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Encore
A blog about living in and planning for retirement

Shifting Medicare Costs to Consumers

Governor Romney’s choice of Paul Ryan as his running mate is a great development. Because now, instead of listening to criticism of President Obama for the slow recovery or of Governor Romney for his activities at Bain Capital, the voters can focus on the issues. Paul Ryan has done something that neither political candidate has done so far — namely, put forth a plan to restore long-run fiscal balance. Ryan’s plan not only restores balance but does so without tax increases, thereby dramatically reducing the size of government. Within the plan itself, the largest and most controversial proposal is his treatment of Medicare, which could raise medical costs for seniors. This blog post discusses Ryan’s Medicare proposals. A forthcoming post will discuss the Romney/Ryan tax proposals.

Netfalls – Remy Musser / Shutterstock.com

Let’s be clear, Medicare is a major contributor to the deficit, and reducing Medicare costs must be a critical component of any plan to help the long-run fiscal outlook. The question is how to cut the program.

Ryan’s plan would fundamentally change the nature of Medicare, extend the eligibility age from 65 to 67, and eliminate the “doughnut hole” relief to the Medicare drug benefit in the 2010 Affordable Care Act (ACA). The first two changes would not start until 2023, for people who are currently under age 55.

Under the Ryan plan, the government would no longer provide coverage directly under Medicare but rather would help seniors buy health insurance in the private market. Ryan describes his plan as “premium support” as opposed to a voucher system. Either approach turns Medicare into a plan that subsidizes private insurance plans.  The theory is that competition among the private plans for the seniors’ dollars will help contain costs. If not, Medicare spending will be limited to the growth of GDP plus 0.5 percent.  This arrangement raises the prospect that the cost of private plans would far exceed the money provided, shifting a large burden to seniors.

When the Ryan plan takes effect in 2023, the age of eligibility would begin to increase from 65 to 67. Such an increase would bring Medicare eligibility in line with Social Security’s full retirement age. It could also encourage people to delay retirement so they do not spend periods without health insurance. But basically, this is a cost-shifting proposal.  Medicare costs would go down, but individuals and (the dwindling numbers of) employers that offer health insurance would have to pay more. States’ spending on Medicaid would also be higher.

Finally, because Ryan proposes repealing the ACA, his plan eliminates the relief for the gap in coverage — the “doughnut hole” — under Medicare Part D. Essentially, after a Medicare beneficiary surpasses the prescription drug coverage limit, the beneficiary is responsible for the entire cost of prescription drugs until the expense reaches the catastrophic threshold. Under the ACA, people who fall within the doughnut hole began in 2010 to receive a rebate and by 2020 the doughnut hole will be completely phased out. Repealing the health care legislation would eliminate this relief and shift more of the costs to the individual.

Earlier versions of Ryan’s plan were sharply criticized because they did not retain a traditional Medicare option. Under his revamped approach, seniors will be able to sign up for traditional Medicare. However, to the extent that sicker people seek to remain in the traditional program, it could become very expensive. To the extent that the traditional Medicare plan costs more than the competing private plans, seniors would have to pay the difference. Moreover, critics suggest that doctors would likely leave the traditional Medicare plans if options were available, since they already find today’s Medicare payments inadequate.

Ryan’s Medicare proposals will contain budget costs, and I admire him for putting it on the table.  But personally, I find the proposals deeply flawed. Without real “bending of the health care cost curve,” premium support simply shifts the costs from the government to the individual.  Cost control is possible only once everyone is in the system. As in Massachusetts, the first step is universal coverage and the second step — currently underway in Massachusetts — is reigning in costs. The ACA, which is modeled on the Massachusetts legislation, is the foundation for real cost savings. Ryan’s proposals will simply raise the average senior’s health care cost in 2023 by more than $6,000 compared with baseline amounts, according to Congressional Budget Office estimates.

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    • I have strong concerns with the Ryan plan for Medicare. At this time, my spouse and I are retired at ages 62 and 57. We have a high deductible plan through my former employer(group of 100,000+ employees) that includes dental coverage. Our combined deductible is $5,000/yr and our 20% co-pay is an additional $5,000/yr. Our premium for this coverage is $1,429 monthly or $17,148 annually. Our insurance costs have been increasing at an annual rate of 10% or higher for the seven years of my retirement. Based on how expensive it is to insure my spouse and I at this time, I do not find it credible that a “private voucher” program proposed under the Ryan plan would result in cost savings for future Medicare beneficiaries. The Republicans would do well to remember that our children and grandchildren and their future healthcare are of concern to us, even if we are exempted from the provisions of the proposed Ryan plan.

    • There should be no Medicare. We have Medcaid for the poor. Most of the wealth in this country is in the hands of the elderly, which makes sense. They have had the longest to save and invest. So keep Medicaid for the poor and eliminate Medicare. I mean really what’s it for? Certainly not the needy. Deficit problem solved. Main problem with this is probably the fact that Obamacare has borrowed $500B+ from Medicare. So of course the Medicare “cash cow” must continue to assure the Obamacare legacy. Only reason to keep it.

    • It very clear to me, the Romney/Ryan plan destroys Medicare as we know it and would cost Seniors Thousands of $’s more a year. NO THANKS! Medicare Advantage was and is too costly a Program to continue with and that is why it is being slowly eliminated from the Medicare system. What will be taken from Medicare Advantage is going into the Affordable Care Act to help eliminate the dough nut hole for Seniors and pay for Seniors screenings, co-pays and such. The Affordable Care Act has already saved Millions of Seniors, Millions of dollars. Obama’s Plan leaves Medicare as it is and Senior’s lose nothing and looks to save Seniors money for drug costs which in some cases are astronomical. Sounds like a Winner to me.

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

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