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Alice M. Rivlin

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Saving Chairman Ryan

Posted: 05/17/11 04:38 PM ET

Has Paul Ryan killed a promising bipartisan approach to Medicare reform -- premium support -- by presenting it in a form unacceptable to most Democrats (including me) and many Republicans? Ryan's critics correctly argue that his version of premium support, passed by House Republicans, would ultimately end traditional Medicare and likely cause many seniors to pay considerably more for health care than the current system. But it would be a serious mistake for health care reformers to demonize the concept of premium support without recognizing that a better constructed version of the same idea could attract support from many Democrats, as well as Republicans, and become the basis for a sustainable bipartisan redesign of Medicare.

The basic concept of premium support is to provide beneficiaries with a subsidy to select among comprehensive health plans offered on a regulated exchange. The plans can all be private or can include a public option. The plans must accept all eligible beneficiaries -- guaranteeing access and preventing cherry picking -- but the plans will be fully compensated for taking care of older or sicker people. The government subsidy will be capped at a predefined level and growth rate, so it is a defined contribution system, but the cap can be changed by law. If this general structure reminds you of the Massachusetts Connector, the subsidies and exchanges created by the Affordable Care Act, or even Medicare Part D, then you get the idea.

The Bipartisan Policy Center's Debt Reduction Task Force, which I co-chaired with former Senator Pete Domenici (R-NM), proposed transitioning Medicare to premium support starting in 2018. In our version, all Medicare beneficiaries would have a choice: Either stay in traditional fee-for-service Medicare or choose a comprehensive health plan on a newly created Medicare Exchange. The growth of the total subsidy -- both for traditional Medicare and for the Exchange -- would be capped at the growth of the economy (GDP) plus one percent. If the cost of traditional Medicare grows faster than that, then its beneficiaries would either have to pay an additional premium or move to the exchange. To protect lower income beneficiaries, the premium could be related to income, although we did not actually spell this out in our plan.

In contrast, the version of premium support in Ryan's budget plan does not preserve the traditional Medicare option. Newly eligible beneficiaries beginning in 2021 would have only the exchange option. Moreover, the Ryan plan has a lower growth rate for the subsidy (only the rate of inflation). In a negotiation with Democrats, these two features, among others, would have to be on the table.

Why would premium support produce better care for Medicare beneficiaries at more sustainable rates of growth? First, with competition among the plans on the Exchange and improving information about plan outcomes, seniors can be expected to migrate to lower cost and higher quality plans. Second, capping the subsidy's growth at a sustainable rate would make the government's contribution predictable and incentivize movement to more efficient health care delivery. Of course, if Congress thinks the cap is too low, it can always raise it.

Premium support has bipartisan origins. The term was coined by two Democratic economists, Henry Aaron and Robert Reischauer, and premium support was the main recommendation of the bipartisan Commission on Medicare Reform, chaired by Senator John Breaux (D-LA) in the late 1990s. Subsidies and exchanges (called "alliances") were proposed by President Clinton and are the basis of the expansion of coverage in President Obama's Affordable Care Act (ACA).

Chairman Ryan has had trouble explaining why he is for exchanges in his Medicare reform and against them in ACA, and President Obama has the opposite problem. Both Republicans and Democrats agree that the rising cost of Medicare is unsustainable and that health care delivery -- especially in a fee-for service system -- is inefficient and often ineffective. If Republicans and Democrats could put partisan rhetoric aside for a while, they might recognize that premium support is a good approach to subsidizing health care. It uses market forces to enhance efficiency and makes the public cost controllable. Then they would just have to get to work on the all-important details of design and level of support.

This post was originally published at The American Square.