  • On the federal budget, James Horney noted that the President’s deficit reduction plan would stabilize the federal debt as a share of the economy in the second half of this decade, while Richard Kogan explained that the President’s proposal to save $1 trillion by capping funding for the wars in Iraq and Afghanistan is sound.
  • On taxes and the economy, Chuck Marr presented data on effective income and payroll tax rates by Americans of different income classes to make the case for the President’s proposed “Buffet Rule” – that those making more than $1 million a year should not pay lower rates than middle-income families.
  • On poverty and government programs, Arloc Sherman noted that deep poverty rose by a statistically significant amount in 40 states (including the District of Columbia) from 2007 to 2010, while falling in none.  Matt Broaddus noted that public health programs like Medicaid have kept millions of people from becoming uninsured as job-based coverage has continued to decline.  Zoë Neuberger warned that pending legislation may not provide enough funds to fulfill the federal government’s longstanding policy of ensuring that the WIC nutrition program can serve all eligible low-income pregnant women, infants, and young children who apply.
  • On housing policy, Will Fischer recognized a Senate committee’s efforts to restore nearly half of the $1.4 billion that a House subcommittee bill would cut from federal housing programs, but he said the Senate measure nevertheless would underfund public housing.

In other news, James Horney issued a statement on the President’s budget package.  Iris J. Lav detailed how a “pay-as-you-go” policy would help control state budgets while preserving flexibility. Will Fischer reported that reduced funding for public housing will impair low-income families and raise future federal expenses.  Zoë Neuberger released a report on possible cuts to the WIC nutrition program.  Finally, we updated our backgrounder on state unemployment insurance programs.

Senate Bill Restores Some Public Housing Funds, but Still Makes Damaging Cuts

September 23, 2011 at 4:51 pm

As I have written, a House subcommittee this month passed deep cuts to public housing that would expose low-income residents to deteriorating living conditions and raise federal costs in the long run by putting off energy efficiency improvements and other cost-effective investments.  The people who would be harmed are some of the nation’s most vulnerable. Most public housing residents have incomes below the poverty line, and close to two-thirds of public housing units house someone who is elderly or has a disability.

Fortunately, the Senate Appropriations Committee has since passed legislation that would ameliorate the worst of these consequences by restoring $560 million of the $1.4 billion the House bill cut.  It also includes important policy improvements that would let agencies use reserves accumulated by managing public housing efficiently to renovate developments, and test a HUD proposal — the Rental Assistance Demonstration (RAD) — to switch some developments to more reliable, sustainable subsidies.   As we’ve written, RAD (previously called Transforming Rental Assistance, or TRA), is an important innovation that would make it easier for local agencies to leverage private investment to rehabilitate public housing.  (We have some concerns about the specifics of the Senate bill’s RAD provision, which we’ll explain in a future post.)

But the Senate bill still deeply underfunds public housing.  Its $1.88 billion in public housing capital funding is $165 million below last year’s level and would not cover the annual increase in the renovation and repairs needed in developments.  And the bill only provides 80 percent of the operating subsidies for which local housing agencies are expected to be eligible in 2012.  This level of funding will ultimately lead to crumbling buildings, unsafe conditions for residents, and higher federal costs down the road.

This year’s Budget Control Act requires an overall cut of about 5 percent in fiscal 2012 non-security discretionary funding.  But appropriators could allocate it in a way that reflects the principle (laid out by the Bowles-Simpson fiscal commission and other groups) that the burden of deficit reduction should not fall on vulnerable low-income people.  The Senate bill’s 12 percent cut to public housing — though far less harsh than the House bill’s 20 percent cut  — does not meet this standard and instead puts a disproportionate burden on the people who rely on public housing for their homes.