Why the Ryan-Wyden Medicare Plan Would Likely Shift Costs to Beneficiaries

Our analysis of the Ryan-Wyden premium support proposal found that it would likely shift substantial costs to Medicare beneficiaries.  Some have asked about that conclusion, so here’s a more detailed explanation.

Traditional Medicare guarantees that beneficiaries have access to a specified package of health care benefits and services, and it pays doctors and hospitals when they provide those services.

Under premium support, in contrast, Medicare would pay insurance plans — one of which would be traditional Medicare — a fixed dollar amount per beneficiary (adjusted for the beneficiary’s health status).  Beneficiaries would pay the difference between the amount of that “premium support payment” and the cost of the plan that they selected.  (Click here for our detailed analysis of premium support.)

Put another way, while traditional Medicare is a defined-benefit system, the Ryan-Wyden premium support plan is a defined-contribution system.  As Chairman Ryan said of the Ryan-Wyden plan, “We are stopping the open-ended, defined-benefit system.”

The Ryan-Wyden proposal would limit the growth of Medicare spending per beneficiary to the growth of gross domestic product (GDP) per capita plus one percentage point.  Health care costs have grown faster than that for several decades, however, and the plan doesn’t clearly spell out what would happen to implement this limit if Medicare spending were projected to exceed it.

But one thing is clear:  limiting the growth in Medicare spending to GDP plus one percentage point is, in essence, limiting the growth in the premium support payment to GDP plus one percentage point.  After all, in a premium support system, the premium support payments constitute virtually all of Medicare’s spending.  Except for modest administrative costs, that’s all there is, so limiting the growth of Medicare spending necessarily means limiting the growth of premium support payments to plans.  Indeed, Chairman Ryan acknowledged at a December 15 briefing that the spending target would be met through automatic reductions in premium support payments, unless Congress decided to take other action.

Would the premium support payments under the Ryan-Wyden plan be sufficient to pay for the current package of guaranteed Medicare benefits without increasing premiums or cost-sharing for beneficiaries?  That’s the question at issue.

Two sentences in the proposal bear on this matter:

• “To offset an increase in the cost of Medicare beyond the growth limit, Congress would be required to intervene and could implement policies that change provider reimbursements, program overhead, and means-tested premiums.”  This apparently refers to steps that Congress might take to hold down the growth of insurance plans’ costs and thereby assure that the premium support payment would be adequate to cover Medicare’s current benefit package.  But Ryan-Wyden couldn’t “require” Congress to intervene, and the proposal doesn’t spell out what would happen if it didn’t intervene.

• “Any increase over [the GDP plus one percentage point] cap will be reflected in reduced support for the sectors most responsible for cost growth, including providers, drug companies, and means-tested premiums.”  This sentence could refer to some sort of automatic mechanism that would act as a fallback if Congress failed to keep plans’ costs within the spending limit.  But no other premium support plan has anything similar, and it’s difficult to see how such an automatic mechanism might be made to work, especially since — under a premium support system — Medicare no longer would be making payments directly to providers or drug companies.

Senator Wyden and Chairman Ryan could readily resolve the ambiguity in this area by providing legislative language for their proposal.  Unfortunately, they have said they do not intend to do so.  In the absence of further specifics — and without some automatic mechanism that reduces the cost of the benefit package to fit within the premium support payment — we can only conclude that the Ryan-Wyden plan, like other premium support proposals, is likely to shift substantial costs to Medicare beneficiaries.